The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act of 1934 (“The Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, in accordance with the definition of “disclosure controls and procedures” in Rule 13a – 14(c) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Management included in its evaluation the cost-benefit relationship of possible controls and procedures. The Company continually evaluates its system of internal controls over financial reporting to determine if changes are appropriate based upon changes in the Company’s operations or the business environment in which it operates.
As of the end of the period covered by this Form 10-Q, the Company performed an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2005, or subsequent to the date the Company completed its evaluation, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Historically the Company has valued its ending inventory and cost of sales for each quarter by taking a physical inventory. As a result of the rapid increase, near the end of the third quarter, in FEMA-related orders and elevated production levels related to the recent Gulf Coast hurricanes Katrina and Rita, the Company modified its internal controls relating to valuing ending inventory and cost of sales for production facilities comprising approximately 33 percent of the net sales for the third quarter of 2005. For this quarter, at these production facilities, the Company did not take a physical inventory, but instead estimated the ending inventory and cost of sales by (i) analyzing bills of material, (ii) evaluating changes in sales prices, material costs, scrap, product mix and other production items, and (iii) comparing the current results to results for prior periods and similar production facilities where physical inventories were conducted. Management has reviewed these estimates, and determined that they result in inventory and cost of sale estimates which are fairly stated. The Company expects to take physical inventories at all production facilities at the end of 2005.
One of the Company’s subsidiaries has installed new computer software. While to date there have been no significant changes in the Company’s internal controls related to the new computer software, the Company anticipates that by the end of 2005, and continuing into 2006, certain advanced functionality of the new computer software will be implemented to further strengthen the Company’s internal controls.
DREW INDUSTRIES INCORPORATED
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
Lippert is a defendant in an action entitledSteelCo., Inc. vs. Lippert Components, Inc. and DOES 1 though 20, inclusive, commenced in Superior Court of the State of California, County of San Bernardino District, on July 16, 2002. On motion of Lippert, the case was removed to the U.S. District Court, Central District of California, Riverside Division.
Plaintiff alleges that Lippert violated certain provisions of the California Business and Professions Code (Sec. 17000 et. seq.) by allegedly selling chassis and component parts below Lippert’s costs, engaging in acts intended to destroy competition, wrongfully interfering with plaintiff’s economic advantage, and engaging in unfair competition. Plaintiff seeks compensatory damages of $8.2 million, treble damages, punitive damages, costs and expenses incurred in the proceeding, and injunctive relief. Lippert believes the case has no merit, and has asserted counterclaims against plaintiff. On February 22, 2005, the court granted Lippert’s motion for partial summary judgment limiting plaintiff’s damages to those incurred prior to December 31, 2002, thereby reducing plaintiff’s damage claim from over $8 million (before trebling) to an amount which we believe could be less than $1 million (before trebling) based on counsel’s analysis of the testimony of plaintiff’s and Lippert’s damage experts, although there can be no assurance of the outcome. The court also granted Lippert’s motions for partial summary judgment as to all aspects of plaintiff’s unfair competition claim and plaintiff’s claim for an injunction. The court denied Lippert’s attempt to limit damages to those incurred prior to May 10, 2002, and certain other aspects of Lippert’s defense. Lippert’s $500,000 settlement offer to plaintiff, which was recorded as a charge in the first quarter of 2005, was rejected. It is anticipated that a trial will be held in early 2006.
Lippert is a defendant in an action entitledMarlon Harris vs. Lippert Components, Inc.commenced in the Superior Court of the State of California, County of San Bernardino District. Plaintiff was injured on a press brake machine while working at Lippert’s Rialto, California division. The machine was purchased used and was not fitted with a guard. The claimant pursued a workers compensation claim and a third party action against Lippert and other defendants, including the manufacturer and the vendor of the subject machine. The third party suit involved allegations of willful and wanton actions and sought compensatory and punitive damages. At trial, the jury found in favor of plaintiff for compensatory and punitive damages.
The verdict was comprised of compensatory damages of $464,000, most of which had been previously paid or accrued by Lippert, and punitive damages of $4 million. Counsel for Lippert advised us that, under California law, the award for punitive damages would most likely be reduced to not in excess of four times the compensatory damages, or a maximum of $1.9 million. Accordingly, at December 31, 2004, the Company recorded a charge of $1.9 million ($945,000 after taxes and the direct impact on incentive compensation) related to the punitive damages awarded in this case. On March 17, 2005, the trial court denied Lippert’s motion to reduce the punitive damage award. Subsequent settlement discussions were then unsuccessful. Accordingly, in the first quarter of 2005, the Company recorded a charge of $2.1 million ($1,050,000 after taxes and the direct impact on incentive compensation) related to the punitive damages awarded in this case. On September 21, 2005, the Company entered into an agreement to settle this litigation for approximately $2.8 million and, as a result, reversed during the third quarter of 2005 approximately $1.2 million of the previously accrued jury award and approximately $200,000 of previously accrued interest.
