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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Fee Required)
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(No Fee Required)
For the transition period from ---------- to ----------
Commission File No. 333-46607-12 Commission File No. 333-46607
WERNER HOLDING CO. (PA), INC. WERNER HOLDING CO. (DE), INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN
ITS CHARTER) ITS CHARTER)
PENNSYLVANIA 25-0906875 DELAWARE 25-1581345
(STATE OR OTHER (IRS EMPLOYER (STATE OR OTHER (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION NO.) JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR INCORPORATION OR
ORGANIZATION) ORGANIZATION)
93 WERNER RD. 16125 1105 NORTH MARKET ST., 19899
GREENVILLE, PENNSYLVANIA (ZIP CODE) SUITE 1300 (ZIP CODE)
(ADDRESS OF PRINCIPAL WILMINGTON, DELAWARE
EXECUTIVE OFFICES) (ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
(724) 588-2550 (302) 478-5723
(CO-REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE) (CO-REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether each of the co-registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of each of the co-registrants' knowledge,
in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
Not applicable
State the aggregate market value of the voting stock held by non-affiliates
of each of the co-registrants. The aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of a specified date within 60 days prior to the date of
filing. (See definition of affiliate in Rule 405, 17 CFR 230.405).
Not applicable
Indicate the number of shares outstanding of each of the co-registrants'
classes of common stock, as of December 31, 1999:
Werner Holding Co. (PA), Inc. 1,964.1630 shares of Class A Common
Stock
21,942.6838 shares of Class B Common Stock
4,656.7850 shares of Class C Common Stock
1,000 shares of Class D Common Stock
45,000 shares of Class E Common Stock
Werner Holding Co. (DE), Inc. 1,000 shares of Common Stock
DOCUMENTS INCORPORATED BY REFERENCE.
NONE
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INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1999
PAGE NO.
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PART I
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Company's Common Equity and Related Stockholder
Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 46
PART III
Item 10. Directors and Executive Officers of the Company 46
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management 55
Item 13. Certain Relationships and Related Transactions 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 58
Signatures 64
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
which include, among other things, discussions of the Company's (as defined)
business and results of operations, position in its industries, future
operations, liquidity and capital resources, as well as, the impact of the Year
2000 and the Company's plans to address the Year 2000 issue. These
forward-looking statements are based upon estimates and assumptions made by
management of the Company that although believed to be reasonable, are
inherently uncertain. Therefore, undue reliance should not be placed upon such
statements and estimates. No assurance can be given that any of such statements
or estimates will be realized and it is likely that actual results will differ
materially from those contemplated by such forward-looking statements.
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The information presented in this Annual Report on Form 10-K relates to Werner
Holding Co. (PA), Inc., a Pennsylvania corporation ("Holding (PA)"), its
wholly-owned subsidiary, Werner Holding Co. (DE), Inc. ("Holding (DE)") and
Werner Co., a Pennsylvania corporation and Holding (DE)'s wholly-owned
subsidiary ("Werner"). Holding (PA) has no substantial operations or assets
other than its investment in Holding (DE) and Holding (DE) has no substantial
operations or assets other than its investments in its subsidiaries. As used
herein and except as the context otherwise may require, the "Company" means
Holding (PA), Holding (DE), Werner and all of their consolidated subsidiaries.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Holding (PA), incorporated in 1945 and Holding (DE), incorporated in 1988,
are the holding companies of Werner Co., a corporation engaged in the
manufacture and sale of climbing products and aluminum extruded products.
Management believes that Werner is the nation's largest manufacturer and
marketer of ladders and other climbing products. Werner's climbing products
include aluminum, fiberglass and wood ladders, scaffolding, stages and planks.
The Werner brand name has over a 50-year history, and management believes Werner
is the most recognized name by both professional and consumer end-users of
climbing products. In addition to climbing products, Werner manufactures and
sells aluminum extruded products and more complex fabricated components to a
number of industries, including the automotive, electronics, and architectural
and construction industries.
DESCRIPTION OF THE BUSINESS
The Company operates in two business segments, Climbing Products and
Extruded Products.
Climbing Products
Werner manufactures approximately 1,500 stock keeping units of fiberglass,
aluminum, and wood climbing products and accessories primarily under the Werner,
Keller and Columbia brand names. The Company produces five principal categories
of climbing equipment: (i) single and twin stepladders; (ii) extension,
straight, and multipurpose ladders; (iii) attic ladders; (iv) stages, planks,
work platforms, and scaffolds; and (v) assorted ladder accessories. The majority
of the Company's climbing products sales are of either aluminum or fiberglass
ladders. Through its development of proprietary aluminum extrusion and
fiberglass pultrusion technology, the Company is a leader in the climbing
products industry.
The Company's sales and marketing network is directed by an experienced
in-house sales team of national and regional sales managers. The Company's
climbing products are sold directly and through approximately 50 independent,
commissioned manufacturers representative organizations, which sell to three
major distribution channels: (i) home improvement and other retail, (ii)
hardware and (iii) professional. The Company's sales organization is further
supported by field merchandisers who assist customers with product
merchandising, point-of-purchase signage and sales techniques.
Extruded Products
The Company is also a manufacturer of lineal extruded products and
highly-engineered fabricated parts. The Company targets extruded products
customers who require special metallurgy, tight tolerances, unusual shapes,
painting, finishing and fabrication requirements. Werner has implemented
sophisticated quality systems, and has been awarded ISO-9002 and QS-9000
certifications by Underwriters Laboratories.
Werner sells aluminum extrusions to customers in the automotive,
electronics, architectural and construction industries who use them in a broad
range of products including garage door openers, bicycle frames, pneumatic
cylinders, material handling systems, electrical connectors, curtain walls and
office partitions.
The Company's extruded products sales organization is supplemented by
approximately 15 independent manufacturer's representative organizations. The
Company operates on a "make-to-order" basis with most extruded products
customers.
SEGMENTS
See Note O entitled "Segment Information" in the Notes to Consolidated
Financial Statements which is incorporated herein by reference.
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RAW MATERIALS AND SUPPLIERS
The Company is a major consumer of aluminum and has implemented various
hedging strategies to mitigate the impact of raw material price fluctuations.
The Company has contracts to provide most of its estimated aluminum requirements
with four principal suppliers. These contracts include stipulated prices with
provisions for price adjustments based on market prices. Two of these contracts
will be renegotiable in 2000, one will be renegotiable in 2001, and one will be
renegotiable in 2003. The Company has several alternative sources for its
aluminum requirements and does not believe that any one of these contracts is
material to the Company's operations.
To hedge the risk associated with price fluctuations for a certain
percentage of its forecasted aluminum raw material requirements, the Company
utilizes futures and option contracts. The Company's practice is not to hold
derivative commodity instruments, including aluminum futures and option
contracts, for trading purposes. These futures and option contracts are placed
with established metal brokers and can range up to two years in duration. The
Company has several alternative brokers and does not believe that any one of
these contracts is material to the operations of the Company.
The Company also has contracts to purchase the basic materials required for
fiberglass pultrusion with its principal suppliers, which contracts are
typically one to three years in length. The Company has several alternative
sources for these basic materials and does not believe that any one of these
contracts is material to the operations of the Company.
PATENTS, TRADEMARKS AND LICENSES
No business segment is dependent, to any significant degree, on patents,
licenses, franchises or concessions and the loss of these patents, licenses,
franchises or concessions would not have a material adverse effect on any
business segment. The Company owns numerous patents worldwide, none of which are
material to the Company's operations as a whole. These patents expire from time
to time over the next 20 years. The Company holds licenses, franchises and
concessions, none of which individually or in the aggregate is material to the
Company's operations as a whole. These licenses, franchises and concessions vary
in duration from one to 15 years.
The Company has numerous trademarks that are utilized in its businesses
worldwide. The Werner logo trademark is material to both of the Company's
business segments. This well-known trademark enjoys a reputation for quality and
value, and in the climbing products industry, is among the world's most trusted
brand names. While the Company believes its other trademarks are important to
its business operations, the loss of any of these other trademarks would not
have a material adverse effect on the Company's operations as a whole.
SENSITIVITY TO ECONOMIC CYCLES AND WEATHER CONDITIONS
A significant percentage of the Company's sales of climbing products is
attributable to new residential and nonresidential construction in the United
States, which are affected by such cyclical factors as interest rates,
inflation, consumer spending habits and employment. Similarly, a significant
percentage of the Company's sales of extruded products is attributable to the
new and used automobile and automotive parts markets, which are also affected by
such cyclical factors. Sales of climbing equipment are also sensitive to
prevailing weather conditions. Unusually severe weather can reduce or defer
sales of climbing products by delaying elective home maintenance and
discouraging do-it-yourself projects, which account for a growing portion of the
Company's sales.
BACKLOG
Due to the Company's ability to quickly meet production orders and its
production forecasting systems, the Company has no significant backlog in
climbing products. Most extruded products are produced on a make-to-order basis.
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COMPETITION
Management estimates that, while it is the largest U.S. producer of
climbing products, there were approximately 14 principal competitors in 1999.
The Company competes in its climbing products segment on the basis of its
reputation for product quality, its well-known brands, its emphasis on customer
service, the breadth of its product lines and its commitment to product
innovation.
In its extruded products business, the Company competes with integrated
primary aluminum producers, large independent producers and numerous small
independent producers located throughout the United States. The Company competes
in its extruded products segment on the basis of its specialized extrusion
capabilities, customer service and price.
Some of the Company's competitors in the climbing products and the extruded
products markets have greater financial resources and are less leveraged than
the Company. Some of the Company's extruded products competitors are larger than
the Company.
