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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number: 0-13646
DREW INDUSTRIES INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3250533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Mamaroneck Avenue, White Plains, N.Y. 10601
(Address of principal executive offices)
(Zip Code)
(914) 428-9098
Registrant's Telephone Number including Area Code
(Former name, former address and former fiscal year,
if changed since last year)
Indicate by check marks 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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 11,296,852 shares of common
stock as of October 29, 1998.
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<PAGE>
DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS FILED WITH
QUARTERLY REPORT OF REGISTRANT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
Page
----
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME 3
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 12-15
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
Not applicable
SIGNATURES 16
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $250,429 $142,011 $87,923 $50,182
Cost of sales 199,475 109,678 69,975 39,094
-------- -------- ------- -------
Gross profit 50,954 32,333 17,948 11,088
Selling, general and administrative expenses 28,598 16,422 9,979 5,773
-------- -------- ------- -------
Operating profit 22,356 15,911 7,969 5,315
Interest expense, net 2,995 1,496 933 635
-------- -------- ------- -------
Income before income taxes 19,361 14,415 7,036 4,680
Provision for income taxes 7,650 5,449 2,756 1,741
-------- -------- ------- -------
Net income $ 11,711 $ 8,966 $ 4,280 $ 2,939
======== ======== ======= =======
Net income per common share:
Basic $ 1.05 $ .95 $ .38 $ .32
======== ======== ======= =======
Diluted $ 1.03 $ .92 $ .38 $ .31
======== ======== ======= =======
Weighted average common shares outstanding:
Basic 11,140 9,468 11,142 9,156
======== ======== ======= =======
Diluted 11,366 9,704 11,351 9,420
======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
------------------- ------------
1998 1997 1997
- -----------------------------------------------------------------------------------------------------
(In thousands, except shares and per share amounts)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short term investments $ 1,531 $ 1,242 $ 1,028
Accounts receivable, trade, less allowance for
doubtful accounts 18,128 9,947 9,181
Inventories (Note 3) 31,371 22,293 29,456
Prepaid expenses and other current assets 3,997 3,913 6,610
--------- -------- --------
Total current assets 55,027 37,395 46,275
Fixed assets, net 41,007 19,840 38,096
Goodwill, net (Note 2) 43,032 14,512 44,215
Other assets 6,151 1,549 1,763
--------- -------- --------
Total assets $ 145,217 $ 73,296 $130,349
========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of long-
term debt and other long-term liabilities $ 754 $ 5,297 $ 643
Accounts payable, trade 9,456 5,498 6,372
Accrued expenses and other current liabilities 20,157 13,956 15,251
--------- -------- --------
Total current liabilities 30,367 24,751 22,266
Long-term indebtedness (Note 4) 50,169 24,971 54,760
Other long-term liabilities 1,370 368 1,370
--------- -------- --------
Total liabilities 81,906 50,090 78,396
--------- -------- --------
Commitments and Contingencies (Note 5)
Stockholders' equity
Common stock, par value $.01 per share:
authorized 20,000,000 shares; issued
11,393,592 shares at September 1998;
11,235,580 shares at September 1997
and 11,363,166 shares at December 1997 114 112 113
Paid-in capital 19,497 17,479 19,249
Retained earnings 44,302 29,563 32,591
--------- -------- --------
63,913 47,154 51,953
Treasury stock, at cost -
49,300 shares at September 1998 and
2,079,770 shares at September 1997 (602) (23,948)
--------- -------- --------
Total stockholders' equity 63,311 23,206 51,953
--------- -------- --------
Total liabilities and stockholders' equity $ 145,217 $ 73,296 $130,349
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
- -----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,711 $ 8,966
Adjustments to reconcile net income to
cash flows provided by operating activities:
Depreciation and amortization 4,819 1,531
Loss on disposal of fixed assets 14 2
Changes in assets and liabilities:
Accounts receivable, net (8,947) (4,148)
Inventories (1,387) 1,706
Prepaid expenses and other assets 1,042 (1,845)
Accounts payable, accrued expenses and
other current liabilities 7,990 2,589
-------- --------
Net cash flows provided by operating
activities 15,242 8,801
-------- --------
Cash flows from investing activities:
Capital expenditures (6,367) (8,251)
Proceeds from sales of fixed assets 275 16
Acquisition of businesses, net of cash received (3,814) (6,576)
-------- --------
Net cash flows used for investing
