UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file Number 0-3922
PATRICK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1057796
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
1800 South 14th Street, P.O. Box 638, Elkhart, Indiana 46515
(Address of principal executive offices) (ZIP code)
Registrant's telephone number, including area code: (219) 294-7511
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X______ No ________
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 [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 10, 1998 (based upon the closing price on NASDAQ and an
estimate that 78.8% of the shares are owned by non-affiliates) was $72,060,165.
As of March 10, 1998, 5,897,766 shares of the Registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's Proxy Statement for its Annual
Meeting of Shareholders to be held on May 15, 1998 are
incorporated by reference into Parts III of this Form 10-K.
PART I
ITEM 1. BUSINESS
The Registrant is a leading manufacturer and supplier of building
products and materials to the Manufactured Housing and Recreational Vehicle
Industries. In addition, the Registrant is a supplier to certain other
industrial markets, such as furniture manufacturing, marine and the automotive
aftermarket. The Registrant manufactures decorative vinyl and paper panels,
cabinet doors, countertops, aluminum extrusions, drawer sides, pleated shades,
wood adhesives, and laminating machines. The Registrant is also an independent
wholesale distributor of pre-finished wall and ceiling panels, particleboard,
hardboard siding, passage doors, roofing products, building hardware, insulation
and other related products.
The Registrant has a nationwide network of distribution centers for its
products, thereby reducing intransit delivery time and cost to the regional
manufacturing plants of its customers. The Registrant believes that it is one
of the few suppliers to the Manufactured Housing and Recreational Vehicle
Industries that has such a nationwide network. The Registrant maintains ten
manufacturing plants and two distribution facilities near its principal offices
in Elkhart, Indiana, and operates fourteen other warehouse and distribution
centers and seventeen other manufacturing plants in fourteen states.
Strategy
Over time, the Registrant has developed very strong working
relationships with its customers. In so doing, the Registrant has oriented its
business and expansion to the needs of these customers. These customers include
all of the larger Manufactured Housing and most of the Recreational Vehicle
manufacturers. The Registrant's customers generally demand high quality
standards and a high degree of flexibility from their suppliers. The result has
been that the Registrant focuses on maintaining and improving the quality of its
manufactured products, and has developed a nationwide manufacturing and
distribution presence in response to its customers' need for flexibility. As
the Registrant explores new markets and industries, it believes that this
nationwide network provides it with a strong foundation for expansion.
The Registrant continually seeks to improve its position as a leading
supplier to the Manufactured Housing and Recreational Vehicle Industries and
other industries to which its products, manufacturing processes, or sales and
distribution system are applicable. Currently, approximately 67% of the
Registrant's sales are to the Manufactured Housing Industry and the remaining
33% is split between the Recreational Vehicle and other industries. These
industries, and the impact that they have on their suppliers, are characterized
by cyclical demand and production, small order quantities, and short lead times.
These characteristics have an impact on the suppliers, many of whom tend to be
small, regional and specific product line companies.
Management has identified several tools which it expects to utilize to
accomplish its operating strategies, including the following:
Diversification into Additional Industries
While the Registrant continually seeks to improve its position as a
leading supplier to the Manufactured Housing and Recreational Vehicle
Industries, it is also seeking to expand its product lines into other industrial
markets. Many of the Registrant's products such as its countertops, cabinet
doors and shelving have applications in the furniture and cabinetry markets. In
addition, the manufacturing processes for the Registrant's aluminum extrusions
are easily applied to the production of products for the marine, automotive and
truck accessories markets and aftermarkets, and many other markets, and the
Registrant's adhesives are produced for almost all industrial applications.
Because industrial order size tends to be for larger numbers of units,
the Registrant enjoys better production efficiencies for these orders. The
Registrant believes that diversification into additional industries will reduce
its vulnerability to the cyclical nature of the Manufactured Housing and
Recreational Vehicle Industries. In addition, the Registrant believes that it's
nationwide manufacturing and distribution capabilities enable it to effectively
serve it's customers and position it for product expansion.
Expansion of Manufacturing Capacity
In the last 3 years, the Registrant has invested approximately $33.7
million to upgrade existing facilities and equipment and to build new
manufacturing facilities for its laminated paneling products, industrial
adhesives, cabinet doors and furniture components. In addition, the Registrant
has invested $10.1 million to purchase existing businesses. The new capacity
created by these investments has enabled the Registrant to obtain more
efficiencies in its operations and will accommodate future growth in the
Registrant's product lines and markets.
Strategic Acquisitions and Expansion
The Registrant supplies a broad variety of building material products
and, with its nationwide manufacturing and distribution capabilities, is
well-positioned for the introduction of new products. The Registrant, from time
to time, considers the acquisition of additional product lines, facilities or
other assets to complement or expand its existing business. In 1995 the
Registrant completed the acquisition of a cabinet door manufacturer and in 1997
purchased the assets of two pleated shade manufacturers. In 1996 the Registrant
expanded existing product lines and capacity with the opening of it's new
manufacturing and distribution complex in Woodburn, Oregon, and in 1997 started
the expansion of it's operations in North Carolina. In 1997 the Registrant also
started a new plastic thermoforming operation that will begin production in mid
1998.
Principal Products
The Registrant distributes primarily prefinished wall and ceiling
panels, particleboard, hardboard siding, roofing products, passage doors,
building hardware, insulation and other products. Through its manufacturing
divisions, the Registrant fabricates decorative vinyl and paper panels, cabinet
doors, countertops, wood mouldings, aluminum extrusions, drawer sides, furniture
components, wood adhesives and laminating presses.
Pre-finished wall panels contributed more than 10% to total sales. The
percentage contributions of this class of product to total sales was 40.9%,
42.0%, and 39.0% for the years ended December 31, 1997, 1996, and 1995
respectively.
The Registrant has no material patents, licenses, franchises, or
concessions and does not conduct significant research and development
activities.
Manufacturing Processes and Operations
The Registrant's laminating facilities utilize various materials
including gypsum, particleboard, plywood and fiberboard which are bonded by
adhesives or a heating process to a number of products including vinyl, paper,
foil and high pressure laminate. These laminated products are utilized to
produce furniture, shelving, wall, counter and cabinet products with a wide
variety of finishes and textures.
The Registrant's metals division utilizes sophisticated technology to
produce aluminum extrusions for framing and window applications. In addition,
the Registrant's metals division extrudes running boards, accessories for
pick-up trucks, marine industry products and construction-related materials.
The Registrant manufactures two distinct cabinet door product lines.
One product line is manufactured from raw lumber utilizing solid oak and other
hardwood materials. The Registrant's other line of doors is made of laminated
particleboard or plywood. The Registrant's doors are sold to the Manufactured
Housing and Recreational Vehicle industries, and continue to gain acceptance
with cabinet manufacturers and "ready-to-assemble" furniture manufacturers.
The Registrant's wood adhesive division, which supplies adhesives used in
most of the Registrant's manufacturing processes and to outside industrial
customers, uses a process of mixing non-toxic non-hazardous chemicals with water
to produce adhesives sold in tubes, pails, barrels, totes and rail tank cars.
Markets
The Registrant is engaged in the manufacturing and distribution of
building products and material for use primarily by the Manufactured Housing and
Recreational Vehicle Industries and other industrial markets.
