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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 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 (EXACT NAME OF CO-REGISTRANT
AS SPECIFIED IN ITS CHARTER) AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 25-0906895 DELAWARE 25-1581345
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 (CO-REGISTRANT'S TELEPHONE
NUMBER INCLUDING AREA CODE) 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 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
---
Indicate by check mark whether each of the co-registrants is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes No X
--- ---
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. NOT APPLICABLE
Indicate the number of shares outstanding of each of the co-registrants' classes
of common stock, as of December 31, 2002:
Werner Holding Co. (PA), Inc. 1,879.5454 shares of Class A Common Stock
21,774.9346 shares of Class B Common Stock
5,515.7790 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
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2002
PAGE NO.
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PART I
Item 1. Business 2
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 51
PART III
Item 10. Directors and Executive Officers of the Company 51
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and Management 58
Item 13. Certain Relationships and Related Transactions 61
Item 14. Controls and Procedures 62
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 62
Signatures 68
Certifications 69
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. 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.
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.
1
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.
According to management's estimates, 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 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 1,100 stock keeping units of fiberglass,
aluminum, and wood climbing products and accessories primarily under the Werner
brand and selectively under the Keller and Stanley brands. The Company produces
five principal categories of climbing equipment: (i) single and twin
stepladders; (ii) extension, fixed, 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, and its broad sales and
distribution system, 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 manufacturer's 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 seven independent manufacturer's representative organizations. The
Company operates on a "make-to-order" basis with most extruded products
customers.
2
SEGMENTS
See Note M entitled "Segment Information" in the Notes to Consolidated
Financial Statements which is incorporated herein by reference.
RAW MATERIALS AND SUPPLIERS
The Company is a major consumer of aluminum and has contracts to provide
most of its estimated aluminum requirements with three principal suppliers.
These contracts include stipulated prices with provisions for price adjustments
based on market prices. One of these contracts will be renegotiable in 2003; one
will be renegotiable in 2004; and one will be renegotiable in 2005. 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.
The Company has implemented various hedging strategies to mitigate the
impact of raw material price fluctuations. To hedge the risk associated with
price fluctuations for a certain percentage of its forecasted aluminum raw
material requirements, the Company has utilized 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. These 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 home construction and elective home
maintenance and discouraging do-it-yourself projects, which account for a
growing portion of the Company's sales.
3
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.
COMPETITION
Management estimates that, while it is the largest U.S. producer of
climbing products, there were approximately 12 principal competitors in 2002.
Competition in U.S. markets from foreign manufacturers, who compete primarily on
the basis of price, is increasing. 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 2,800 salaried and hourly employees as of
December 31, 2002. Of the 2,100 hourly employees, approximately 1,600 are
covered by seven collective bargaining agreements which expire in 2003 through
2005. 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 67% of the
Company's 2002 total net sales. The Company's two largest climbing products
customers, The Home Depot and Lowe's, accounted for approximately 31% and 18%,
respectively, of the Company's 2002 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 2002 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 2002 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.
4
PREVIOUS 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 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 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"). In May 1998, the Company
refinanced the outstanding amounts borrowed under the receivables line of credit
with proceeds from a sale of its accounts receivable under a five-year
Receivables Purchase Agreement which provides a maximum availability of $50
million. Upon such refinancing, the receivables line of credit was terminated.
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.
On March 31, 1998, the Company transferred MIICA's 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 of 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.
Business Acquisition. In October 1999, Werner acquired certain assets of
Keller Ladders, Inc. ("Keller") for a purchase price of approximately $12.2
million. The purchased assets related to three climbing products manufacturing
facilities located in Merced, California, Swainsboro, Georgia, and Goshen,
Indiana; the Keller, Columbia and Blue Ribbon brand names; and certain
equipment, inventory, intellectual property and other assets used in Keller's
climbing products business. No product or other significant liabilities were
assumed in connection with this acquisition. The Goshen, Indiana, and
Swainsboro, Georgia, facilities were subsequently closed to improve efficiency
and reduce overall manufacturing and distribution costs.
5
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 as of December 31, 2002. Werner's corporate headquarters offices are
located at 93 Werner Rd., Greenville, Pennsylvania 16125. The Company's
principal facilities consist of the following:
OWNED/ APPROXIMATE
LOCATION PRINCIPAL USE LEASE EXPIRATION SQUARE FOOTAGE
Greenville, PA Office, Manufacturing, Distribution Owned 640,000
Franklin Park, IL Office, Manufacturing, Distribution Owned 672,000
Anniston, AL Manufacturing, Distribution Owned 550,000
Carrollton, KY Manufacturing, Distribution Owned (1) 200,000
Merced, CA Manufacturing, Distribution 12/31/2035 (2) 351,000
Bell, CA Warehouse 4/30/2006 39,100
Phoenix, AZ Warehouse 1/14/2006 14,500
Dallas, TX Warehouse 6/30/2004 16,480
Houston, TX Warehouse 5/31/2006 30,200
Jefferson, LA Warehouse 4/30/2003 7,800
Greensboro, NC Warehouse 4/30/2004 15,200
Maryland Heights, MO Warehouse 9/30/2003 8,700
Minneapolis, MN Warehouse 8/31/2005 11,900
Greenville, PA Warehouse 12/1/2003 50,000
(1) Collateral for 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.
As of December 31, 2002, the Company's facilities at Greenville,
Pennsylvania, Franklin Park, Illinois, Anniston, Alabama, and Merced,
California, 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.
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 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,
6
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 filed an appeal on
September 2, 1999. On September 27, 2001, the Court of Appeals for the Third
Circuit affirmed the dismissal of all claims except for a claim relating to the
Company's redemption of stock from the Elizabeth Werner trust and the Anne
Werner estate. The Court of Appeals has remanded the claim relating to the stock
redemption to the District Court with directions to allow the plaintiffs to file
a second amended complaint with respect to that claim only. On December 18,
2001, the Estate and the Trust filed an amended complaint. Count I of the
complaint alleges that Holding (PA) made material misrepresentations in
connection with the redemption of shares of stock held by the Trust and the
Estate. This action has proceeded to the discovery phase. 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.
7
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, 2002, 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, 2002 is as follows:
Class A Common Stock: 26 holders
Class B Common Stock: 106 holders
Class C Common Stock: 30 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 various dates from the Recapitalization Closing Date through
December 31, 2002, pursuant to Holding (PA)'s Stock Option Plan, Holding
(PA) has granted to key employees of Werner non-qualified incentive stock
options, exercisable at prices ranging from $2,421.29 to $3,100.00 per
share, to purchase up to an aggregate of 6,120 shares of Class C Common
Stock. See Note G entitled "Stock Incentive Plans" in the Notes to
Consolidated Financial Statements in this report.
(b) On various dates from January 1, 1999 to December 31, 2002,
certain members of Werner's management purchased shares of Holding (PA)'s
Class C Common Stock at purchase prices ranging from $2,421.29 to $3,100.00
per share, or an aggregate of approximately $5,878,000 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 $3,726,000. The balance of such
loans, excluding interest thereon, is $2,426,000 at December 31, 2002. See
Note G entitled "Stock Incentive Plans" in the Notes to Consolidated
Financial Statements in this report.
The transactions set forth in paragraph (a) 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
transactions set forth in paragraph (b) 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 Company believes that exemptions other than
those specified above may exist with respect to the transactions set forth
above.
8
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
2002 2001 2000 1999 1998
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(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Net sales $ 520.4 $ 535.7 $ 545.2 $ 503.7 $ 452.7
Cost of sales 343.8 379.2 384.5 348.6 322.5
----------------------------------------------------------------------------------------------------------------------
Gross profit 176.6 156.5 160.7 155.1 130.2
General and administrative expenses(a) 30.0 24.0 29.5 29.9 31.6
Selling and distribution expenses 82.0 83.1 85.6 77.1 66.8
Benefit plan curtailment and settlement
gains, net - - (6.1) - -
Plant shutdown costs - (0.1) 1.1 - -
----------------------------------------------------------------------------------------------------------------------
Operating profit 64.6 49.5 50.6 48.1 31.8
Other income (expense), net (b) 0.3 0.9 (2.2) (2.0) 0.7
----------------------------------------------------------------------------------------------------------------------
Income before interest and taxes 64.9 50.4 48.4 46.1 32.5
Interest expense 21.5 26.1 27.9 27.1 30.6
----------------------------------------------------------------------------------------------------------------------
Income before income taxes 43.4 24.3 20.5 19.0 1.9
Income taxes 16.0 8.7 8.2 7.7 1.8
----------------------------------------------------------------------------------------------------------------------
Net income $ 27.4 $ 15.6 $ 12.3 $ 11.3 $ 0.1
======================================================================================================================
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 43.2 $ 30.5 $ 5.5 $ 0.9 $ 9.4
Working capital 75.1 65.5 61.2 61.5 53.6
Total assets 298.2 285.0 269.9 255.4 212.8
Reserve for product liability and workers'
compensation claims (including current) 48.2 44.1 38.0 29.8 14.3
Total debt (including current maturities) 261.6 277.4 279.5 278.9 279.9
Common shareholders' equity (deficit)(c) (102.3) (123.8) (131.3) (143.9) (154.4)
OTHER FINANCIAL DATA:
Cash flow provided by operating activities 41.8 44.1 34.6 27.6 51.8
Cash flows used in investing activities (11.8) (16.0) (26.7) (32.5) (2.6)
Cash flows used in financing activities (17.2) (3.2) (3.3) (3.6) (42.9)
Depreciation and amortization(d) 15.9 14.6 12.8 13.3 17.5
Capital expenditures 12.1 19.4 26.7 20.5 8.9
EBITDA(e) 81.4 66.4 63.1 60.8 51.5
See Notes to Selected Consolidated Historical Financial Data.
9
NOTES TO SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN MILLIONS)
(a) General and administrative expenses in 2002, 2001, 2000, 1999 and
1998 include $0.9, $1.0, $1.0, $1.0 and $6.6, respectively, of
amortization of certain expenses associated with the
Recapitalization.
(b) Net investment gains and losses related to the liquidation of
investments previously associated with MIICA are included in
"Other income (expense) net."
(c) The shareholders' deficit occurred in 1997 as a 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.
(d) Depreciation and amortization is comprised of the following
components in 2002, 2001, 2000, 1999 and 1998: depreciation of
property, plant and equipment, $12.1, $10.4, $9.1, $8.8 and $8.5,
respectively; amortization of certain expenses associated with
the Recapitalization, $0.9, $1.0, $1.0, $1.0 and $6.6,
respectively; and other amortization, $2.9, $3.2, $2.7, $3.5 and
$2.4, respectively. Depreciation and amortization excludes
amortization of deferred financing fees and original issue
discount.
(e) 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
2002, 2001, 2000, 1999 and 1998 excludes $0.6, $1.3, $1.9, $1.5
and $1.5, respectively, of accounts receivable securitization
expense. EBITDA for 2002 includes severance cost of $1.6 million
associated with the separation of a former executive officer.
EBITDA for 2001 includes: (a) costs for severance and related
benefits of $0.9 in connection with a 10% reduction of the
Company's salaried employees, (b) net investment income related
to investments formerly held by MIICA of $0.7 and, (c) other
nonrecurring income of $0.2. EBITDA for 2000 includes: (a)
benefit plan curtailment and settlement gains of $6.1, (b) costs
of $2.2 related to consulting and transition associated with
former executive officers and other employees, (c) a credit loss
related to a group credit arrangement of $1.4, (d) $1.2 of
impairment losses related to investments formerly held by MIICA,
(e) a plant shutdown provision of $1.1 related to the closing of
two facilities associated with the Keller acquisition and, (f)
other nonrecurring income totaling $1.2. EBITDA for 1999
includes: (a) nonrecurring 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 acquisition of Keller
business and, (c) other nonrecurring expenses of $1.2 primarily
related to a former employee and the discontinued operations of a
former subsidiary. EBITDA for 1998 includes nonrecurring expenses
of $0.5 due to shutdown of an extrusion paint and thermal
production line.
10
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. In the text below, financial statement amounts have
been rounded and the percentage changes are based on the financial statements.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements contain information that is pertinent to management's discussion and
analysis. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions about future events that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities. Future events
and their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment based on various
assumptions and other factors such as historical experience, current and
expected economic conditions, and in some cases, actuarial techniques. The
Company constantly re-evaluates these significant factors and makes adjustments
where facts and circumstances dictate. Historically, actual results have not
significantly deviated from those determined using the estimates described
above. The Company believes that the following accounting policies are critical
due to the degree of estimation required.
The Company provides credit to its customers in the normal course of
business, performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses. The allowance for doubtful accounts
related to trade receivables is determined based on two methods. The amounts
calculated from each of these methods are combined to determine the total amount
reserved. First, an evaluation of specific accounts is conducted when
information is available indicating a customer may not be able to meet its
financial obligations. Judgments are made in these specific cases based on
available facts and circumstances, and a specific reserve for that customer may
be recorded to reduce the receivable to the amount that is expected to be
collected. These specific reserves are re-evaluated and adjusted as additional
information is received that impacts the amount reserved. Second, a general
reserve is established for all customers based on historical collection and
write-off experience. The collectibility of trade receivables could be
significantly reduced if default rates are greater than expected or if an
unexpected material adverse change occurs in a major customer's ability to meet
its financial obligations.
The Company must generate sufficient taxable income in future periods to
realize the total value of its deferred tax assets. A valuation allowance that
reduces deferred tax assets to the amount expected to be realized is determined
based on projections of taxable income. If the level of projected taxable income
used to determine the valuation allowance is not achieved, the carrying value of
the deferred tax assets will not be realized.
The Company maintains third party insurance coverage, subject to certain
deductible provisions, for product liability and workers' compensation claims
which occur on or after March 31, 1998 and maintains a reserve for the insurance
deductibles related to such claims. The reserve for product liability and
workers' compensation claims is determined on an undiscounted actuarial basis.
The reserve includes an amount determined from loss reports for individual cases
and an amount, based on past experience, for losses incurred but not reported.
The determination of the reserve is primarily predicated on the assumption that
selected claims reporting and payment patterns, and frequency and severity
trends, will continue to apply. The methods and assumptions used to estimate the
resulting reserve are continually reviewed, and any adjustments are reflected in
earnings currently. Actual claims experience will affect the amount of expense
ultimately recognized.
11
Pension assets and liabilities are determined on an actuarial basis and are
primarily affected by the market value of plan assets, estimates of the expected
return on plan assets and the discount rate used to determine the present value
of pension liabilities. Actual changes in the fair market value of plan assets
and differences between the actual return on plan assets, the expected return on
plan assets and changes in the selected discount rate will affect the amount of
pension expense ultimately recognized.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net Sales. Net sales were down $15.3 million, or 2.9%, to $520.4 million
for 2002 from $535.7 million for 2001. Net sales of climbing products decreased
by $12.2 million, or 2.7%, to $444.3 million for 2002 from $456.5 million for
2001. The sales decline reflects lower unit sales volumes related primarily to
wood stepladders and to a major customer lowering its inventory levels mostly
during the first quarter. Net sales of extruded products of $76.1 million for
2002 declined by $3.1 million, or 3.9%, compared to 2001. The decline in sales
is primarily due to the impact of lower aluminum prices and continued softness
in the markets served by this segment of the Company's business.
Gross Profit. Gross profit improved by $20.1 million, or 12.8%, to $176.6
million for 2002 from $156.5 million for 2001 despite lower net sales. Gross
profit as a percentage of net sales in 2002 improved to 33.9% from 29.2% for
2001. The higher gross profit is largely due to manufacturing productivity
improvements and other manufacturing cost reduction initiatives. Lower aluminum
and other material costs as well as product mix improvements also contributed to
the higher gross profit. On March 27, 2003, the Company announced that it will
gradually phase out its ladder, stages, scaffold and plank assembly, fabrication
and distribution operations in Greenville, Pennsylvania. The Company will
continue to maintain its corporate headquarters, remelt, aluminum extrusion,
extruded products fabrication and fiberglass pultrusion operations in
Greenville. The Company's wage and benefit costs at its Greenville manufacturing
facility are higher than at its other facilities. This initiative, which is part
of the Company's continuous improvement program to optimize its operations and
reduce manufacturing costs, will result in the permanent layoff of approximately
500 employees at the Greenville facility. The next step will be to discuss with
the unions representing the majority of the affected employees the effect of
this decision on those employees.
General and Administrative Expenses. General and administrative expenses
were $30.0 million for 2002 compared to $24.1 million for 2001, an increase of
$5.9 million or 24.6%. The increase is due, in part, to severance cost of $1.6
million recognized in the first quarter of 2002 associated with the separation
of a former executive officer. Excluding this one-time severance cost, general
and administrative expenses increased by $4.3 million, or 17.8%, in 2002. The
increase reflects higher performance based compensation and related expense
accruals associated with improved profitability and higher depreciation related
to capitalized computer hardware and software costs. These increases more than
offset the absence of severance and related expenses associated with the
reduction in salaried employees that occurred during the second quarter of 2001.
Selling and Distribution Expenses. Selling and distribution expenses
declined by $1.1 million, or 1.4%, to $82.0 million for 2002 compared to $83.1
million for 2001 primarily reflecting the impact of lower unit sales volumes,
changes in customer mix and lower freight rates.
Operating Profit. Operating profit improved by $15.1 million, or 30.6%, to
$64.6 million for 2002 from $49.5 million for 2001. Operating profit of the
Climbing Products segment increased $12.8 million, or 24.1%, to $65.9 million in
2002 including a charge of $1.3 million for an allocated portion of severance
costs related to the separation of a former executive officer. Excluding the
one-time severance cost allocation, operating profit of the Climbing Products
segment in the current period would have increased by $14.1 million, or 26.6%,
from $53.1 million in 2001. The improvement in the profitability of climbing
products reflects manufacturing productivity improvements and other cost
reduction initiatives as well as lower material costs and product mix
improvements Operating income of the Extruded Products segment was $0.4 million
for 2002 compared to break-even in 2001. The increase in operating profit of
$0.4 million is primarily due to improved manufacturing performance. Corporate
and Other expenses declined by $2.0 million in 2002 compared to 2001 primarily
due to reduced manufacturing consulting expenses associated with implementing
manufacturing productivity improvement initiatives.
Other Income (Expense), Net. Other income (expense), net declined by $0.6
million from net income of $0.9 million in 2001 to net income of $0.3 million in
2002. The decline is due to lower net investment income related to investments
formerly held by MIICA, the Company's captive insurance subsidiary that was
dissolved in 1998, and the absence of interest received in 2001 related to an
overpayment of income tax liabilities. The decline was partially offset by lower
costs associated with the receivables purchase agreement resulting from lower
utilization and interest rates during 2002.
Interest Expense. Interest expense declined by $4.6 million to $21.5
million for 2002 from $26.1 million for 2001 which primarily reflects the
favorable impact of lower interest rates and lower levels of debt in the current
year. Accelerated amortization of deferred financing fees of $0.4 million was
recorded in 2002 as a result of a $15 million voluntary repayment of term loans
under the Senior Credit Facility made by the Company in
12
March 2002. Accelerated amortization of the deferred financing fees of $0.7
million was recorded in 2001 associated with the reduction in borrowing capacity
resulting from the amendment of the Senior Credit Facility effective July 24,
2001.
Income Taxes. Income taxes increased $7.4 million to $16.1 million for 2002
from $8.7 million for 2001 reflecting higher pre-tax income in 2002 and an
increase in the effective tax rate to 37% from 36% in 2001. The increase in the
effective tax rate is primarily due to lower estimated income tax accruals in
the prior year.