activities (9,906) (14,811)
-------- --------
Cash flows from financing activities:
Proceeds from private placement of Senior Notes 40,000
Proceeds from Industrial Revenue Bonds 4,153
Proceeds from term loan 21,000
Proceeds from line of credit 51,050 56,000
Repayments under line of credit (99,150) (48,050)
Repayments of other indebtedness (560) (2,739)
Exercise of stock options 249 278
Acquisition of treasury stock (602) (20,800)
Other 27 18
-------- --------
Net cash flows (used for) provided
by financing activities (4,833) 5,707
-------- --------
Net increase (decrease) in cash 503 (303)
Cash and short-term investments at beginning of period 1,028 1,545
-------- --------
Cash and short-term investments at end of period $ 1,531 $ 1,242
======== ========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest on debt $ 3,010 $ 1,340
Income taxes $ 7,420 $ 7,666
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Total
Common Treasury Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------
(In thousands, except shares)
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1997 $ 113 $ -- $19,249 $32,591 $51,953
Net income for nine months ended
September 30, 1998 11,711 11,711
Issuance of 30,426 shares of common stock
pursuant to stock option plan 1 154 155
Income tax benefit relating to issuance of
common stock upon exercise of stock options 94 94
Acquisition of 49,300 shares of treasury stock (602) (602)
-------- -------- ------- ------- -------
Balance - September 30, 1998 $ 114 $ (602) $19,497 $44,302 $63,311
======== ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The Consolidated Financial Statements presented herein have been prepared
by the Company in accordance with the accounting policies described in its
December 31, 1997 Annual Report on Form 10-K and should be read in conjunction
with the Notes to Consolidated Financial Statements which appear in that report.
In the opinion of management, the information furnished in this Form 10-Q
reflects all adjustments necessary for a fair statement of the results of
operations as of and for the nine and three month periods ended September 30,
1998 and 1997. All such adjustments are of a normal recurring nature. The
Consolidated Financial Statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include some information and
notes necessary to conform with annual reporting requirements.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No.130, "Reporting Comprehensive Income."
Statement 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The Company had no
"other" comprehensive income for the nine months ended September 30, 1998 and
1997.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information," for fiscal
years beginning after December 15, 1997. This statement addresses presentation
and disclosure matters and will have no impact on the Company's financial
position or results of operations. The Company anticipates that it will have
additional footnote disclosures regarding segments for the year ended December
31, 1998.
2. Acquisitions
Lippert Components, Inc.
On October 7, 1997, the Company acquired Lippert Components, Inc.
("Lippert") for $27 million in cash and 1,923,231 shares of Drew common stock
having a value of approximately $25.3 million. In addition, 230,769 shares are
held in escrow pending the results of an earn-out. All 2,154,000 shares are
restricted and are subject to a registration rights agreement. The cash portion
of the transaction was financed by Drew's then existing credit facility.
Lippert, which has 17 plants in 13 states east of the Rocky Mountains,
manufactures products for the manufactured housing and recreational vehicle
industry, consisting primarily of chassis and chassis parts, refurbished axles
and tires, and galvanized roofing. The refurbishing of axles and tires, except
for Lippert's Florida operation, has now been transferred to Shoals, while
Shoals has transferred to Lippert all of its chassis parts business.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets and liabilities based
upon their respective estimated fair values at the date of acquisition. The
excess of purchase price over the fair value of the net assets acquired
("goodwill") was $30.1 million, which is being amortized over 30 years.
7
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The results of the acquired business have been included in the Company's
consolidated statements of income beginning October 7, 1997. Lippert's sales for
its fiscal year ended September 30, 1997 were $99 million, on which they
achieved earnings before interest, taxes and goodwill amortization of
approximately $8.2 million, excluding shareholder compensation, benefits and
related items which will not continue subsequent to the acquisition. These
earnings are net of other nonrecurring compensation and startup costs of
approximately $.5 million.