EMPLOYEES
The Company had approximately 3,400 salaried and hourly employees as of
December 31, 1999. Of the 2,343 hourly employees, approximately 2,000 are
covered by seven collective bargaining agreements, six of which expire in 2000
and one of which expires in 2002. The Company plans to renegotiate and renew
union contracts as they expire. The Company believes that its labor relations
are satisfactory at all of its facilities.
DEPENDENCE ON KEY CUSTOMERS
The Company's 10 largest customers accounted for approximately 55% of the
Company's 1999 total net sales. The Company's two largest climbing products
customers, The Home Depot and Lowe's, accounted for approximately 23% and 13%,
respectively, of the Company's 1999 total net sales. The Company does not have
contractual agreements for the supply of products with most of its climbing
products customers. The loss of certain key customers or a significant decrease
in the volume of products supplied to any of such customers could have a
material adverse effect on the Company. No extruded products customer accounted
for more than 10% of the Company's 1999 total net sales.
ENVIRONMENTAL REGULATION
The Company's operations are subject to a wide variety of federal, state
and local laws and regulations governing, among other things, emissions to air,
discharge to waters, the generation, handling, storage, transportation,
treatment and disposal of hazardous substances and other materials, and employee
health and safety matters. Also, as an owner and/or operator of real property or
a generator of hazardous substances, the Company may be subject to environmental
cleanup liability, regardless of fault, pursuant to the Comprehensive
Environmental Response Compensation and Liability Act or analogous state laws.
The Company believes that its operations and facilities have been and are being
operated in compliance in all material respects with applicable environmental
and health and safety laws and regulations. However, the operation of
manufacturing plants entails risks of financial exposure for environmental
noncompliance and cleanup liabilities. Capital and operating expenditures for
environmental compliance in 1999 were not material. There can be no assurance
that the Company will not incur costs in the future for cleanup and other
remedial activities that will have a material adverse effect on the Company. In
addition, potentially significant expenditures could be required in order to
comply with evolving environmental and health and safety laws, regulations or
requirements that may be adopted or imposed in the future.
RECENT TRANSACTIONS
The Recapitalization. On October 8, 1997, Holding (PA) entered into a
recapitalization agreement, which was amended and restated on October 27, 1997
(the "Recapitalization Agreement") with certain
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affiliates of INVESTCORP S.A. ("Investcorp") and certain other international
investors organized by Investcorp (such affiliates and investors are
collectively referred to as the "Investors"). Pursuant to the Recapitalization
Agreement on November 24, 1997 (the "Recapitalization Closing Date"), Holding
(PA) amended and restated its Articles of Incorporation pursuant to which all of
Holding (PA)'s issued and outstanding capital stock was reclassified. On the
Recapitalization Closing Date, Holding (PA) then redeemed certain shares of the
reclassified stock (representing approximately 85% of the then outstanding
shares of Holding (PA)) for cash totaling in the aggregate approximately $330.7
million and the right to receive upon certain conditions, an additional,
one-time, lump sum payment (the "Market Participation Right"). In addition, on
the Recapitalization Closing Date, Holding (PA) sold to the Investors shares of
the newly created Class C, D and E Common Stock of Holding (PA) for
approximately $122.7 million (the "Cash Equity Investment"). The foregoing
transactions are collectively referred to herein as the "Recapitalization". As a
result of the Recapitalization, the pre-Recapitalization shareholders continue
to own approximately 33% of the outstanding voting equity of Holding (PA) and
the Investors own approximately 67% of the outstanding voting equity of Holding
(PA). Financing for the Recapitalization, together with the repayment of certain
existing indebtedness of the Company was funded by (i) the Cash Equity
Investment, (ii) the offering of $135.0 million principal of 10% Senior
Subordinated Notes due 2007 of Holding (DE) (the "Notes") and (iii) $186.5
million of borrowings under a $320.0 million secured senior credit facility with
a syndicate of banks and financial institutions which included two term loans, a
revolving credit loan and a receivables line of credit (collectively, the
"Senior Credit Facility").
The MIICA Insurance Transfer. Prior to March 31, 1998, the Company operated
Manufacturers Indemnity and Insurance Company of America, a Colorado corporation
("MIICA"), as a captive insurance company to provide product liability, workers'
compensation and environmental insurance to Holding (PA) and its subsidiaries.
In the first quarter of 1998, the Company undertook an extensive evaluation of
the cost and efficiency of providing such insurance through MIICA and determined
to obtain coverage from an external commercial insurance company. On March 31,
1998, the Company entered into an arrangement with a commercial insurance
provider under which MIICA transferred its outstanding product and workers'
compensation liabilities for losses incurred on or prior to March 31, 1998 to a
commercial insurance provider in exchange for the payment of approximately $42.4
million (collectively, the "MIICA Insurance Transfer"). The Company paid this
amount from the proceeds of the liquidation of a substantial portion of MIICA's
insurance fund investments. Under the terms of the agreements governing the
MIICA Insurance Transfer, the commercial insurance provider assumed all MIICA's
product and workers' compensation liabilities for losses incurred prior to March
31, 1998 up to an aggregate limit of $75 million. Holding (PA) has agreed to
indemnify the commercial insurance company for losses in excess of this limit.
In conjunction with the MIICA Insurance Transfer, the Company obtained product
liability and workers' compensation insurance coverage for such losses which
occur on or after April 1, 1998 from an external commercial insurance company.
The Company believes that this insurance coverage is adequate for its current
and future anticipated business needs. As a result of the MIICA Insurance
Transfer, on July 8, 1998 the Company discontinued the operations of and
dissolved MIICA.
Subsidiary Consolidation. In the second quarter of 1998, the Company
undertook a review of the desirability and necessity of operating through all of
Holding (DE)'s direct and indirect subsidiaries, including certain of those
subsidiaries who have guaranteed the Notes (the "Subsidiary Guarantors"). As a
result of this review, Holding (DE) determined to consolidate a number of its
direct and indirect subsidiaries through mergers into Holding (DE) or Werner. On
May 14, 1998, R.D. Arizona Ladder Corp. was merged with Werner, with Werner
remaining as the surviving corporation. On June 30, 1998, Ardee Investment Co.,
Inc. merged with Werner Financial Inc., with Werner Financial Inc. remaining as
the surviving corporation. Werner Financial Inc. was then merged with Holding
(DE) with Holding (DE) remaining as the surviving corporation. In addition, on
June 30, 1998, the following subsidiaries of Holding (DE) were merged with
Werner, with Werner remaining as the surviving corporation: Phoenix Management
Services, Inc.; Werner Management Co.; Florida Ladder Company; Kentucky Ladder
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Company; and Gold Medal Ladder Company. On December 31, 1998, Olympus
Properties, Inc. was merged with Werner, with Werner remaining as the surviving
corporation. This consolidation of Holding (DE)'s subsidiaries was permitted
under the Senior Credit Facility and the Indenture governing the Notes and has
no impact upon holders of the Notes or the consolidated results of operations of
the Company.
Business Acquisition. In October 1999, Werner acquired certain assets of
Keller Ladders, Inc. ("KLI") for a purchase price of approximately $12.2
million. The purchased assets consisted of three climbing products manufacturing
facilities located in Merced, CA, Swainsboro, GA and Goshen, IN; the Keller,
Columbia and Blue Ribbon brand names; and certain equipment, inventory,
intellectual property and other assets used in KLI's climbing products business.
No product or other significant liabilities were assumed in connection with this
acquisition.
ITEM 2. PROPERTIES.
The Company believes its manufacturing, warehouse and office facilities are
suitable, adequate and have sufficient manufacturing capacity for its current
requirements. The Company also believes that its facilities are being utilized
consistently with the Company's plans and do not have substantial excess
capacity. Werner's corporate headquarters offices are located at 93 Werner Rd.,
Greenville, Pennsylvania 16125. The Company's principal facilities consist of
the following:
OWNED/ APPROX.
LOCATION PRINCIPAL USE LEASE EXPIRATION SQUARE FOOTAGE
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Greenville, PA.............. Office, Manufacturing, Distribution Owned 640,000
Franklin Park, IL........... Office, Manufacturing, Distribution Owned 672,000
Anniston, AL................ Manufacturing, Distribution Owned 410,000
Carrolton, KY............... Manufacturing, Distribution Owned(1) 200,000
Swainsboro, GA.............. Manufacturing, Distribution 10/31/02 240,000
Merced, CA.................. Manufacturing, Distribution 12/31/35(2) 185,115
Goshen, IN.................. Manufacturing, Distribution 8/31/00 98,200
Portland, OR................ Distribution 3/31/00 16,500
Union City, CA.............. Warehouse 10/31/00 38,600
Bell, CA.................... Warehouse 4/30/01 39,100
Phoenix, AZ................. Warehouse 9/30/00 18,500
Dallas, TX.................. Warehouse 6/30/04 16,480
Houston, TX................. Warehouse 2/28/01 40,000
Jefferson, LA............... Warehouse 4/30/03 7,800
Greensboro, NC.............. Warehouse 4/30/01 15,200
Maryland Hgts., MO.......... Warehouse 9/30/00 8,700
Franklin Park, IL........... Warehouse 1/31/00 100,000
Minneapolis, MN............. Warehouse 8/31/05 11,900
Anniston, AL................ Warehouse 2/28/00 75,000
Greenville, PA.............. Warehouse 11/30/02 50,000
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(1) Subject to Variable Rate Industrial Building Revenue Bonds due 2015 issued
by the County of Carroll, Kentucky.