Manufactured Housing
The Manufactured Housing Industry has historically served as a more
affordable alternative to the home buyer. Because of the relatively lower cost
of construction as compared to site-built homes, manufactured homes
traditionally have been one of the principal means for first-time home buyers to
overcome the obstacles of large down payments and higher monthly mortgage
payments. Manufactured Housing also presents an affordable alternative to
site-built homes for retirees and others desiring a lifestyle in which home
ownership is less burdensome than in the case with site-built homes.
Manufactured homes are built in accordance with national and state
building codes. Manufactured homes are factory-built and transported to a site
where they are installed, often permanently. Some manufactured homes have
design limitations imposed by the constraints of efficient production and
over-the-road transit. Delivery expense limits the effective competitive
shipping range of the manufactured homes to approximately 400 to 600 miles.
The Manufactured Housing Industry is cyclical, and is affected by the
availability of alternative housing such as apartments, town houses and
condominiums. In addition, interest rates, availability of financing, regional
population, employment trends, and general regional economic conditions affect
the sale of manufactured homes. The Manufactured Housing Institute reported
that during the four-year period ended December 31, 1991, shipments of
manufactured homes declined 26.6% to a total of approximately 171,000 units
nationally in 1991. The reported number of units increased sharply in the five
years following 1991, with increases in each of those years. Manufactured home
unit shipments in 1997 were 353,000, which is 2.8% lower than 1996, but still
106% more units than shipped in 1991.
These cycles have a historic precedent. The Registrant believes that
the factors responsible for the national decline prior to 1992 included weakness
in the manufacturing, the agricultural and, in particular, the oil industry
sectors. These industry sectors have historically provided a significant portion
of the Manufactured Housing Industry's customer base. Additionally, high
vacancy rates in apartments, high levels of repossession inventories, and
over-built housing markets in certain regions of the country resulted in fewer
sales of new manufactured homes in the past. Changes in these market
characteristics have caused the Manufactured Housing cycle to change positively.
Manufactured Housing now accounts for 33% of all homes built, which is up from
25% in 1989.
Recreational Vehicles
The Recreational Vehicle Industry has been characterized by cycles of
growth and contraction in consumer demand, reflecting prevailing general
economic conditions which affect disposable income for leisure time activities.
Fluctuations in interest rates, consumer confidence, and concerns about the
availability and price of gasoline, in the past, have had an adverse impact on
recreational vehicle sales. Recently the industry has been characterized by
shifting demand towards lower-priced, higher-value products which appeal to
economy-minded, value-conscious buyers.
Recreational Vehicle classifications are based upon standards
established by the Recreational Vehicle Industry Association. The principal
types of recreational vehicles include conventional travel trailers, folding
camping trailers, fifth wheels, motor homes, and van conversions. These
Recreational Vehicles are distinct from mobile homes, which are manufactured
houses designed for permanent and semi-permanent residential dwelling.
Conventional travel trailers and folding camping trailers are
non-motorized vehicles which are designed to be towed by passenger automobiles,
pick-up trucks or vans. They provide comfortable, self-contained living
facilities for short periods of time. Conventional travel trailers and folding
camping trailers are towed by means of a frame hitch attached to the towing
vehicle. Fifth wheel trailers, designed to be towed by pick-up trucks, are
constructed with a raised forward section that is attached to the bed area of
the pick-up truck. This allows for a bi-level floor plan and more living space
than a conventional travel trailer.
A motor home is a self-powered vehicle built on a motor vehicle chassis.
The interior typically includes a driver's area, kitchen, bathroom, dining and
sleeping areas. Motor homes are self-contained with their own lighting,
heating, cooking, refrigeration, sewage holding and water storage facilities.
Although they are not designed for permanent or semi-permanent living, motor
homes do provide comfortable living facilities for short periods of time.
Van conversions are conventional vans modified for recreational or other
use.
Sales of Recreational Vehicle products have been cyclical. Shortages of
motor vehicle fuels and significant increases in fuel prices have had a material
adverse effect on the market for Recreational Vehicles in the past, and could
adversely affect demand in the future. The Recreational Vehicle Industry is
also affected by the availability and terms of financing to dealers and retail
purchasers. Substantial increases in interest rates and decreases in the
general availability of credit have had a negative impact upon the industry in
the past and may do so in the future. Recession and lack of consumer confidence
generally results in a decrease in the sale of leisure time products such as
Recreational Vehicles.
Other Markets
Many of the Registrant's products, such as its countertops, laminated
panels, cabinet doors and shelving, may be utilized in the furniture and
cabinetry markets. The Registrant's aluminum extrusion process is easily
applied to the production of running boards and other accessories for pick-up
trucks and vans, and also certain building products. The Registrant's adhesives
are marketed in many industrial adhesive markets.
While demand in these industries also fluctuates with general economic
cycles, the Registrant believes that these cycles are less severe than those in
the Manufactured Housing and Recreational Vehicle industries. As a result, the
Registrant believes that diversification into these new markets will reduce its
reliance on the markets it has traditionally served and will mitigate the impact
of their historical cyclical patterns on its operating results.
Marketing and Distribution
The Registrant's sales are to Manufactured Housing and Recreational
Vehicle manufacturers and other building products manufacturers. The Registrant
has approximately 4,000 customers. The Registrant has three customers, who
together accounted for 34.2% of the Registrant's total sales in 1997 and two of
whom accounted for 21.9% in 1996. Ten other customers collectively accounted
for approximately 24.8% of 1997 sales. The Registrant believes it has good
relationships with its customers.
Products for distribution are purchased in carload or truckload
quantities, warehoused, and then sold and delivered by the Registrant. Some of
the Registrant's products are shipped directly from the suppliers to the
customers. The Registrant typically experiences a two to four week delay
between issuing its purchase orders and delivering of products to the
Registrant's warehouses or customers. The Registrant's customers do not
maintain long-term supply contracts, and therefore the Registrant must bear the
risk of accurate advance estimation of customer orders. The Registrant
maintains a substantial inventory to satisfy these orders. The Registrant has
no significant backlog of orders.
The Registrant operates sixteen warehouse and distribution centers and
twenty-seven manufacturing plants located in Alabama, Arizona, California,
Florida, Georgia, Idaho, Indiana, Kansas, New Mexico, Nevada, North Carolina,
Oregon, Pennsylvania, and Texas. Through the use of these facilities, the
Registrant is able to minimize its in-transit delivery time and cost to the
regional manufacturing plants of its customers.
Suppliers
During the year ended December 31, 1997, the Registrant purchased
approximately 65% of its raw materials and distributed products from twenty
different suppliers. The five largest suppliers accounted for approximately 40%
of the Registrant's purchases. Materials are primarily commodity products, such
as lauan, gypsum, aluminum, particleboard and other lumber products which are
available from many suppliers. Alternate sources of supply are available for
all of the Registrant's important materials.
Competition
The Manufactured Housing and Recreational Vehicle industries are highly
competitive with low barriers to entry. This level of competition carries
through to the suppliers to these industries. Competition is based primarily on
price, product features, quality and service. The Registrant has several
competitors in each of its classes of products. Some manufacturers and
suppliers of materials purchased by the Registrant also compete with it and sell
directly to the same industries. Most of the Registrant's competitors compete
with the Registrant on a regional basis. In order for a competitor to compete
with the Registrant on a national basis, the Registrant believes that a
substantial capital commitment and experienced personnel would be required. The
industrial markets in which the Registrant continues to expand are also highly
competitive.
Employees
As of December 31, 1997, the Registrant had 1,596 employees of which
1,359 employees are engaged directly in production, warehousing, and delivery
operations, 49 in sales, and 188 in office and administrative activities. There
are five manufacturing plants and one distribution center covered by collective
bargaining agreements. The Registrant considers its relationships with its
employees to be good.