Coil Clip
On May 14, 1998, Lippert acquired the manufactured housing inventory and
customer list, as well as certain intangible assets, of Coil Clip, Inc., for
approximately $3.8 million. Coil Clip had annual sales of chassis parts to such
customers of approximately $4.5 million. Subsequent to the acquisition, Lippert
has retained all such customers.
Lippert and Coil Clip also entered into a supply agreement pursuant to
which Coil Clip will supply Lippert with steel blanks and chassis parts for use
in its manufactured housing chassis parts business.
The purchase price has been allocated to the underlying assets based upon
their respective estimated fair market values at date of acquisition. Intangible
assets acquired of $3.3 million are being amortized over useful lives averaging
six years.
Pritt Tire and Axle, Inc.
On May 5, 1997 the Company's subsidiary, Shoals Supply, Inc. ("Shoals")
acquired the assets and business of Pritt Tire and Axle, Inc. ("Pritt") of
Bristol, Indiana. Pritt refurbishes axles and tires used in the transportation
of manufactured homes.
The purchase price consisted of cash of $4.4 million and a three-year
warrant to purchase 40,000 shares of the common stock of Drew at $11.00 per
share. As part of this transaction, in the third quarter of 1997, Shoals
acquired, from the former owner of Pritt, the manufacturing facility utilized by
Pritt for approximately $1 million.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets and liabilities based
upon their respective estimated fair values at the date of acquisition. The
excess of purchase price over the fair value of the net assets acquired
("goodwill") is $2.9 million, which is being amortized over 30 years.
The results of the acquired business have been included in the Company's
consolidated statements of income beginning May 5, 1997. Pritt had net sales of
$4.4 million from January 1, 1997 to May 4, 1997.
8
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Inventories
Inventories are valued at the lower of cost (using the first-in, first-out
method) or market. Cost includes material, labor and overhead; market is
replacement cost or realizable value after allowance for costs of distribution.
Inventories consist of the following (in thousands):
September 30, December 31,
----------------- ------------
1998 1997 1997
---- ---- ----
Finished goods $ 9,183 $ 2,720 $ 8,989
Work in process 2,319 614 1,746
Raw Material 19,869 18,959 18,721
------- ------- -------
Total $31,371 $22,293 $29,456
======= ======= =======
4. Long-Term Indebtedness
On January 28, 1998, the Company completed a private placement of $40
million of 6.95 percent, seven year Senior Notes. Amortization of the seven year
Senior Notes is $8 million annually beginning on January 28, 2001.
Proceeds of the Senior Notes were used to reduce borrowings under Drew's
then existing $65 million credit facility with The Chase Manhattan Bank, as
agent. Simultaneously, such credit facility was replaced with a $25 million
revolving credit facility which expires on May 15, 2002. The balance of the loan
under such credit facility was $4.5 million at September 30, 1998.
Interest on borrowings under the new credit facility is payable at the
prime rate. In addition, the Company has the option to convert a portion of the
loan to a Eurodollar loan at 1% over the LIBO rate. Furthermore, the Company is
required to pay a commitment fee, accrued at the rate of 3/8 of 1% per annum, on
the daily unused amount of the revolving line of credit.
Pursuant to both the Senior Notes and the new credit facility, the Company
is required to maintain minimum net worth and interest and fixed charge
coverages and meet certain other financial requirements. Borrowings under both
facilities are secured only by capital stock of the Company's subsidiaries.
5. Contingencies
Effective July 29, 1994, the Company spun off to its stockholders LBP,
Inc. (formerly known as Leslie Building Products, Inc.) including its
subsidiary, Prime Acquisition Corp. ("Prime"), (formerly known as Leslie-Locke,
Inc.), the Company's former home improvement building products segment.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Prime's discontinued ladder manufacturing subsidiary, filed a voluntary
petition seeking liquidation under the
9
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
provisions of chapter 7 of the United States Bankruptcy Code. The liabilities of
White Metal are all product liability claims, and related costs, resulting from
its discontinued ladder manufacturing business. While Drew was named as a
defendant in certain actions commenced in connection with these claims, Drew has
not been held responsible, and Drew disclaims any liability for the obligations
of White Metal.