(2) Building and improvements owned by Werner, real property leased under 15
year ground lease with four 5 year renewals.
The Company's facilities at Greenville, PA, Franklin Park, IL, and
Anniston, AL serve both the climbing products and extruded products segments of
its business. All other facilities primarily serve the climbing products segment
of the Company's business.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is involved from time to time in various legal proceedings and
claims incident to the normal conduct of its business. Although it is impossible
to predict the outcome of any pending legal proceeding, the Company believes
that such legal proceedings and claims, individually and in the aggregate, are
either without merit, covered by insurance or adequately reserved for, and will
not have a material adverse effect on its results of operations, financial
position, or cash flows.
In March 1998, an action was filed in the United States District Court for
the Western District of Pennsylvania entitled Elizabeth Werner, et al v. Eric J.
Werner, et al (Civil Action No. 98-503). The plaintiffs of the action are
Elizabeth Werner, Jeffrey R. Ackerman, individually and as trustee under a trust
for the benefit of Elizabeth Werner; Matthew W. Weiss (by his parent Elizabeth
Werner); Timothy F. Burke, Jr., as executor of the estate of Anne L. Werner and
as trustee of certain trusts under Anne L. Werner's last will and testament;
Edward A. Pollock; and all of such plaintiffs derivatively on behalf of Holding
(PA). Defendants include Donald M. Werner, Howard L. Solot, Michael E. Werner,
Eric J. Werner, Michael J. Solot, Craig R. Werner and Bruce D. Werner
(collectively, the "Management Shareholders"), former company officers Richard
L. Werner, Robert I. Werner, Marc L. Werner, certain non-management
shareholders, Holding (PA), Holding (DE) and certain of its subsidiaries
including Werner. The action purports, in part, to be brought derivatively on
behalf of Holding (PA) and, in part, to be brought on behalf of plaintiffs
individually against the Company and certain current and former officers and
directors of the Company. The aspect of the case purportedly brought on behalf
of Holding (PA) alleges breaches of fiduciary duty by various members of the
Company's management arising out of, among other things, the issuance of
restricted stock to management of the Company in 1992 and 1993. Holding (PA)'s
Board of Directors referred the matter to a special committee of disinterested
directors to investigate the merits of the claim and to take appropriate actions
on behalf of Holding (PA). After a detailed investigation, the special committee
recommended that the derivative claims not be pursued by or on behalf of Holding
(PA). Accordingly, all the defendants made motions to dismiss the derivative
claims. Pursuant to an amendment to the complaint filed by plaintiffs on March
29, 1999, the only remaining corporate defendant in this action is Holding (PA).
Pursuant to the same amendment, the only remaining derivative claim asserted by
the plaintiffs is a claim for excessive compensation, not relating to the
restricted stock issuances. The aspect of the case purportedly brought on behalf
of plaintiffs individually against the Company appears to arise out of the 1992
and 1993 restricted stock issuances as well as certain alleged
misrepresentations by representatives of the Company. The plaintiffs seek
monetary damages in an unspecified amount. In May 1999, the magistrate judge
issued a report and recommendation ruling that all of the plaintiffs' claims be
dismissed. The District Court issued a Memorandum Order on August 4, 1999
granting the motion to dismiss all remaining claims against all defendants
without prejudice and adopted the magistrate judge's report as the opinion of
the District Court. The plaintiffs have appealed such decision. Management
believes that the ultimate resolution of this lawsuit will not have a material
adverse effect on the Company's results of operations, financial position, or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the common stock of
either Holding (PA) or Holding (DE). As of December 31, 1999, all of the issued
and outstanding shares of Holding (DE)'s common stock were held by Holding (PA).
The number of shareholders of record of each class of common stock of Holding
(PA) as of December 31, 1999 is as follows:
Class A Common Stock: 25 holders
Class B Common Stock: 106 holders
Class C Common Stock: 31 holders
Class D Common Stock: 11 holders
Class E Common Stock: 12 holders
No dividends have been paid to shareholders of Holding (PA) in the last two
years and no dividends are expected to be declared in the near future. Holding
(DE) declares and pays from time to time, certain cash dividends to its sole
shareholder, Holding (PA), in order to allow Holding (PA) to pay certain
obligations such as taxes and ordinary course operating expenses not exceeding
$2,000,000 in any fiscal year. The Senior Credit Facility and the Indenture
governing the Notes limit the Company's ability to pay dividends on its capital
stock.
Holding (DE) has not issued or sold any equity securities within the past
three years that were not registered under the Securities Act of 1933, as
amended (the "Securities Act"). Holding (PA) has not issued or sold any equity
securities within the past three years that were not registered under the
Securities Act, except as follows:
(a) On the Recapitalization Closing Date, and as part of the
Recapitalization, Holding (PA) sold to the Investors shares of Class C, D
and E Common Stock at a price per share of $2,421.29, or an aggregate
offering price of $122,700,000. See Business -- "The Recapitalization".
(b) On the Recapitalization Closing Date, and as part of the
Recapitalization, Holding (PA) issued and sold a Class E Stock Purchase
Warrant to Investcorp Bank E.C. for $10.00, which allows Investcorp Bank
E.C. the right to purchase a number of shares of Common Stock from Holding
(PA) upon the occurrence of a sale or initial public offering of the
Company.
(c) On various dates from the Recapitalization Closing Date through
December 31, 1999, pursuant to Holding (PA)'s Stock Option Plan, Holding
(PA) has granted to key employees of Werner non-qualified incentive stock
options, exercisable at $2,421.29 per share, to purchase up to an aggregate
of 7,600 shares of Class C Common Stock. See Note H entitled "Stock
Incentive Plans" in the Notes to Consolidated Financial Statements in this
report.
(d) On various dates from January 1, 1999 to December 31, 1999,
certain members of Werner's management purchased shares of Holding (PA)'s
Class C Common Stock at a purchase price of $2,421.29 per share, or an
aggregate of approximately $1,932,189 pursuant to Management Stock Purchase
Agreements. Certain of these individuals received secured loans from the
Company pursuant to its Stock Loan Plan to finance a portion of the
purchase price paid for the shares of Class C Common Stock in an aggregate
amount of approximately $685,000. See Note H entitled "Stock Incentive
Plans" in the Notes to Consolidated Financial Statements in this report.
The transactions set forth in paragraphs (a), (b) and (d) above were
undertaken in reliance upon the exemption from the registration requirements of
the Securities Act afforded by Section 4(2) thereof and/or Regulation D
promulgated thereunder, as sales not involving a public offering. The
transactions set forth in paragraph (c) above were undertaken in reliance upon
the exemption from the registration requirements of the Securities Act afforded
by Rule 701 promulgated thereunder, as sales by an issuer to employees,
directors or officers pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. The Company believes
that exemptions other than those specified above may exist with respect to the
transactions set forth above.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data is that of Holding (PA).
Holding (PA) is a guarantor of the Notes and has no substantial operations or
assets other than its investment in Holding (DE). As a result, the consolidated
financial condition and results of operations of Holding (PA) are substantially
the same as those of Holding (DE). This table contains selected financial data
and is qualified by the more detailed Consolidated Financial Statements and
Notes thereto of Holding (PA). The selected financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
FISCAL YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
OPERATING DATA:
Net sales.................................. $484.6 $436.1 $416.3 $366.9 $336.0
Cost of sales.............................. 348.6 322.5 303.4 268.0 251.4
------ ------ ------ ------ ------
Gross profit............................ 136.0 113.6 112.9 98.9 84.6
General and administrative expenses(a)..... 29.9 31.6 27.6 23.8 22.2
Selling and distribution expenses.......... 58.0 50.2 49.1 47.9 47.2
Recapitalization expense(b)................ -- -- 22.7 -- --
Non-cash compensation charge(c)............ -- -- 78.5 -- --
------ ------ ------ ------ ------
Operating profit (loss).................... 48.1 31.8 (65.0) 27.2 15.2
MIICA investment gains (losses)(d)......... -- (1.5) (14.6) 9.5 1.3
Other income (expense), net................ (2.0) 2.2 (1.2) 0.2 2.7
------ ------ ------ ------ ------
Income (loss) before interest and taxes.... 46.1 32.5 (80.8) 36.9 19.2
Interest expense(e)........................ 27.1 30.6 9.0 7.5 7.2
------ ------ ------ ------ ------
Income (loss) before provision for income
taxes................................... 19.0 1.9 (89.8) 29.4 12.0
Income taxes............................... 7.7 1.8 0.7 10.0 5.1
------ ------ ------ ------ ------
Income (loss) before extraordinary
charge.................................. 11.3 0.1 (90.5) 19.4 6.9
Extraordinary charge(f).................... -- -- -- -- 0.6
------ ------ ------ ------ ------
Net income (loss).......................... $ 11.3 $ 0.1 $(90.5) $ 19.4 $ 6.3
====== ====== ====== ====== ======
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and equivalents....................... $ 0.9 $ 9.4 $ 3.1 $ 1.0 $ 0.6
Insurance fund investments(g).............. -- -- 58.6 80.9 68.2
Working capital............................ 61.5 53.6 30.1 49.2 59.4
Total assets............................... 255.4 212.8 288.2 261.2 234.6
Reserve for product liability and workers'
compensation claims (including
current)(g)............................. 29.8 14.3 49.6 45.3 41.5
Total debt (including current
maturities)............................. 278.9 279.9 322.5 83.4 83.5
Common shareholders' equity (deficit)(h)... (143.9) (154.4) (153.7) 75.1 62.1
OTHER FINANCIAL DATA:
Cash flow provided by (used in) operating
activities.............................. $ 27.6 $ 51.8 $ 17.2 $ 19.5 $ (1.4)
Cash flows used in investing activities.... (32.5) (2.6) (3.6) (15.8) (18.9)
Cash flows (used in) provided by financing
activities.............................. (3.6) (42.9) (11.5) (3.3) 20.8
Depreciation and amortization(i)........... 13.3 17.5 11.2 9.1 7.7
Capital expenditures....................... 20.5 8.9 11.7 13.0 12.5
Dividends declared per share............... -- -- 10.50 11.25 10.20
EBITDA(j).................................. 60.8 51.5 (69.6) 46.0 26.9
See Notes to Selected Consolidated Historical Financial Data.