Net Income. Net income improved by $11.8 million to $27.4 million for the
year ended December 31, 2002 from net income of $15.6 million for the year ended
December 31, 2001 as a result of the factors described above.
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Sales. Net sales decreased $9.5 million, or 1.7%, to $535.7 million for
2001 from $545.2 million for 2000 which primarily reflects the impact of lower
sales of extruded products partially offset by increased sales of climbing
products.
Net sales of climbing products increased $13.7 million, or 3.1%, to $456.5
million for 2001 from $442.8 million for 2000. The increase is primarily due to
improving the product mix of both the Werner and Keller brand product lines, in
part due to amending the programs of selected accounts that did not meet the
Company's profitability requirements, and redesigning the Keller brand product
line.
Net sales of extruded products of $79.2 million for 2001 declined by $23.3
million, or 22.7%, compared to 2000 reflecting the impact of the slowing economy
on the markets served by this segment of the Company's business and the
allocation of more aluminum extrusion capacity to support the Climbing Products
segment.
Gross Profit. Gross profit decreased by $4.2 million, or 2.6%, to $156.5
million for 2001 from $160.7 million for 2000 primarily reflecting the impact of
lower sales of extruded products. Gross profit as a percentage of net sales for
2001 was 29.2% compared to 29.5% for 2000. The favorable impact on gross profit
of the improving product mix for climbing products in 2001 was more than offset
by the lower volume and less profitable mix of extruded product sales,
additional costs at the Company's west coast manufacturing facility as capacity
was added and volume was increased, and consulting expenses associated with
implementing manufacturing productivity improvement initiatives.
General and Administrative Expenses. General and administrative expenses
were $24.1 million for 2001 compared to $29.5 million for 2000, a reduction of
$5.4 million or 18.4%. Factors contributing to the reduction include the absence
of consulting, transition and employment termination costs recorded in 2000
associated with certain former executive officers and other employees, lower
current year salaried payroll and related costs, and lower legal and
professional expenses. These cost reductions were partially offset by increased
amortization related to capitalized software costs and the severance and related
expenses associated with the reduction in salaried employees. During the quarter
ended June 30, 2001, the Company implemented several cost reduction initiatives
as a result of the slowdown in the U.S. economy. These initiatives included
reductions in discretionary spending and the reduction of approximately 6% in
April, and an additional reduction of approximately 4% in June, of the Company's
salaried employees. The pre-tax charge to provide severance and other benefits
to the affected salaried employees of $0.9 million was recorded in the quarter
ended June 30, 2001.
Selling and Distribution Expenses. Selling and distribution expenses
declined by $2.5 million, or 2.9%, to $83.1 million for 2001 compared to $85.6
million for 2000 which primarily reflects the impact of lower sales volume and
more productive warehousing and distribution in part related to operation of the
west coast manufacturing facility.
Operating Profit. Operating profit declined by $1.1 million, or 2.2%, to
$49.5 million for 2001 from $50.6 million for the year ended 2000. Operating
profit of the Climbing Products segment increased $7.0 million, or 15.1%, to
$53.1 million for 2001 from $46.1 million in 2000. The higher operating profit
of the Climbing Products segment primarily reflects the impact of improvements
in product mix in part relating to the redesigned Keller brand product line, the
absence of a $1.1 million charge related to plant shutdown costs that was
recorded in 2000 and the higher manufacturing costs at those facilities, and
lower selling, general and administrative expenses. Operating profit of the
Climbing Products segment also improved due to utilizing internal aluminum
13
extrusion capacity to produce more extrusions for ladders rather than purchase
them from outside suppliers at a premium over the Company's manufacturing costs.
The Extruded Products segment operated at break-even for 2001 compared to
operating profit of $6.9 million for 2000. The decline is due to the lower unit
sales volumes and a less profitable product mix partially offset by lower
selling, general and administrative expenses. Corporate and Other expenses
increased $1.2 million for 2001 compared to 2000 primarily due to consulting
expenses associated with implementing manufacturing productivity improvement
initiatives.
Other Income (Expense) Net. Other income (expense), net increased by $3.1
million from net expense of $2.2 million in 2000 to net income of $0.9 million
in 2001. The increase is primarily due to increased net investment income
associated with investments formerly held by MIICA of $0.7 million in 2001
compared to a net investment loss of $1.2 million in 2000, and the absence of a
$1.4 million charge which was recorded in 2000 associated with non-performance
of another participant in a group credit arrangement.
Interest Expense. Interest expense declined by $1.8 million to $26.1
million for 2001 from $27.9 million for 2000 reflecting the impact of lower
interest rates in 2001 which more than offset the accelerated amortization of
the deferred financing fees of $0.7 million associated with the reduction in
borrowing capacity resulting from the amendment of the Senior Credit Facility
effective July 24, 2001.
Income Taxes. Income taxes increased $0.5 million to $8.7 million for 2001
from $8.2 million for 2000 reflecting higher pre-tax income in 2001 partially
offset by a decrease in the effective tax rate to 36% from 40% in 2000. The
decrease in the effective tax rate is due to lower estimated income tax
accruals.
Net Income. Net income increased by $3.3 million to $15.6 million for the
year ended December 31, 2001 from net income of $12.3 million for the year ended
December 31, 2000 as a result of all of the above factors.
14
LIQUIDITY AND CAPITAL RESOURCES
Debt and Other Contractual Obligations
The following table provides a summary of the Company's contractual
obligations by due date as of December 31, 2002.
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------
LESS
THAN 1 1-3 4-5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
DEBT:
Senior Credit Term Loan Facilities (1) $ 122.2 $27.1 $95.1 $ - $ -
Senior Subordinated Notes, due 2007 135.0 - - 135.0 -
Variable Rate Demand Industrial Building
Revenue Bonds, due 2015 5.0 - - - 5.0
RECEIVABLES PURCHASE AGREEMENT (2) 20.0 20.0 - - -
CAPITAL LEASE PAYMENTS 1.4 0.5 0.7 0.2 -
OPERATING LEASE PAYMENTS 8.5 2.0 2.9 1.2 2.4
REVOLVING CREDIT FACILITY (3) - - - - -
------------------------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL CASH OBLIGATIONS $ 292.1 $49.6 $98.7 $ 136.4 $ 7.4
========================================================================================================================
(1) The payments due by period reflected for the Senior Credit Term Loan
Facilities represent the contractually committed obligations for
principal payments during the term of the facility. The Company has
the option to repay term loans from time to time, in whole or in part,
without premium or penalty.
(2) The Company maintains a $50 million receivables purchase agreement
with a financial institution and its affiliate (the "Receivables
Purchase Agreement") which will expire in May 2003. As of December 31,
2002, the Company utilized $20 million of this facility.
(3) Available borrowings under the Company's Revolving Credit Facility,
which will expire in November 2003, are reduced by amounts issued
under a letter of credit subfacility. The Company executes letters of
credit in the normal course of business that ensure payments to third
parties. The aggregate amount of letters of credit issued at December
31, 2002 was $21.1 million which results in reducing the amount
available under the Revolving Credit Facility from $70.0 million to
$48.9 million. Each letter of credit has an expiration date of one
year or less. Management believes the likelihood of demand for payment
under these instruments is minimal and expects no material cash
outlays to occur in connection with these instruments.
At December 31, 2002, the Company had $261.6 million of consolidated
indebtedness, including $133.0 million of Senior Subordinated Notes reflected
net of unamortized original issue discount; $122.2 million of Term Loans under
the Senior Credit Facility; and $6.4 million of other debt. The Senior Credit
Facility provides for Term Loans and a $70 million Revolving Facility of which
$48.9 million was available for borrowing at December 31, 2002.
The Senior Credit Facility and the Notes contain various restrictive
covenants including restrictions on additional indebtedness, mergers, asset
dispositions, restricted payments, prepayment and amendments of subordinated
indebtedness. These covenants also prohibit, among other things, the payment of
dividends. The financial covenants of the Senior Credit Facility require the
Company to meet specific interest coverage, maximum leverage, minimum EBITDA,
and capital expenditure requirements. The Company is in compliance with all its
debt covenants effective December 31, 2002. The Company anticipates that it will
continue to comply with its debt covenants in 2003; however, continued
compliance is primarily based 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.
The Company maintains a Receivables Purchase Agreement with a financial
institution and its affiliate to provide additional financing capacity with a
maximum availability of $50 million depending upon the level of accounts
receivable and certain other factors. Under the Receivables Purchase Agreement,
which will expire in May 2003, the Company established a consolidated
wholly-owned subsidiary, Werner Funding Corporation ("Funding"), which is a
special purpose bankruptcy-remote entity that acquires, on a daily basis, a
variable
15
percentage interest of certain eligible trade receivables generated by
the Company. The purchases by Funding are financed through the sale of an
undivided percentage ownership interest in such receivables to the affiliate of
the financial institution. The Receivables Purchase Agreement represents
"off-balance sheet financing" since the ownership interest of the affiliate in
Funding's accounts receivable results in assets being removed from the balance
sheet rather than resulting in a liability to the affiliate of the financial
institution. The Company has agreed to continue servicing the sold receivables
for the financial institution at market rates, therefore no servicing asset or
liability has been recorded. As of December 31, 2002, the Company sold $78.8
million of accounts receivable in exchange for $20.0 million in cash and an
undivided interest in the accounts receivable of $58.7 million. An additional
$21.5 million of financing was available under the Receivables Purchase
Agreement at December 31, 2002.
The Company satisfies its working capital needs and capital expenditure
requirements primarily through a combination of operating cash flow, borrowings
under the Senior Credit Facility and sales of accounts receivable under the
Receivables Purchase Agreement. The Company believes it has sufficient funds
available in the next twelve months to support debt service requirements,
projected capital expenditures and working capital needs based on projected
results of operations and availability under both the Senior Credit Facility and
the Receivables Purchase Agreement. The Receivables Purchase Agreement and the
$70 million Revolving Facility expire in May 2003 and November 2003,
respectively. The Company may need to renew or replace one or both of these to
satisfy its future working capital needs. The Company currently anticipates that
it will be able to extend or replace both of these facilities and intends to do
so; however, there can be no assurance that the Company will be able to effect a
renewal or a replacement on commercially reasonable terms, or at all.
The Company's ability to make scheduled payments of principal on existing
indebtedness or to refinance its indebtedness (including the Notes), or to fund
planned capital expenditures or to finance acquisitions (although the Company
has not entered into any pending agreements for 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 capital expenditures and fund potential future acquisitions, if any.
In addition, there can be no assurance that the Company will be able to effect
any refinancing on commercially reasonable terms, or at all.
The return on plan assets of the Company's pension plan has been below the
expected long-term rate of return due to the decline in equities markets. As a
result, the market value of pension plan assets at the end of December 31, 2002
and 2001 was less than the accumulated benefit obligation which required the
recognition of a minimum pension liability of $22.0 million ($13.4 million
after-tax) and $10.8 million ($6.7 million after-tax), respectively, based on
the provisions of Financial Accounting Standards Board ("FASB") Statement No.
87, Employers' Accounting for Pensions. The minimum liability adjustment at
December 31, 2002 resulted in an increase in noncurrent liabilities of $22.0
million, an increase in noncurrent deferred income tax assets of $7.9 million, a
decrease in shareholders' equity of $13.4 million and an increase in noncurrent
intangible assets of $0.7 million.
Pension expense increased by $1.1 million in 2002 to $1.9 million from $0.8
million in 2001 primarily due to lower than expected returns on plan investments
and a decrease in the discount rate used to value pension liabilities from 7.00%
to 6.50%. The assumption selected for the expected long-term rate of return on
assets is 8.50%. This rate reflects historical returns on equity and fixed
income securities provided by independent investment professionals and also
reflects the plan's typical asset allocation among equity and fixed income
securities. The decline in the discount rate, which is used to value pension
liabilities, reflects the general decline in interest rates as of December 31,
2002 compared to December 31, 2001. Pension expense in 2003 is expected to be
approximately $1.5 million greater than expense in 2002. In addition, pension
plan contributions of $1.0 million will be required to be paid to the pension
trust during 2003 to meet the minimum funding requirements of the Employee
Retirement Income Security Act ("ERISA"). No pension funding was required in
2002.
16
Cash Flows
Net cash flows provided by operating activities were $41.8 million for 2002
compared to $44.1 million provided by operating activities for 2001. The
increase in net income in 2002 improved operating cash flows; however, less cash
was generated from reducing accounts receivable and inventories in 2002 than in
2001. These factors, in addition to an increase in payments of product
liabilitiy and workers' compensation claims, accounted for most of the net
decrease in cash provided by operating activities of $2.4 million in 2002. Net
cash flows from operating activities increased $9.5 million to $44.1 million for
2001 from $34.6 million for 2000. The increase is primarily due to an increase
in net income and the reduction of working capital, excluding cash and cash
equivalents. Also affecting the comparability of cash flows from operating
activities in 2001 compared to 2000 is the absence of a non-cash benefit plan
curtailment and settlement gains, net of $6.1 million recognized in 2000.
Net cash used for investing activities was $11.8 million for 2002 compared
to $16.0 million for 2001 primarily reflecting lower capital expenditures during
2002 partially offset by lower proceeds received on the disposal of investments
formerly held by MIICA. Net cash used in investing activities decreased $10.7
million to $16.0 million in 2001 from $26.7 million in 2000 primarily due to
lower capital expenditures and the sale or liquidation of investments formerly
held by MIICA.
Net cash used for financing activities was $17.2 million for 2002 compared
to $3.2 million for 2001 which primarily reflects increased repayments of debt
in the current period. The Senior Credit Facility allows the Company to
voluntarily repay the principal amount of Term Loans from time to time, in whole
or in part, without premium or penalty. In March 2002 the Company voluntarily
repaid $15 million of Term Loans. Net cash used in financing activities was $3.2
million in 2001 compared to $3.3 million in 2000. Unscheduled debt payments of
$0.7 million were made in 2001 as required by the Company's Senior Credit
Facility with the net proceeds received from the sale of an investment formerly
held by MIICA. There were no cash overdrafts in 2001 and repurchases of common
stock were lower when compared to the prior year.
Capital Expenditures
The Company's capital expenditures were $12.1 million, $19.4 million and
$26.7 million, in 2002, 2001 and 2000, 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 $16 million in 2003 for various capital projects,
including cost reduction and new product development projects, maintenance
capital projects and information systems.
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/or 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 Company purchases aluminum, resins, fiberglass 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 and option contracts with respect to its
purchases of aluminum to minimize or hedge commodity price fluctuations. See
"Item 1. Business - Raw Materials and Suppliers" and "Item 7A. Quantitative and
Qualitative Disclosures About Market Risk."
17
Recently Issued Accounting Standards
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, effective for fiscal years beginning after June 15,
2002. The Statement provides accounting requirements for retirement obligations
associated with tangible long-lived assets. The obligations affected are those
for which there is a legal obligation to settle as a result of existing or
enacted law. The adoption of Statement No. 143 will not have a significant
impact on the Company's results of operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Statement No. 146 will apply to all exit or disposal activities initiated after
December 31, 2002. The adoption of Statement No. 146 is expected to impact the
timing of liability recognition associated with such activities.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The interpretation elaborates on the
disclosures to be made in interim and annual financial statements about
obligations under certain guarantees. It also requires the recognition of a
liability at the inception of a guarantee equal to the fair value of the
obligation undertaken in issuing the guarantee. The disclosure requirements are
effective for financial statements of interim and annual periods ending after
December 15, 2002 (see Note J to the Consolidated Financial Statements). The
initial measurement and recognition provisions are required to be applied on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company does not expect the interpretation to have a material impact on results
of operations, financial position or cash flows.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which amended Statement
No. 123, Accounting for Stock-Based Compensation. The new standard provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. Additionally, the
statement amends the disclosure requirements of Statement No. 123 to require
prominent disclosures in the annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. This statement is effective for financial
statements for fiscal years ending after December 15, 2002. In compliance with
Statement No. 148, the Company elected to continue to apply the intrinsic value
method in accounting for its stock-based employee compensation arrangement as
defined by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employee, and has made the applicable disclosures in Notes B and G to
the consolidated financial statements.
18
.
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 cash flows and related
weighted-average interest rates by expected maturity dates or applicable
floating rate index.
FAIR VALUE
DECEMBER 31 DECEMBER 31
--------------------------------------------------------------------------------- ------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL 2002 2001
----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Liabilities:
Long-term debt,
including
current portion:
Fixed Rate-Notes $ - $ - $ - $ - $135,000 $ - $135,000 $135,675 $130,950
Avg. Interest Rate - - - - 10.00% -
Fixed Rate-Capital
Leases $ 521 $ 400 $ 239 $ 199 $ 27 $ - $ 1,386 $ 1,386 $ 1,253
Avg. Interest Rate 8.46% 8.74% 7.56% 6.97% 4.47% -
Variable Rate-Term
Loans $ 27,101 $ 49,722 $ 45,374 $ - $ - $ 5,000 $127,197 $127,197 $143,522
Avg. Interest Rate (1) (1) (1) (2)
(1) Average interest rate is equal to LIBOR plus 2.00% to 2.25%.
(2) Average interest rate on Variable Rate Industrial Building Revenue
Bonds during 2002 was approximately 2.0%.
The Company's operations in foreign countries are not significant.
International sales were not material to the Company's operations for the year
ended December 31, 2002. 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. The Company does not actually take delivery of aluminum that
is the subject of the futures contracts.
In the case of futures contracts relating to the Extruded Products segment
of the business, the Company agrees to purchase aluminum in the future at a set
price relative to a customer firm order commitment. The futures contract is
liquidated prior to settlement. The difference between the price of aluminum on
the date the Company enters into the contract and the price on the settlement
date represents the financial gain or loss on the contract. These futures
contracts qualify for hedge accounting and, therefore, the gain or loss is
recognized in earnings, together with the offsetting gain or loss due to the
changes in the fair value of the firm commitment, in the period the customer
order attributed to the firm commitment is shipped. At December 31, 2002, the
Company had purchased futures contracts, maturing in 2003, for the delivery of
35.4 million pounds of aluminum at a weighted average settlement price of $.665
per pound. The unrecognized loss for the change in the fair value of such
futures contracts that qualify for hedge accounting was $ 0.1 million at
December 31, 2002. At December 31, 2001, the Company had purchased futures
contracts, maturing in 2002, for the delivery of 13.9 million pounds of aluminum
at a weighted average settlement price of $.658 per pound. The unrecognized loss
for the change in fair value of such futures contracts was $0.3 million at
December 31, 2001.
19
During the fourth quarter of 2002, the Company began buying futures
contracts relating to the Climbing Products segment of the business to manage
its exposure to variable cash flows of forecasted sales of Climbing Products.
The futures contracts are liquidated prior to settlement. The difference between
the price of aluminum on the date the Company enters into the contract and the
price on the settlement date represents the financial gain or loss on the
contract. These futures contracts did not qualify for hedge accounting in 2002.
As a result, the gain or loss on these futures contracts was recognized in
earnings in the period of the change in aluminum prices. The gains and losses
recognized by the Company during 2002, including the unrealized loss for the
change in fair value of open futures contracts at December 31, 2002, were
immaterial.