The Registrant provides retirement, group life, hospitalization, and
major medical plans under which the employee pays a portion of the cost.
ITEM 2. PROPERTIES AND EQUIPMENT
As of December 31, 1997, the Registrant maintained the following warehouse,
manufacturing and distribution facilities:
Ownership or
Location Use Area Sq. Ft. Lease Arrangement
Elkhart, IN Manufacturing(5) 40,400 Leased to 2000
Elkhart, IN Mfg&Dist(1)(3)(5) 133,600 Leased to 2005
Elkhart, IN Manufacturing(3) 20,000 Owned
Elkhart, IN Manufacturing (5) 42,000 Leased to 1998
Elkhart, IN Manufacturing(2) 31,000 Leased to 1999
Elkhart, IN Manufacturing(2) 30,000 Leased to 2000
Elkhart, IN Manufacturing(5) 36,000 Owned
Goshen, IN Manufacturing(5) 50,870 Owned
Bristol, IN Mfg. & Dist.(1)(5) 62,000 Owned
Decatur, AL Distribution(1) 30,000 Leased to 1998
Decatur, AL Manufacturing(2) 35,000 Owned
Decatur, AL Manufacturing(2) 35,000 Leased to 1999
Decatur, AL Manufacturing(4) 41,000 Owned
Eatonton, GA Manufacturing(2) 48,300 Leased to 1998
Valdosta, GA Mfg. & Dist.(1)(2) 30,800 Owned
Charlotte, NC Mfg. & Dist.(1)(2) 53,000 Leased to 1998
Charlotte, NC Manufacturing(2) 46,800 Owned
Halstead, KS Distribution(1) 36,000 Owned
Waco, TX Distribution(1) 57,000 Leased to 1999
Waco, TX Manufacturing(2) 57,000 Leased to 1999
Mt. Joy, PA Distribution(1) 58,500 Owned
Mt. Joy, PA Manufacturing(2) 30,000 Owned
Ocala, FL Manufacturing(3) 20,600 Leased to 1999
Ocala, FL Manufacturing(3) 15,000 Leased to 1999
Ocala, FL Mfg. & Dist.(1)(2) 55,500 Owned
Fontana, CA Mfg. & Dist.(1)(2) 110,000 Owned
Fontana, CA Manufacturing(2) 71,755 Owned
Phoenix, AZ Manufacturing (3) 43,600 Leased to 2000
Phoenix, AZ Manufacturing (2) 36,000 Leased to 1998
Phoenix, AZ Manufacturing (5) 15,700 Leased to 1999
Woodburn, OR Manufacturing(3) 21,500 Owned
Woodburn, OR Mfg. & Dist.(1,2,3) 153,000 Owned, Subject to Mortgage
Mishawaka, IN Manufacturing(4) 191,000 Owned, Subject to Mortgage
Elkhart, IN Manufacturing(4) 190,500 Owned
Boulder City, NV Manufacturing(5) 24,700 Leased to 1999
Elkhart, IN Admin. Offices 10,000 Owned
(1) Distribution center
(2) Vinyl/paper/foil laminating
(3) Cabinet doors
(4) Aluminum and adhesives
(5) Other
Additionally, the Registrant operates distribution centers out of public
warehouses in Phoenix, Arizona, Woodland, California, Nampa, Idaho and Belen,
New Mexico. As of December 31, 1997, the Registrant owned or leased 35 trucks,
64 tractors, 87 trailers, 138 forklifts, 28 automobiles and a corporate
aircraft. All owned and leased facilities and equipment are in good condition
and well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is subject to claims and suits in the ordinary course of
business. In management's opinion, currently pending legal proceedings and
claims against the Registrant will not, individually or in the aggregate, have a
material adverse effect on the Registrant's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The Registrant's common stock is traded on the NASDAQ/NMS under the
symbol PATK. The high and low trade prices of the Registrant's common stock as
reported on NASDAQ/NMS for each quarterly period during the last two years was
as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1997 17 1/4 - 14 18 1/4 - 13 1/8 20 1/8 - 13 3/4 16 5/8 - 13 1/2
1996 15 1/4 - 11 14 3/4 - 12 1/4 15 3/8 - 12 1/4 16 1/2 - 14
The quotations represent prices between dealers, do not include retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
There were approximately 710 holders of the Registrant's common stock as
of December 31, 1997 as taken from the transfer agent's shareholder listing.
The Registrant declared a first time regular quarterly dividend of $.04
per common share starting June 30, 1995 and continued it through December 31,
1997. Although this is a regular quarterly dividend, any future determination
to pay cash dividends will be made by the Board of Directors in light of the
Registrant's earnings, financial position, capital requirements and such other
factors as the Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for each of the five years set
forth below has been derived from financial statements examined by McGladrey &
Pullen, LLP, independent certified public accountants, certain of which have
been included elsewhere herein. The following data should be read in
conjunction with the Financial Statements and related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein:
As of or for the Year Ended December 31,
1997 1996 1995 1994 1993
(dollars in thousands, except per share amounts)
Net sales $ 410,567 $ 403,511 $ 362,519 $ 330,981 $ 258,557
Gross profit 52,142 53,362 49,690 42,328 33,593
Warehouse and delivery
expenses 15,158 14,645 13,244 12,070 10,188
Selling, general, and
administrative expenses 22,145 19,909 18,809 14,792 13,099
Interest expense, net 1,149 1,078 1,200 940 918
Income taxes 5,396 6,929 6,344 5,642 3,633
Net income 8,294 10,800 10,093 8,884 5,755
Earnings per common share (1) 1.40 1.81 1.70 1.46 1.11
Weighted average common
shares outstanding(1) 5,921 5,967 5,947 6,094 5,162
Cash dividends, per
common share .16 .16 .12 --- ---
Working capital 40,181 45,646 43,280 35,011 27,356
Total assets 112,187 106,606 95,916 87,269 67,990
Long-term debt 25,015 26,152 26,200 21,150 11,624
Shareholders' equity 68,726 62,296 52,989 43,439 36,460
(1) Adjusted to reflect the three-for-two stock split effected in the nature of
a stock dividend effective June 10, 1993 and the two-for-one stock split
effective March 8, 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Registrant's business has shown significant revenue growth since
1991, as net sales increased annually from $143 million to over $410 million in
six years.
In 1997, the Registrant again achieved record annual sales of $410.6
million. The increase in sales resulted from the continued strength of both the
economy and the Manufactured Housing and Recreational Vehicle Industries.
The following table sets forth the percentage relationship to net sales
of certain items in the Registrant's statements of operations:
Year Ended
December 31,
1997 1996 1995
Net sales 100.0% 100.0% 100.0%
Cost of sales 87.3 86.8 86.3
Gross profit 12.7 13.2 13.7
Warehouse and delivery 3.7 3.6 3.7
Selling, general and administrative 5.4 4.9 5.2
Operating income 3.6 4.7 4.8
Net income 2.0 2.7 2.8
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to year Ended December 31, 1996
Net Sales. Net sales increased by 7.1 million, or 1.7%, from $403.5
million for the year ended December 31, 1996, to $410.6 million in the year
ended December 31, 1997. This small sales increase was attributable to a 2.8%
decrease in the year in units shipped by the Manufactured Housing Industry,
which represents approximately 67% of Registrant's sales. The Registrant's
sales to the Recreational Vehicle Industry were higher in the year 1997 because
the Industry, which represents approximately 16% of Registrant's sales, was
experiencing an increase in units shipped of the units that utilize Registrants
products.