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ITEM 6. SELECTED FINANCIAL DATA. (CONTINUED)
NOTES TO SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN MILLIONS)
(a) General and administrative expenses in 1999 and 1998 include
$1.0 and $6.6, respectively, of amortization of certain
non-recurring expenses associated with the Recapitalization.
(b) Represents Recapitalization expense of $22.7 consisting of
investment banker fees, transaction fees, legal and
accounting fees, transaction bonuses paid to certain Company
employees and other miscellaneous costs incurred in
connection with the Recapitalization.
(c) Reflects the non-recurring non-cash compensation charge (and
a corresponding credit to shareholders' equity) of $78.5
associated with (a) the accelerated vesting, as a result of
the Recapitalization, of outstanding restricted
Pre-Recapitalization Class B Stock previously granted to
certain key management employees; (b) the accelerated
vesting, as a result of the Recapitalization, of outstanding
restricted Pre-Recapitalization Class B Stock previously
granted to a former key management employee upon his
separation from the Company; and (c) changes in the terms of
the plan under which such stock was granted.
(d) 1998 includes three months of MIICA investment losses
(January 1, 1998 through March 31, 1998, the date of the
MIICA Insurance Transfer).
(e) Reflects a full year of interest expense in 1999 and 1998 on
the debt incurred to finance the Recapitalization.
(f) Reflects expenses incurred in regard to the early
extinguishment of debt, net of income tax benefits of $0.4.
(g) Decreases in 1998 are primarily due to the MIICA Insurance
Transfer which occurred on March 31, 1998.
(h) The shareholders' deficit at December 31, 1997 was the
result of the Recapitalization and the recording of related
expenses, net of income tax benefits. In connection with the
Recapitalization, the Investors made an equity investment of
approximately $122.7, representing approximately 67% of the
outstanding capital stock and voting power of the Company.
(i) Depreciation and amortization is comprised of the following
components in 1999 and 1998: depreciation of property, plant
and equipment, $8.9 and $8.5, respectively; amortization of
certain non-recurring expenses associated with the
Recapitalization, $1.0 and $6.6, respectively; and other
amortization, $3.4 and $2.4, respectively. Depreciation and
amortization excludes amortization of deferred financing
fees and original issue discount.
(j) EBITDA represents earnings before interest, income taxes,
depreciation and amortization. EBITDA is presented because
it is commonly used by certain investors to analyze and
determine a company's ability to service and/or incur debt.
However, EBITDA should not be considered in isolation or as
a substitute for net income, cash flows or other income or
cash flows data prepared in accordance with generally
accepted accounting principles or as a measure of a
company's profitability or liquidity. EBITDA for both 1999
and 1998 excludes $1.5 of accounts receivable securitization
expense. EBITDA for 1999 includes: (a) non-recurring
recruiting, relocation and other costs of $2.2 due to the
transition in chief executive officers of the Company, (b)
costs of $2.1 related to the Keller business described in
Note R to the Consolidated Financial Statements and, (c)
other non-recurring expenses of $1.2 primarily related to a
former employee and the discontinued operations of a former
subsidiary. EBITDA for 1998 includes non-recurring expenses
of $.5 to shutdown an extrusion paint and thermal production
line. EBITDA for 1997 includes: (a) the non-recurring,
non-cash compensation charge of $78.5; and (b)
recapitalization expense of $22.7 and other non-recurring
adjustments.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Historical Financial Data," and the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Annual Report on Form 10-K.
GENERAL
Werner is a manufacturer and marketer of ladders and other climbing
products. Werner also manufactures and sells aluminum extruded products and more
complex fabricated components.
The Recapitalization. Pursuant to the Recapitalization Agreement, on
November 24, 1997, the Company (a) amended and restated its Articles of
Incorporation pursuant to which the Company's capital stock was reclassified,
(b) redeemed for cash certain shares of the reclassified stock totaling $330.7
million and (c) sold to the Investors shares of newly created Class C, D and E
Common Stock of the Company totaling $122.7 million. As a result of the
Recapitalization, the Pre-Recapitalization shareholders continue to own
approximately 33% of the outstanding voting equity of the Company and the
Investors own approximately 67% of the outstanding voting equity of the Company.
Recapitalization Financing. The Recapitalization was funded by (a) $186.5
million of borrowings under the Senior Credit Facility, (b) the issuance of
$135.0 million of Notes and (c) proceeds from the sale of certain shares of the
Company's stock to the Investors.
Recapitalization Accounting. The transaction was accounted for as a
recapitalization and as such, the historical basis of the Company's assets and
liabilities was not affected. Recapitalization related costs totaling $22.7
million were expensed and reflected as a component of operating income in 1997.
The MIICA Insurance Transfer. In the first quarter of 1998, the Company
obtained commercial insurance coverage for its product liability and workers'
compensation claims as opposed to providing insurance for such claims through
MIICA, the Issuer's captive insurance subsidiary. On March 31, 1998 the Company
entered into the MIICA Insurance Transfer pursuant to which a commercial
insurance provider agreed to assume product liability and workers' compensation
losses which occurred on or before March 31, 1998 and to extinguish the
Company's liability in regard to such losses. The Company paid approximately
$42.4 million for this insurance coverage from the proceeds of the liquidation
of certain of MIICA's insurance fund investments. Immediately prior to the MIICA
Insurance Transfer, the Company had a reserve for such losses of approximately
$47.5 million. As a result of the MIICA Insurance Transfer the Company
recognized a gain of approximately $4.5 million, which is included in other
income (expense), net. Such gain is net of costs incurred to discontinue the
operations of MIICA. MIICA was dissolved in the third quarter of 1998. The
Company has also obtained third party insurance coverage, subject to certain
deductible provisions, for product liability and workers' compensation claims
which occur on or after April 1, 1998.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Sales. Net sales increased $48.5 million, or 11.1%, to $484.6 million
for 1999 from $436.1 million for 1998.
Net sales of climbing products increased $50.2 million, or 15.2%, to $380.2
million in 1999 from $330.0 million in 1998. This increase was primarily due to
increased sales volume in both fiberglass and aluminum climbing products, which
was achieved through the ongoing successful growth of the Com-
10
13
pany's customer base, the addition of new customers, including $6.6 million
related to the acquisition of certain assets of Keller Ladders, Inc., new
product development and increased marketing efforts, particularly to large home
improvement retailers.
Net sales of extruded products of $104.4 million for 1999 declined by $1.7
million or 1.6% compared to 1998 primarily due to lower aluminum prices.
Gross Profit. Gross profit increased to $136.0 million for 1999 from
$113.6 million for 1998. Gross profit margin was 28.1% for 1999 and 26.1% for
1998. The increase was primarily due to greater sales of higher margin climbing
products and the benefits of spreading fixed costs over higher production
volumes.
General and Administrative Expense. General and administrative expense
decreased $1.8 million, or 5.7%, to $29.8 million for 1999 from $31.6 million
for 1998. The decrease was primarily due to certain non-recurring costs in 1998
associated with the Recapitalization, partially offset by increases in
recruiting and relocation expenses and increases in consulting expenses related
to certain cost reduction initiatives.
Selling and Distribution Expense. Selling and distribution expense
increased $7.8 million, or 15.7%, to $58.0 million for 1999 from $50.2 million
for 1998. The increase was primarily due to increases in advertising and
distribution expenses.
Operating Profit (Loss). Operating profit increased $16.3 million to $48.1
million for 1999 from $31.8 million in 1998. Operating profit of the Climbing
Products segment increased $6.9 million or 19.0% to $43.3 million in 1999 from
$36.4 million in 1998. This increase was primarily attributable to the increased
sale of higher margin climbing products partially offset by related increases in
advertising and distribution expenses. Operating profit of the Extruded Products
segment increased $2.0 million or 30.9% to $8.5 million from $6.5 million in
1998. This increase was primarily attributable to improvements in the
profitability of the product mix. Corporate and Other expenses decreased $7.4
million from $11.1 million in 1998 to $3.7 million in 1999. This decrease was
primarily due to certain non-recurring expenses in 1998 associated with the
Recapitalization.
Other (Expense) Income, Net. Other (expense) income, net decreased by $2.7
million from net income of $0.6 million for 1998 to net expense of $2.1 million
in 1999. The increase in expense is primarily attributable to a decrease in
1999, compared to 1998, of $1.5 million in MIICA investment losses, the gain
recognized on the MIICA Insurance Transfer offset by provisions for remaining
MIICA assets in 1998, and other expenses in 1999, primarily attributable to
certain non-recurring expenses with respect to a former employee and expenses
associated with the discontinued operations of a former subsidiary.
Interest Expense. Interest expense decreased $3.5 million to $27.1 million
for 1999 from $30.6 million for 1998. The decrease was primarily due to lower
interest rates.
Income Taxes. Income taxes increased $5.8 million to $7.6 million for 1999
from $1.8 million for 1998. This increase was primarily due to an increase in
taxable income in 1999 as compared to the year ended 1998.