Option contracts relating to the Climbing Products segment of the business,
all qualify for hedge accounting. Through the end of the third quarter of 2002,
the Company created a collar by purchasing call options and selling put option
contracts for aluminum with a net initial investment near zero to hedge its
exposure to variable cash flows of forecasted sales of Climbing Products. Price
movement inside the collar was not protected by the derivatives. Whereas, price
movement outside the collar or strike price provides either a financial gain or
loss (depending upon price movement) if the option is exercised. The gain or
loss on the option contract is recognized in earnings, together with the
offsetting gain or loss due to the changes in the actual purchase price of
aluminum outside the collar, in the period that the forecasted sale affects
earnings. At December 31, 2002, the Company had purchased call option contracts
and sold put option contracts, maturing in 2003, covering 18.0 million pounds of
aluminum at strike prices ranging from $.611 to $.729 per pound. The Company had
net option contract obligation liabilities of $0.4 million at December 31, 2002.
At December 31, 2001, the Company had purchased call option contracts and sold
put option contracts, maturing in 2002, covering 61.8 million pounds of aluminum
at strike prices ranging from $.622 to $.713 per pound. The Company had net
option contract obligation liabilities of $1.8 million at December 31, 2001.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants 22
Consolidated Balance Sheets 23
Consolidated Statements of Income 25
Consolidated Statements of Changes in Shareholders' Equity (Deficit) 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Directors of Werner Holding Co. (PA), Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, 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, 2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 audits provide a
reasonable basis for our opinion.
As discussed in Note B to the consolidated financial statements, the
Company changed its method of accounting for derivatives effective January 1,
2001.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, PA
March 3, 2003
22
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31
2002 2001
----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 43,161 $ 30,473
Accounts receivable 54,219 54,250
Allowance for doubtful accounts (1,800) (1,835)
Refundable income taxes 1,748 1,501
Inventories 52,530 52,916
Deferred income taxes 1,062 338
Other 1,598 1,803
- -------------------------------------------------------------------------------
Total current assets 152,518 139,446
Other assets:
Deferred income taxes 18,521 14,970
Deferred financing fees, net 4,078 6,469
Other 10,710 12,195
- -------------------------------------------------------------------------------
33,309 33,634
Property, plant and equipment:
Land and improvements 8,793 8,700
Buildings 48,211 47,521
Machinery and equipment 167,344 150,317
- -------------------------------------------------------------------------------
224,348 206,538
Less accumulated depreciation and amortization 121,032 109,658
- -------------------------------------------------------------------------------
103,316 96,880
Capital projects in progress 9,100 15,049
- -------------------------------------------------------------------------------
112,416 111,929
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 298,243 $ 285,009
===============================================================================
See notes to consolidated financial statements.
23
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31
2002 2001
----------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 16,173 $ 21,014
Accrued liabilities 33,655 36,037
Current maturities of long-term debt 27,622 16,907
- --------------------------------------------------------------------------------------------------
Total current liabilities 77,450 73,958
Long-term obligations:
Long-term debt - less current maturities (net of unamortized original
issue discount of $2,007 in 2002 and $2,411 in 2001) 233,954 260,457
Reserve for product liability and workers' compensation claims 48,205 44,069
Other long-term obligations 40,959 30,348
- --------------------------------------------------------------------------------------------------
Total liabilities 400,568 408,832
Shareholders' deficit:
Common stock:
Class A - $.01 par value; voting; 5,000 shares authorized;
1,880 shares issued and outstanding -- --
Class B - $.01 par value; voting; 25,000 shares authorized;
21,775 shares issued and outstanding -- --
Class C - $.01 par value; non-voting; 45,000 shares authorized;
5,516 shares issued and outstanding in 2002 and
5,541 shares issued and outstanding in 2001 -- --
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 200,872 200,947
Accumulated deficit (287,078) (314,506)
Accumulated other non-owner changes in equity (13,694) (7,882)
Notes receivable arising from stock loan plan (2,426) (2,383)
- --------------------------------------------------------------------------------------------------
Total shareholders' deficit (102,325) (123,823)
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 298,243 $ 285,009
==================================================================================================
See notes to consolidated financial statements.
24
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
2002 2001 2000
----------------------------------
Net sales $ 520,404 $ 535,685 $ 545,226
Cost of sales 343,795 379,161 384,478
- ---------------------------------------------------------------------------------------
Gross profit 176,609 156,524 160,748
General and administrative expenses 29,982 24,056 29,489
Selling and distribution expenses 82,000 83,127 85,646
Benefit plan curtailment and settlement gains, net -- -- (6,104)
Plant shutdown costs -- (148) 1,093
- ---------------------------------------------------------------------------------------
Operating profit 64,627 49,489 50,624
Other income (expense), net 324 941 (2,223)
- ---------------------------------------------------------------------------------------
Income before interest and income taxes 64,951 50,430 48,401
Interest expense 21,472 26,148 27,887
- ---------------------------------------------------------------------------------------
Income before income taxes 43,479 24,282 20,514
Income taxes 16,051 8,727 8,246
- ---------------------------------------------------------------------------------------
NET INCOME $ 27,428 $ 15,555 $ 12,268
=======================================================================================
See notes to consolidated financial statements.
25
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31
2002 2001 2000
------------------ ---------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------------- ---------------- ----------------------
CLASS A COMMON STOCK:
Balance, beginning of year 1,880 $ -- 1,880 $ -- 1,964 $ --
Repurchase of common stock -- -- -- -- (84) --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 1,880 $ -- 1,880 $ -- 1,880 $ --
===================================================================================================================================
CLASS B COMMON STOCK:
Balance, beginning of year 21,775 $ -- 21,775 $ -- 21,943 $ --
Repurchase of common stock -- -- -- -- (168) --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 21,775 $ -- 21,775 $ -- 21,775 $ --
===================================================================================================================================
CLASS C COMMON STOCK:
Balance, beginning of year 5,541 $ -- 5,674 $ -- 4,657 $ --
Issuance of common stock 260 -- 60 -- 1,237 --
Repurchase of common stock (285) -- (193) -- (220) --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 5,516 $ -- 5,541 $ -- 5,674 $ --
===================================================================================================================================
CLASS D COMMON STOCK:
Balance, beginning of year 1,000 $ -- 1,000 $ -- 1,000 $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 1,000 $ -- 1,000 $ -- 1,000 $ --
===================================================================================================================================
CLASS E COMMON STOCK:
Balance, beginning of year 45,000 $ 1 45,000 $ 1 45,000 $ 1
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 45,000 $ 1 45,000 $ 1 45,000 $ 1
===================================================================================================================================
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year $ 200,947 $ 201,272 $ 198,786
Issuance of common stock 780 147 3,019
Repurchase of common stock (855) (472) (533)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 200,872 $ 200,947 $ 201,272
===================================================================================================================================
ACCUMULATED DEFICIT:
Balance, beginning of year $(314,506) $(330,061) $(341,718)
Net income 27,428 15,555 12,268
Repurchase of common stock -- -- (611)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $(287,078) $(314,506) $(330,061)
===================================================================================================================================
ACCUMULATED OTHER NON-OWNER EQUITY CHANGES:
Derivative Commodity Instruments:
Balance, beginning of year $ (1,137) $ -- $ --
Cumulative effect of accounting change for
derivatives (net of deferred tax of $69) -- (118) --
Amounts reclassified to income (net of deferred
tax of $807 in 2002 and $1,037 in 2001) 1,373 1,766 --
Change in fair value of derivative commodity
instruments (net of deferred tax of $289
in 2002 and $1,635 in 2001) (492) (2,785) --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year (256) (1,137) --
Minimum Pension Liability:
Balance, beginning of year (6,745) -- (260)
Adjustment (net of deferred tax of $3,930 in
2002, $3,962 in 2001 and $152 in 2000) (6,693) (6,745) 260
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year (13,438) (6,745) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total accumulated other non-owner
equity changes, end of year $ (13,694) $ (7,882) $ --
===================================================================================================================================
NOTES RECEIVABLE ARISING FROM STOCK LOAN PLAN:
Balance, beginning of year $ (2,383) $ (2,468) $ (685)
Change in notes receivable related to stock loan plan (43) 85 (1,783)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (2,426) $ (2,383) $ (2,468)
===================================================================================================================================
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) $(102,325) $(123,823) $(131,256)
===================================================================================================================================
COMPREHENSIVE INCOME:
Net income $ 27,428 $ 15,555 $ 12,268
Accumulated other non-owner equity changes (5,812) (7,882) 260
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 21,616 $ 7,673 $ 12,528
===================================================================================================================================
See notes to consolidated financial statements.
26
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
2002 2001 2000
----------------------------------------------
OPERATING ACTIVITIES
Net income $ 27,428 $ 15,555 $ 12,268
Reconciliation of net income to net cash provided by operating activities:
Depreciation 12,081 10,456 9,059
Amortization of deferred financing fees and original issue discount 2,796 3,310 2,692
Amortization of recapitalization and other deferred costs 3,799 4,189 3,740
Provision for plant shutdown costs - - 1,093
Provision for losses on accounts receivable 803 635 716
Benefit plan curtailment and settlement gains, net - - (6,104)
Provision for product liability and workers' compensation claims 12,105 11,844 11,609
Payment of product liability and workers' compensation claims (7,969) (5,770) (3,499)
Deferred income taxes (862) 3,016 (457)
Loss on disposition of property, plant and equipment 406 - -
Impairment of investments - 303 1,163
Changes in operating assets and liabilities:
Accounts receivable 31 4,082 10,061
Refundable income taxes (247) 532 (1,336)
Inventories 386 7,702 (2,271)
Accounts payable (4,841) (2,288) (5,840)
Other assets and liabilities, net (4,153) (9,420) 1,736
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 41,763 44,146 34,630
INVESTING ACTIVITIES
Capital expenditures (12,053) (19,402) (26,745)
Proceeds from sale of investments - 2,096 -
Proceeds from liquidation of investments 209 1,197 47
Proceeds from sale of property, plant and equipment - 127 -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,844) (15,982) (26,698)
FINANCING ACTIVITIES
Repayments of long-term debt (17,113) (2,776) (1,450)
Decrease in cash overdrafts - - (1,923)
Issuance of common stock 195 37 704
Repurchase of common stock (453) (278) (748)
Repayment of notes receivable arising from stock loan plan 140 - 137
Payment of deferred financing fees - (192) -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (17,231) (3,209) (3,280)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 12,688 24,955 4,652
Cash and cash equivalents at beginning of year 30,473 5,518 866
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 43,161 $ 30,473 $ 5,518
===========================================================================================================================
CASH PAID DURING THE YEAR FOR:
Interest $ 19,476 $ 24,827 $ 26,458
Income taxes, net of refunds $ 17,160 $ 5,179 $ 9,051
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Capital lease obligations incurred $ 921 $ 270 $ 1,631
Issuance of common stock in exchange for notes receivable
arising from stock loan plan $ 585 $ 110 $ 2,315
Cancellation of notes receivable arising from stock loan plan
in connection with repurchase of common stock $ (402) $ (195) $ (396)
See notes to consolidated financial statements.
27
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 position and results of operations of Werner Holding
Co. (PA), Inc. are substantially the same as those of Werner Holding Co. (DE),
Inc. All significant intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Revenue Recognition - Sales are recorded when product is shipped and when
title and risk of loss transfer to the customer. Effective in the fourth quarter
of 2000, the Company modified its revenue recognition policies to be consistent
with the guidance provided by the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. The
impact of the modification on the Company's results of operations was not
material.
Shipping and Handling Fees and Expenses - Pursuant to the Financial
Accounting Standards Board's Emerging Issues Task Force ("EITF") Issue 00-10,
Accounting for Shipping and Handling Fees and Costs, all shipping and handling
fees billed to customers are classified as revenues and all shipping and
handling costs are removed from revenues when presenting the income statement.
Shipping and handling costs represent costs associated with shipping products to
customers and handling finished goods. Shipping and handling costs of $48,026,
$50,330 and $51,559 are included in the caption entitled, "Selling and
distribution expenses" in the consolidated statements of income for the years
ended December 31, 2002, 2001 and 2000, respectively.
Accounts Receivable - The Company provides credit to its customers in the
normal course of business. 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 $444, $616 and $561 in 2002, 2001
and 2000, respectively.
Inventories - Inventories are stated at the lower of cost or market (net
realizable value). Cost was determined by the last-in, first-out (LIFO) method
for approximately 90% and 89% of the inventories at December 31, 2002 and 2001,
respectively.
Derivative Commodity Instruments - Effective January 1, 2001, the Company
adopted the Financial Accounting Standards Board's (the "FASB") Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended by
Statement No. 137 and No. 138. The fair value of all outstanding derivatives is
recorded on the balance sheet at December 31, 2002 and 2001. The adoption of
Statement No. 133 resulted
28
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
in a net of tax transition loss of $118 recorded by the Company effective
on January 1, 2001 as a cumulative-effect adjustment to accumulated other
comprehensive income to recognize the fair value of all derivatives.
Derivatives are held as part of a formal risk management policy. For
derivatives that qualify for hedge accounting, the Company formally measures the
effectiveness of its hedging relationships both at the hedge inception and on an
ongoing basis by formally assessing the historical and probable future high
correlation of changes in the fair value or expected future cash flows of the
hedged item. The ineffective portions, which were immaterial for the years ended
December 31, 2002 and 2001, are included in the Company's results of operations
in the period in which the ineffectiveness occurs. If the hedging relationship
ceases to be highly effective or it becomes probable that an expected
transaction will no longer occur, gains or losses on the derivative are included
in the Company's results of operations. The amount of such gains or losses was
immaterial for the years ended December 31, 2002 and 2001. Prior to January 1,
2001, all gains and losses on qualifying hedge transactions were deferred and
were reported as a component of the underlying transaction.
The Company's derivatives that qualify for hedge accounting consist of
aluminum futures and options contracts that are designated either as fair value
or cash flow hedges. The Company utilizes aluminum commodity futures and option
contracts to manage the market risk of changing prices associated with customer
firm order commitments and a certain percentage of its forecasted sales.
Generally, these contracts cover exposures of one year or less. Futures
contracts obligate the Company to make or receive a payment equal to the net
change in value of the contract at its maturity. In the case of option
contracts, the Company creates a price risk tolerance range (referred to as a
"collar") by purchasing call option contracts and selling put option contracts
with a minimal net initial investment. Price movement inside the collar is not
protected by the derivatives, whereas, price movement outside the collar or
strike price provides either a financial gain or loss (depending upon price
movement) if the option is exercised. Such contracts that qualify are designated
as hedges, correspond to the commitment or forecasted sales period, and are
effective in hedging the Company's exposure to changes in aluminum prices during
that cycle. At December 31, 2002 and 2001, the Company had futures contracts to
purchase aluminum totaling $6,820 and $9,137, respectively. The unrecognized
loss for the change in fair value of these contracts was $140 and $293 at
December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001, the
Company had purchased call option contracts and sold put option contracts
covering 18.0 and 61.8 million pounds of aluminum, respectively. The net option
contract obligation liabilities were $401 and $1,804 at December 31, 2002 and
2001, respectively.
Changes in the fair value of derivatives are recorded in results of
operations or in other comprehensive income, depending on whether a derivative
qualifies for hedge accounting, and is designated as a fair value or cash flow
hedge. For cash flow hedges, the effective portion of the change in fair value
is recorded in other comprehensive income and is reclassified to the results of
operations in the period in which earnings are impacted by the hedged item or in
the period that the transaction no longer qualifies as a cash flow hedge. No
derivative initially designated as a cash flow hedge ceased to qualify as a cash
flow hedge during the years ended December 31, 2002 and 2001. As of December 31,
2002, all of the $256 loss, net of tax, recognized in other comprehensive income
is expected to be recognized in the Company's results of operations over the
next twelve months. For fair value hedges, the effective portion of the change
in fair value of the derivative and the equal and offsetting change in the firm
commitment are recorded on the balance sheet. The gain or loss on the derivative
is recognized in results of operations in the period in which earnings are
impacted by the hedged item. For derivatives that do not qualify for hedge
accounting, the gain or loss is recognized in earnings in the period of change
in aluminum prices.
Property, Plant and Equipment - Property, plant and equipment are recorded
at cost. Maintenance and repair costs are charged to expense as incurred.
Expenditures that increase capacities or extend useful lives are capitalized.
Depreciation is computed principally using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives for buildings
range from 40 to 45 years and for machinery and equipment range from 3 to 14
years. The net book value of capitalized lease assets, which primarily consist
of machinery and equipment, was $1,353 and $1,041 at December 31, 2002 and 2001,
respectively.
Interest is capitalized in connection with major capital projects. The
capitalized interest is recorded as part of the asset to which it relates and is
amortized over the asset's estimated useful life. In 2002, 2001 and 2000,
interest costs of $428, $1,273 and $1,152, respectively, were capitalized.
Interest costs incurred in 2002, 2001 and 2000 totaled $21,900, $27,421 and
$29,039, respectively.
29
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Long-lived assets are periodically 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.
Internal Use Software - Statement of Position (SOP) 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use, requires
the capitalization of certain costs applicable to internal use software,
including associated hardware costs, external direct material and service costs,
and employee payroll and payroll related costs. Amortization of capitalized
software costs was $2,018, $1,042 and $650 in 2002, 2001 and 2000, respectively.
The unamortized balance of computer software costs capitalized was $16,719 and
$15,597 at December 31, 2002 and 2001, respectively. Capitalized computer
software costs, which are included in machinery and equipment in the
accompanying balance sheet, are amortized over periods ranging from 3 to 7
years.
Reserve for Product Liability and Workers' Compensation Claims - The
Company maintains third party insurance coverage, subject to certain deductible
provisions, for product liability and workers' compensation claims which occur
on or after March 31, 1998 and maintains a reserve for the insurance deductibles
related to such claims which totals $48,205 and $44,069 at December 31, 2002 and
2001, respectively. The reserve for product liability and workers' compensation
claims is determined on an undiscounted actuarial basis and includes an amount
derived from loss reports for individual cases and an amount, based on past
experience, for losses incurred but not reported. The resulting actuarial loss
estimates are expressed as a range of reasonable estimates which is expected to
include the loss that ultimately will occur. The reserve which is recorded is
within the range of reasonable estimates. While management believes that the
reserve is adequate, the ultimate liability may be in 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. Prior to March 31, 1998, the Company operated a captive
insurance company that maintained reserves for product liability and workers'
compensation claims of the Company (see Note J).
Stock-Based Compensation - The Company has a stock option plan which is
described more fully in Note G. The Company measures stock-based compensation
costs using the intrinsic value method of accounting pursuant to Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations. Had compensation costs for stock options been
determined using the fair market value method of FASB Statement No. 123,
Accounting for Stock-Based Compensation, the effect on net income would have
been as follows:
FOR THE YEARS ENDED DECEMBER 31
2002 2001 2000
----------------------------------------------------
Net income, as reported $ 27,428 $ 15,555 $ 12,268
Less total stock-based employee compensation
costs determined using fair value method, net
of related tax effects 318 422 328
- ----------------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME $ 27,110 $ 15,133 $ 11,940
================================================================================================================
The weighted average fair value of options granted during 2002, 2001 and
2000 estimated using the Black-Scholes option pricing model was $775.11, $725.81
and $724.42 per share, respectively. The fair value of each option grant was
determined using weighted average assumptions of risk-free interest rates of
4.31%, 5.07% and 5.15%; for grants in 2002, 2001 and 2000, respectively, and an
average life of options of 7.1 years and expected volatility and dividend yield
of 0% for grants in 2002, 2001 and 2000.