Gross Profit. Gross profit decreased by approximately $1.2 million, or
2.3%, from $53.3 million in the 1996 year to $52.1 million in the same period of
1997. As a percentage of sales, gross profit decreased from 13.2% in the year
1996 to 12.7% in 1997. This decrease was attributable to reduced volumes in
certain operations and competitive market pressure on product pricing.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
increased by approximately $0.5 million, or 3.5%, from $14.6 million in 1996, to
$15.1 million in the year 1997. As a percentage of sales, warehouse and
delivery expenses increased from 3.6% in 1996 to 3.7% in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $2.2 million, or 11.2% in the
1997 year, from $19.9 million to $22.1 million. As a percentage of net sales,
these expenses increased from 4.9% to 5.4% in 1997 compared to 1996. These
expense increases were partially attributable to new Management Information
System expenses and additional personnel required due to the growth the
Registrant has experienced over the last several years, and for management
transition plans. The Registrant believes that the new Management Information
System currently being implemented will improve it's information system and will
be operational so that the Year 2000 will not pose significant operational
problems for the Registrant's software systems.
Operating Income. Operating income decreased by approximately $4.0
million, or 21.1% from $18.8 million in 1996 to $14.8 million in 1997, because
of the lower sales and the higher operating expenses. As a percentage of sales,
operating income decreased from 4.7 % to 3.6% in 1997.
Interest Expense. Interest expense increased by approximately $71,000.
The Registrant's borrowing levels were about the same during 1997 compared to
1996, but invested funds were lower.
Net Income. Net income decreased by approximately $2.5 million from
$10.8 million in 1996 to $8.3 million in 1997. This decrease is attributable to
the factors described above.
Year Ended December 31, 1996 Compared to year Ended December 31, 1995
Net Sales. Net sales increased by $41.0 million, or 11.3%, from $362.5
million for the year ended December 31, 1995, to $403.5 million in the year
ended December 31, 1996. This sales increase was attributable to a 6.9%
increase in 1996 units shipped by the Manufactured Housing Industry. This
Industry represents approximately 69% of the Registrant's sales. The
Registrant's sales to the Recreational Vehicle Industry were higher this year
because the Industry was experiencing a slight increase in units shipped of the
units that utilize the Registrant's products. The Recreational Vehicle Industry
sales as a percent of the Registrant's total sales were 15%, down .05% from 1995
because of increased Manufactured Housing Industry sales. The Registrant's
sales to furniture, marine and other industries was approximately 16% of total
sales which was also less than in 1995 due to the increased Manufactured Housing
sales.
Gross Profit. Gross profit increased by approximately $3.7 million, or
7.4%, from $49.7 million in the fiscal year 1995, to $53.4 million in 1996. As
a percentage of sales, gross profit was lower by 0.5% due to increases in labor,
building and equipment depreciation, and workers compensation and group
insurance costs.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
increased by approximately $1.4 million, or 10.6%, from $13.2 million in fiscal
1995, to $14.6 million in 1996. This is 0.1% less as a percentage of net sales
than in 1995. The increase in dollars is due to the increased sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.1 million, or 5.8%, in 1996, from $18.8
million in 1995 to $19.9 million in 1996. As a percentage of net sales, these
expenses decreased from 5.2% in 1995 to 4.9% in 1996.
Operating Income. Operating income increased by approximately $1.2
million, from $17.6 million in 1995 to $18.8 million, because of the increased
sales resulting in increased gross profits and the operating expenses being
lower as percentages of sales. As a percentage of sales, operating income
decreased from 4.8% to 4.7% in the year 1996 as compared to 1995.
Interest Expense. Interest expense, net of interest income, decreased by
approximately $122,000. The Registrant's borrowing levels were slightly lower
during most of 1996 compared to 1995, and temporary investments were higher.
Net Income. Net income increased by approximately $0.7 million from
$10.1 million in 1995 to $10.8 million in 1996. This increase is attributable
to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's primary capital requirements are to meet working capital
needs, support its capital expenditure plans, and meet debt service
requirements.
The Registrant, in September, 1995, issued to an insurance company in a
private placement $18,000,000 of senior unsecured notes. The ten year notes
bear interest at 6.82%, with semi-annual interest payments that began in 1996
and seven annual principal repayments beginning September 15, 1999. These funds
were used to reduce existing bank debt and for working capital needs.
The Registrant had a bank financing agreement (the Credit Agreement) with
NBD Bank, N.A. In September, 1995 with funds from the insurance company private
placement, the Registrant prepaid the term loan in full and paid the revolver
outstanding balance. The Revolving Credit Agreement was amended on February 13,
1997 and provides loan availability of $10,000,000 with maturity in three years.
Pursuant to the private placement and the Credit Agreement, the
Registrant is required to maintain certain financial ratios, all of which are
currently complied with.
The Registrant believes that cash generated from operations and
borrowings under its credit agreements will be sufficient to fund its working
capital requirements and normal recurring capital expenditures as currently
contemplated. The Registrant initiated an expansion project of approximately
$6,000,000 in North Carolina in 1997. When completed in 1998, the Registrant
anticipates obtaining state industrial revenue bond funding to cover the costs
of this project.
SEASONALITY
Manufacturing operations in the Manufactured Housing and Recreational
Vehicle Industries historically have been seasonal and are generally at the
highest levels when the climate is moderate. Accordingly, the Registrant's
sales and profits are generally highest in the second and third quarters.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income" (FAS 130), which requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence of other financial statements. The Statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of comparative financial statements for earlier periods is
required. The Company has evaluated the impact of FAS 130 and determined it
will have no effect on its financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (FAS 131), which requires
that a public business enterprise report financial and descriptive information
about its reportable operating segments. The Statement is effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. The Company is
currently evaluating the impact FAS 131 will have on its financial statements,
if any.
INFLATION
The Registrant does not believe that inflation had a material effect on
results of operations for the periods presented.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in Item 14 (a) 1. on
page 18 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth in the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on
May 15, 1998, under the caption "Election of Directors," which information is
hereby incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 15, 1998,
under the caption "Compensation of Executive Officers and Directors," which
information is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 15, 1998,
under the caption "Election of Directors," which information is hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 15, 1998,
under the caption "Certain Transactions," which information is hereby
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
(a) 1. FINANCIAL STATEMENTS
Independent auditor's report F-1
Balance sheets -
December 31, 1997 and 1996 F-2
Statements of income-years ended
December 31, 1997, 1996, and 1995 F-3
Statements of shareholders' equity-
years ended December 31,
1997, 1996, 1995 F-4
Statements of cash flow-
years ended December 31,
1997, 1996, and 1995 F-5
Notes to the financial statements F-6-16
(a) 2. FINANCIAL STATEMENT SCHEDULES
Independent auditor's report
on supplemental schedule & consent F-17
Schedule II - Valuation and qualifying
accounts and reserves F-18
All other schedules have been omitted as not required, not applicable, not
deemed material or because the information is included in the Notes to Financial
Statements.
(a) 3. EXHIBITS
The exhibits listed in the accompanying Exhibit Index on pages 39 and 40
are filed or incorporated by reference as part of this report.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for the three months ended December
31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 25, 1998.