Net Income. Net income was $11.3 million for 1999 compared to a net income
of $0.1 million for 1998. The change was due to a combination of the above
factors.
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. Net sales increased $19.8 million, or 4.8%, to $436.1 million
for 1998 from $416.3 million for 1997.
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14
Net sales of climbing products increased $15.8 million, or 5.0%, to $330.0
million in 1998 from $314.2 million in 1997. This increase was primarily due to
increased sales volume in both fiberglass and aluminum climbing products, which
was achieved through the ongoing successful growth of the Company's customer
base, new product development and increased marketing efforts, particularly to
large home improvement retailers.
Net sales of extruded products increased $4.0 million, or 3.9%, to $106.1
million for 1998 from $102.1 million for 1997. The increase is due to growth of
extrusions sold to customers in the building products and transportation
sectors.
Gross Profit. Gross profit increased slightly to $113.6 million for 1998
from $112.9 million for 1997. Gross profit margin was 26.1% for 1998 and 27.1%
for 1997, reflecting general market conditions.
General and Administrative Expense. General and administrative expense
increased $4.0 million, or 14.4%, to $31.6 million for 1998 from $27.6 million
for 1997. This increase was primarily due to the amortization of certain
non-recurring costs associated with the Recapitalization of $6.6 million offset
by decreases in certain costs of $2.6 million.
Selling and Distribution Expense. Selling and distribution expense
increased $1.1 million, or 2.2%, to $50.2 million for 1998 from $49.1 million
for 1997.
Non-Cash Compensation Charge. A non-cash compensation charge of $78.5
million, primarily relating to the accelerated vesting of Pre-Recapitalization
Class B Stock in connection with the Recapitalization, was recorded in 1997.
Operating Profit (Loss). Operating profit increased $96.8 million to $31.8
million for 1998 from an operating loss of $65.0 million in 1997. Operating
profit of the Climbing Products segment decreased $1.8 million or 4.7% to $36.4
million in 1998 from $38.2 million in 1997. This decrease was primarily
attributable to increases in sales-based advertising and promotional expense.
Operating profit of the Extruded Products segment increased $0.6 million or
11.1% to $6.5 million from $5.9 million in 1997. This increase was primarily
attributable to the growth of extrusions sold to customers in the building and
transportation sectors. The remaining increase in operating profit of $98.0
million between 1998 and 1997 was primarily the result of the Recapitalization
expense and the non-cash compensation charge incurred in 1997.
Other Income (Expense), Net. Other income (expense), net decreased by
$16.5 million from net expense of $15.8 million for 1997 to net income of $0.7
million in 1998. The decrease in expense is primarily attributable to a decrease
of $13.1 million in MIICA investment losses, between 1998 and 1997, and the gain
of $4.5 million recognized on the MIICA Insurance Transfer offset by provisions
for remaining MIICA assets and other expenses.
Interest Expense. Interest expense increased $21.6 million to $30.6
million for 1998 from $9.0 million for 1997. The increase was primarily due to
the additional interest on the debt resulting from the Recapitalization.
Income Taxes. Income taxes increased $1.1 million to $1.8 million for 1998
from $0.7 million for 1997. This increase was primarily due to: an increase in
taxable income in 1998 as compared to the year ended 1997 due to the inclusion
in 1997 of charges associated with the Recapitalization; the inclusion in 1997
of the non-cash compensation charge of $78.5 million which was not deductible
for income tax purposes; and an increase of $1.7 million in the valuation
allowance in 1998 relating to the realization of certain deferred tax assets.
Net Income. Net income was $0.1 million for 1998 compared to a net loss of
$90.5 million for 1997. The change was due to a combination of the above
factors.
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LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a significant amount of indebtedness in connection
with the Recapitalization. At December 31, 1999, the Company had approximately
$278.9 million of consolidated indebtedness, including $131.8 million of
indebtedness, net of the original issue discount, pursuant to the Notes, and
$142.1 million of borrowings under the Senior Credit Facility. The Senior Credit
Facility provides for $145.0 million of Term Loan Facilities, and a $100.0
million Revolving Facility. At December 31, 1999 $93.9 million was available for
borrowing under the Revolving Facility.
In May 1998, the Company entered into a five-year $50.0 million receivables
purchase agreement with a financial institution and its affiliate (the
"Receivables Purchase Agreement") and refinanced outstanding amounts borrowed
under the receivables portion of the Senior Credit Facility. As of December 31,
1999, the Company sold $89.5 million of accounts receivable in exchange for
$20.0 million in cash and an undivided interest in the accounts receivable of
$69.5 million. As of December 31, 1999, an additional $30.0 million of financing
was available under the Receivables Purchase Agreement.
The Company satisfies its debt service requirements and meets its
operating, working capital and capital expenditure needs through a combination
of operating cash flow and funds available under the Senior Credit Facility and
the Receivables Purchase Agreement.
In connection with the Recapitalization, the Company refinanced all of its
existing debt except for the Variable Rate Demand Industrial Building Revenue
Bonds due 2015 (the "IRBs") with the proceeds from the Notes and the Senior
Credit Facility.
Net cash flows from operating activities decreased $24.2 million to $27.6
million for the year ended December 31, 1999 from $51.8 million for the year
ended 1998. The decrease is primarily attributable to the net proceeds from the
sale of accounts receivable under the Receivables Purchase Agreement of $20.0
million in 1998. Net cash flows from operating activities increased $34.6
million to $51.8 million for the year ended December 31, 1998 from $17.2 million
for the year ended 1997. This is primarily attributable to: the decrease in
operating working capital (receivables, inventory, accounts payable and accrued
expenses) of $9.3 million; the decrease in the payment of product liability and
workers' compensation claims of $7.3 million; and the net proceeds from the sale
of accounts receivable under the Receivables Purchase Agreement of $20.0
million. Operating working capital also primarily decreased as a result of this
sale of receivables. The payment of product liability and workers' compensation
claims decreased as a result of the MIICA Insurance Transfer. Cash flow used in
investing activities increased $29.9 million to $32.5 million in 1999 from $2.6
million in 1998. This increase was due primarily to an increase in capital
expenditures of $11.5 million and the acquisition of certain assets of Keller
Ladders, Inc. for $12.2 million.
The Company's ability to make scheduled payments of principal ($1.5 million
for each of the years 2000 through 2002), or to pay interest (expected to range
from $25.1 million to $25.3 million annually for years 2000 to 2002, assuming
current interest rates and debt levels, net of scheduled principal payments),
on, or to refinance its indebtedness (including the Notes), or to fund planned
capital expenditures or finance acquisitions, will depend on its future
financial and operating performance, which to a certain extent is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based on the current and anticipated level
of operations, management believes that cash flow from operations and available
cash, together with available borrowings under the Senior Credit Facility and
sales of accounts receivable under the Receivables Purchase Agreement, will be
adequate to meet the Company's anticipated future requirements for working
capital, budgeted capital expenditures, and scheduled payments of principal and
interest on its indebtedness, including the Notes, for the next twelve months.
The Company, however, may need to refinance all or a portion of the principal of
the Notes on or prior to maturity. There can be no assurance that the Company's
business will generate sufficient cash flows from operations or that future
borrowings will be available under the Senior Credit Facility and the
Receivables Purchase Agreement in an amount sufficient to enable the Company to
service its indebtedness, including the Notes, or make anticipated
13
16
capital expenditures and fund potential future acquisitions. In addition, there
can be no assurance that the Company will be able to effect any refinancing on
commercially reasonable terms, or at all.
Capital Expenditures
The Company's capital expenditures were $20.5 million, $8.9 million and
$11.7 million, in 1999, 1998 and 1997, respectively. Approximately $5 million of
the amount expended in each of such years has been for the renewal and
replacement of existing facilities and equipment; thus in an economic downturn,
the Company believes it will be able to adjust the amount spent on capital
expenditures without compromising the base need of its operations. The Company
expects to spend approximately $35 million in 2000 for various capital projects,
including information systems, quality enhancement, cost improvement, efficiency
improvement, and increased capacity.
Seasonality, Working Capital and Cyclicality
Sales of certain products of the Company are subject to seasonal variation.
Demand for the Company's ladder products is affected by residential housing
starts and existing home sales, commercial construction activity, and overall
home improvement expenditures. Due to seasonal factors associated with the
construction industry, sales of products and working capital are typically
higher during the second and third quarters than at other times of the year. The
Company expects to use the Senior Credit Facility and the Receivables Purchase
Agreement to meet any seasonal variations in its working capital requirements.
The residential and commercial construction markets are sensitive to cyclical
changes in the economy.
Raw Material Costs and Inflation
The rate of inflation over recent years has been relatively low and has not
had a significant effect on the Company's results of operations. The Company
purchases aluminum, glass and other raw materials from various suppliers. While
all such materials are available from numerous independent suppliers, commodity
raw materials are subject to price fluctuations. There have been historical
periods of rapid and significant movements in the price of aluminum, both upward
and downward. Historically, the Company has entered into futures contracts with
respect to its purchases of aluminum to minimize or hedge commodity price
fluctuations. See "Business -- Raw Materials and Suppliers".
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS No. 133), Accounting
for Derivative Instruments and Hedging Activities, which was originally required
to be adopted by the Company in 2000. In September 1999, the FASB issued SFAS
No. 137 (SFAS No. 137), Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS No. 133. SFAS No. 137
deferred the date by which the Company is required to adopt SFAS No. 133 to
2001. SFAS No. 133 requires that the Company recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of such derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in accumulated other non-owner
equity changes until the hedged item is recognized in earnings. The portion of a
derivative's change in fair value, if unrelated to a hedge, will be immediately
recognized in earnings. The Company has not yet determined what the effect of
SFAS No. 133 will be on the earnings and financial position of the Company.
