================================================================================ 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. ================================================================================
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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