PATRICK INDUSTRIES, INC
By Mervin D. Lung
Mervin D. Lung,
Chairman of the Board
and Chief Executive Officer
Pursuant to the Requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
Mervin D. Lung Chairman of the Board, Chief March 25, 1998
Mervin D. Lung Executive Officer and Director
David D. Lung President, Chief Operating Officer March 25, 1998
David D. Lung and Director
Keith V. Kankel Vice President-Finance, March 25, 1998
Keith V. Kankel Principal Accounting Officer and Director
Thomas G. Baer Vice President-Operations and Director March 25, 1998
Thomas G. Baer
Harold E. Wyland Vice President-Sales and Director March 25, 1998
Harold E. Wyland
Clyde H. Keith Director March 25, 1998
Clyde H. Keith
Merlin D. Knispel Director March 25, 1998
Merlin D. Knispel
Dorothy M. Lung Director March 25, 1998
Dorothy M. Lung
John H. McDermott Director March 25, 1998
John H. McDermott
Robert C. Timmins Director March 25, 1998
Robert C. Timmins
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1997
CONTENTS
INDEPENDENT AUDITOR'S REPORT F-1
FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of income F-3
Consolidated statements of shareholders' equity F-4
Consolidated statements of cash flows F-5
Notes to financial statements F-6 -
F-16
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PATRICK INDUSTRIES, INC.
Elkhart, Indiana
We have audited the accompanying consolidated balance sheets of PATRICK
INDUSTRIES, INC. AND SUBSIDIARIES as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 PATRICK INDUSTRIES,
INC. AND SUBSIDIARIES as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
McGLADREY & PULLEN, LLP
Elkhart, Indiana
January 28, 1998
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
1997 1996
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,765,171 $ 2,041,482
Investment in marketable securities 4,400,000
Trade receivables 17,127,797 15,208,671
Inventories 34,602,154 39,342,506
Prepaid expenses 608,611 393,520
Total current assets 56,103,733 61,386,179
PROPERTY and EQUIPMENT, net 48,221,356 39,759,294
Intangible and OTHER ASSETS 7,862,419 5,460,793
$ 112,187,508 $ 106,606,266
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,138,517 $ 1,138,517
Accounts payable, trade 10,329,507 10,545,175
Accrued liabilities 4,455,005 4,056,031
Total current liabilities 15,923,029 15,739,723
LONG-TERM DEBT, less current maturities 25,015,218 26,151,527
DEFERRED COMPENSATION obligations 1,416,002 1,069,357
DEFERRED TAX LIABILITIES 1,107,000 1,350,000
COMMITMENTS and Contingencies
ShareHOLDERS' EQUITY
Preferred stock, no par value; authorized
1,000,000 shares
Common stock, no par value; authorized
12,000,000 shares; issued 1997 5,895,766
shares; 1996 5,963,766 shares 21,896,822 22,138,494
Retained earnings 46,829,437 40,157,165
68,726,259 62,295,659
$ 112,187,508 $ 106,606,266
See Notes to Financial Statements.
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
1997 1996 1995
Net sales $ 410,566,851 $ 403,510,956 $ 362,519,418
Cost of goods sold 358,425,516 350,149,363 312,829,489
Gross profit 52,141,335 53,361,593 49,689,929
Operating expenses:
Warehouse and delivery 15,158,001 14,644,949 13,244,189
Selling, general, and administrative 22,144,623 19,909,274 18,809,458
37,302,624 34,554,223 32,053,647
Operating income 14,838,711 18,807,370 17,636,282
Interest expense, net 1,148,955 1,078,206 1,199,742
Income before income taxes (credits) 13,689,756 17,729,164 16,436,540
Federal and state income taxes 5,395,800 6,929,000 6,344,000
Net income $ 8,293,956 $ 10,800,164 $ 10,092,540
Basic earnings per common share $ 1.40 $ 1.81 $ 1.70
See Notes to Financial Statements.
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Common Retained
Stock Stock Earnings Total
Balance, December 31, 1994 $ $ 21,457,167 $ 21,981,842 $ 43,439,009
Net income 10,092,540 10,092,540
Proceeds from the exercise of 26,374 stock
options including related tax benefit 169,322 169,322
Dividends on common stock ($.12 per share (712,319) (712,319)
Balance, December 31, 1995 21,626,489 31,362,063 52,988,552
Net income 10,800,164 10,800,164
Proceeds from the exercise of 84,800 stock
options including related tax benefit 545,474 545,474
Issuance of 30,000 shares of common stock
for stock award plan 393,750 393,750
Repurchase and retirement of 117,900 shares (427,219) (1,052,257) (1,479,476)
of common stock
Dividends on common stock ($.16 per share) (952,805) (952,805)
Balance, December 31, 1996 22,138,494 40,157,165 62,295,659
Net income 8,293,956 8,293,956
Proceeds from the exercise of 1,500 stock
options including related tax benefit 16,125 16,125
Repurchase and retirement of 69,500 shares
of common stock (257,797) (678,203) (936,000)
Dividends on common stock ($.16 per share) (943,481) (943,481)
Balance, December 31, 1997 $ $ 21,896,822 $ 46,829,437 $ 68,726,259
See Notes to Financial Statements.
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,293,956 $ 10,800,164 $ 10,092,540
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,780,713 4,506,768 3,556,512
Deferred income taxes (243,000) (111,000) 101,000
Other (254,927) 488,557 183,054
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (1,024,045) 5,218,684 (1,717,489)
Inventories 6,279,132 (3,880,354) 1,031,077
Prepaid expenses (204,174) (5,738) (83,293)
Increase (decrease) in:
Accounts payable and accrued
liabilities (49,892) 954,657 (4,803,782)
Income taxes payable 577,920 (306,332)
Net cash provided by operating
activities 19,155,683 17,971,738 8,053,287
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (12,095,357) (9,811,116) (11,866,492)
Investment in marketable securities 4,400,000 (4,400,000)
Acquisition of businesses, net of cash (6,797,316) (3,346,596)
Cash held in escrow 4,584,738
Other 60,344 (264,539) (225,217)
Net cash (used in) investing
activities (14,432,329) (14,475,655) (10,853,567)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term debt agreements 24,000,000
Principal payments on long-term debt (1,136,309) (917,503) (19,974,000)
Proceeds from exercise of common
stock options 16,125 545,474 169,322
Repurchase of common stock (936,000) (1,479,476)
Cash dividends paid (943,481) (952,805) (712,319)
Net cash provided by (used in)
financing activities (2,999,665) (2,804,310) 3,483,003
Increase in cash and cash
equivalents 1,723,689 691,773 682,723
Cash and cash equivalents, beginning 2,041,482 1,349,709 666,986
Cash and cash equivalents, ending $ 3,765,171 $ 2,041,482 $ 1,349,709
See Notes to Financial Statements.
Note 1. Nature of Business, Use of Estimates, and Significant Accounting
Policies
NATURE OF BUSINESS:
The Company's operations consist primarily of the manufacture and distribution
of building products and materials for use primarily by the manufactured housing
and recreational vehicle industries for customers throughout the United States.
Credit is generally granted on an unsecured basis for terms of 30 days.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Patrick
Industries, Inc. and its wholly- owned subsidiaries, Harlan Machinery Company,
Inc., Patrick Door, Inc., and its majority-owned subsidiary, Patrick Mouldings,
L.L.C. ("the Company"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS:
The Company has cash on deposit in financial institutions in amounts which, at
times, may be in excess of insurance coverage provided by the Federal Deposit
Insurance Corporation.