YEAR 2000 READINESS PROGRAM
The Year 2000 issue arose because many computer hardware and software
systems used only the last two digits to represent a year. As a result, these
systems may not have properly processed dates
14
17
beyond 1999 which could have caused errors in information or system failures. If
the Company's computer systems did not correctly recognize and process date
information beyond the year 1999, the Year 2000 issue could have had a material
adverse impact on the operations of the Company.
Based on all current information, the Company has not experienced any
significant events in connection with Year 2000 issues. The Company will
continue to monitor for potential issues with its own internal computer systems,
as well as those of its customers and suppliers, in order to minimize any
potential risk. The Company now believes that any potential Year 2000 issue that
might arise would not have a significant impact on its operations and would most
likely be an isolated, short-term event.
Program Completion. In 1996, the Company commenced a program intended to
mitigate and prevent the adverse effect of the Year 2000 issue. This program
consisted of the following phases:
AWARENESS PHASE -- development of a detailed strategic approach to
address the Year 2000 issue;
ASSESSMENT PHASE -- an assessment of all computer systems, software,
building infrastructure components and equipment with embedded technology
to identify each item that requires date code remediation and an assessment
and certification of third parties' Year 2000 compliance;
REMEDIATION PHASE -- implementation of code enhancements, hardware and
software upgrades, system replacements, vendor and customer assurances,
contingency planning and other associated changes; and
VALIDATION PHASE -- testing of systems for Year 2000 readiness.
The Company completed all phases of the program in advance of December 31,
1999.
Costs. The Company primarily utilized internal resources to reprogram,
replace and test its computer systems, software, equipment and building
infrastructure components for Year 2000 modifications. The Company's Year 2000
expenditures approximated $1.6 million and were funded by normal operating cash
flow. All Year 2000 expenditures were expensed as incurred and did not have a
material effect on results of operations, liquidity or capital resources.
Approximately $0.5 million and $0.9 million of the project costs were incurred
in 1999 and 1998, respectively. The Company does not expect to incur any
additional significant direct costs related to the Year 2000 issue during the
current year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures. The following discussion about the Company's
market risk disclosures involves forward looking statements. Actual results
could differ materially from those projected in the forward looking statements.
The Company is exposed to market risk related to changes in interest rates,
foreign currency exchange rates and commodity prices. The Company does not use
derivative financial instruments for speculative or trading purposes.
The Company is exposed to market risk from changes in interest rates on
long-term debt obligations. The Company manages such risk through the use of a
combination of fixed and variable rate debt. Currently, the Company does not use
derivative financial instruments to manage its interest rate risk.
The following table provides information about the Company's debt
obligations and financial instruments that are sensitive to changes in interest
rates. For debt obligations, the table presents principal
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cash flows and related weighted-average interest rates by expected maturity
dates or applicable floating rate index.
DECEMBER 31,
--------------------------------------------------- FAIR VALUE
2000 DECEMBER 31,
THROUGH -------------------
2002 2003 2004 THEREAFTER TOTAL 1999 1998
------- ------- ------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Liabilities
Long-term debt, including Current Portion
Fixed Rate.................................... $135,000 $135,000 $132,300 $133,650
Average Interest Rate......................... 10.00%
Variable Rate................................. $1,450 $30,550 $56,050 $ 56,150 $147,100 $147,100 $148,550
Average Interest Rate......................... LIBOR+ LIBOR+ LIBOR+ LIBOR+
2.00% 2.00% 2.00% 2.00%
to to to to
2.25% 2.25% 2.25% 2.25%
The Company has no operations in foreign countries. International sales
were not material to the Company's operations for the year ended December 31,
1999. Accordingly, the Company is not subject to material foreign currency
exchange rate risk. To date, the Company has not entered into any foreign
currency forward exchange contracts or other derivative financial instruments
relative to foreign currency exchange rates.
The Company is exposed to market risk from changes in the price of
aluminum. The Company manages such risk through the use of aluminum futures and
option contracts. At December 31, 1999, the Company had purchased futures
contracts, maturing in 2000, for the delivery of 15.2 million pounds of aluminum
at a weighted average settlement price of $.6215 per pound. The fair value of
such futures contracts was $11.4 million at December 31, 1999. At December 31,
1998, the Company had purchased futures contracts, maturing in 1999, for the
delivery of 64.9 million pounds of aluminum at a weighted average settlement
price of $.6573 per pound and contracts, maturing in 2000, for 2.7 million
pounds of aluminum at a weighted average settlement price of $.5990 per pound.
The fair value of such futures contracts was $38.7 million at December 31, 1998.
At December 31, 1999, the Company had purchased call option contracts and sold
put option contracts, maturing in 2000, covering 59.1 million pounds of aluminum
at strike prices ranging from $.6463 to $.7484 per pound. The fair value of such
option contracts was $1.8 million at December 31, 1999. The Company did not
utilize option contracts during 1998.
16
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants.......................... 18
Consolidated Balance Sheets................................. 19
Consolidated Statements of Operations....................... 21
Consolidated Statements of Changes in Shareholders' Equity
(Deficit)................................................. 22
Consolidated Statements of Cash Flows....................... 23
Notes to Consolidated Financial Statements.................. 24
17
20
REPORTS OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Werner Holding Co. (PA), Inc.:
In our opinion, the accompanying consolidated balance sheet as of December
31, 1999 and the related consolidated statements of operations, of changes in
shareholders' equity (deficit) and of cash flows present fairly, in all material
respects, the financial position of Werner Holding Co. (PA), Inc. and
subsidiaries at December 31, 1999, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
As discussed in Note B, the Company changed its method of computing
depreciation prospectively as of January 1, 1999.
/s/ PRICEWATERHOUSECOOPERS LLP
Pittsburgh, PA
February 25, 2000
Shareholders and Board of Directors
Werner Holding Co. (PA), Inc.
Greenville, Pennsylvania
We have audited the accompanying consolidated balance sheet of Werner
Holding Co. (PA), Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, changes in shareholders' equity (deficit)
and cash flows for each of the two years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Werner Holding
Co. (PA), Inc. and subsidiaries at December 31, 1998, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
February 28, 1999
18
21
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31
--------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and equivalents...................................... $ 866 $ 9,387
Undivided interest in accounts receivable................. 68,393 46,298
Allowance for doubtful accounts........................... (1,900) (1,600)
Refundable income taxes................................... 697 1,132
Inventories............................................... 58,348 46,777
Deferred income taxes..................................... 2,420 2,830
Other..................................................... 1,907 1,520
-------- --------
Total current assets........................................ 130,731 106,344
Other assets:
Deferred income taxes..................................... 10,972 5,355
Deferred financing fees, net.............................. 11,474 13,745
Other..................................................... 18,756 21,642
-------- --------
41,202 40,742
Property, plant and equipment:
Land and improvements..................................... 7,307 7,262
Buildings................................................. 42,470 34,077
Machinery and equipment................................... 114,422 102,019
-------- --------
164,199 143,358
Less accumulated depreciation and amortization............ 91,504 83,455
-------- --------
72,695 59,903
Capital projects in progress.............................. 10,812 5,790
-------- --------
83,507 65,693
-------- --------
TOTAL ASSETS................................................ $255,440 $212,779
======== ========
19
22
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31
--------------------
1999 1998
-------- --------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 31,065 $ 22,742
Accrued liabilities....................................... 36,679 28,583
Current maturities of long-term debt...................... 1,450 1,450
-------- --------
Total current liabilities................................... 69,194 52,775
Long-term obligations:
Long-term debt -- less current maturities (net of
unamortized original issue discount of $3,216 in 1999
and $3,617 in 1998).................................... 277,434 278,483
Reserve for product liability and workers' compensation
claims................................................. 29,247 13,639
Other long-term obligations............................... 23,441 22,279
-------- --------
330,122 314,401
Shareholders' deficit:
Common stock:
Class A -- $.01 par value; voting; 5,000 shares
authorized;
1,964 shares issued and outstanding in 1999 and
2,059 shares issued and outstanding in 1998....... -- --
Class B -- $.01 par value; voting; 25,000 shares
authorized;
21,943 shares issued and outstanding in 1999 and
22,438 shares issued and outstanding in 1998...... -- --
Class C -- $.01 par value; non-voting; 45,000 shares
authorized;
4,657 shares issued and outstanding in 1999 and
4,682 shares issued and outstanding in 1998....... -- --
Class D -- $.01 par value; voting; 1,000 shares
authorized;
1,000 shares issued and outstanding............... -- --
Class E -- $.01 par value; non-voting; 50,000 shares
authorized; 45,000 shares issued and outstanding.... 1 1
Additional paid-in capital................................ 198,786 198,847
Accumulated deficit....................................... (341,718) (351,607)
Accumulated other non-owner changes in equity............. (260) (1,638)
Notes receivable arising from stock loan plan............. (685) --
-------- --------
Total shareholders' deficit................................. (143,876) (154,397)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $255,440 $212,779
======== ========
See notes to consolidated financial statements.