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and LBP, Inc.
and its subsidiary, Prime, were served with a summons and complaint in an
adversary proceeding commenced by the chapter 7 trustee of White Metal. The
complaint, which appears to allege several duplicate claims, seeks damages in
the aggregate amount of $10.6 million plus attorneys fees, of which
approximately $8.4 million is sought from the Company and Kinro, including
approximately $7.5 million of tax related claims which is sought, jointly and
severally, from the Company, Kinro, LBP, Inc. and Prime. The proceeding is based
principally upon the trustee's allegations 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. 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 $.9 million.
On July 14,1998, the court granted defendants' motion to dismiss the
trustee's tax-related claims aggregating approximately $7.5 million (excluding
duplicate claims). The court permitted the trustee to replead the dismissed
claims, but the trustee elected not to replead. However, the trustee could
appeal the court's decision dismissing these claims. The remaining $.9 million
of the trustee's claims were not dismissed, but the Company believes that the
claims are without merit and will continue to vigorously defend against the
claims. However, an estimate of potential loss, if any, cannot be made at this
time. The Company believes the defense of this proceeding will not have a
material adverse impact on its financial condition or results of operations.
10
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Weighted Average Common Shares Outstanding
Net income per diluted common share reflects the dilution of the weighted
average common shares by the assumed issuance of common stock pertaining to
stock options and warrants. The numerator, which is equal to net income, is
constant for both the basic and diluted earnings per share calculations.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding - basic 11,140,139 9,468,488 11,141,798 9,155,810
Assumed issuance of common stock
pertaining to stock options and warrants 226,349 235,583 209,177 263,737
---------- --------- ---------- ---------
Weighted average common shares
outstanding - diluted 11,366,488 9,704,071 11,350,975 9,419,547
========== ========= ========== =========
</TABLE>
11
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company, through its wholly-owned subsidiaries Kinro, Inc. ("Kinro"),
Lippert Components, Inc. ("Lippert") and Shoals Supply, Inc. ("Shoals") is a
leading supplier of a broad array of components for manufactured homes and
recreational vehicles. Manufactured products include windows, doors, chassis,
chassis parts, galvanized roofing and new and refurbished axles. The Company
also distributes new and refurbished tires. Approximately 80 percent of the
Company's sales are for manufactured homes, 16 percent are for recreational
vehicles ("RV's") and 4 percent for other industries. Many of the producers of
manufactured homes, to whom the Company sells windows, also manufacture RV's. At
September 30, 1998, the Company operated 33 plants in 16 states.
On May 5, 1997 Shoals acquired the assets and business of Pritt Tire and
Axle, Inc. ("Pritt") which is being operated as an additional branch of Shoals.
Pritt had net sales of $4.4 million from January 1, 1997 to May 4, 1997.
The results of Lippert have been included in the Company's consolidated
statements of income beginning October 7, 1997, the date of Lippert's
acquisition by the Company. Lippert's sales for its fiscal year ended September
30, 1997 were $99 million, on which they achieved earnings before interest,
taxes and goodwill amortization of approximately $8.2 million, excluding
shareholder compensation, benefits and related items which will not continue
subsequent to the acquisition. These earnings are net of other nonrecurring
compensation and startup costs of approximately $.5 million.
RESULTS OF OPERATIONS
Net sales for the nine months and quarter ended September 30, 1998
increased 76% and 75%, respectively, over the same periods last year. The 1997
periods do not include any sales for Lippert, which was acquired by the Company
on October 7, 1997, and only includes Pritt from May 5, 1997, the date of
Pritt's acquisition by the Company. Excluding sales of Lippert and Pritt, net
sales increased 14% for the nine months and 15% for the third quarter over the
1997 periods. This increase is attributable to sales of manufactured housing
products which increased 10% and 9%, respectively, and recreational vehicle
products which increased 28% and 30% for the nine months and quarter,
respectively. These increases compare to industry-wide increases in shipments of
approximately 4.5% in the manufactured housing industry and 15% in the
recreational vehicle industry, for the nine months ended September 1998. Also
affecting the increase in sales dollars is the increase in shipments of vinyl
windows which are higher-priced than aluminum windows. Sales of Lippert have
also increased during 1998 as a result of its new RV chassis product line. In
addition, Lippert recently received new commitments for manufactured housing
chassis business from one of the largest producers of manufactured homes.