Deferred Financing Fees - Amortization of deferred financing fees is
computed using the effective interest method. Amortization of $394 and $716 of
deferred financing fees was accelerated during 2002 and 2001, respectively (see
Note D).
30
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Advertising - The Company expenses all advertising as incurred. These
expenses totaled $16,062, $13,992 and $12,730 for years 2002, 2001 and 2000,
respectively.
Statement of Cash Flows - Cash and cash equivalents include cash on hand,
demand deposits and short-term highly liquid debt instruments purchased with an
original maturity of three months or less.
Fair Values of Financial Instruments - The Company's disclosures for
financial instruments are as follows:
Cash and cash equivalents - The carrying amounts reported in the
balance sheet for cash and cash 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 their fair value at December 31, 2002 and 2001.
The fair value (based upon prevailing market rates) of the outstanding
borrowings of the Senior Subordinated Notes at December 31, 2002 and
2001 was $135,675 and $130,950, respectively.
Derivative instruments - Effective January 1, 2001, the fair
value of the Company's derivative instruments is recorded in the
balance sheet.
Recently Issued Accounting Standards - In July 2001, the FASB issued
Statement No. 142, Goodwill and Other Intangible Assets. Statement
No. 142 requires that goodwill no longer be amortized to earnings, but instead
be reviewed for impairment. The amortization of goodwill ceased upon the
adoption of Statement No. 142 effective January 1, 2002. The adoption of
Statement No. 142 did not impact the Company's results of operations, financial
position or cash flows.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, effective for fiscal years beginning after June 15,
2002. The Statement provides accounting requirements for retirement obligations
associated with tangible long-lived assets. The obligations affected are those
for which there is a legal obligation to settle as a result of existing or
enacted law. The adoption of Statement No. 143 will not have a significant
impact on the Company's results of operations, financial position or cash flows.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for fiscal years
beginning after December 15, 2001. The new rules on asset impairment supersede
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and provide a single accounting model
for long-lived assets to be disposed of. The adoption of Statement No. 144 did
not impact the Company's results of operations, financial position or cash
flows.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Statement No. 145 rescinds previous accounting guidance which
required all gains and losses from extinguishment of debt to be classified as an
extraordinary item in the income statement. As a result, the criteria contained
in Accounting Principles Board Opinion No. 30 will be used to classify those
gains and losses. This statement also amends other existing authoritative
pronouncements to make various technical corrections, eliminate inconsistencies,
clarify meanings, or describe their applicability under changed conditions.
Statement No. 145 is effective for fiscal years beginning after May 15, 2002.
The Company does not expect Statement No. 145 to have a material impact on its
results of operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Statement
31
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
No. 146 will apply to all exit or disposal activities initiated after
December 31, 2002. The adoption of Statement No. 146 is expected to impact the
timing of liability recognition associated with such activities.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The interpretation elaborates on the
disclosures to be made in interim and annual financial statements about
obligations under certain guarantees. It also requires the recognition of a
liability at the inception of a guarantee equal to the fair value of the
obligation undertaken in issuing the guarantee. The disclosure requirements are
effective for financial statements of interim and annual periods ending after
December 15, 2002 (see Note J to the Consolidated Financial Statements). The
initial measurement and recognition provisions are required to be applied on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company does not expect the interpretation to have a material impact on results
of operations, financial position or cash flows.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which amended Statement
No. 123, Accounting for Stock-Based Compensation. The new standard provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. Additionally, the
statement amends the disclosure requirements of Statement No. 123 to require
prominent disclosures in the annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. This statement is effective for financial
statements for fiscal years ending after December 15, 2002. In compliance with
Statement No. 148, the Company elected to continue to apply the intrinsic value
method in accounting for its stock-based employee compensation arrangement as
defined by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employee, and has made the applicable disclosures in Notes B and G.
C. INVENTORIES
Inventories are as follows:
DECEMBER 31
2002 2001
-----------------
Finished goods $33,525 $32,595
Work-in-process 11,770 11,436
Raw materials and supplies 17,085 17,564
- --------------------------------------------------------------------------
Total inventories, which approximates replacement cost 62,380 61,595
Less excess of cost over LIFO stated values 9,850 8,679
- --------------------------------------------------------------------------
NET INVENTORIES $52,530 $52,916
==========================================================================
32
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
D. DEBT
Debt consists of the following:
DECEMBER 31
2002 2001
---------------------------------------
Senior Credit Term Loan Facilities $ 122,197 $ 138,522
Senior Subordinated Notes, due 2007, net of unamortized
original issue discount of $2,007 in 2002 and $2,411 in 2001 132,993 132,589
Variable Rate Demand Industrial Building Revenue Bonds,
due 2015 5,000 5,000
Capital lease obligations 1,386 1,253
- ---------------------------------------------------------------------------------------------------------------
Total debt 261,576 277,364
Less current maturities (1) 27,622 16,907
- ---------------------------------------------------------------------------------------------------------------
Debt classified as long-term $ 233,954 $ 260,457
===============================================================================================================
(1) Includes $15,000 at December 31, 2001 related to voluntary repayments of
Senior Credit Term Loans that occurred in March 2002.
The Company maintains a Senior Credit Facility and, pursuant to an
indenture dated November 24, 1997, issued the Senior Subordinated Notes (the
"Notes"). Each of the Company's subsidiaries (except for Werner Funding
Corporation) has guaranteed the Senior Credit Facility and the Notes. Such
guarantee of the Notes is subordinate to the guarantee of the Senior Credit
Facility.
Senior Credit Facility:
The Senior Credit Facility was entered into on November 24, 1997 and
originally consisted of $145,000 in term loan facilities; a $100,000 revolving
credit facility; and a $75,000 receivables credit facility which was terminated
in 1998. On July 24, 2001, the financial covenants of the Senior Credit Facility
were amended effective as of June 30, 2001 to reduce the amount available under
the revolving credit facility from $100,000 to $70,000 and to amend the
financial covenants to reduce the minimum EBITDA requirement and to make the
maximum leverage and interest coverage covenants more restrictive. Pursuant to
EITF Issue 98-14, Debtor's Accounting for Changes in Line-of-Credit or Revolving
Debt Arrangements, additional interest expense of $716 was recorded in the
quarter ended September 30, 2001 due to the accelerated amortization of the
deferred financing fees associated with the reduction in the amount available
under the revolving credit facility.
Term Loan Facilities. The Term Loan Facilities consist of two tranches
of term loans in an original aggregate principal amount of $145,000. The Tranche
B term loans were in an original aggregate principal amount of $90,000, and the
Tranche C term loans were in an original aggregate principal amount of $55,000.
The Tranche B and C term loans mature on November 30, 2004 and 2005,
respectively.
A provision of the Senior Credit Facility requires that net proceeds
from certain asset sales be used to reduce debt when the aggregate of such net
proceeds since inception of the facility exceeds $2,000. Pursuant to this
provision, $683 was used to reduce term loans during the quarter ended June 30,
2001 as a result of the sale of an investment formerly held by Manufacturers
Indemnity and Insurance Company of America ("MIICA"), the Company's captive
insurance company which was dissolved in 1998.
In March 2002, the Company voluntarily repaid $15,000 of term loans,
without premium or penalty, as permitted by the Senior Credit Agreement.
Additional interest expense of $394 was recorded in the quarter ended March 31,
2002 due to the accelerated amortization of the deferred financing fees
associated with the term loans voluntarily repaid. The Senior Credit Facility
provides for the adjustment of future principal installments when voluntary
payments are made. Effective December 31, 2002, Tranche B term loans are due in
33
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
aggregate principal amounts of $26,613 in 2003, and $49,234 in 2004, and Tranche
C term loans are due in aggregate principal amounts of $488 in 2003, $488 in
2004, and $45,374 in 2005.
Revolving Credit Facility. The Revolving Credit Facility consists of a
revolving credit facility in an aggregate principal amount of $70,000 under
which no amounts were borrowed at December 31, 2002 or 2001. The Company is
entitled to draw amounts under the Revolving Facility for general corporate
purposes and working capital requirements. The Revolving Facility includes
sub-limits for letters of credit and swing line loans available on same-day
notice. The Revolving Facility matures on November 30, 2003. Available
borrowings under this arrangement are reduced by amounts issued under a letter
of credit subfacility which totaled $21,101 and $16,359 at December 31, 2002 and
2001, respectively.
Borrowings under the Senior Credit Facility bear interest at
alternative floating rate structures at management's option (ranging from 3.41%
to 3.83% and 3.66% to 4.03% at December 31, 2002 on Tranche B Term Loans and
Tranche C Term Loans, respectively, and ranging from 3.88% to 5.82% and 4.13% to
6.07% at December 31, 2001 on Tranche B Term Loans and Tranche C Term Loans,
respectively), and are collateralized by all of the capital stock of each of the
Company's subsidiaries and substantially all of the inventory and property,
plant and equipment of the Company and its subsidiaries, except for Werner
Funding Corporation. The Senior Credit Facility requires an annual commitment
fee of 0.25% on the average daily unused amount of the Revolving Credit
Facility.
The Notes:
The principal amount of the Notes is $135,000 and they mature on
November 15, 2007. Interest at 10% on the Notes is payable semi-annually in
arrears on May 15 and November 15. The Notes are general unsecured obligations
of the Company ranking subordinate in right of payment to all existing and
future senior indebtedness of the Company. The Notes rank pari passu in right of
payment with all other indebtedness of the Company that is subordinated to the
senior indebtedness of the Company.
The Notes were not redeemable at the Company's option prior to November
15, 2002. The Notes are redeemable at the Company's option at 105.000% during
the twelve months beginning November 15, 2002, 103.333% during the twelve months
beginning November 15, 2003, 101.667% during the twelve months beginning
November 15, 2004 and at 100% thereafter (expressed as a percentage of principal
amount).
Industrial Building Revenue Bonds:
Variable Rate Demand Industrial Building Revenue Bonds were issued in
order to finance the Company's acquisition of land and equipment and the
subsequent construction of a climbing products manufacturing facility. Under a
lease agreement, the Company makes rental payments to the issuer in amounts
sufficient to meet the debt service payments on the bonds. The bonds bear
interest at a variable rate established weekly which may not exceed 15% per
annum (1.9% and 2.1% at December 31, 2002 and 2001, respectively). The interest
rate on the bonds may be converted to a fixed rate upon the satisfaction of
certain conditions. Prior to a conversion to a fixed rate, the bonds are subject
to purchase from the holder upon demand at a price equal to principal plus
accrued interest. On or prior to the date of conversion to a fixed rate, the
bonds are subject to redemption, in whole or in part, at the option of the
Company. After conversion to a fixed rate, the bonds are subject to redemption,
as a whole or in part, at the Company's option, on or after the tenth
anniversary of the conversion, at annual redemption prices varying from 103% to
100% of the principal outstanding. Certain property and equipment having an
original cost of $3,889 are pledged as collateral for the bonds.
Covenants:
The Senior Credit Facility and the Notes contain various restrictive
covenants including restrictions on additional indebtedness, mergers, asset
dispositions, restricted payments, prepayment and amendments of subordinated
indebtedness. These covenants also prohibit, among other things, the payment of
dividends. The financial covenants of the Senior Credit Facility require the
Company to meet specific interest coverage, maximum leverage, minimum EBITDA,
and capital expenditure requirements.
34
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Other:
No short-term borrowings were outstanding at December 31, 2002 or 2001.
Future minimum lease payments under capital leases are as follows:
2003 $ 615
2004 459
2005 266
2006 207
Thereafter 28
- -----------------------------------------------------------------------------------------------------------
Total minimum payments 1,575
Less amount representing interest 189
- -----------------------------------------------------------------------------------------------------------
Capital lease obligations 1,386
Less current maturities 521
- -----------------------------------------------------------------------------------------------------------
Long-term capital lease obligations $ 865
===========================================================================================================
The aggregate amount of contractually scheduled principal payments,
excluding obligations under capital leases, for the five years after December
31, 2002 are $27,101, $49,722, $45,374, zero, $135,000 and $5,000 thereafter.
E. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31
2002 2001
---------------------------------------
Advertising, promotions and allowances $ 11,512 $ 16,554
Payroll 11,981 8,219
Interest 2,422 2,794
Net option contract obligation liabilities 401 1,804
Other 7,339 6,666
- ---------------------------------------------------------------------------------------------------------------
Total $ 33,655 $ 36,037
===============================================================================================================
F. SHAREHOLDERS' EQUITY
In October 1997, the Company entered into a recapitalization agreement
(the "Recapitalization Agreement") with certain affiliates of INVESTCORP S.A.
("Investcorp") and certain other international investors organized by Investcorp
(collectively the "Investors"). Pursuant to the Recapitalization Agreement, on
November 24, 1997, (the "Recapitalization Closing Date") the Company (a) amended
and restated its Articles of Incorporation pursuant to which the Company's
capital stock was reclassified, (b) redeemed for cash and the Market
Participation Right (as hereinafter described) certain shares of the
reclassified stock and (c) sold to the Investors shares of newly created Class
C, D and E Common Stock of the Company (all of which actions together
constituted the "Recapitalization"). 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. The transaction was accounted
for as a recapitalization and, as such, the historical basis of the Company's
assets and liabilities was not affected.
Market Participation Right - If, prior to the tenth anniversary of the
Recapitalization Closing Date: (i) there is an initial underwritten public
offering of at least 10% of the common equity of the Company, or the Investors
sell a majority of their shares of the Company and (ii) at the time of such
initial public offering or sale of shares, the Company's equity value equals or
exceeds certain target values that imply significant annual compound rates
35
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
of return (between 20% and 40%) to the Post-Recapitalization shareholders, then
those persons who have the Market Participation Right shall be entitled to
receive an aggregate amount equal to up to 5% of the Company's equity value (the
"Payment"). The Payment will be payable in cash, provided that the Company, in
its discretion, may make up to half of the Payment in notes or similar
obligations with market terms which the Company's Board of Directors in good
faith believes are of equivalent value. The Payment will be treated as an equity
distribution to those persons who have the Market Participation Right.
Voting Rights - Holders of the Class A Common Stock and Class B Common
Stock are entitled to one vote per share and holders of the Class D Common Stock
are entitled to approximately 50.7 votes per share. Class C Common Stock and
Class E Common Stock have no voting rights. Upon the occurrence of a sale of
100% of the outstanding equity securities of the Company, a sale of
substantially all the assets of the Company or a public offering of any equity
securities of the Company ("Triggering Event"), each outstanding share of Class
A Common Stock, Class B Common Stock, Class C Common Stock, Class D Common Stock
and Class E Common Stock will convert into one share of Common Stock of the
Company. This additional class of common stock with a par value of $.01 per
share is authorized (131,000 shares under the Company's Articles of
Incorporation), but no shares were issued or outstanding at December 31, 2002
and 2001. When issued, this class of Common Stock of the Company will have one
vote per share.
Other Arrangements - In connection with the Recapitalization, the
Company entered into an agreement for management and consulting services for a
five-year term with Investcorp International, Inc. ("III"), pursuant to which
the Company prepaid to III $5,000 upon the consummation of the Recapitalization.
This amount was amortized to expense over the five-year period ending in 2002.
Effective as of November 2002, the Company and III renewed the management
advisory and consulting services for an additional one-term with automatic
one-year renewals thereafter. Under the agreement, the Company pays an annual
fee of $1,500 to III for such services.
G. STOCK INCENTIVE PLANS
The Werner Holding Co. (PA), Inc. 1997 Stock Incentive Plan, as
amended, (the "Stock Option Plan") is administered by the Company's Board of
Directors. Pursuant to the Stock Option Plan, certain directors, employees and
officers of the Company are given an opportunity to acquire shares of the
Company's Class C Common Stock (the "Class C Stock") through the grant of
non-qualified and qualified stock options, stock appreciation rights and
restricted stock. The options granted under the Stock Option Plan are
exercisable at no less than the fair market value of the Class C Stock at the
time of grant and vest on the seventh anniversary of the grant date with the
possibility for accelerated vesting based, in part, on the achievement of
certain financial targets as provided for in the Stock Option Plan. The Stock
Option Plan also provides for vesting of certain percentages of the options in
the event of an Initial Public Offering or Approved Sale as defined in the Stock
Option Plan. Options issued pursuant to the Stock Option Plan expire on the
thirtieth day following the seventh anniversary of the grant date. A total of
8,353 shares of Class C Stock have been reserved for issuance under the Plan.
36
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Presented below is a summary of the Stock Option Plan activity:
WEIGHTED
AVERAGE
STOCK EXERCISE
OPTIONS PRICE
-------------------------------------
Outstanding at January 1, 2000 6,450 $ 2,421.29
Granted 760 $ 2,564.18
Exercised - -
Forfeited 905 $ 2,421.29
- -------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 6,305 $ 2,427.75
Granted 935 $ 2,450.00
Exercised - -
Forfeited 1,120 $ 2,457.65
- -------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2001 6,120 $ 2,436.77
Granted 700 $ 3,000.00
Exercised - -
Forfeited 700 $ 2,425.39
- -------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 6,120 $ 2,502.49
=======================================================================================================
Stock options outstanding and exercisable as of December 31, 2002 are
summarized as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE NUMBER CONTRACTUAL PRICE NUMBER PRICE
PER SHARE OF SHARES LIFE (YEARS) PER SHARE OF SHARES PER SHARE
- ----------------------------------------------------------------------------------------------------------
$2,421.29-$2,450.00 5,320 3.0 $ 2,425.80 735 $ 2,421.29
$3,000.00-$3,100.00 800 6.5 3,012.50 10 3,100.00
- ----------------------------------------------------------------------------------------------------------
6,120 3.5 $ 2,502.49 745 $ 2,430.40
==========================================================================================================
At December 31, 2001, options were exercisable for 930 shares at a
weighted average exercise price of $2,428.59. At December 31, 2000, options were
exercisable for 522 shares at a weighted average exercise price of $2,421.29.
During 2002 and 2001, options for 185 and 48 shares, respectively, which were
exercisable by employees, were cancelled upon termination of employment.
The Company has entered into certain Management Stock Purchase
Agreements, pursuant to which certain members of the Company's management are
given the opportunity to purchase shares of the Company's Class C Stock from
either the Company or certain of the Investors (the "Stock Purchase Plan"). In
2002, 2001 and 2000, shares of Class C Stock purchased under the Stock Purchase
Plan were 260, 60 and 1,237 shares, respectively. As required by the Stock
Purchase Plan, 285, 193 and 220 shares were repurchased during 2002, 2001 and
2000, respectively, from participants who terminated employment. The Class C
Stock purchased pursuant to the Stock Purchase Plan carries certain
restrictions. In conjunction with the adoption of the Stock Purchase Plan, the
Company also adopted the Werner Holding Co. (PA), Inc. Stock Loan Plan (the
"Stock Loan Plan") to finance a portion of the purchase price paid for the
shares acquired under the Stock Purchase Plan. At December 31, 2002 and 2001,
notes outstanding under the Stock Loan Plan were $2,426 and $2,383,
respectively. The notes are full recourse and bear interest at rates determined
based on interest rates paid on the Company's third party credit arrangements
and are due no later than November 24, 2004 or upon sale of the shares. All
shares purchased pursuant to the terms of the Stock Loan Plan are pledged to the
Company. The notes are classified as a reduction of shareholders' equity in the
Company's consolidated balance sheet.