20
23
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
Net sales............................................... $484,646 $436,091 $416,321
Cost of sales........................................... 348,643 322,451 303,354
-------- -------- --------
Gross profit............................................ 136,003 113,640 112,967
General and administrative expense...................... 29,839 31,626 27,652
Selling and distribution expense........................ 58,029 50,165 49,075
Recapitalization expense................................ -- -- 22,714
Non-cash compensation charge............................ -- -- 78,527
-------- -------- --------
Operating profit (loss)................................. 48,135 31,849 (65,001)
Other (expense) income, net............................. (2,067) 645 (15,813)
-------- -------- --------
Income (loss) before interest and taxes................. 46,068 32,494 (80,814)
Interest expense........................................ 27,102 30,591 8,979
-------- -------- --------
Income (loss) before provision for income taxes......... 18,966 1,903 (89,793)
Income taxes............................................ 7,649 1,757 714
-------- -------- --------
NET INCOME (LOSS)....................................... $ 11,317 $ 146 $(90,507)
======== ======== ========
See notes to consolidated financial statements.
21
24
WERNER HOLDING CO. (PA), INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRE-RECAPITALIZATION
COMMON STOCK POST-RECAPITALIZATION COMMON STOCK
-------------------------------------- -----------------------------------
CLASS A CLASS B CLASS A CLASS B
----------------- ------------------ ---------------- ----------------
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS
------ ------- ------ ------- ------ ------- ------ -------
Balance at January 1, 1997........................ 13,227 $13 148,473 $148 $ $
Net (loss)........................................
Unrealized losses on investments (net of deferred
tax benefit of $5,934)...........................
Reclassification adjustment for losses realized
included in net loss (net of tax)................
Adjustment to minimum pension liability...........
Total other non-owner changes in equity...........
Amortization of deferred compensation.............
Repurchase of common stock........................ (55) -- (574) --
Dividends declared ($10.50 per share).............
Redemption and reclassification of common stock in
connection with the Recapitalization............. (13,172) (13) (147,899) (148) 2,059 -- 22,438 --
Issuance of common stock in connection with the
Recapitalization, net of issuance costs of
$2,196...........................................
Non-cash compensation charge......................
------- --- -------- ---- ----- --- ------ ---
Balance at December 31, 1997...................... -- -- -- -- 2,059 -- 22,438 --
Net income........................................
Unrealized losses on investments (net of deferred
tax benefit of $1,243)...........................
Reclassification adjustment for losses realized
included in net income (net of tax)..............
Adjustment to minimum pension liability (net of
deferred tax of $980)............................
Total other non-owner changes in equity...........
------- --- -------- ---- ----- --- ------ ---
Balance at December 31, 1998...................... -- -- 2,059 -- 22,438 --
Net income
Unrealized gains on investments (net of deferred
tax of $46)......................................
Reclassification adjustment for gains realized in
net income (net of tax)..........................
Adjustment to minimum pension liability (net of
deferred tax of $827)............................
Total other non-owner changes in equity...........
Repurchase of common stock........................ (95) (495)
Notes receivable arising from stock loan plan.....
------- --- -------- ---- ----- --- ------ ---
Balance at December 31, 1999...................... $-- $ -- 1,964 $-- 21,943 $--
======= === ======== ==== ===== === ====== ===
POST-RECAPITALIZATION COMMON STOCK
------------------------------------------------------
CLASS C CLASS D CLASS E ADDITIONAL
---------------- ---------------- ---------------- PAID-IN RETAINED
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS CAPITAL EARNINGS
------ ------- ------ ------- ------ ------- ---------- --------
Balance at January 1, 1997........................ $ $ $ $ 1,316 $ 70,402
Net (loss)........................................ (90,507)
Unrealized losses on investments (net of deferred
tax benefit of $5,934)...........................
Reclassification adjustment for losses realized
included in net loss (net of tax)................
Adjustment to minimum pension liability...........
Total other non-owner changes in equity...........
Amortization of deferred compensation.............
Repurchase of common stock........................ (731)
Dividends declared ($10.50 per share)............. (1,691)
Redemption and reclassification of common stock in
connection with the Recapitalization............. (1,515) (329,226)
Issuance of common stock in connection with the
Recapitalization, net of issuance costs of
$2,196........................................... 4,682 -- 1,000 -- 45,000 1 120,519
Non-cash compensation charge...................... 78,527
----- --- ----- --- ------ -- -------- ---------
Balance at December 31, 1997...................... 4,682 -- 1,000 -- 45,000 1 198,847 (351,753)
Net income........................................ 146
Unrealized losses on investments (net of deferred
tax benefit of $1,243)...........................
Reclassification adjustment for losses realized
included in net income (net of tax)..............
Adjustment to minimum pension liability (net of
deferred tax of $980)............................
Total other non-owner changes in equity...........
----- --- ----- --- ------ -- -------- ---------
Balance at December 31, 1998...................... 4,682 -- 1,000 -- 45,000 1 198,847 (351,607)
Net income 11,317
Unrealized gains on investments (net of deferred
tax of $46)......................................
Reclassification adjustment for gains realized in
net income (net of tax)..........................
Adjustment to minimum pension liability (net of
deferred tax of $827)............................
Total other non-owner changes in equity...........
Repurchase of common stock........................ (25) (61) (1,428)
Notes receivable arising from stock loan plan.....
----- --- ----- --- ------ -- -------- ---------
Balance at December 31, 1999...................... 4,657 $-- 1,000 $-- 45,000 $1 $198,786 $(341,718)
===== === ===== === ====== == ======== =========
ACCUMULATED OTHER
NON-OWNER
CHANGES IN EQUITY
----------------------------------
UNREALIZED NOTES
GAINS RECEIVABLE
MINIMUM (LOSSES) ARISING FROM
PENSION ON STOCK LOAN
LIABILITY INVESTMENTS TOTAL PLAN OTHER TOTAL
--------- ----------- ----- ------------ ----- ---------
Balance at January 1, 1997........................ $ (275) $ 3,807 $ 3,532 $ $(332) $75,079
Net (loss)........................................ (90,507)
Unrealized losses on investments (net of deferred
tax benefit of $5,934)........................... (12,962) (12,962) (12,962)
Reclassification adjustment for losses realized
included in net loss (net of tax)................ 10,609 10,609 10,609
Adjustment to minimum pension liability........... (1,946) (1,946) (1,946)
---------
Total other non-owner changes in equity........... (94,806)
Amortization of deferred compensation............. 133 133
Repurchase of common stock........................ (731)
Dividends declared ($10.50 per share)............. (1,691)
Redemption and reclassification of common stock in
connection with the Recapitalization............. 199 (330,703)
Issuance of common stock in connection with the
Recapitalization, net of issuance costs of
$2,196........................................... 120,520
Non-cash compensation charge...................... 78,527
------- -------- -------- -------- ----- ---------
Balance at December 31, 1997...................... (2,221) 1,454 (767) -- -- (153,672)
Net income........................................ 146
Unrealized losses on investments (net of deferred
tax benefit of $1,243)........................... (2,302) (2,302) (2,302)
Reclassification adjustment for losses realized
included in net income (net of tax).............. 808 808 808
Adjustment to minimum pension liability (net of
deferred tax of $980)............................ 623 623 623
---------
Total other non-owner changes in equity........... (725)
------- -------- -------- -------- ----- ---------
Balance at December 31, 1998...................... (1,598) (40) (1,638) -- -- (154,397)
Net income 11,317
Unrealized gains on investments (net of deferred
tax of $46)...................................... 84 84 84
Reclassification adjustment for gains realized in
net income (net of tax).......................... (44) (44) (44)
Adjustment to minimum pension liability (net of
deferred tax of $827)............................ 1,338 1,338 1,338
---------
Total other non-owner changes in equity........... 12,695
Repurchase of common stock........................ (1,489)
Notes receivable arising from stock loan plan..... (685) (685)
------- -------- -------- -------- ----- ---------
Balance at December 31, 1999...................... $ (260) $ -- $ (260) $ (685) $ -- $(143,876)
======= ======== ======== ======== ===== =========
See notes to consolidated financial statements.
22
25
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
---------------------------------
1999 1998 1997
--------- --------- ---------
OPERATING ACTIVITIES
Net income (loss)........................................... $ 11,317 $ 146 $(90,507)
Reconciliation of net income (loss) to net cash provided by
operating activities:
Recapitalization expense................................ 22,714
Non-cash compensation charge............................ 78,527
Net gain on transfer of loss reserves and discontinuance
of MIICA.............................................. (4,506)
Depreciation............................................ 8,774 8,465 8,371
Amortization of deferred financing fees and original
issue discount........................................ 2,672 2,611 320
Amortization of Recapitalization costs and other........ 4,478 9,079 2,809
Provision for losses on accounts receivable............. 709 599 (115)
Provision for product liability and workers'
compensation claims................................... 17,710 17,023 15,841
Payment of product liability and workers' compensation
claims................................................ (2,102) (4,206) (11,517)
Deferred income taxes................................... (6,058) 9,640 (8,044)
Realized net (gains) losses on disposition and
impairment of investments............................. 2,520 16,407
Net purchases of trading securities..................... (1,975)
Net proceeds from sale of accounts receivable........... 20,000
Changes in operating assets and liabilities:
Accounts receivable................................... 43,811 (16,521)
Undivided interest in accounts receivable............. (22,095) (46,298)
Refundable income taxes............................... 435 (312) 1,196
Inventories........................................... (5,964) (2,107) (263)
Accounts payable...................................... 8,323 (2,162) 3,213
Accrued liabilities................................... 9,845 (3,183) (1,267)
Other (net)........................................... (487) 686 (1,957)
-------- -------- --------
Net cash provided by operating activities................... 27,557 51,806 17,232
INVESTING ACTIVITIES
Capital expenditures........................................ (20,452) (8,940) (11,710)
Acquisition of certain assets of Keller Ladders, Inc........ (12,209)
Available-for-sale securities:
Purchases of debt and equity securities................... (572) (79,484)
Sale of debt and equity securities........................ 59,497
Net sales of other investments.............................. 207 6,936 24,073
Other....................................................... 4,062
-------- -------- --------
Net cash used in investing activities....................... (32,454) (2,576) (3,562)
FINANCING ACTIVITIES
Redemption of common stock.................................. (332,899)
Issuance of common stock.................................... 122,716
Payment of Recapitalization fees and expenses............... (37,952)
Refinancing of debt......................................... (65,571)
Issuance of Senior Subordinated Notes, net.................. 130,950
Borrowings under Senior Credit Facility..................... 186,500
Net repayments under revolving credit agreements............ (6,300)
Repayment of receivables facility........................... (41,500)
Repayments of long-term debt................................ (1,450) (1,450) (6,571)
Repurchase of common stock.................................. (1,489) (731)
Dividends paid.............................................. (1,691)
Issuance of notes receivable arising from stock loan plan,
net....................................................... (685)
-------- -------- --------
Net cash used in financing activities....................... (3,624) (42,950) (11,549)
-------- -------- --------
Net (decrease) increase in cash and equivalents............. (8,521) 6,280 2,121
Cash and equivalents at beginning of year................... 9,387 3,107 986
-------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR......................... $ 866 $ 9,387 $ 3,107
======== ======== ========
CASH PAID (RECEIVED) DURING THE YEAR FOR
Interest.................................................... $ 24,732 $ 26,112 $ 7,752
======== ======== ========
Income taxes................................................ $ 13,272 $ (7,567) $ 9,955
======== ======== ========
See notes to consolidated financial statements.