For purposes of the statement of cash flows, the Company considers all overnight
repurchase agreements in connection with its sweep account arrangements with its
bank to be cash equivalents.
MARKETABLE SECURITIES:
At times, the Company has investments in marketable debt securities. Management
determines the classification of the securities at the time they are acquired
and evaluates the appropriateness of such classifications at each balance sheet
date. Available-for-sale securities are stated at fair value, and unrealized
holding gains and losses, net of deferred tax effects, are reported as a
separate component of shareholders' equity.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out (FIFO) method)
or market.
PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost. Depreciation has been computed
primarily by the straight-line method applied to individual items based on
estimated useful lives which generally range from 10 to 40 years for buildings
and improvements and from 3 to 15 years for machinery and equipment,
transportation equipment, and leasehold improvements.
Goodwill:
Goodwill, the excess of cost over the fair value of net assets acquired, is
amortized by the straight-line method over 15-year periods. At each balance
sheet date, management assesses whether there has been a permanent impairment in
the value of goodwill. In the event that an impairment is evident, the Company
would record an expense for that impairment. Factors considered by management
include current operating results, anticipated future cash flows, trends, and
prospects, as well as the effects of obsolescence, demand, competition, and
other economic factors.
Revenue recognition:
The Company ships product based on specific orders from customers. Shipments
are made by the Company only after receiving authorization from the customer,
and revenue is recognized upon delivery.
EARNINGS PER COMMON SHARE:
The Financial Standards Accounting Board has issued Statement No. 128, "Earnings
per Share," which supersedes APB Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have common stock or
potential common stock, such as options, warrants, and convertible securities,
outstanding that are publicly traded. Those entities that have only common
stock outstanding are required to present basic earnings per share amounts.
Diluted per share amounts assume the conversion, exercise, or issuance of all
potential common stock instruments unless the effect is to reduce a loss or
increase the income per common share from continuing operations. All entities
required to present per share amounts must initially apply Statement No. 128 for
annual and interim periods ending after December 15, 1997.
Stock options outstanding are immaterial and had no effect on earnings per
share. Application of Statement No. 128 had no effect on previously reported
earnings per share.
Earnings per common share for the years ended December 31, 1997, 1996, and 1995
have been computed based on the weighted average common shares outstanding of
5,921,058, 5,967,489, and 5,946,948, respectively.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 130, "Reporting Comprehensive Income" (FAS 130), which requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence of other financial statements. The Statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of comparative financial statements for earlier periods is
required. The Company has evaluated the impact of FAS 130 and determined it
will have no effect on its financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (FAS 131), which requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. The Statement is effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. The Company is
currently evaluating the impact FAS 131 will have on its financial statements,
if any.
Note 2. Investment in Marketable Securities
During the year ended December 31, 1996, the Company purchased marketable debt
securities in the total amount of $4,400,000. The securities are stated at fair
value which was equal to their cost at December 31, 1996. These securities were
sold during the year ended December 31, 1997.
Note 3. Balance Sheet Data
TRADE RECEIVABLES:
Trade receivables in the accompanying balance sheets at December 31, 1997 and
1996 are stated net of an allowance for doubtful accounts of $125,000 and
$80,000 respectively.
INVENTORIES:
1997 1996
Raw materials $ 19,710,068 $ 24,204,345
Work in process 1,170,054 1,029,127
Finished goods 5,089,861 5,311,075
Materials purchased for resale 8,632,171 8,797,959
$ 34,602,154 $ 39,342,506
Property and equipment:
1997 1996
Land and improvements $ 3,352,851 $ 3,084,374
Buildings and improvements 23,083,890 18,107,574
Machinery and equipment 45,857,694 38,649,613
Transportation equipment 2,883,395 3,404,977
Leasehold improvements 2,874,513 2,383,751
78,052,343 65,630,289
Less accumulated depreciation 29,830,987 25,870,995
$ 48,221,356 $ 39,759,294
Intangible and other assets:
Goodwill, at amortized cost $ 5,597,062 $ 3,080,202
Other, primarily cash value of life insurance 2,265,357 2,380,591
$ 7,862,419 $ 5,460,793
Accrued liabilities:
Payroll and related expenses $ 2,927,304 $ 2,885,859
Property taxes 907,678 639,280
Other 620,023 530,892
$ 4,455,005 $ 4,056,031
Note 4. Pledged Assets and Long-Term Debt
Long-term debt at December 31, 1997 and 1996 is as follows:
1997 1996
Senior Notes, insurance company $ 18,000,000 $ 18,000,000
Indiana Development Finance Authority Bonds 2,700,000 3,000,000
State of Oregon Economic Development Revenue Bonds 4,800,000 5,200,000
Other 653,735 1,090,044
26,153,735 27,290,044
Less current maturities 1,138,517 1,138,517
$ 25,015,218 $ 26,151,527
The senior notes bear interest at a fixed rate of 6.82% and are unsecured. The
annual principal installments of $2,571,428 commence on September 15, 1999 and
the final installment is due September 15, 2005. This agreement requires that
the Company maintain a minimum level of tangible net worth.
The Indiana Development Finance Authority Bonds are payable in annual
installments of $300,000 plus interest at a variable tax exempt bond rate, set
periodically to enable the bonds to be sold at par (3.98% at December 31, 1997).
The final installment is due November 1, 2006. The bonds are collateralized by
real estate and equipment purchased with the bond funds and are backed by a bank
standby letter of credit.
The State of Oregon Economic Development Revenue Bonds are payable in annual
installments of $400,000 plus interest at a variable tax exempt bond rate (4.25%
at December 31, 1997). The final installment is due December 1, 2009. The
bonds are collateralized by real estate and equipment purchased with the bond
funds and are backed by a bank standby letter of credit.
The Company has an unsecured revolving credit agreement which allows borrowings
up to $10,000,000 or a borrowing base defined in the agreement and which expires
on February 2, 2000. Interest on this note is at either prime or the Eurodollar
rate plus 1% to 1.25%. The Company pays .25% of the unused portion of the
revolving line. In addition, this agreement requires the Company to, among
other things, maintain minimum levels of tangible net worth, working capital,
and debt to net worth. In addition, the Company is contingently liable for
standby letters of credit of $2,075,000 to meet credit policies of certain
suppliers.
Aggregate maturities of long-term debt for the years ending December 31, 1999
through 2002 are as follows: 1999 $3,486,646; 2000 $3,271,428; 2001 $3,271,428;
and 2002 $3,271,428.
Based on the borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair value of the long-term debt
instruments approximates their carrying value.
Interest expense for the years ended December 31, 1997, 1996, and 1995 was
approximately $1,720,000, $1,670,000, and $1,420,000 respectively.
Note 5. Equity Transactions
Common stock sold to key employees through the exercise of stock options
resulted in a tax deduction for the Company equivalent to the taxable income
recognized by the employee. For financial reporting purposes, the tax benefit
resulting from this deduction, along with the proceeds from the exercise of the
options, is accounted for as an increase to common stock.