37
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
H. INCOME TAXES
The components of income taxes (benefit) are as follows:
FOR THE YEARS ENDED DECEMBER 31
2002 2001 2000
-------------------------------------------------------
Current taxes:
Federal $ 13,532 $ 5,197 $ 8,095
State and local 1,492 514 608
- ----------------------------------------------------------------------------------------------------------------
15,024 5,711 8,703
Deferred taxes:
Federal 1,096 2,804 (866)
State and local (69) 212 409
- ----------------------------------------------------------------------------------------------------------------
1,027 3,016 (457)
- ----------------------------------------------------------------------------------------------------------------
TOTAL $ 16,051 $ 8,727 $ 8,246
================================================================================================================
Income taxes (benefit) for financial reporting purposes varied from
income taxes (benefit) at the federal statutory rate as follows:
FOR THE YEARS ENDED DECEMBER 31
2002 2001 2000
-------------------------------------------------------
Income taxes at federal statutory rate $ 15,218 $ 8,499 $ 7,180
State and local income taxes, net of federal benefit 775 469 400
Adjustments to estimated income tax accruals - (950) 1,169
Change in federal capital loss carryforward 120 64 (924)
Change in valuation allowance (120) (64) 924
Other, net 58 709 (503)
- ----------------------------------------------------------------------------------------------------------------
INCOME TAXES $ 16,051 $ 8,727 $ 8,246
================================================================================================================
38
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Significant components of the Company's deferred tax assets and
liabilities are as follows:
DECEMBER 31
2002 2001
---------------------------------------
Deferred tax liabilities:
Depreciation $ 11,934 $ 9,387
Estimated income tax accruals 3,443 5,333
Capitalized supplies 1,964 1,979
Other 374 581
- ------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 17,715 17,280
Deferred tax assets:
Provision for product liability and workers' compensation claims 17,901 16,352
Accrued vacation 1,377 1,239
Accrued employee retirement benefits 7,612 4,081
Deferred compensation 6,440 6,170
Accrued expenses and other reserves 3,244 3,504
Capital losses 2,619 2,740
State net operating loss carryforward, net of federal benefit 575 575
Other 149 667
- ------------------------------------------------------------------------------------------------------------------
39,917 35,328
Valuation allowance (2,619) (2,740)
- ------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 37,298 32,588
- ------------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $ 19,583 $ 15,308
==================================================================================================================
FASB Statement No. 109, Accounting for Income Taxes, requires that
deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. As realization of deferred tax assets relating to certain capital
losses is considered uncertain, a valuation allowance has been recorded. The
Company believes that it will have taxable income in future periods sufficient
to fully recognize its remaining deferred tax assets.
The Company has state net operating loss carryforwards of $5,254 and
$5,109 which expire in 2008 and 2018, respectively.
I. OPERATING LEASES
The Company leases certain real estate and various equipment under
long-term operating leases. Total rent expense amounted to $3,241, $3,690 and
$5,910 for 2002, 2001 and 2000, respectively.
Future minimum rental commitments as of December 31, 2002 for all
noncancellable operating leases are as follows:
2003 $ 1,948
2004 1,595
2005 1,257
2006 742
2007 445
Thereafter 2,441
- -------------------------------------------------------------------------------------------
TOTAL $ 8,428
===========================================================================================
39
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
J. COMMITMENTS AND CONTINGENCIES
The Company has contracts to provide most of its estimated aluminum
requirements with three principal suppliers. These contracts include stipulated
prices, with provisions for price adjustments based on market. The three
contracts are renegotiable, one each in 2003, 2004 and 2005, respectively.
Until March 31, 1998, the Company provided insurance for its product
liability and workers' compensation claims through MIICA. On March 31, 1998, the
Company transferred MIICA's outstanding product and workers' compensation
liabilities for losses incurred on or prior to March 31, 1998 to a commercial
insurance provider (the "MIICA Insurance Transfer"). Under the terms of the
agreements governing the MIICA Insurance Transfer, the commercial insurance
provider assumed all of MIICA's product and workers' compensation liabilities
for losses incurred prior to March 31, 1998 up to an aggregate limit of $75,000.
Holding (PA) has agreed to indemnify the commercial insurance company for losses
in excess of this limit. Based on information known to date, the Company
believes that the ultimate amount of such losses will not exceed $75,000.
Letters of credit are issued to guarantee the Company's performance
under certain contractual obligations. A letter of credit in the amount of $16.0
million has been issued to an insurance company to guarantee the payment of
certain claims under the Company's product liability and workers' compensation
programs. Repayment of principal plus certain accrued interest of the Company's
outstanding Variable Rate Demand Industrial Building Revenue Bonds is guaranteed
by a letter of credit in the amount of $5.1 million. Letters of credit, which
have a term of one year or less, total $21.1 million at December 31, 2002.
Management believes the likelihood of demand for payment under these instruments
is minimal and expects no material cash outlays to occur in connection with
these instruments.
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 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 filed an appeal on September 2,
1999. On September 27, 2001, the Court of Appeals for the Third Circuit affirmed
the dismissal of all claims except for a claim relating to the Company's
redemption of stock from the Elizabeth Werner trust and the Anne Werner estate.
The Court of Appeals has remanded the claim relating to the stock redemption to
the District Court with directions to allow the plaintiffs to file a second
amended complaint with respect to that claim only. On December 18, 2001, the
Estate and the Trust filed an amended complaint. Count I of the complaint
alleges that Holding (PA) made material misrepresentations in connection with
the redemption of shares of stock held by the Trust and the Estate. The action
has proceeded to the discovery phase. Management
40
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
K. EMPLOYEE RETIREMENT AND BENEFIT PLANS
The Company sponsors a non-contributory defined benefit plan that
covers certain hourly and salary employees and certain other plans under which
benefit accruals are frozen. Prior to December 31, 2000, the Company sponsored
two non-contributory defined benefit pension plans which provided retirement
benefits to substantially all employees and two unfunded non-qualified
supplemental retirement plans which provided a defined pension benefit in excess
of limits imposed by federal tax law to certain key employees. Effective
December 31, 2000, the Company froze benefit accruals under all but one of the
plans resulting in recognition of a curtailment gain of $7,905. Also effective
December 31, 2000, the two non-contributory defined benefit plans were merged.
Pension benefits were not affected by the merger.
The Company sponsors postretirement life insurance plans which cover
substantially all employees and postretirement health-care and other benefit
plans which provide benefits to certain key employees. Effective December 31,
2000, the Company's obligation to provide certain postretirement life insurance
benefits to certain key employees was settled for vested participants and
eliminated for non-vested participants. As a result, the Company recognized a
settlement loss of $2,034 and a curtailment gain of $448. At December 31, 2002,
the remaining liability related to vested participants totals $220 and is
included in Accrued Liabilities in the accompanying consolidated balance sheet.
Substantially all of this liability will be paid in 2003.
41
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following provides a reconciliation of benefit obligations, plan
assets and funded status of the plans:
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation at January 1 $ 53,795 $ 50,182 $ 2,592 $ 2,107
Service cost 750 611 59 52
Interest cost 3,680 3,612 175 153
Plan amendment 536 - - 336
Actuarial loss 3,992 2,435 202 149
Benefits paid (3,237) (3,045) (213) (205)
- ---------------------------------------------------------------------------------------------------------------------
Benefit obligation at December 31 59,516 53,795 2,815 2,592
CHANGE IN PLAN ASSETS
Fair value of assets at January 1 32,848 38,404 - -
Losses on plan assets (4,253) (3,578) - -
Employer contributions and accruals 919 1,067 213 205
Benefits paid (3,237) (3,045) (213) (205)
- ---------------------------------------------------------------------------------------------------------------------
Fair value of assets at December 31 26,277 32,848 - -
- ---------------------------------------------------------------------------------------------------------------------
FUNDED STATUS - (UNDERFUNDED) (33,239) (20,947) (2,815) (2,592)
Unrecognized transition (asset) obligation - (222) 2 3
Unrecognized prior service cost 639 110 317 412
Unrecognized net actuarial loss 21,331 10,789 942 689
- ---------------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ (11,269) $ (10,270) $ (1,554) $ (1,488)
=====================================================================================================================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST
OF:
Other long-term obligations:
Accrued employee retirement benefits $ (11,937) $ (12,906) $ (1,348) $ (1,458)
Minimum pension liability adjustment (21,969) (10,817) - -
Accrued liabilities (1,871) - (206) (30)
Other noncurrent assets:
Prepaid pension liability 2,538 2,636 - -
Intangible pension asset 639 110 - -
Accumulated other non-owner changes
in equity 21,331 10,707 - -
- ---------------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ (11,269) $ (10,270) $ (1,554) $ (1,488)
=====================================================================================================================
As of December 31, 2002 and 2001, the accumulated benefit obligations
for all pension plans exceeded the fair value of plan assets.
The assumed health care trend rate for 2002 is 8.0% decreasing ratably
to 5.0% in the year 2010. The effect of a one percentage point increase
(decrease) in the accrued health-care cost trend rate assumption would increase
(decrease) the accumulated postretirement benefit obligation by $155 and ($131),
respectively, at December 31, 2002. The effect on the postretirement benefit
cost would not be material.
42
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net periodic pension and other postretirement benefit costs consist of
the following components:
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 750 $ 611 $ 1,909 $ 59 $ 52 $ 49
Interest cost 3,680 3,612 4,151 175 153 196
Expected return on plan assets (2,696) (3,203) (3,420) - - -
Amortization of transition obligation (222) (237) (66) - - 35
Amortization of prior service cost 8 8 3 19 - -
Amortization of actuarial (gain) loss 399 - (84) 26 24 13
- ----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost 1,919 791 2,493 279 229 293
Curtailment and settlement (gain) loss - - (7,905) - - 1,586
- ----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost including
curtailment and settlement (gain) loss $ 1,919 $ 791 $(5,412) $ 279 $ 229 $ 1,879
============================================================================================================================
WEIGHTED AVERAGE ASSUMPTIONS AS
OF DECEMBER 31
Discount rate 6.50% 7.00% 7.50% 6.50% 7.00% 7.50%
Expected return on plan assets 8.50% 8.50% 8.50% N/A N/A N/A
Rate of compensation increase N/A N/A 5.00% N/A N/A N/A
The benefit curtailment and settlement gains, net of $6,104 reflected
in the consolidated statement of income for year 2000 includes associated
professional fees of $215.
The Company also sponsors a defined contribution plan which covers
substantially all of its employees. For certain employees covered by a
collective bargaining agreement, contributions are based on negotiated rates and
hours worked; for others, contributions are based on a percentage of employees'
contributions and, effective January 1, 2001, were increased based on a
combination of the participant's age and length of service. The expense related
to these plans was $2,754, $2,774 and $1,485 in 2002, 2001 and 2000,
respectively.
The Company also participates in various multi-employer plans pursuant
to collective bargaining agreements. In connection with these plans, the Company
contributed and charged to expense $425, $441, and $392 in 2002, 2001, and 2000,
respectively.
The Company has employment contracts with several key employees the
most significant of which is the contract with the Company's chief executive
officer that provides for deferred incentive compensation associated with a
deferred stock plan and retention incentive compensation.
43
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
L. OTHER INCOME (EXPENSE), NET
Other income (expense), net is comprised of the following:
FOR THE YEARS ENDED DECEMBER 31
2002 2001 2000
----------------------------------------------
Accounts receivable securitization expense $ (607) $ (1,289) $ (1,919)
Investment income (losses) related to MIICA investments 187 627 (1,163)
Miscellaneous income (expense), net 744 1,603 859
- --------------------------------------------------------------------------------------------------------------
Total $ 324 $ 941 $ (2,223)
==============================================================================================================
Prior to December 31, 2000, the Company participated in a group credit
arrangement related to certain employee insurance coverage whereby the group
collectively provided the insurer with credit assurance through letters of
credit issued by the participants. The Company was contingently liable up to the
amount of its letters of credit totaling $1,362 which were issued under the
credit arrangement. As a result of non-performance by one of the other
participants, the total amount of the Company's letters of credit were drawn
upon by the issuer in January 2001. The credit loss is included in Miscellaneous
income (expense), net in year 2000.
44
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
M. SEGMENT INFORMATION
The Company classifies its business into two segments: Climbing
Products, which includes aluminum, fiberglass and wood ladders, scaffolding,
stages and planks, and Extruded Products, which includes aluminum extrusions and
fabricated components. The Company's reportable segments are based on the
characteristics of the product and the markets and distribution channels through
which the products are sold. The Company evaluates segment performance based on
operating earnings. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies.
FOR THE YEARS ENDED DECEMBER 31
2002 2001 2000
--------------------------------------------------------
NET SALES
Climbing Products $ 444,336 $ 456,515 $ 442,772
Extruded Products 76,068 79,170 102,454
- ------------------------------------------------------------------------------------------------------------------
$ 520,404 $ 535,685 $ 545,226
==================================================================================================================
OPERATING PROFIT (LOSS)
Climbing Products $ 65,895 $ 53,115 $ 46,134
Extruded Products 354 (27) 6,853
Corporate & Other (1,622) (3,599) (2,363)
- ------------------------------------------------------------------------------------------------------------------
$ 64,627 $ 49,489 $ 50,624
==================================================================================================================
DEPRECIATION AND AMORTIZATION
Climbing Products $ 13,237 $ 12,011 $ 10,342
Extruded Products 1,687 1,519 1,325
Corporate & Other 3,752 4,425 3,824
- ------------------------------------------------------------------------------------------------------------------
$ 18,676 $ 17,955 $ 15,491
==================================================================================================================
IDENTIFIABLE ASSETS
Climbing Products $ 214,434 $ 201,559 $ 198,151
Extruded Products 40,539 37,926 39,859
Corporate & Other 43,270 45,524 31,864
- ------------------------------------------------------------------------------------------------------------------
$ 298,243 $ 285,009 $ 269,874
==================================================================================================================
CAPITAL EXPENDITURES
Climbing Products $ 5,772 $ 10,422 $ 11,009
Extruded Products 1,341 3,039 1,250
Corporate & Other 4,940 5,941 14,486
- ------------------------------------------------------------------------------------------------------------------
$ 12,053 $ 19,402 $ 26,745
==================================================================================================================
Operating profit (loss) for Corporate & Other includes Recapitalization
expense amortization and various corporate expenses not allocated to the
reportable segments and eliminations. "Other income (expense), net" reflected in
the consolidated statements of income is also not allocated to the reportable
segments. Operating profit for the year 2002 for the Climbing Products and
Extruded Products segments includes the impact of severance costs of
approximately $1,300 and $300, respectively, associated with the separation of a
former executive officer. Operating profit for the year 2000 for the Climbing
Products and Extruded Products segments includes the impact of benefit plan
curtailment and settlement gains of $4,881 and $1,223, respectively, - see Note
K. Operating profit for the Climbing Products segment for 2000 also includes the
impact of a $1,093 charge related to plant shutdown costs - see Note P.
Climbing Products net sales to two significant customers individually
exceeded 10% of the Company's total net sales in 2002, 2001 and 2000 as follows:
31% and 18%, 32% and 16%, and 24% and 14% of net sales, respectively. No
customer included in the Extruded Products segment accounted for more than 10%
of the Company's net sales in those years.
45
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues included in the consolidated financial statements of the
Company are primarily derived from customers domiciled in the United States.
Substantially all of the Company's long-lived assets are located in the United
States.
N. SALE OF ACCOUNTS RECEIVABLE
The Company maintains a Receivables Purchase Agreement (the
"Receivables Purchase Agreement") with a financial institution and its affiliate
to provide additional financing capacity with a maximum availability of $50,000
depending upon the level of accounts receivable and certain other factors. Under
the Receivables Purchase Agreement, which will expire in May 2003, the Company
established a consolidated wholly-owned subsidiary, Werner Funding Corporation
("Funding"), which is a special purpose bankruptcy-remote entity that acquires,
on a daily basis, a variable percentage interest of certain eligible trade
receivables generated by the Company. The purchases by Funding are financed
through the sale of an undivided percentage ownership interest in such
receivables to the affiliate of the financial institution. The Company has
agreed to continue servicing the sold receivables for the financial institution
at market rates, therefore no servicing asset or liability has been recorded.
As of December 31, 2002 and 2001 the Company had transferred, on a
recurring basis, $78,765 and $76,469 of accounts receivable in exchange for
$20,000 in cash and an undivided interest in accounts receivable of $58,704 and
$56,382, respectively. In accordance with the provisions of FASB Statement No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, the transactions have been recorded as a sale of
receivables to a qualified special purpose entity. The ongoing cost associated
with the Receivables Purchase Agreement, which represents a return to investors
in the purchased interests, as well as the cost of implementation and the loss
on the sale of accounts receivable, is reported in the accompanying consolidated
statements of income in Other income (expense), net. These costs totaled $607,
$1,289 and $1,919 in 2002, 2001 and 2000, respectively. The interest rates on
the purchased interests at December 31, 2002 and 2001 were 1.40% and 1.96%,
respectively. As of December 31, 2002, $21,500 was available but unused under
the Receivables Purchase Agreement.
The key economic assumptions used to measure the undivided interest at
the date of the securitization for securitizations completed in 2002 were a
discount rate of 2.02% and an estimated life of approximately two months. At
December 31, 2002 an immediate adverse change in the discount rate or estimated
life of 10% and 20% would not result in a significant reduction in the fair
value of the undivided interest. These sensitivities are hypothetical and should
be used with caution. Changes in fair value based on changes in assumptions
generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, the effect of a
variation in a particular assumption on the fair value of the retained interest
is calculated without changing any other assumption. In reality, changes in one
factor may result in changes in another.
The accompanying consolidated balance sheets at December 31, 2002 and
2001 reflect an allowance for doubtful accounts that relates, in large part, to
accounts receivable representing the undivided interest in the assets of the
financial institution affiliate.
O. OTHER LONG-TERM OBLIGATIONS
Other long-term obligations are comprised of the following:
DECEMBER 31
2002 2001
----------------------------------------
Accrued employee retirement benefits $ 13,284 $ 14,364
Minimum pension liability adjustment 21,969 10,817
Deferred incentive compensation 4,579 3,792
Other 1,127 1,375
- ----------------------------------------------------------------------------------------------------------------
Total $ 40,959 $ 30,348
================================================================================================================
46
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
P. PLANT SHUTDOWN RESERVE
During the quarter ended June 30, 2000, the Company recorded plant
shutdown costs of $1,400 associated with a plan to improve efficiency and reduce
overall manufacturing and distribution costs by closing its Goshen, Indiana and
Swainsboro, Georgia facilities. During the quarter ended December 31, 2000, the
charge was reduced by $307 to $1,093 due to reopening a portion of the
Swainsboro, Georgia facility. The plan reflected the elimination of
approximately 240 jobs primarily in manufacturing functions. The affected
employees were paid severance, vacation and other benefits totaling
approximately $372. Plant shutdown costs also include other estimated exit costs
of $721, including continuing lease payments, security and other costs
applicable to the leased facilities through the end of the respective
non-cancelable lease periods. During the fourth quarter of 2001, the estimate of
other exit costs was reduced by $148 from $721 to $573 and were paid as of
Janaury 31, 2002.
Q. SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in Note D, the Company's debt includes borrowings under
the Senior Credit Facility and the Notes. The issuer of the debt is Werner
Holding Co. (DE), Inc. (the "Issuer"). Werner Holding Co. (PA), Inc. (the
"Parent Company") has provided a full, unconditional, joint and several guaranty
of the Issuer's obligation under the Senior Credit Facility and the Notes. In
addition, the Issuer's wholly-owned subsidiaries, except for Werner Funding
Corporation, (collectively, the "Guarantor Subsidiaries") have provided full,
unconditional, joint and several guarantees of the Senior Credit Facility and
the Notes.