On August 6, 2004, Keystone RV Company, Inc. filed a third-party petition against Lippert in an action entitledFeagins, et. al. v. D.A.R., Inc. d/b/a Fun Time RV, et. al. pending in the Probate Court, Denton County, State of Texas. Plaintiffs brought an action for wrongful death allegedly caused by an RV
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manufactured by defendant Keystone RV Company, Inc. (“Keystone”) seeking compensatory, future and exemplary damages. Keystone filed a third-party petition against Lippert for proportionate contribution from Lippert as the manufacturer, designer and supplier of certain components of the RV. Neither plaintiffs nor any of the other five defendants filed claims against Lippert. Lippert’s counsel has advised that, at this stage of the case, based on the current theories of plaintiff’s expert, Lippert did not commit any act or omission that contributed to or caused the accident; however, there can be no assurance that plaintiff’s or another defendant’s theories will not in the future focus on an alleged act or omission by Lippert. Plaintiffs seek compensatory damages in excess of $130 million and each of the five plaintiffs seeks $25 million in exemplary damages from each defendant. Lippert maintains product liability insurance but certain of such insurance may not cover exemplary damages. The trial is in the discovery stage, and there has been no determination of liability. Lippert’s liability insurer has assigned counsel to defend Keystone’s claim against Lippert.
Lippert and Kinro sell products to Oakwood Homes, Inc. (“Oakwood”), which filed for relief under Chapter 11 of the United States Bankruptcy Code in November 2002. Proofs of claim filed by Lippert and Kinro are pending. Kinro was advised that the OCH Liquidation Trust (the “Trust”) intended to file preference claims against Kinro with respect to payments made to Kinro by Oakwood prior to the bankruptcy filing, and Lippert had received such claims asserted by the Trust. The preference claims were in the aggregate amount of approximately $4 million. Although, we believe that Lippert and Kinro had valid defenses to the preference claims and that there would be no material liability to the Trust, in order to avoid protracted and costly litigation, both Lippert and Kinro agreed to settle these claims. Pursuant to the separate settlements, Lippert waived a portion of its allowed unsecured claims valued at $32,000, and Kinro waived a portion of its allowed unsecured claims valued at $7,000.
On or about October 11, 2005 and October 12, 2005 two actions were commenced in the Superior Court of the State of California, County of Sacramento, entitledArlen Williams, Jr. vs. Weekend Warrior Trailers, Inc., Zieman Manufacturing Company, et. al., Case No. CV027691, andJoseph Giordano and Dennis Gish, vs. Weekend Warrior Trailers, Inc, and Zieman Manufacturing Company, et. al., Case No. 05AS04523. Each case purports to be a class action on behalf of the named plaintiffs and all others similarly situated. The complaints in both cases are virtually identical. Defendant Zieman Manufacturing Company (“Zieman”) is an indirect subsidiary of the Company.
Plaintiffs allege that defendant Weekend Warrior sold model years 1999 - 2005 FS2600 and FS3000 trailers, equipped with frames manufactured by Zieman, that are defective in design and manufacture. Plaintiffs allege that the defects cause the trailer to place excessive weight on the trailer coach tongue and the towing vehicle’s trailer hitch, causing damage to the trailers and the towing vehicles, and that the tires on the trailers do not support the advertised maximum towing capacity of the trailers. Plaintiffs seek to certify a class of residents of California who purchased new or used model years 1999 - 2005 FS2600 and FS3000 trailers. Plaintiffs seek monetary damages in an unspecified amount (including compensatory, incidental and consequential damages), punitive damages, restitution, declaratory and injunctive relief, attorney’s fees and costs.
Zieman intends to vigorously defend against the allegations made by plaintiffs. Zieman is currently analyzing the complaints and preparing a response to the allegations regarding the frames manufactured by Zieman, as well as plaintiffs’ standing as a class. Zieman and Lippert’s liability insurers have indicated their intention to defend Zieman, subject to reservation of the insurers’ rights upon terms and conditions that have not yet been provided, and may be subject to negotiation.
In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, it is management’s opinion that after final disposition, including anticipated insurance recoveries, any monetary liability or financial
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impact to the Company beyond that provided in the consolidated balance sheet as of September 30, 2005, would not be material to the Company’s financial position or annual results of operations.
Item 6 - Exhibits
| a) | Exhibits as required by item 601 of Regulation 8-K: |
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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 Executive Vice President and Chief Financial Officer |
November 9, 2005
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