================================================================================
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: JUNE 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. 11,381,492 shares of common
stock as of July 31, 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 JUNE 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>
Six Months Ended Three Months Ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 162,506 $91,829 $ 87,325 $50,201
Cost of sales (Note 3) 129,500 70,584 69,399 39,119
--------- ------- -------- -------
Gross profit 33,006 21,245 17,926 11,082
Selling, general and administrative expenses 18,619 10,649 9,650 5,553
--------- ------- -------- -------
Operating profit 14,387 10,596 8,276 5,529
Interest expense, net 2,062 861 987 562
--------- ------- -------- -------
Income before income taxes 12,325 9,735 7,289 4,967
Provision for income taxes 4,894 3,708 2,894 1,886
--------- ------- -------- -------
Net income $ 7,431 $ 6,027 $ 4,395 $ 3,081
========= ======= ======== =======
Net income per common share:
Basic $ .67 $ .63 $ .39 $ .34
========= ======== ======== =======
Diluted $ .65 $ .61 $ .39 $ .33
========= ======== ======== =======
Weighted average common shares outstanding:
Basic 11,141 9,602 11,147 9,155
========= ======= ======== =======
Diluted 11,374 9,833 11,395 9,385
========= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DREW INDUSTRIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 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 $ 3,445 $ 1,379 $ 1,028
Accounts receivable, trade, less allowance for
doubtful accounts 17,408 9,320 9,181
Inventories (Note 3) 29,537 22,264 29,456
Prepaid expenses and other current assets 4,050 2,932 6,610
-------- ------- -------
Total current assets 54,440 35,895 46,275
Fixed assets, net 41,247 15,238 38,096
Goodwill, net (Note 2) 43,426 14,443 44,215
Other assets 5,811 1,300 1,763
-------- ------- --------
Total assets $144,924 $66,876 $130,349
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of long-
term debt and other long-term liabilities $ 794 $ 6,972 $ 643
Accounts payable, trade 11,547 6,835 6,372
Accrued expenses and other current liabilities 18,307 12,218 15,251
-------- ------- --------
Total current liabilities 30,648 26,025 22,266
Long-term indebtedness (Note 4) 53,364 20,199 54,760
Other long-term liabilities 1,370 385 1,370
-------- ------- --------
Total liabilities 85,382 46,609 78,396
-------- ------- --------
Commitments and Contingencies (Note 5)
Stockholders' equity
Common stock, par value $.01 per share: authorized
20,000,000 shares; issued 11,381,492 shares at
June 1998; 11,235,580 shares at June 1997 and
11,363,166 shares at
December 1997 114 112 113
Paid-in capital 19,406 17,479 19,249
Retained earnings 40,022 26,624 32,591
-------- ------- --------
59,542 44,215 51,953
Treasury stock, at cost - 2,079,770 shares at June 1997 (23,948)
-------- ------- --------
Total stockholders' equity 59,542 20,267 51,953
-------- ------- --------
Total liabilities and stockholders' equity $144,924 $66,876 $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>
Six Months Ended
June 30,
--------------------
1998 1997
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,431 $ 6,027
Adjustments to reconcile net income to
cash flows provided by operating activities:
Depreciation and amortization 3,111 948
Loss on disposal of fixed assets 25
Changes in assets and liabilities:
Accounts receivable, net (8,227) (3,521)
Inventories 447 1,830
Prepaid expenses and other assets 1,565 (541)
Accounts payable, accrued expenses and other current liabilities 8,231 2,263
-------- --------
Net cash flows provided by operating activities 12,583 7,006
-------- --------
Cash flows from investing activities:
Capital expenditures (5,378) (4,265)
Proceeds from sales of fixed assets 113
Acquisition of businesses, net of cash received (3,814) (5,534)
-------- --------
Net cash flows used for investing activities (9,079) (9,799)
-------- --------
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 35,600 23,575
Repayments under line of credit (80,700) (21,275)
Repayments of term loans (298) (158)
Exercise of stock options 158 278
Acquisition of treasury stock (20,800)
Other 7
-------- --------
Net cash flows (used for) provided by financing activities (1,087) 2,627
-------- --------
Net increase (decrease) in cash 2,417 (166)
Cash and short-term investments at beginning of period 1,028 1,545
-------- --------
Cash and short-term investments at end of period $ 3,445 $ 1,379
======== ========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest on debt $ 1,244 $ 758
Income taxes $ 4,242 $ 5,009
</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 Paid-in Retained Stockholders'
Stock Capital Earnings Equity
- ------------------------------------------------------------------------------------------------
(In thousands, except shares)
<S> <C> <C> <C> <C>
Balance - December 31, 1997 $ 113 $ 19,249 $ 32,591 $ 51,953
Net income for six months ended
June 30, 1998 7,431 7,431
Issuance of 18,326 shares of common stock
pursuant to stock option plan 1 102 103
Income tax benefit relating to issuance of
common stock upon exercise of stock options 55 55
------ -------- -------- --------
Balance - June 30, 1998 $ 114 $ 19,406 $ 40,022 $ 59,542
====== ======== ======== ========
</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 six and three month periods ended June 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 six months ended June 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 impact on disclosure in the Company's
financial statements of Statement 131, which will be adopted on December 31,
1998, has not yet been determined.
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 16 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, Inc.
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 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.
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.
8
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories consist of the following (in thousands):
June 30,
--------------------- December 31,
1998 1997 1997
---- ---- ----
Finished goods $ 9,678 $ 4,183 $ 8,989
Work in process 1,944 1,760 1,746
Raw Material 17,915 16,321 18,721
------- ------- -------
Total $29,537 $22,264 $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 at the end of year three.