Following is condensed consolidated financial information for the
Parent Company, the Issuer, the Guarantor Subsidiaries and Werner Funding
Corporation (the "Non-Guarantor Subsidiary"). Separate financial statements of
the Guarantor Subsidiaries are not presented because management has determined
that they would not provide additional information that is material to
investors. Therefore, each of the Guarantor Subsidiaries is combined in the
presentation below. Further, separate financial statements of the Issuer have
not been provided as management has determined that they would not provide
information that is material to investors, as the Issuer has no substantial
operations or assets, other than its investment in its subsidiaries.
Investments in subsidiaries are accounted for on the equity method of
accounting. Earnings at subsidiaries are, therefore, reflected in the respective
investment accounts of the Parent Company and the Issuer. The investment in
subsidiaries and intercompany balances and transactions have been eliminated.
Income taxes are allocated generally on a separate return basis with
reimbursement for losses utilized on a consolidated basis in accordance with a
tax sharing agreement between the Company and each of its subsidiaries.
47
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
-----------------------------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------------------------
DECEMBER 31, 2002
ASSETS
Current assets:
Accounts receivable $ - $ - $ - $ 54,219 $ - $ 54,219
Inventories, net - - 52,530 - - 52,530
Other current assets 127 280 45,356 6 - 45,769
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 127 280 97,886 54,225 - 152,518
Property, plant and equipment, net - 1 112,415 - - 112,416
Investment in subsidiaries (114,826) (87,728) 7,656 - 194,898 -
Other assets - 5 33,294 10 - 33,309
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $(114,699) $ (87,442) $ 251,251 $ 54,235 $ 194,898 $ 298,243
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Other current liabilities $ (899) $ 32,344 $ 46,186 $ (181) $ - $ 77,450
Intercompany payable (receivable) (11,475) (233,049) 197,764 46,760 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities (12,374) (200,705) 243,950 46,579 - 77,450
Long-term debt - 228,089 5,865 - - 233,954
Other long-term liabilities - - 89,164 - - 89,164
Total equity (deficit) (102,325) (114,826) (87,728) 7,656 194,898 (102,325)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY
(DEFICIT) $(114,699) $ (87,442) $ 251,251 $ 54,235 $ 194,898 $ 298,243
===============================================================================================================================
DECEMBER 31, 2001
ASSETS
Current assets:
Accounts receivable $ - $ - $ - $ 54,250 $ - $ 54,250
Inventories, net - - 52,916 - - 52,916
Other current assets 344 188 31,739 9 - 32,280
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 344 188 84,655 54,259 - 139,446
Property, plant and equipment, net - 2 111,927 - - 111,929
Investment in subsidiaries (135,881) (110,862) 7,576 - 239,167 -
Other assets 5 1,503 32,026 100 - 33,634
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $(135,532) $(109,169) $ 236,184 $ 54,359 $ 239,167 $ 285,009
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Other current liabilities $ (791) $ 23,419 $ 51,438 $ (108) $ - $ 73,958
Intercompany payable (receivable) (10,918) (251,375) 215,401 46,892 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities (11,709) (227,956) 266,839 46,784 - 73,958
Long-term debt - 254,668 5,789 - - 260,457
Other long-term liabilities - - 74,417 - - 74,417
Total equity (deficit) (123,823) (135,881) (110,861) 7,575 239,167 (123,823)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY
(DEFICIT) $(135,532) $(109,169) $ 236,184 $ 54,359 $ 239,167 $ 285,009
===============================================================================================================================
48
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF INCOME
---------------------------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31, 2002
Net sales $ - $ - $ 520,404 $ - $ - $ 520,404
Cost of sales - - 343,795 - - 343,795
-------------------------------------------------------------------------------------------------------------------------
Gross profit - - 176,609 - - 176,609
Selling, general and administrative
expenses 4 5 111,973 - - 111,982
-------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (4) (5) 64,636 - - 64,627
Other(expense) income, net 26,988 28,581 (2,465) 3,115 (55,895) 324
Interest income (expense) 831 (2,796) (16,517) (2,990) - (21,472)
-------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 27,815 25,780 45,654 125 (55,895) 43,479
Income taxes (benefit) 387 (1,103) 16,723 44 - 16,051
-------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 27,428 $ 26,883 $ 28,931 $ 81 $ (55,895) $ 27,428
=========================================================================================================================
FOR THE YEAR ENDED
DECEMBER 31, 2001
Net sales $ - $ - $ 535,685 $ - $ - $ 535,685
Cost of sales - - 379,161 - - 379,161
-------------------------------------------------------------------------------------------------------------------------
Gross profit - - 156,524 - - 156,524
Selling, general and administrative
expenses 12 51 107,120 - - 107,183
Plant shutdown costs - - (148) - - (148)
-------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (12) (51) 49,552 - - 49,489
Other(expense) income, net 15,029 15,838 (3,072) 4,670 (31,524) 941
Interest income (expense) 1,039 (1,676) (21,548) (3,963) - (26,148)
-------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 16,056 14,111 24,932 707 (31,524) 24,282
Income taxes (benefit) 501 (737) 8,716 247 - 8,727
-------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 15,555 $ 14,848 $ 16,216 $ 460 $ (31,524) $ 15,555
=========================================================================================================================
FOR THE YEAR ENDED
DECEMBER 31, 2000
Net sales $ - $ - $ 545,226 $ - $ - $ 545,226
Cost of sales - - 384,478 - - 384,478
-------------------------------------------------------------------------------------------------------------------------
Gross profit - - 160,748 - - 160,748
Selling, general and administrative
expenses 20 46 115,069 - - 115,135
Benefit plan curtailment and
settlement gains, net - - (6,104) - - (6,104)
Plant shutdown costs - - 1,093 - - 1,093
-------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (20) (46) 50,690 - - 50,624
Other(expense) income, net 11,849 12,866 (5,143) 6,640 (28,435) (2,223)
Interest income (expense) 1,034 (3,625) (20,824) (4,472) - (27,887)
-------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 12,863 9,195 24,723 2,168 (28,435) 20,514
Income taxes (benefit) 595 (2,234) 9,146 739 - 8,246
-------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 12,268 $ 11,429 $ 15,577 $ 1,429 $ (28,435) $ 12,268
=========================================================================================================================
49
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY CONSOLIDATED
----------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31, 2002
Net cash from operating activities $ 675 $ (2,213) $ 43,303 $ (2) $ 41,763
Net cash from investing activities (557) 18,535 (29,822) - (11,844)
Net cash from financing activities (118) (16,325) (788) - (17,231)
----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents - (3) 12,693 (2) 12,688
Cash and cash equivalents at
beginning of year - 4 30,465 4 30,473
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ - $ 1 $ 43,158 $ 2 $ 43,161
================================================================================================================
FOR THE YEAR ENDED
DECEMBER 31, 2001
Net cash from operating activities $ 327 $ (2,284) $ 46,100 $ 3 $ 44,146
Net cash from investing activities (86) 4,394 (20,290) - (15,982)
Net cash from financing activities (241) (2,128) (840) - (3,209)
----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents - (18) 24,970 3 24,955
Cash and cash equivalents at
beginning of year - 22 5,495 1 5,518
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ - $ 4 $ 30,465 $ 4 $ 30,473
================================================================================================================
FOR THE YEAR ENDED
DECEMBER 31, 2000
Net cash from operating activities $ (300) $ 2,954 $ 31,982 $ (6) $ 34,630
Net cash from investing activities 207 (1,899) (25,006) - (26,698)
Net cash from financing activities 93 (1,450) (1,923) - (3,280)
----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents - (395) 5,053 (6) 4,652
Cash and cash equivalents at
beginning of year - 417 442 7 866
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ - $ 22 $ 5,495 $ 1 $ 5,518
================================================================================================================
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The following table sets forth the name, age and principal position of
each of the directors of Holding (PA), Holding (DE) and the executive officers
of the Company. The individuals who constitute the Board of Directors of Holding
(PA) also constitute the Board of Directors of Holding (DE) except as noted
below.
Each director of Holding (PA) and Holding (DE) will hold office until
the next annual meeting of shareholders of Holding (PA) and Holding (DE),
respectively, or until his successor has been elected and qualified. Officers of
the Company are appointed by the respective Boards of Directors of Holding (PA)
and its subsidiaries and serve at the discretion of such Boards, subject to any
applicable employment agreements.
NAME AGE POSITION(S)
- ---- --- -----------
Donald M. Werner 69 Chairman of the Board of Directors
Michael E. Werner 43 Vice Chairman of the Board of Directors (1)
Dennis G. Heiner 59 President and Chief Executive Officer, Director
Steven R. Bentson 53 Vice President, Manufacturing
John J. Fiumefreddo 48 Vice President, Engineering and New Product Development
Larry V. Friend 56 Vice President, Chief Financial Officer and Treasurer
Edward W. Gericke 45 Senior Vice President, Sales
Peter R. O'Coin 55 Senior Vice President, Operations
Eric J. Werner 40 Vice President, Secretary and General Counsel
Mamoun Askari 39 Director
James O. Egan 54 Director
James F. Hardymon 68 Director (1)
Charles K. Marquis 60 Director
Dana R. Snyder 55 Director (1)
Howard L. Solot 65 Director
Christopher J. Stadler 38 Director
Thomas J. Sullivan 40 Director
Stephen Tempini 43 Director
(1) Director of Holding (PA) only.
Donald M. Werner served as President and Chief Executive Officer of
Holding (PA) from May 1997 until his retirement in January 2000. From 1995 to
1997, Mr. Werner was President of Werner Ladder Co. Prior to 1995, Mr. Werner
served in various positions with the Company including Sales Manager, Vice
President-Marketing and Senior Vice President-Corporate Sales and Marketing. Mr.
Werner also holds various directorships at subsidiaries of Holding (PA). Mr.
Werner served as Chairman of the American Hardware Manufacturers Association and
served on the boards of directors of the Scaffolding Industry Association and
the Hardware Group Association. Mr. Werner is the father of Eric J. Werner, the
uncle of Michael E. Werner and the cousin of Howard L. Solot.
Michael E. Werner was appointed Vice Chairman of the Board of Directors
in January 2001. Mr. Werner is the President and Chief Executive Officer of
Globe Union Group, Inc. and an officer and director of various Globe Union
affiliates since August 2002. Prior to that, Mr. Werner served as Managing
Partner of Generation Capital Partners I, LLC, a private equity investment firm
beginning November 2001. Previously, he served as President of the Company's
Werner Ladder Co. business unit from 1997 until January 2001. Mr. Werner joined
the Company in 1988 and has held several positions including Vice
President-National Accounts and Vice President-Sales & Marketing. Mr. Werner is
the nephew of Donald M. Werner and the cousin of Eric J. Werner.
Dennis G. Heiner has served as President and Chief Executive Officer of
Holding (PA) since January 1, 2000 and Holding (DE) and Werner since June 1999.
Prior to joining the Company, Mr. Heiner served as Executive Vice President of
Black & Decker Corporation since 1989 and was its President-Hardware & Building
51
Products Group Worldwide from 1998 to 1999. Mr. Heiner was President-Security
Hardware Worldwide from 1992 to 1998, President-Household Products Worldwide
from 1986 to 1992 and Group Vice President-U.S. Household Products from 1985 to
1986. Prior to Black & Decker, Mr. Heiner served as Division President for
Beatrice Companies Inc. Window Coverings Division and as Vice President-Finance
and then President for their Del Mar Window Coverings Division. Mr. Heiner holds
various directorships and officerships at subsidiaries of Holding (PA) and is a
director of Franklin Covey Co.
Steven R. Bentson has served as Vice President, Manufacturing of the
Company since July 2001. From 1992 through 2000, he was employed by Pentair Inc.
where he served as Vice President-Operations for Porter-Cable, President of
Century Manufacturing and President of DeVilbiss Air Power Company. Mr. Bentson
was employed by Black & Decker from 1979 through 1992 serving in both
engineering and operations management positions including Plant Manager of the
Outdoor Products Plant and Superintendent of the Professional Power Tool Plant.
John J. Fiumefreddo joined the Company as Vice President, Engineering
and New Product Development in July 2002. Prior to joining the Company, Mr.
Fiumefreddo was employed at Black & Decker from 1997 through 2002 where he held
the positions of Vice Presiden-Engineering, Vice President-Product Planning &
Development and Vice President-Strategic Manufacturing Operations. From 1987
through 1997, Mr. Fiumefreddo was Director of Engineering with Kohler Co.
Larry V. Friend was appointed Vice President, Chief Financial Officer
and Treasurer in January 2001. He joined the Company in April 1999 as Vice
President and Controller and was appointed Vice President-Finance in June 2000.
Mr. Friend also holds various officerships at subsidiaries of Holding (PA).
Prior to joining the Company, Mr. Friend was an independent financial consultant
in 1998 and 1999. During 1996 and 1997, he served as President and CEO of the
North and Central American operations of Ceramicas Industriales, S. A. Mr.
Friend was Vice President and Chief Financial Officer of Universal Rundle
Corporation from 1990 until 1996 and held Vice President, Controller and other
finance positions at National Forge Company from 1982 until 1990. Between 1968
and 1981, Mr. Friend was employed by Price Waterhouse (now
PricewaterhouseCoopers LLP).
Edward W. Gericke was appointed Senior Vice President, Sales for Werner
Ladder Co. in January 2001. He joined the Company in January 1998 as Vice
President, Sales. Prior to joining the Company, Mr. Gericke was employed by
Huffy/True Temper from May 1987 to January 1998 where he held multiple positions
in sales, marketing and operations; the most recent of which was Vice President,
Sales and Marketing.
Peter R. O'Coin was appointed Senior Vice President, Operations in
March 2002. Mr. O'Coin also holds various officerships at subsidiaries of
Holding (PA). Prior to joining the Company, he was President and Chief Executive
Officer of West American Rubber Company from 2000 to 2001. From 1993 to 1999,
Mr. O'Coin was Vice President, Manufacturing of Kwikset Corporation, a division
of Black & Decker. Prior to that, Mr. O'Coin held various positions at General
Electric Company, the most recent of which was General Manager of General
Electric Lighting.
Eric J. Werner joined the Company in 1988 as Secretary and Corporate
Counsel. He has served as Vice President of the Company since 1999 and General
Counsel of the Company since 1993. Mr. Werner also holds various officerships at
subsidiaries of Holding (PA). Prior to joining the Company, Mr. Werner was an
associate at the law firm of O'Connor, Broude, Snyder and Aronson. Mr. Werner is
the son of Donald M. Werner and the cousin of Michael E. Werner.
Mamoun Askari became a director of Holding (PA) in June 2000. Mr.
Askari has been an executive of Investcorp or one or more of its wholly-owned
subsidiaries since September 1990. Prior to joining Investcorp, Mr. Askari was
an Associate with Deloitte, Haskins & Sells (now Deloitte & Touche LLP).
James O. Egan has served as director of Holding (PA) since May 1999.
Mr. Egan has been an executive officer of Investcorp or one of its wholly-owned
subsidiaries since January 1999. Prior to joining Investcorp, Mr. Egan was a
partner in the accounting firm of KPMG from October 1997 to December 1998. Prior
to that, Mr. Egan was a Senior Vice President and Chief Financial Officer of
Riverwood International from May 1996 to September 1997. Prior to that, Mr.
Egan was a partner in the accounting firm of Coopers & Lybrand L.L.P. (now
PricewaterhouseCoopers LLP). Mr. Egan is a director of CSK Auto Corporation,
Harborside Healthcare Corporation and Jostens, Inc.
52
James F. Hardymon became a director of Holding (PA) in May 2001. Mr.
Hardymon was an executive with Textron, Inc. for ten years and retired as
Chairman and Chief Executive Officer in 1999. Prior to that, Mr. Hardymon was
employed by Emerson Electric Company for 28 years and held various positions
including Vice Chairman, Chief Operating Officer, President and director. Mr.
Hardymon is a director of Air Products and Chemicals, Inc., Lexmark
International, Inc., Circuit City Stores, Inc., Schneider Electric, S.A.,
American Standard Companies, Inc. and Championship Auto Racing Teams, Inc. Mr.
Hardymon is a member of the advisory board of Investcorp and Proudfoot
Consulting Company.
Charles K. Marquis has served as director of Holding (PA) since May
1999. Mr. Marquis has been a senior advisor to Investcorp or one or more of its
wholly-owned subsidiaries since January 1999. Prior to joining Investcorp, Mr.
Marquis was a partner in the law firm of Gibson, Dunn & Crutcher, LLP. Mr.
Marquis is a director of CSK Auto Corporation, Jostens, Inc. and Tiffany & Co.
Dana R. Snyder has served as a director of Holding (PA) since May 2002.
Mr. Snyder was an executive with Ply Gem Industries, Inc. for two years and
retired as President, Chief Operating Officer and director in 1997. Prior to
that, Mr. Snyder was employed for six years by The Stolle Corporation, a
subsidiary of Alcoa Inc., and held various positions including President of
Alcoa Construction Products Group. From 1986 to 1989 Mr. Snyder served as
President of the wood products group of Kusan, Inc.
Howard L. Solot has served as director of Holding (PA) since 1974. He
has served as Executive Vice President and Chief Operating Officer of Holding
(PA) from 1995 until his retirement in March of 1999. He joined the Company in
1959 and has held various planning, systems, engineering and manufacturing
related positions, including Plant Manager, Division General Manager, Vice
President-Engineering and Corporate Planning and Senior Vice
President-Manufacturing. Mr. Solot also holds various director positions at
subsidiaries of Holding (PA). Mr. Solot served as a member of the board of
directors of the Aluminum Extruders Council. Mr. Solot is the cousin of Donald
M. Werner.
Christopher J. Stadler has served as director of Holding (PA) since
November 1997. He has been an executive of Investcorp or one or more of its
wholly-owned subsidiaries since April 1996. Prior to joining Investcorp, Mr.
Stadler was a director with CS First Boston Corporation. Mr. Stadler is a
director of CSK Auto Corporation, US Unwired and Saks Incorporated.
Thomas J. Sullivan has served as director of Holding (PA) since July
1999. Mr. Sullivan has been an executive of Investcorp or one or more of its
wholly-owned subsidiaries since April 1996. Prior to joining Investcorp, Mr.
Sullivan was Vice President and Treasurer of the Leslie Fay Companies, Inc. (now
Leslie Fay Company, Inc.). Mr. Sullivan is a director of US Unwired.
Stephen Tempini became a director of Holding (PA) in January 2002. Mr.
Tempini has been an executive of Investcorp or one or more of its wholly-owned
subsidiaries since April 2001. Prior to joining Investcorp, Mr. Tempini was
Senior Vice President of Proxicom, Inc. from 1998 to 2000 (later acquired by
Data Dimensions Holdings plc). Mr. Tempini was First Vice President and Senior
Director of Merrill Lynch from 1995 to 1998 and the Manager of Emerging
Technology at General Electric Company from 1991 to 1995.
DIRECTOR COMPENSATION
Neither Holding (PA) nor Holding (DE) pays any remuneration to
executives of Investcorp or any additional remuneration to its employees for
serving as directors. Directors who are not employees of Holding (PA), Holding
(DE) or Investcorp receive an annual retainer fee in the amount of $10,000 plus
$10,000 for attending each committee meeting subject to an annual maximum of
$50,000 per director. All directors are reimbursed for any expenses incurred in
attending meetings.