Operating profit as a percent of sales for the nine months ended September
30, decreased to 8.9% in 1998 from 11.2% in 1997 as a result of lower operating
margins of newly acquired operations, as well as (i) regional competitive
pressures, (ii) start-up costs for new facilities, and (iii) wage inflation in
certain parts of the country. For the quarter, operating profit as a percent of
sales decreased to 9.1% in 1998 from 10.6% in 1997 for the same reasons. The
regional competitive pressures are particularly severe in certain of the
Company's products representing approximately 15% of total sales. The impact of
this competition on operating results is expected to be greater in the fourth
quarter than it has been in 1998, and the situation may continue in 1999.
12
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Expense, Net
Interest expense, net, increased $1.5 million to $3.0 million for the nine
months and $.3 million to $.9 million for the third quarter primarily as a
result of the debt of $35.6 million incurred for acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Statements of Cash Flows reflect the following:
<TABLE>
<CAPTION>
Nine Months
September 30,
-------------------
1998 1997
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Net cash flows provided by operating activities $ 15,242 $ 8,801
Net cash flows (used for) investment activities $ (9,906) $(14,811)
Net cash flows (used for) provided by financing activities $ (4,833) $ 5,707
</TABLE>
Net cash provided by operating activities primarily resulted from net
income before the deduction of depreciation and amortization. The seasonal
changes in the components of working capital generally offset each other.
Cash flows used for investing activities include $3.8 million for the
acquisition of assets from Coil Clip, Inc. and capital expenditures of $6.4
million for the 1998 period, primarily related to two new factories constructed
by Lippert. Capital expenditures for 1998 are expected to approximate $8 million
and should be a similar amount for 1999. Such capital expenditures have been
funded from the proceeds of Industrial Revenue Bonds as well as cash flow from
operations.
Cash flows used for financing activities in the 1998 period includes a net
decrease in debt of approximately $4.2 million. In addition, $.6 million was
used to acquire 49,300 shares of treasury stock under the program authorized by
the Board of Directors to repurchase up to 250,000 shares of the Company's
common stock.
On January 28, 1998, the Company completed a private placement of $40
million of 6.95 percent, seven year Senior Notes. Amortization of the seven year
Senior Notes is $8 million annually beginning on January 28, 2001. Proceeds of
the Senior Notes were used to reduce borrowings under Drew's then existing $65
million credit facility with The Chase Manhattan Bank, as agent. Simultaneously,
such credit facility was replaced with a $25 million revolving credit facility,
which expires on May 15, 2002.
Effective July 29, 1994, the Company spun off to its stockholders LBP,
Inc. (formerly known as Leslie Building Products, Inc.) and its subsidiary,
Prime Acquisition Corp. ("Prime") (formerly known as Leslie-Locke, Inc.) the
Company's former home improvement building products segment.
13
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Prime's discontinued ladder manufacturing subsidiary, filed a voluntary
petition seeking liquidation under the provisions of chapter 7 of the United
States Bankruptcy Code. The liabilities of White Metal are primarily product
liability claims, and related costs, resulting from its discontinued ladder
manufacturing business. While Drew was named as a defendant in certain actions
commenced in connection with these claims, Drew has not been held responsible,
and Drew disclaims any liability for the obligations of White Metal.
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and LBP, Inc.
and its subsidiary, Prime, were served with a summons and complaint in an
adversary proceeding commenced by the chapter 7 trustee of White Metal. The
complaint, which appears to allege several duplicate claims, seeks damages in
the aggregate amount of $10.6 million plus attorneys fees, of which
approximately $8.4 million is sought from the Company and Kinro including
approximately $7.5 million of tax related claims which is sought, jointly and
severally, from the Company, Kinro, LBP, Inc. and Prime. The proceeding is based
principally upon the trustee's allegations 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. 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 $.9 million.