SHAREHOLDER RIGHTS PLAN:
On February 29, 1996, the Company's Board of Directors adopted a shareholder
rights agreement, granting certain new rights to holders of the Company's common
stock. Under the agreement, one right was granted for each share of common
stock held as of March 20, 1996, and one right will be granted for each share
subsequently issued. Each right entitles the holder, in an unfriendly takeover
situation, and after paying the exercise price (currently $30), to purchase
Patrick common stock having a market value equal to two times the exercise
price. Also, if the Company is merged into another corporation, or if 50
percent or more of the Company's assets are sold, then rightholders are
entitled, upon payment of the exercise price, to buy common shares of the
acquiring corporation's common stock having a then current market value equal to
two times the exercise price. In either situation, these rights are not
available to the acquiring party. However, these exercise features will not be
activated if the acquiring party makes an offer to acquire the Company's
outstanding shares at a price which is judged by the Board of Directors to be
fair to all Patrick shareholders. The rights may be redeemed by the Company
under certain circumstances at the rate of $.01 per right. The rights will
expire on March 20, 2006. The Company has authorized 100,000 shares of
preferred stock, Series A, no par value, in connection with this plan, none of
which have been issued.
REPURCHASE OF COMMON STOCK:
The Company's Board of Directors from time to time has authorized the repurchase
of shares of the Company's common stock, in the open market or through
negotiated transactions, at such times and at such prices as management may
decide.
Note 6. Commitments and Related Party Leases
The Company leases office, manufacturing, and warehouse facilities and certain
equipment under various noncancelable agreements which expire at various dates
through 2005. These agreements contain various renewal options and provide for
minimum annual rentals plus the payment of real estate taxes, insurance, and
normal maintenance on the properties. Certain of the leases are with the
chairman/major shareholder and expire at various dates through September 30,
2005.
The total minimum rental commitment at December 31, 1997 under the leases
mentioned above is ap- proximately $9,024,000, which is due approximately
$2,828,000 in 1998, $2,043,000 in 1999, $1,488,000 in 2000, $1,062,000 in 2001,
$673,000 in 2002, and $930,000 thereafter.
The total rent expense included in the statements of income for the years ended
December 31, 1997, 1996, and 1995 is approximately $3,400,000 $3,400,000, and
$3,000,000 respectively, of which approximately $1,300,000 was paid each year to
the chairman/major shareholder.
The Company has entered into a commitment to construct and furnish new
facilities at a cost of approximately $9,000,000, of which approximately
$5,300,000 has been incurred prior to December 31, 1997. The Company plans to
finance a portion of these costs with a bond issue of $6,000,000 which is
expected to be completed during 1998.
Note 7. Major Customers
Net sales for the year ended December 31, 1997 included sales to three
customers, each of which accounted for 10% or more of the total net sales of the
Company for the year. The percentage of sales for these customers was 13.3%,
10.9%, and 10.0%.
Net sales for the years ended December 31, 1996 and 1995 include sales to two
major customers, each of which accounted for 10% or more of the total net sales
of the Company for those years. The percentage of total Company sales to one
major customer was 10.6% and 11.3% and to the other was 11.2% and 12.2% for the
years ended December 31, 1996 and 1995 respectively.
The balances due from these customers at December 31, 1997 and 1996 were not
significant to the total trade receivables balance.
Note 8. Income Tax Matters
Federal and state income taxes for the years ended December 31, 1997, 1996, and
1995, all of which are domestic, consist of the following:
1997 1996 1995
Current:
Federal $ 4,987,400 $ 6,016,000 $ 5,185,000
State 651,400 1,024,000 1,058,000
Deferred (243,000) (111,000) 101,000
$ 5,395,800 $ 6,929,000 $ 6,344,000
The provisions for income taxes for the years ended December 31, 1997, 1996, and
1995 are different from the amounts that would otherwise be computed by applying
a graduated federal statutory rate of 34% to 35% to income before income taxes.
A reconciliation of the differences is as follows:
1997 1996 1995
Rate applied to pretax income $ 4,791,400 $ 6,197,000 $ 5,637,000
State taxes, net of federal
tax benefit 558,400 701,000 723,000
Permanent differences 46,000 31,000 (16,000)
$ 5,395,800 $ 6,929,000 $ 6,344,000
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the current period plus or minus
the change during the period in deferred tax assets and liabilities.
The composition of the deferred tax assets and liabilities at December 31, 1997
and 1996 is as follows:
1997 1996
Gross deferred tax liability,
accelerated depreciation $ (2,762,000) $ (2,634,000)
Gross deferred tax assets:
Trade receivables allowance 48,000 31,000
Inventory capitalization 285,000 337,000
Nondeductible accruals 619,000 431,000
Deferred compensation 545,000 412,000
Unvested stock awards 120,000 44,000
Other 38,000 29,000
1,655,000 1,284,000
Net deferred tax liabilities $ (1,107,000) $ (1,350,000)
Note 9. Compensation Plans
DEFERRED COMPENSATION OBLIGATIONS:
The Company has deferred compensation agreements with certain key employees.
The agreements provide for monthly benefits for ten years subsequent to
retirement, disability, or death. The Company has accrued an estimated
liability based upon the present value of an annuity needed to provide the
future benefit payments.
BONUS PLAN:
The Company pays bonuses to certain management personnel. Historically, bonuses
are determined annually and are based upon corporate and divisional income
levels. The charge to operations amounted to approximately $1,980,000,
$2,196,000, and $2,124,000 for the years ended December 31, 1997, 1996, and 1995
respectively.
PROFIT-SHARING PLAN:
The Company has a qualified profit-sharing plan, more commonly known as a 401(k)
plan, for substantially all of its employees with over one year of service and
who are at least 21 years of age. The plan provides for a matching contribution
by the Company as defined in the agreement and, in addition, provides for a
discretionary contribution annually as determined by the Board of Directors.
The amounts of contributions for the years ended December 31, 1997, 1996, and
1995 were immaterial.
STOCK OPTION PLAN:
The Company has adopted a stock option plan with shares of common stock reserved
for options to key employees. These options were not included in computing
earnings per common share because the effect of their inclusion was immaterial.
Following is a summary of transactions of granted shares under o
ption for the years ended December 31, 1997 and 1996:
1997 1996
WEIGHTED Weighted
AVERAGE Average
EXERCISE Exercise
SHARES PRICE Shares Price
Outstanding, beginning of year 98,000 $10.75 187,800 $6.64
Canceled during the year (500) 10.75 (5,000) 2.09
Exercised during the year (1,500) 10.75 (84,800) 2.19
Outstanding, end of year 96,000 $10.75 98,000 $10.75
Eligible, end of year for exercise 68,750 $10.75 45,000 $10.75
A further summary about fixed options outstanding at December 31, 1997 is as
follows:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
Exercise price of $10.75 96,000 2.25 $10.75 68,750 $10.75
As permitted under generally accepted accounting principles, the Company's
present accounting with respect to the recognition and measurement of stock-
based employee compensation costs, primarily related to the Company's stock
option plan, is in accordance with APB Opinion No. 25, which generally requires
that compensation costs be recognized for the difference, if any, between the
quoted market price of the stock and the amount an employee must pay to acquire
the stock. The Company has adopted the provisions of FASB Statement No. 123
which prescribes a fair-value based method of measurement that results in the
disclosure of computed compensation costs for essentially all awards of stock-
based compensation to employees. This requirement is to be applied
prospectively to any options granted. No options were granted during the years
ended December 31, 1997 and 1996 and, therefore, there is no pro forma net
income effect.
STOCK AWARD PLAN:
The Company has adopted a stock award plan for the five existing nonemployee
directors. Grants awarded during May 1996 of 30,000 shares are subject to
forfeiture in the event the recipient terminates as a director within two years
from the date of grant. The related compensation expense is being recognized
over the two-year vesting period. No grants were awarded during 1997.