53
SHAREHOLDER RIGHTS AGREEMENT
Pursuant to the Shareholder Rights Agreement entered into in November
1997, (i) Class D Investors have a right to designate at least a majority of
Holding (PA)'s Board, (ii) the Chief Executive Officer of Holding (PA) shall be
a director, and, (iii) the Management Shareholders (Donald M. Werner, Howard L.
Solot, Michael E. Werner, Eric J. Werner, Michael J. Solot, Craig R. Werner and
Bruce D. Werner, who were active in the management of the Company at the time,
collectively, the "Management Shareholders") are entitled to designate a minimum
of one director and up to that number of directors equal to one third of the
authorized number of directors minus one. See "Certain Relationships and Related
Transactions - Agreements with Certain Shareholders and Directors - Shareholder
Rights Agreement."
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth information concerning annual and
long-term compensation for the last three fiscal years awarded to, earned by or
paid to the Chief Executive Officer of the Company and each of the other four
most highly compensated executive officers whose remuneration exceeded $100,000
(collectively, the "Named Executive Officers"). The current compensation
arrangements for certain of these officers are described in "Employment
Arrangements" below.
LONG-TERM
COMPENSATION
----------------------------
SECURITIES
DEFERRED UNDERLYING
NAME AND PRINCIPAL OTHER ANNUAL STOCK OPTIONS/SARS
POSITIONS YEAR SALARY BONUS COMPENSATION UNITS ($) (SHARES)
- ------------------------------------------------------------------------------------------------------------------------
Dennis G. Heiner (1) 2002 $543,265 $715,000 $470,012 $ - $ -
President, Chief 2001 525,000 350,000 450,506 - -
Executive Officer 2000 525,000 - 392,801 - -
Steven R. Bentson (2) 2002 243,269 225,000 21,791 - -
Vice President, Manufacturing 2001 103,846 65,000 10,585 - 200
since July 2001
Larry V. Friend (3) 2002 217,307 190,000 27,399 - -
Vice President, 2001 199,123 80,000 21,426 - 100
Chief Financial Officer 2000 167,015 25,000 48,998 - -
and Treasurer
Peter R. O'Coin (4) 2002 218,320 230,000 77,853 - 450
Senior Vice President,
Operations since March 2002
Eric J. Werner (5) 2002 199,385 193,000 35,269 - -
Vice President, Secretary 2001 197,577 120,000 39,753 - -
and General Counsel 2000 191,000 60,000 23,259 - -
(1) The amount shown for Mr. Heiner under Other Annual Compensation reflects
payments of $8,734, $10,966 and $6,350 in respect of life insurance premiums
paid by the Company in 2002, 2001 and 2000, respectively, $27,163 and
$26,250 in respect of Company contributions made under the 401(k) Plan in
2002 and 2001, respectively, $8,391, $9,187 and $13,143 of imputed income
arising from the personal use of a Company provided automobile in 2002, 2001
and 2000, respectively, and retention incentive compensation as set forth in
his employment contract of $425,724, $404,103 and $373,308 in 2002, 2001 and
2000, respectively.
54
(2) The amount shown for Mr. Bentson under Other Annual Compensation reflects
payments of $1,350 and $582 in respect of life insurance premiums paid by
the Company in 2002 and 2001, respectively, $14,159 and $5,885 in respect of
Company contributions made under the 401(k) Plan in 2002 and 2001,
respectively, $6,282 and $1,418 of imputed income arising from the personal
use of a Company provided automobile in 2002 and 2001, respectively, and
$2,700 for moving expenses in 2001.
(3) The amount shown for Mr. Friend under Other Annual Compensation reflects
payments of $2,525, $2,103 and $955 in respect of life insurance premiums
paid by the Company in 2002, 2001 and 2000, respectively, $14,494, $12,323
and $1,002 in respect of Company contributions made under the 401(k) Plan in
2002, 2001 and 2000, respectively, $10,380, $7,000 and $8,349 of imputed
income arising from the personal use of a Company provided automobile in
2002, 2001 and 2000, respectively, and $38,692 for moving expenses in 2000.
(4) The amount shown for Mr. O'Coin under Other Annual Compensation reflects
payments of $2,659 in respect of life insurance premiums paid by the Company
in 2002, $11,906 in respect of Company contributions made under the 401(k)
Plan in 2002, $7,004 of imputed income arising from the personal use of a
Company provided automobile in 2002, and $56,284 for moving expenses in
2002.
(5) The amount shown for Mr. Werner under Other Annual Compensation reflects
payments of $7,547, $14,483 and $448 in respect of life insurance premiums
paid by the Company in 2002, 2001 and 2000, respectively, $11,963, $11,855
and $3,820 in respect of Company contributions made under the 401(k) Plan in
2002, 2001 and 2000, respectively, $4,825, $3,850 and $3,567 in respect of
accruals under postretirement benefit plans in 2002, 2001 and 2000,
respectively, $8,572, $7,203 and $8,310 of imputed income arising from the
personal use of a Company provided automobile in 2002, 2001 and 2000,
respectively, and $2,362, $2,362 and $7,114 of financial planning services
in 2002, 2001 and 2000, respectively.
EMPLOYMENT ARRANGEMENTS
In November 1997, Holding (PA) entered into a three-year employment
agreement with Eric J. Werner which was renewed for another three-year term in
December 2000. In April 1999, the Company entered into a three-year employment
agreement with Larry V. Friend which was amended in October 2001 to extend the
term for an additional three and one-half years. In June 1999, the Company
entered into a five and one-half year employment agreement with Dennis G.
Heiner. In July 2001, the Company entered into a three-year employment agreement
with Steven R. Bentson. In March 2002, the Company entered into a three-year
employment agreement with Peter R. O'Coin. The employment agreements for all of
these officers are collectively referred to as the "Employment Agreements." The
Employment Agreements provide for a base annual salary in the following amounts:
$525,000 for Dennis G. Heiner, $225,000 for Steven R. Bentson, $160,000 for
Larry V. Friend, $275,000 for Peter R. O'Coin, and $183,000 for Eric J. Werner.
In addition to such executive's salary, the Employment Agreements also provide
for an annual bonus payment up to a maximum of 100% of annual salary for Dennis
G. Heiner, 60% of annual salary for Steven R. Bentson, 40% of annual salary for
Larry V. Friend, 65% for Peter R. O'Coin, and 60% of annual salary for Eric J.
Werner. This bonus is reduced, within a range of board discretion, to the extent
that the Company falls short of EBITDA targets specified in the Employment
Agreements. The Employment Agreements further provide for an additional cash
bonus payable at the discretion of the Company's Board of Directors. The
employment agreement for Dennis G. Heiner also provides for retention incentive
compensation each year up to an additional $360,000, plus interest on amounts
unpaid, contingent upon Mr. Heiner remaining in the employ of the Company until
the fifth anniversary of his commencement date. Under the Employment Agreements,
Holding (PA) may only terminate such executives' employment, without obligation
for severance, for cause. Except with respect to Dennis G. Heiner, if an
executive's employment is terminated without cause or if an executive terminates
his employment for good reason, the Company must (i) pay such executive a lump
sum equal to 12 months' base salary, and the most recent annual bonus paid (or
earned but not yet paid) prior to termination of employment, and (ii) continue
such executive's employee benefits for 12 months. With respect to Dennis G.
Heiner, if Mr. Heiner's employment is terminated without cause or if he
terminates his employment for good reason, the Company must (i) pay Mr. Heiner a
lump sum equal to the sum of $1,050,000 and two times the most recent annual
bonus paid (or earned but not yet paid) prior to his termination of employment
and (ii) continue his employee benefits for a period of 24 months or until Mr.
Heiner receives similar benefits from subsequent employment whichever occurs
earlier. The Employment Agreements define "cause" as conviction of embezzlement
or other felony involving fraud with respect to performance of duties and,
subject to notice and opportunity to cure, willful engagement in gross
55
misconduct concerning duties. "Good reason" is defined as a reduction in salary,
bonus opportunities or employee benefits from the level in effect as of the
commencement date of the respective employment contract, adverse changes in
duties and forced relocation.
MANAGEMENT STOCK INCENTIVE PLAN
In November 1997, Holding (PA) adopted a stock incentive plan, pursuant
to which options to purchase Class C Common Stock may be granted to employees
and directors of the Company. From December 1998 through October 2002 the
Company issued options representing approximately 13% of the outstanding post-
Recapitalization common stock to certain members of senior management, including
certain of the Named Executive Officers. Awards granted under the plan to
employees include a provision terminating the award upon termination of
employment under certain circumstances or accelerating the receipt of benefits
upon the occurrence of specified events, including any change of control of
Holding (PA). Each option is subject to certain vesting provisions. To the
extent not earlier vested or terminated, all options will vest on the seventh
anniversary of the date of grant and will expire 30 days thereafter if not
exercised. Upon the termination of an optionee's employment with the Company,
Holding (PA) has certain rights to repurchase, and the optionee has certain
rights to require an affiliate of Investcorp to repurchase (subject to the
right, granted to Holding (PA), to repurchase such shares instead of the
Investcorp affiliate), the Class C Common Stock purchased by the optionee
pursuant to the exercise of his option(s).
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO GRANT
OPTION/SAR EMPLOYEES EXERCISE EXPIRATION DATE
NAME GRANTED IN FISCAL YEAR PRICE DATE VALUE (1)
- -------------------------------------------------------------------------------------------------------------------------
Peter R. O'Coin 450 64.3% $ 3,000.00 Aug. 15, 2009 $ 363,011
(1) For purposes of fair market value disclosures, the fair market value of an
option grant is determined using the Black-Scholes option pricing model.
See Notes B and G to the Company's Consolidated Financial Statements.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTIONS/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS/SARS THE-MONEY OPTIONS/SARS
SHARES AT FISCAL YEAR END AT FISCAL YEAR END ($)
ACQUIRED ON VALUE --------------------------------------------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------
Dennis G. Heiner - - 375 875 $ 217,016 $ 506,371
Steven R. Bentson - - - 200 - 110,000
Larry V. Friend - - 38 187 21,991 105,348
Peter R. O'Coin - - - 450 - -
Eric J. Werner - - - 300 - 173,613
In November 1997, Holding (PA) adopted a Stock Loan Plan in order to
make loans to certain members of management entering into certain stock purchase
agreements between management participants and the Investors (the "Loan
Participants"). Loans made pursuant to the Stock Loan Plan mature in seven
years, and bear interest at the Company's effective borrowing rate using the
rates under the Revolving Facility of the Senior Credit Facility and the
Receivables Purchase Agreement. Holding (PA) negotiates with each Loan
Participant the amount of principal to be paid from such Loan Participant's
annual bonus. The Stock Loan Plan requires each Loan Participant to enter into a
pledge agreement and to execute a secured promissory note. Shares with an
56
aggregate fair market value of $780,000, $147,000 and $3,019,000 were purchased
in 2002, 2001 and 2000, respectively, pursuant to the Stock Loan Plan and
management stock purchase agreements.
DEFERRED STOCK PLAN
Effective August 1999, the Company adopted the Werner Co. Deferred
Stock Plan (the "Deferred Stock Plan"). The Deferred Stock Plan is administered
by a committee of the Board of Directors of the Company (the "Committee").
Pursuant to the Deferred Stock Plan, Dennis G. Heiner (the "Participant") is
given the opportunity on or before December 31 of each year to make an
irrevocable election to defer all or part of his salary and/or bonus for the
next year subject to the approval of the Committee. If the Participant makes,
and the Committee approves, such an election, the Committee shall grant to the
Participant Stock Units (as hereinafter defined) determined by dividing the
portion of the Participant's deferred salary and/or bonus by the fair market
value of a share of Class C Common Stock as of the applicable pay date. Under
the Deferred Stock Plan, the Participant is entitled to receive Stock Units
which are defined as non-voting units of measurement which are deemed for
recordkeeping purposes to be equivalent to shares of Class C Common Stock, such
that, one Stock Unit is equal to one outstanding share of the Company's Class C
Common Stock. Distribution of benefits under the Deferred Stock Plan shall be
made to the Participant on the first business day of the first month following
his termination of service, or immediately upon a change in control, and shall
be made in an equivalent whole number of shares of Class C Common Stock. The
Company has certain rights to repurchase the shares of Class C Common Stock
distributed to the Participant upon the cessation of his employment or upon a
sale or initial public offering of the Company as defined in the Deferred Stock
Plan. Under the Deferred Stock Plan as of December 31, 1999, Mr. Heiner has
earned 275 Stock Units from salary and bonus compensation. In addition, Mr.
Heiner is entitled to receive 1,033 Stock Units pursuant to his employment
agreement. Such Stock Units will be vested over a three-year period from the
date of his employment through June 15, 2002 and the Company recognizes the
related compensation expense over the three-year vesting period. In 2002, 2001
and 2000, the Company recognized $366,000, $840,000 and $840,000, respectively,
of compensation expense related to Mr. Heiner's Stock Units.
PENSION PLANS
The benefits for all salaried employees under the Retirement Plan for
Employees of Werner Holding Co. (DE), Inc. (the "Retirement Plan"), a funded,
tax-qualified defined benefit pension plan, and for certain stated executives
under the Werner Holding Co. (DE), Inc. Supplemental Pension Plan A and/or the
Werner Holding Co. (DE), Inc. Supplemental Pension Plan B (the "Supplemental
Pension Plans") were frozen as of December 31, 2000. Effective January 1, 2001,
Company contributions under the 401(k) Plan were increased. No further benefits
will accrue under the Retirement Plan or the Supplemental Pension Plans for
service after December 31, 2000. The following table shows the annual benefits
accrued as of December 31, 2000 for each of the Named Executive Officers. These
amounts would be payable at age 65.
SUPPLEMENTAL
RETIREMENT PENSION
NAME PLAN PLAN TOTAL
- ---------------------------- -------------- --------------- ---------------
Dennis G. Heiner $ 3,562 $ - $ 3,562
Steven R. Bentson - - -
Larry V. Friend 3,891 1,770 5,661
Peter R. O'Coin - - -
Eric J. Werner 29,000 25,698 54,698
The Supplemental Pension Plans are unfunded, non-qualified plans which
provide lifetime annual pension benefits to certain stated executives in excess
of benefits payable under the Retirement Plan, due to Retirement Plan
limitations imposed by the Employee Retirement Income Security Act ("ERISA"),
plus additional other benefits. Supplemental Pension Plan A covers all members
of the Company's former Management Committee and Supplemental Pension Plan B
covers most of the elected corporate officers. Supplemental Pension Plan
benefits are a function of service and final average compensation (both frozen
as of December 31, 2000). Executives must have spent at least ten years of
service as either an elected salaried corporate officer or a member of the
former Management Committee of the Company and retire from the Company after age
55 to be eligible. Eligibility for the supplemental plans is conditioned upon
participants' compliance with a non-competition agreement.
57
CONSULTING AND SEPARATION AGREEMENT
On January 24, 2001, in connection with Michael E. Werner's resignation
as an officer and employee of the Company, the Company entered into an agreement
regarding Mr. Werner's termination of employment and future consulting services.
Pursuant to the agreement, Mr. Werner serves as a Director and Vice Chairman of
the Board of Holding (PA) and was paid a separation payment of $500,000 and
benefits as set forth in the agreement. In addition, the Company engaged Mr.
Werner to provide consulting services to the Company for a one-year period
commencing February 19, 2001, in return for monthly payments of approximately
$22,083 during the term of the consulting arrangement. Mr. Werner was also paid
an incentive payment of $250,000 on February 18, 2002 with an opportunity to
receive an additional amount at the Board of Directors' discretion as set forth
in the agreement. No additional amounts were paid and the consulting agreement
expired as of February 19, 2002.
COMMITTEES OF THE BOARD OF DIRECTORS; COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
The full Board of Directors of Werner determines the compensation for
management of Werner. Dennis G. Heiner is a member of the Board of Directors of
Werner. The compensation for the Named Executive Officers is determined under
each such officer's employment agreement.
None of the executive officers of the Company served on the Board of
Directors or on the compensation committee of any other entity, the officers of
which served on any of the Boards of Directors of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
All of the outstanding voting stock of Holding (DE) is owned by Holding
(PA). The following table sets forth certain information regarding the
beneficial ownership of the capital stock of Holding (PA).
The Class A Stock, Class B Stock and Class D Common Stock are the only
classes of Holding (PA)'s capital stock that have the power to vote. The Class A
Stock and Class B Stock each possesses the right to one vote per share. The
Class D Common Stock possesses the right to 50.6818 votes per share. Investcorp
and the Investors beneficially own approximately 67% of the outstanding voting
stock of Holding (PA). In addition, the Investors own 3,856 shares of Class C
Common Stock and 45,000 shares of Class E Common Stock. See "Certain
Relationships and Related Transactions-Agreements with Certain Shareholders and
Directors."
The table sets forth as of December 31, 2002 (i) each person known by
the Company to be the beneficial owner of more than 5% of each class of voting
stock of Holding (PA), (ii) each person who is a director of Holding (PA) or
Named Executive Officer of the Company who is known to beneficially own shares
of voting stock of Holding (PA) and (iii) all directors of Holding (PA) and
executive officers of the Company as a group. Unless otherwise indicated, each
of the shareholders shown in the table below has sole voting and investment
power with respect to the shares beneficially owned.
NUMBER OF PERCENT
SHARES (1) OF CLASS
------------ ------------
CLASS A VOTING STOCK
Noel Berk-Rauch 142 7.6%
Aleena R. Shapiro (2) 110 5.9%
Howard L. Solot (3) 277 14.7%
Donald M.Werner 304 16.2%
Richard L. Werner (4) 331 17.6%
Ronald E. Werner (5) 240 12.8%
All directors and executive officers as a group,
including certain of the above named persons 716 38.1%
58
NUMBER OF PERCENT
SHARES (1) OF CLASS
------------ ------------
CLASS B VOTING STOCK
Howard L. Solot (6) 1,083 5.0%
Bruce D. Werner Trust (7) 1,399 6.4%
Craig R. Werner Trust (8) 1,508 6.9%
Michael E. Werner Revocable Trust (9) 1,496 6.9%
Donald M. Werner (10) 601 2.8%
Eric J. Werner (11) 1,384 6.4%
Ronald E. Werner (12) 1,856 8.5%
All directors and executive officers as a group,
including certain of the above named persons 4,564 21.0%
NUMBER OF PERCENT
SHARES (1) OF CLASS
------------ ------------
CLASS D VOTING STOCK
INVESTCORP S.A. (13) (14) 1,000 100.0%
SIPCO Limited (15) 1,000 100.0%
CIP Limited (16) (17) 920 92.0%
Ballet Limited (16) (17) 92 9.2%
Denary Limited (16) (17) 92 9.2%
Gleam Limited (16) (17) 92 9.2%
Highlands Limited (16) (17) 92 9.2%
Noble Limited (16) (17) 92 9.2%
Outrigger Limited (16) (17) 92 9.2%
Quill Limited (16) (17) 92 9.2%
Radial Limited (16) (17) 92 9.2%
Shoreline Limited (16) (17) 92 9.2%
Zinnia Limited (16) (17) 92 9.2%
INVESTCORP Investment Equity Limited (14) 80 8.0%
(1) As used in the table above, a beneficial owner of a security includes any
person who, directly or indirectly, through contract, arrangement,
understanding, relationship, or otherwise has or shares (i) the power to
vote, or direct the voting of, such security or (ii) investment power which
includes the power to dispose, or to direct the disposition of, such
security. In addition, a person is deemed to be the beneficial owner of a
security if that person has the right to acquire beneficial ownership of
such security within 60 days.