On July 14,1998, the court granted defendants' motion to dismiss the
trustee's tax-related claims aggregating approximately $7.5 million (excluding
duplicate claims). The court permitted the trustee to replead the dismissed
claims, but the trustee elected not to replead. However, the trustee could
appeal the court's decision dismissing these claims. The remaining $.9 million
of the trustee's claims were not dismissed, but the Company believes that the
claims are without merit and will continue to vigorously defend against the
claims. However, an estimate of potential loss, if any, cannot be made at this
time. The Company believes the defense of this proceeding will not have a
material adverse impact on its financial condition or results of operations.
INFLATION
The prices of raw materials, consisting primarily of aluminum, steel,
vinyl, glass and tires, are influenced by demand and other factors specific to
these commodities rather than being directly affected by inflationary pressures.
Prices of certain commodities have historically been volatile. In order to hedge
the impact of future prices fluctuations on a portion of its future aluminum raw
material requirements, the Company periodically purchases aluminum futures
contracts on the London Metal Exchange. At September 30, 1998, the Company had
futures contracts for 1.1 million pounds, representing only 5 percent of annual
aluminum requirements, at an aggregate cost slightly above current market value.
The Company has been recently experiencing wage inflation pressures due to
labor shortages in certain parts of the country. Labor costs are approximately
15% of total costs of sales.
14
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
YEAR 2000
The "Year 2000" issue is the result of computer programs being written
using two digits rather than four digits to define a specific year. Such a
computer program may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in system failures or miscalculations.
The Company has addressed this risk to the reliability and availability of
its financial, operational and administrative computer systems. Prior to the
public concerns about the Year 2000 issue, the Company had decided to upgrade
its computer systems in order to enhance the information flow, capacity and
functionality of its systems. Some of the Company's manufacturing processes are
reliant on computer technology and all such significant processes have been
verified to be Year 2000 compliant. The upgrades to the computer systems will
allow the Company to achieve Year 2000 compliance. The installation and testing
of certain critical systems has been completed at a cost of less than $1
million, and the balance of the systems should be completed in the first half of
1999 at a cost of less than $.5 million. The Company has obtained assurances
from its software vendors that the new systems will be Year 2000 compliant.
While the Company believes that its internal computer systems, as well as
those of vendors who provide data processing services to the Company, will be
Year 2000 compliant, there can be no assurance that Year 2000 system failures by
the Company's vendors, customers or financial institutions will not result in
significant disruptions to the Company's operations. The Company believes,
however, that its alternative sources of supply of critical raw materials,
diverse customer list and financial resources mitigate the likelihood of a
severe adverse impact on the Company's operating results. The Company will also
consider operating strategies, such as maintaining easily accessible back-up of
critical information and adjusting inventory levels as the year 2000 approaches,
to minimize the impact of short-term disruptions caused by systems failures of
third parties.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This report contains certain statements, including the Company's plans
regarding its operating strategy, its products and performance and its views of
industry prospects, which could be construed to be forward looking statements
within the meaning of the Securities and Exchange Act of 1934. These statements
reflect the Company's current views with respect to future plans, events and
financial performance.
The Company has identified certain risk factors which could cause actual
plans and results to differ substantially from those included in the forward
looking statements. These factors include pricing pressures due to competition,
raw material costs (particularly aluminum, vinyl, steel and glass), adverse
weather conditions impacting retail sales, inventory adjustments by retailers,
and interest rates. In addition, general economic conditions may affect the
retail sale of manufactured homes and RV's.
15
<PAGE>
DREW INDUSTRIES INCORPORATED
SIGNATURES
Pursuant to the requirements 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.
DREW INDUSTRIES INCORPORATED
Registrant
By /s/ Fredric M. Zinn
-------------------------------------
Fredric M. Zinn
Principal Financial Officer
November 10, 1998
16
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