23
26
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A. DESCRIPTION OF BUSINESS
Werner Holding Co. (PA), Inc. through its subsidiaries is a manufacturer of
climbing equipment which includes aluminum, fiberglass and wood ladders,
scaffolding, stages, and planks; and aluminum extruded products. The Company
operates in two business segments, Climbing Products and Extruded Products,
which are located in the United States.
B. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The consolidated financial statements of Werner
Holding Co. (PA), Inc. include its accounts and the accounts of its wholly-owned
subsidiary, Werner Holding Co. (DE), Inc., and its wholly-owned subsidiaries
(collectively the "Company"). Werner Holding Co. (PA), Inc. has no substantial
operations or assets, other than its investment in Werner Holding Co. (DE), Inc.
The consolidated financial condition and results of operations of Werner Holding
Co. (PA), Inc. are substantially the same as those of Werner Holding Co. (DE),
Inc. Intercompany accounts and transactions have been eliminated.
Revenue Recognition -- Sales are recorded when products are shipped and
title passes to the customer.
Accounts Receivable -- The Company provides credit, in the normal course of
business, to its customers. The Company's customers are not concentrated in any
specific geographic region. The Company performs ongoing credit evaluations of
its customers and maintains allowances for potential credit losses which, when
realized, have been within the range of management's expectations. Write-offs of
uncollectible accounts receivable have totaled $621, $72 and $565 in 1999, 1998
and 1997, respectively.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Inventories -- Inventories are stated at the lower of cost or market (net
realizable value). Cost is determined by the last-in, first-out (LIFO) method
for approximately 93% and 95% of the inventories at December 31, 1999 and 1998,
respectively.
Derivative Commodity Instruments -- The Company utilizes commodity futures
and option contracts to hedge the market risk of changing prices associated with
a certain percentage of its anticipated aluminum raw material requirements.
These contracts obligate the Company to make or receive a payment equal to the
net change in value of the contract at its maturity. Such contracts are
designated as hedges, correspond to the commitment period and are effective in
hedging the Company's exposure to changes in aluminum prices during that cycle.
At December 31, 1999 and 1998, the Company had futures contracts to purchase
aluminum totaling $9,454 and $44,297, respectively. The fair value of these
contracts was approximately $11,388 and $38,732 at December 31, 1999 and 1998,
respectively. At December 31, 1999, the Company had purchased call option
contracts and sold put option contracts covering 59.1 million pounds of
aluminum. The fair value of these contracts was approximately $1,811 at December
31, 1999. The Company did not utilize option contracts during 1998.
All gains and losses on qualifying hedge transactions are deferred and are
reported as a component of the underlying transaction (the deferral accounting
method). Cash flows related to these
24
27
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
B. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
transactions are recognized in the statement of cash flows in a manner
consistent with the underlying transactions.
Property, Plant and Equipment -- Property, plant and equipment is stated at
cost. The straight-line method of depreciation was adopted for all property,
plant and equipment placed into service after January 1, 1999. For property,
plant and equipment placed into service prior to January 1, 1999, depreciation
is computed using accelerated methods. The Company believes the new method will
more appropriately reflect its financial results by better allocating costs of
new property over the estimated useful lives of these assets. In addition, the
new method more closely conforms with that prevalent in the industries in which
the Company operates. The effect of this change was not material to the results
of operations or financial position of the Company for the year ended December
31, 1999. The estimated useful lives for buildings range from 40 to 45 years and
for machinery and equipment range from 3 to 14 years.
Long-lived assets are reviewed for impairment. Impairment is recognized
when events or changes in circumstances indicate that the carrying amount of the
asset, or related group of assets, may not be recoverable. If the expected
future undiscounted cash flows are less than the carrying amount of the asset,
an impairment loss is recognized at that time. Measurement of impairment may be
based upon appraisals, market values of similar assets or discounted cash flows.
Insurance Fund Investments -- Until March 31, 1998, the Company's captive
insurance subsidiary, Manufacturers Indemnity and Insurance Company of America
("MIICA"), maintained an investment fund which consisted of debt securities,
equity securities, real estate, cash and equivalents, and other investments.
MIICA's investments in debt and equity securities were available for sale;
therefore, these securities were reported at market value. Investments in real
estate were recorded at depreciated value and short-term and other investments
were stated primarily at cost which approximated market. Investments in special
expiration price options were classified as trading securities and were reported
at market value.
Realized gains and losses on the sale of investments were recognized in
operations. The cost of securities sold was based on the specific identification
method. Changes in market values of debt and equity securities were reflected as
unrealized gains or losses directly in shareholders' equity and accordingly, had
no effect on operations until sold unless such losses were other than temporary,
at which time such losses were recognized in operations. Changes in market
values of special expiration price options were reported directly in operations.
Substantially all of the MIICA insurance fund investments were liquidated as
part of the discontinuance of MIICA -- see Note M.
Reserve for Product Liability and Workers' Compensation Claims -- Until
March 31, 1998, MIICA maintained reserves for the product liability, workers'
compensation and environmental liability claims of the Company. On March 31,
1998, the Company obtained third party commercial insurance coverage for its
product liability and workers' compensation claims previously provided for by
MIICA. Under the terms of this insurance coverage, the commercial insurance
provider agreed to assume losses which occurred on or before March 31, 1998,
capped at a maximum of $75,000 in losses and extinguished the Company's
liability in regard to such losses -- see Note M. Additionally, on April 1,
1998, the Company obtained third party insurance coverage, subject to certain
deductible provisions, for product liability and workers' compensation claims
which occur on or after that date and maintains a reserve for the insurance
deductibles related to such claims. The reserve for product liability and
workers' compensation claims includes an amount determined from loss reports for
individual cases and an amount, based on past experience, for losses incurred
but not reported. Such reserve is necessarily based on estimates and, while
management believes that the amount is adequate, the ultimate liability may be
in
25
28
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
B. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
excess of or less than the amount provided. The methods for making such
estimates and for establishing the resulting reserve are continually reviewed,
and any adjustments are reflected in earnings currently.
Deferred Financing Fees -- Amortization of deferred financing fees is
computed using the effective interest method.
Advertising -- The Company expenses all advertising as incurred. These
expenses for the years ended December 31, 1999, 1998 and 1997 totaled $12,858,
$8,606, and $8,001, respectively.
Stock-Based Compensation -- The Company accounts for stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees.
Statement of Cash Flows -- Cash and equivalents include cash on hand,
demand deposits and short-term highly liquid debt instruments purchased with an
original maturity of three months or less, exclusive of investments that were
held by MIICA.
Recently Issued Accounting Standards -- In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement No. 133 (SFAS No. 133),
Accounting for Derivative Instruments and Hedging Activities, which was
originally required to be adopted by the Company in 2000. In September 1999, the
FASB issued SFAS No. 137 (SFAS No. 137), Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133. SFAS
No. 137 deferred the date by which the Company is required to adopt SFAS No. 133
to 2001. SFAS No. 133 requires that the Company recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of such derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in accumulated other non-owner
equity changes until the hedged item is recognized in earnings. The portion of a
derivative's change in fair value, if unrelated to a hedge, will be immediately
recognized in earnings. The Company has not yet determined what the effect of
SFAS No. 133 will be on the earnings and financial position of the Company.
Comprehensive Income -- The Company adopted SFAS No. 130, Reporting
Comprehensive Income on January 1, 1998. SFAS No. 130 requires that an
enterprise classify items of other comprehensive income or "other non-owner
changes in equity" as referred to by the Company, by their nature in a financial
statement and display the accumulated other non-owner changes in equity
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet.
Fair Values of Financial Instruments -- The Company's disclosures for
financial instruments are as follows:
Cash and equivalents -- The carrying amounts reported in the balance
sheet for cash and equivalents bear interest at prevailing market rates and
therefore approximate fair value.
Long-term debt -- The carrying amounts of the Company's borrowings
under its credit agreements and the Variable Rate Demand Industrial
Building Revenue Bonds, bear interest at prevailing market rates and
therefore approximate t