Note 10. Business Combination
In January 1995, the Company purchased substantially all the assets of U.S.
Door, Inc., a manufacturer of wooden cabinet doors. The purchase price of the
acquired assets was $3,346,000. The excess of the total acquisition cost over
the fair value of the net assets acquired of $1,876,000 is being amortized over
fifteen years by the straight-line method. The acquisition has been accounted
for as a purchase and the results of operations of U.S. Door, Inc. since the
date of acquisition are included in the consolidated financial statements.
In August 1997, the Company purchased substantially all of the assets of United
Shade, Inc., a manufacturer of window shades and blinds. The total acquisition
cost was $5,810,400. The excess of the total acquisition cost over the fair
value of the net assets acquired of $2,760,000 is being amortized over fifteen
years by the straight-line method. The acquisition has been accounted for as a
purchase and results of operations of United Shade, Inc. since the date of
acquisition are included in the consolidated financial statements.
Summarized pro forma financial information for the years ended December 31, 1997
and 1996 as though United Shade, Inc. had been acquired as of January 1, 1996
follow:
1997 1996
Net sales $ 414,074,000 $ 409,360,000
Net income 8,609,527 11,171,054
Earnings per share 1.45 1.87
Note 11. Cash Flows Information
Supplemental information relative to the statements of cash flows for the years
ended December 31, 1997, 1996, and 1995 is as follows:
1997 1996 1995
Supplemental disclosures of cash
flows information:
Cash payments for:
Interest $ 1,720,934 $ 1,583,112 $ 1,416,133
Income taxes $ 5,360,319 $ 7,379,844 $ 6,751,132
Supplemental schedule of noncash
investing and financing activities:
Equipment contracts incurred
for use of equipment $ - $ 1,307,547 $ -
The amounts in the statements of cash flows are stated net of the 1997 purchase
of United Shade, Inc. and the 1995 purchase of U.S. Door, Inc.
Note 12. Unaudited Interim Financial Information
Presented below is certain selected unaudited quarterly financial information
for the years ended Decem- ber 31, 1997 and 1996 (dollars in thousands, except
per share data):
Quarter Ended
March 31, June 30, September 30, December 31,
1997
Net sales $ 96,936 $ 106,600 $ 105,126 $ 101,905
Gross profit 11,957 13,328 13,379 13,477
Net income 2,086 2,242 2,074 1,892
Earnings per common share 0.35 0.38 0.35 0.32
Weighted average common
shares outstanding 5,964,594 5,929,140 5,895,766 5,895,766
1996
Net sales $ 93,768 $ 107,395 $ 105,686$ 96,662
Gross profit 11,753 14,443 14,480 12,685
Net income 1,945 3,204 3,285 2,366
Earnings per common share 0.33 0.54 0.55 0.40
Weighted average common
shares outstanding 5,967,157 5,965,951 5,973,212 5,963,614
INDEX TO EXHIBITS
Exhibit Number
Exhibits
3(a) -Amended Articles of Incorporation of the Registrant
as further amended (filed as Exhibit 3(a) to the
Registrant's Form 10-K/A-1 amending its report on
Form 10-K for the fiscal year ended December 31, 1992
and incorporated herein by reference) ...........
3(b) -By-Laws of the Registrant (filed as Exhibit 3(b) to
the Registrant's Form 10-K/A-1 amending its report on
Form 10-K for the fiscal year ended December 31, 1992
and incorporated herein by reference) ...........
3(c) - Preferred Share Purchase Rights Agreement (filed
April 3, 1996 on Form 8-A and incorporated herein by
reference)
10(a) -Second Amendment to February 2, 1994 Credit
Agreement, dated as of June 26, 1995 among the
Registrant, NBD Bank, as agent, and NBD Bank, N.A.
(filed as Exhibit 10(a) to the Registrant s Form 10-K
for the fiscal year ended December 31, 1995 and
incorporated herein by reference) ...........
10(b) -Note Agreement, dated September 1, 1995, between the
Registrant and Nationwide Life Insurance Company
(filed as Exhibit 10(b) to the Registrant s Form 10-K
for the fiscal year ended December 31, 1995 and
incorporated herein by reference) ...........
10(c) -Commercial Lease and Option to Purchase dated as of
October 1, 1995 between Mervin Lung Building Company,
Inc., as lessor, and the Registrant, as lessee (filed
as Exhibit 10(c) to the Registrant s Form 10-K for
the fiscal year ended December 31, 1995 and
incorporated herein by reference) ...........
10(d) -First Amendment to Credit Agreement, dated as of
October 27, 1994 among the Registrant, NBD Bank, as
agent, and NBD Bank, N.A. (filed as Exhibit 10(a) to
the Registrant's Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by
reference) ...........
10(e) -Loan Agreement dated as of December 1, 1994 between
the State of Oregon Economic Development Commission,
along with the Pledge and Security Agreement relating
thereto (filed as Exhibit 10(b) to the Registrant's
Form 10-K for the fiscal year ended December 31, 1994
and incorporated herein by reference) ...........
10(f) -Credit Agreement dated as of February 2, 1994 among
the Registrant, NBD Bank, as agent, and NBD Bank,
N.A. (filed as Exhibit 10(a) to the Registrant's Form
10-K for the fiscal year ended December 31, 1993 and
incorporated herein by reference) ...........
Exhibit Number Exhibits
10(g) -Loan Agreement dated as of November 1, 1991 between
the Registrant and the Indiana Development Finance
Authority, along with the Pledge and Security
Agreement relating thereto (filed as Exhibit 10(c) to
the Registrant's Form 10-K/A-1 amending its report on
Form 10-K for the fiscal year ended December 31, 1992
and incorporated herein by reference) .....
*10(h) -Patrick Industries, Inc. 1987 Stock Option Program,
as amended (filed as Exhibit 10(e) to the
Registrant's Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by
reference) ...........
*10(i) -Patrick Industries, Inc. 401(k) Employee Savings
Plan (filed as Exhibit 10(a) to the Registrant's Form
10-K for the fiscal year ended December 31, 1993 and
incorporated herein by reference) ...........
*10(j) -Form of Employment Agreements with Executive
Officers (filed as Exhibit 10(e) to the Registrant's
Form 10-K/A-1 amending its report on Form 10-K for
the fiscal year ended December 31, 1992 and
incorporated herein by reference) .....
*10(k) -Form of Deferred Compensation Agreements with
Executive Officers (filed as Exhibit 10(f) to the
Registrant's Form 10-K/A-1 amending its report on
Form 10-K for the fiscal year ended December 31, 1992
and incorporated herein by reference) ...........
10(l) -Commercial Lease and dated as of October 1, 1994
between Mervin D. Lung, as lessor, and the
Registrant, as lessee (filed as Exhibit 10(k) to the
Registrant's Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by
reference) ...........
10(m) -Commercial Lease dated September 1, 1994 between
Mervin D. Lung Building Company, Inc., as lessor, and
the Registrant, as lessee (filed as Exhibit 10(l) to
the Registrant's Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by
reference) ...........
10(n) -Commercial Lease dated November 1, 1994 between
Mervin D. Lung Building Company, Inc., as lessor, and
the Registrant, as lessee (filed as Exhibit 10(m) to
the Registrant's Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by
reference) ...........
12** -Computation of Operating Ratios ...........
23 -Consent of accountants (included in Independent
auditor's report on supplemental schedule & consent
on page F-15) .....
27** -Financial Data Schedule ...........
*Management contract or compensatory plan or arrangement
**Filed herewith