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 $7.5 million at June 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.
The Company has entered into interest rate hedge agreements to effectively
convert variable rate debt to fixed rate debt in order to reduce the risk of
incurring higher interest costs due to rising interest rates. At June 30, 1998,
the Company had entered into a contract that expires in May 1999 which hedges
interest related to $10 million of debt at an effective rate of 7.44%.
5. Contingencies
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.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Prime's discontinued ladder manufacturing subsidiary, filed a voluntary
petition seeking liquidation under the provisions of chapter 7 of the United
States Bankruptcy Code. The liabilities of White Metal are all product
9
<PAGE>
DREW INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
liability costs. While Drew was named as a defendant in certain actions
commenced in connection with these claims, Drew has not been held responsible,
and Drew disclaims any liability for the obligations of White Metal.
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and 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 up to
approximately $7.5 million 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
approximately $7.5 million of the trustee's tax related claims (excluding
duplicate claims). The Court granted the trustee the opportunity to replead the
tax-related claims. The remaining $.9 million of the trustee's claims were not
dismissed, but the Company believes that the trustee's 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>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------- ----------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding - basic 11,140,960 9,602,493 11,147,383 9,154,652
Assumed issuance of common stock
pertaining to stock options and warrants 233,312 230,361 247,430 230,839
---------- --------- ---------- ---------
Weighted average common shares
outstanding - diluted 11,374,272 9,832,854 11,394,812 9,385,491
========== ========= ========== =========
</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 85 percent of the
Company's sales are for manufactured homes and 15 percent are for recreational
vehicles ("RV's"). Many of the producers of manufactured homes, to whom the
Company sells windows, also manufacture RV's. At June 30, 1998, the Company
operated 32 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.
Lippert, which was acquired by the Company on October 7, 1997,
manufactures products for the manufactured housing and recreational vehicle
industry, consisting primarily of chassis and chassis parts, refurbished axles
and tires, and galvanized roofing. 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 did 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 six months and quarter ended June 30, 1998 increased 86%
and 74%, respectively, over the same periods last year. The 1997 period does 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 11%
for the six months and 10% for the second quarter over the 1997 periods. This
increase is attributable to sales of manufactured housing products which
increased 8% and 6%, respectively, and recreational vehicle products which
increased 27% and 29% for the six months and quarter, respectively. These
increases compare to industry-wide increases in shipments of approximately 3% in
the manufactured housing industry and 14% in the recreational vehicle industry,
for the six months ended June 1998. Also affecting the increase in sales dollars
is the increase in shipments of vinyl windows which are higher-priced than
aluminum windows.
Operating profit increased 36% to $14.4 million and 49% to $8.3 million
for the six months and quarter, respectively, over the same periods last year.
Included in operating profit are the results of Lippert and Pritt since they
were acquired by the Company. The contribution by these acquired operations to
the Company's operating profit was $3.8 million on net sales of $63.2 million
for the six months ended June 30,1998 and $2.5 million on net sales of $34.7
million for the quarter then ended. Excluding these operations acquired in 1997,
operating profit increased approximately 1.4% for the six months and 8.4% for
the quarter from the 1997 periods. Gross profit percentage for the second
quarter improved over the 1997 quarter slightly but is still slightly lower than
last year for the six month period. During 1998, the Company continued the
integration of the operations of the recently acquired Lippert business and the
start-up of several newly constructed facilities. Costs associated with these
actions and the continuing impact of competitive pressures
12
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
which began in the second quarter of 1997, resulted in lower margins in the
first quarter of 1998, as compared to last year's first quarter which benefitted
from favorable material costs.
Interest Expense, Net
Interest expense, net, increased $1.2 million to $2.1 million for the six
months and $.4 million to $1.0 million for the second quarter primarily as a
result of the debt incurred of $35.6 million for acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Statements of Cash Flows reflect the following:
<TABLE>
<CAPTION>
Six Months
June 30,
--------------------
1998 1997
- ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Net cash flows provided by operating activities $ 12,583 $ 7,006
Net cash flows (used for) investment activities $ (9,079) $ (9,799)
Net cash flows (used for) provided by financing activities $ (1,087) $ 2,627
</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,
however, the increase in trade payables was greater than expected at June 1998
as a result of the timing of payments.
Cash flows used for investing activities include $3.8 million for the
acquisition of assets from Coil Clip, Inc. and capital expenditures of $5.4
million for the 1998 period, primarily related to two new factories constructed
by Lippert. Capital expenditures for 1998 are expected to approximate $8
million. 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 $1.2 million.
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 at the end of year three.
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.
13
<PAGE>
DREW INDUSTRIES INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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.
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 costs. While Drew was named as a defendant in certain actions
commenced in connection with these claims, Drew has not been held responsible,
and Drew disclaims any liability for the obligations of White Metal.
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and 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 up to
approximately $7.5 million 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
approximately $7.5 million of the trustee's tax related claims (excluding
duplicate claims). The Court granted the trustee the opportunity to re-plead the
tax-related claims. The remaining $.9 million of the trustee's claims were not
dismissed, but the Company believes that the trustee's 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 June 30, 1998, the Company currently
had futures contracts for 2.8 million pounds at an aggregate cost of $1.8
million, which was approximately $.1 million 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>
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems. The
Company had previously decided to upgrade its computer systems. These upgrades
will allow the Company to achieve Year 2000 compliance. The cost of these
upgrades, which are currently in progress and expected to be completed during
1998, are not material to the Company's results of operations or financial
position. Remaining expenditures, primarily capital in nature, are expected to
be less than $.5 million. No significant expenditures were required to
specifically achieve Year 2000 compliance.
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, 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
August 12, 1998
16
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