(2) Ms. Shapiro does not directly own any stock in Holding (PA). The number of
shares shown as owned are held in the name of Rauch Trust of which Aleena R.
Shapiro is Trustee. Ms. Shapiro disclaims the beneficial ownership of such
shares.
(3) Includes 36.47 shares of Class A Stock held in the name of Mr. Solot's
spouse, Janet F. Solot.
(4) Includes 331.05 shares of Class A Stock held in the name of Richmond Drive
Enterprises, L.P., a limited partnership, the general partners of which are
Mr. Werner and Lois S. Werner. Lois S. Werner is the spouse of Mr. Werner.
(5) Includes 238.85 shares of Class A Stock held in the name of the Florence J.
Werner Irrevocable Trust of which Ronald E. Werner is the trustee. Mr.
Werner disclaims the beneficial ownership of such shares.
59
(6) Includes 826 shares of Class B Stock held in the name of Alligator
Partners, L.P., a limited partnership, the general partners of which are
Mr. Solot and Janet F. Solot, and 212.17 shares of Class B Stock held in
the name of Mr. Solot's spouse, Janet F. Solot.
(7) Includes 17.30 shares of Class B Stock held as joint tenant with Tammy H.
Werner and 391.01 shares of Class B Stock held in the name of the Bruce D.
Werner Family Limited Partnership.
(8) Includes 925.40 shares of Class B Stock owned by the Craig R. Werner Family
Limited Partnership.
(9) Includes 179.98 shares of Class B Stock held in the name of the Laura W.
Werner Revocable Trust, 102.92 shares of Class B Stock held in the name of
the Jonathan C. Werner Gift Trust, 57.65 shares of Class B Stock held in
the name of the Margot A. Werner Gift Trust and 102.92 shares of Class B
Stock held in the name of the Stephanie N. Werner Gift Trust.
(10) Includes 22 shares of Class B Stock owned with Barbara Werner as joint
tenants and 88 shares of Class B Stock held in the name of Barbara Werner.
(11) Includes 29.48 shares of Class B Stock owned with Melanie R. Werner as
joint tenants, 274.56 shares of Class B Stock held in the name of Melanie
R. Werner, Custodian for Isabelle N. Werner and 274.56 shares of Class B
Stock held in the name of Melanie R. Werner, Custodian for Sophia K.
Werner.
(12) Includes 1,145.74 shares of Class B Stock held in the name of the Robert I.
Werner Irrevocable Trust and 200.17 shares of Class B Stock held in the
name of the Florence J. Werner Irrevocable Trust. Mr. Werner disclaims the
beneficial ownership of all of these shares.
(13) Investcorp does not directly own any stock in Holding (PA). The number of
shares shown as owned by Investcorp includes all of the shares owned by
INVESTCORP Investment Equity Limited (see (14) below). Investcorp owns no
stock in Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited,
Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline
Limited, Zinnia Limited, or in the beneficial owners of these entities (see
(17) below). Investcorp may be deemed to share beneficial ownership of the
shares of voting stock held by these entities because the entities have
entered into revocable management services or similar agreements with an
affiliate of Investcorp, pursuant to which each such entity has granted
such affiliate the authority to direct the voting and disposition of the
Holding (PA) voting stock owned by such entity for so long as such
agreement is in effect. Investcorp is a Luxembourg corporation with its
address at 37 rue Notre-Dame, Luxembourg.
(14) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and a
wholly-owned subsidiary of Investcorp, with its address at P.O. Box 1111,
West Wind Building, George Town, Grand Cayman, Cayman Islands.
(15) SIPCO Limited may be deemed to control Investcorp through its ownership of
a majority of a company's stock that indirectly owns a majority of
Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind
Building, George Town, Grand Cayman, Cayman Islands.
(16) CIP Limited ("CIP") owns no stock in Holding (PA). CIP indirectly owns less
than 0.1% of the stock in each of Ballet Limited, Denary Limited, Gleam
Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill
Limited, Radial Limited, Shoreline Limited and Zinnia Limited (see (17)
below). CIP may be deemed to share beneficial ownership of the shares of
voting stock of Holding (PA) held by such entities because CIP acts as a
director of such entities and the ultimate beneficial shareholders of each
of those entities have granted to CIP revocable proxies in companies that
own those entities' stock. None of the ultimate beneficial owners of such
entities beneficially owns individually more than 5% of Holding (PA)'s
voting stock.
(17) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited is a Cayman Islands
corporation with its address at P.O. Box 2197, West Wind Building, George
Town, Grand Cayman, Cayman Islands.
60
Right of First Offer, Tag-Along Rights
Pursuant to the Restated Articles, prior to an initial public offering
of the capital stock of Holding (PA), any holder of Class A Stock or Class B
Stock that intends to sell any shares of such stock will be required to furnish
notice to Holding (PA) of such holder's intent to sell such shares. Following
the receipt of such notice, Holding (PA) will have the option to purchase such
stock on the same terms as the proposed sale. In addition, if any holder of
Class D Common Stock proposes to transfer shares of such stock, holders of the
other classes of Holding (PA) capital stock will have certain tag-along rights
with respect thereto. Any shares for which any holders elect to exercise such
tag-along rights but whose shares are not sold in connection therewith will have
such shares redeemed by Holding (PA), to the extent it is legally permitted to
do so.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
AGREEMENTS WITH CERTAIN SHAREHOLDERS AND DIRECTORS
Consulting and Financial Services Agreements
In November 1997, the Company entered into an agreement for management
advisory and consulting services for a five-year term with Investcorp
International, Inc. ("III"), pursuant to which the Company prepaid III
$5,000,000. Effective as of November 2002, the Company and III renewed the
management advisory and consulting services agreement for an additional one-year
term with automatic one-year extensions thereafter. Under the agreement, the
Company pays III an annual fee of $1,500,000 for such services.
On January 1, 2000, in connection with Donald M. Werner's retirement,
the Company entered into a consulting agreement with Mr. Werner. Pursuant to
this consulting agreement, Mr. Werner will provide certain consulting services
to the Company for a period of one year in exchange for payment at a rate of
$150,000 per year. The consulting agreement is automatically renewed for
successive one-year periods unless either party provides written notice thirty
(30) days prior to the expiration of the current term. The Company terminated
the agreement effective June 4, 2002.
In connection with Michael E. Werner's resignation as an officer and
employee of the Company effective January 24, 2001, the Company entered into a
consulting and separation agreement with Mr. Werner. Pursuant to the consulting
and separation agreement, Mr. Werner provided consulting services to the Company
for a one-year period commencing February 19, 2001, in exchange for monthly
payments of approximately $22,083 during the term of the consulting arrangement.
The consulting agreement expired as of February 19, 2002.
Shareholder Rights Agreement
In November 1997, Holding (PA) executed the Shareholder Rights
Agreement with each of the Management Shareholders and each holder of Class D
Common Stock ("Class D Investors"). The Shareholder Rights Agreement contains
the following provisions: (i) the right, following an initial public offering of
Holding (PA)'s capital stock, in favor of the Class D Investors to require the
Management Shareholders to sell their remaining equity interests in Holding (PA)
if the Class D Investors decide to sell as a group 85% or more of their
remaining equity interests in the Company and the Class D Investors hold at that
time (prior to giving effect to the proposed sale) more than 80% of the shares
of Class D Common Stock purchased by the Investors in November 1997, (ii) the
right in favor of all holders of Holding (PA)'s capital stock, during the period
until, but ending prior to, an initial public offering, to participate on a pro
rata basis in equity financings by the Company (other than issuances of equity
securities in connection with stock incentive or compensation plans approved by
Holding (PA)'s Board of Directors or in connection with business acquisitions by
Holding (PA)) if the securities to be issued by the Company are not being issued
at fair market value as determined in good faith by Holding (PA)'s Board of
Directors, (iii) certain demand and piggy-back registration rights in favor of
the Class D Investors and certain piggy-back registration rights in favor of all
other shareholders of Holding (PA), (iv) the obligation of the Management
Shareholders to enter into certain customary "lock-up" agreements with
underwriters in future public offerings, and (v) an agreement by the Class D
Investors and the Management Shareholders to vote their respective shares such
that (a) at least a majority of Holding (PA)'s Board will consist of persons
designated by the Class D Investors, (b) the Chief Executive Officer of Holding
(PA) shall be a director and (c) the Management Shareholders shall be entitled
to designate a minimum of one director and up to that number of directors equal
to one third of the authorized number of directors (rounded to the nearest whole
number) minus one.
61
ITEM 14. CONTROLS AND PROCEDURES.
Within ninety days prior to the filing of this annual report, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the President and Chief Executive Officer (the
"CEO") and the Vice President, Chief Financial Officer and Treasurer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements:
The financial statements set forth in the Index are filed as part of
this Annual Report on Form 10-K.
(2) Financial Statement Schedules:
The information required by schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange Commission
is provided elsewhere herein or is either not required or is inapplicable and
therefore has been omitted.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
62
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ------------------------
2 Amended and Restated Recapitalization Agreement, dated as of
October 27, 1997, by and among Holding (PA) and certain investors
organized by Investcorp S.A. (filed as Exhibit 2 to Holding (DE)'s
Form S-4 Registration Statement No. 333-46607 and incorporated
herein by reference).
3.1 Certificate of Incorporation of Werner Holding Co. (DE), Inc.
(filed as Exhibit 3.1 to Holding (DE)'s Form S-4 Registration
Statement No. 333-46607 and incorporated herein by reference).
3.2 By-laws of Werner Holding Co. (DE), Inc. (filed as Exhibit 3.2 to
Registrant's Form S-4 Registration Statement No. 333-46607 and
incorporated herein by reference).
3.3 Amended and Restated Articles of Incorporation of Werner Holding
Co. (PA), Inc. (filed as Exhibit 3.3 to Holding (DE)'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 and
incorporated herein by reference).
3.4 Amended and Restated By-laws of Werner Holding Co. (PA), Inc.
(filed as Exhibit 3.4 to Holding (DE)'s Quarterly Report on Form
10-Q for the quarter ended June 30, 2002 and incorporated herein by
reference).
3.5 Articles of Incorporation of Werner Co. (filed as Exhibit 3.5 to
Holding (DE)'s Form S-4 Registration Statement No. 333-46607 and
incorporated herein by reference).
3.6 By-laws of Werner Co. (filed as Exhibit 3.6 to Holding (DE)'s Form
S-4 Registration Statement No. 333-46607 and incorporated herein by
reference).
3.7 Certificate of Incorporation of WIP Technologies, Inc. (filed as
Exhibit 3.19 to Holding (DE)'s Form S-4 Registration Statement No.
333-46607 and incorporated herein by reference).
3.8 By-laws of WIP Technologies, Inc. (filed as Exhibit 3.20 to Holding
(DE)'s Form S-4 Registration Statement No. 333-46607 and
incorporated herein by reference).
3.9 Certificate of Incorporation of Werner Funding Corporation (filed
as Exhibit 3.9 to Holding (DE)'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and incorporated herein by
reference).
3.10 By-laws of Werner Funding Corporation (filed as Exhibit 3.10 to
Holding (DE)'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and incorporated herein by reference).
3.11 Amendment to By-laws of WIP Technologies, Inc. (filed as Exhibit
3.11 to Holding (DE)'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 and incorporated herein by reference).
4.1 Indenture between the Company and IBJ Schroder Bank & Trust
Company, as Trustee, dated as of November 24, 1997 (filed as
Exhibit 4.1 to Holding (DE)'s Form S-4 Registration Statement No.
333-46607 and incorporated herein by reference).
4.2 Form of Note (included as Exhibit B to Exhibit 4.1 in Holding
(DE)'s Form S-4 Registration Statement No. 333-46607 and
incorporated herein by reference).
4.3 Registration Rights Agreement among the Company, Chase Securities
Inc., Donaldson, Lufkin & Jenrette Securities Corporation and
Goldman Sachs & Co. dated November 24, 1997 (filed as Exhibit 1.2
in Holding (DE)'s Form S-4 Registration Statement No. 333-46607 and
incorporated herein by reference).
4.4 Form of Letter of Transmittal (filed as Exhibit 1.3 in Holding
(DE)'s Form S-4 Registration Statement No. 333-46607 and
incorporated herein by reference).
10.1 Shareholder Agreement, dated as of November 24, 1997, by and among
Holding (PA), Investcorp Investment Equity Limited, certain other
holders of shares of Class D Common Stock of Holding (PA) and the
other individuals listed on the signature pages thereto (filed as
Exhibit 10.2 to Holding (DE)'s Form S-4 Registration Statement No.
333-46607 and incorporated herein by reference).
63
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ------------------------
10.2 Form of Employment Agreement, dated as of November 24, 1997,
between Werner Management Co. and certain named executive officers
(filed as Exhibit 10.3 to Holding (DE)'s Form S-4 Registration
Statement No. 333-46607 and incorporated herein by reference).
10.3 Form of Amendment No. 1 to Employment Agreement, dated as of
January 1, 1999, by and between Werner Co., successor by merger to
Werner Management Co. and certain named executive officers (filed
as Exhibit 10.39 to Holding (DE)'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 and incorporated herein by
reference).
10.4 Management Stock Incentive Plan, established by Werner Holding Co.
(PA), Inc. as of November 24, 1997 (filed as Exhibit 10.4 to
Holding (DE)'s Form S-4 Registration Statement No. 333-46607 and
incorporated herein by reference).
10.5 Form of Stock Option Agreements pursuant to Stock Incentive Plan
between Werner Holding Co. (PA), Inc. and certain employees (filed
as Exhibit 10.5 to Holding (DE)'s Form S-4 Registration Statement
No. 333-46607 and incorporated herein by reference).
10.6 Trust Indenture, dated as of September 1, 1990, between the County
of Carroll, Kentucky, and Dai-Ichi Kangyo Trust Company (filed as
Exhibit 10.6 to Holding (DE)'s Amendment No. 1 to Form S-4
Registration Statement No. 333-46607 and incorporated herein by
reference).
10.7 Variable Rate Demand Industrial Building Revenue Bonds issued by
the County of Carroll, Kentucky (filed as Exhibit 10.7 to Holding
(DE)'s Amendment No. 1 to Form S-4 Registration Statement No.
333-46607 and incorporated herein by reference).
10.8 Lease Agreement, dated as of September 1, 1990, between County of
Carroll, Kentucky, and Kentucky Ladder Company (filed as Exhibit
10.8 to Holding (DE)'s Amendment No. 1 to Form S-4 Registration
Statement No. 333-46607 and incorporated herein by reference).
10.9 Employment Agreement between Werner Co. and Peter R. O'Coin (filed
as Exhibit 10.1 to Holding (DE)'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002 and incorporated herein by
reference).
10.10 Master Registration Rights Agreement, dated as of November 24,
1997, by Werner Holding Co. (PA), Inc. for the benefit of certain
shareholders (filed as Exhibit 10.10 to Holding (DE)'s Form S-4
Registration Statement No. 333-46607 and incorporated herein by
reference).
10.11 Werner Holding Co. (PA), Inc. 1997 Stock Loan Plan (filed as
Exhibit 10.11 to Holding (DE)'s Form S-4 Registration Statement No.
333-46607 and incorporated herein by reference).
10.12 Credit Agreement, dated as of November 24, 1997, among the Company,
Bankers Trust Company, as Administrative Agent and Co-Arranger,
Merrill Lynch Capital Corporation, as Syndication Agent and as
Co-Arranger, The Chase Manhattan Bank, as Documentation Agent, and
Goldman Sachs Credit Partners L.P., as Co-Agent (filed as Exhibit
10.12 to Holding (DE)'s Form S-4 Registration Statement No.
333-46607 and incorporated herein by reference).
10.13 First Amendment, dated as of June 30, 2001, to the Credit
Agreement, dated as of November 24, 1997, among Werner Holding Co.
(DE), Inc., the Guarantors party hereto, the lending institutions
party to the Credit Agreement, and Bankers Trust Company, as
Administrative Agent (filed as Exhibit 10.1 to Holding (DE)'s
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001 and incorporated herein by reference).
64
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ------------------------
10.14 Form of Second Stock Option Modification Agreement (filed as
Exhibit 10.1 to Holding (DE)'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 and incorporated herein by
reference).
10.15 Amended and Restated Retirement Plan for Employees of Werner
Holding Co. (DE), Inc. (filed as Exhibit 10.14 to Holding (DE)'s
Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference).
10.16 Amended and Restated Supplemental Pension Plan A Applicable to Key
Executives of Werner Holding Co. (DE), Inc., its Parent and
Subsidiaries (filed as Exhibit 10.15 to Holding (DE)'s Annual
Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference).
10.17 Amended and Restated Supplemental Pension Plan B Applicable to
Elected Salaried Corporate Officers of Werner Holding Co. (DE),
Inc., its Parent and Subsidiaries (filed as Exhibit 10.16 to
Holding (DE)'s Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference).
10.18 Werner Co. Short Term Variable Pay Bonus Compensation Plan (filed
as Exhibit 10.2 to Holding (DE)'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 and incorporated herein by
reference).
10.19 Amended and Restated Werner Holding Co. (DE), Inc. Employee Savings
Plan (filed as Exhibit 10.1 to Holding (DE)'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001 and incorporated
herein by reference).
10.20 Form of Management Stock Purchase Agreement between Stepup Limited,
Werner Holding Co. (PA), Inc. and certain individuals (filed as
Exhibit 10.19 to Holding (DE)'s Form S-4 Registration Statement No.
333-46607 and incorporated herein by reference).
10.21 Form of Loan and Pledge Agreement of Werner Holding Co. (PA), Inc.
(filed as Exhibit 10.20 to Holding (DE)'s Form S-4 Registration
Statement No. 333-46607 and incorporated herein by reference).
10.22 Agreement for Management Advisory, Strategic Planning and
Consulting Services between the Company and Investcorp
International, Inc. effective as of November 25, 2002.
10.23 Employment Agreement, dated as of July 9, 2001, between Werner Co.
and Steve Bentson.
10.24 Reinsurance Agreement, dated March 31, 1998, among Manufacturers
Indemnity and Insurance Company of America and National Union Fire
Insurance Company of Pittsburgh, PA (filed as Exhibit No. 10.24 to
Holding (DE)'s Amendment No. 1 to Form S-4 Registration Statement
No. 333-46607 and incorporated herein by reference).
10.25 Agreement, dated March 31, 1998, among National Union Fire
Insurance Company of Pittsburgh, PA, Manufacturers Indemnity and
Insurance Company of America and the Reinsurers named therein
(filed as Exhibit No. 10.25 to Holding (DE)'s Amendment No. 1 to
Form S-4 Registration Statement No. 333-46607 and incorporated
herein by reference).
10.26 Assumption Agreement, dated March 31, 1998, among National Union
Fire Insurance Company of Pittsburgh, PA, Manufacturers Indemnity
and Insurance Company of America and Werner Holding Co. (PA), Inc.
(filed as Exhibit No. 10.26 to Holding (DE)'s Amendment No. 1 to
Form S-4 Registration Statement No. 333-46607 and incorporated
herein by reference).
10.27 Novation and Assumption Agreement, dated March 31, 1998, among
Insurance Company of North America, National Union Fire Insurance
Company of Pittsburgh, PA, and Werner Holding Co. (PA), Inc. (filed
as Exhibit No. 10.27 to Holding (DE)'s Amendment No. 1 to Form S-4
Registration Statement No. 333-46607 and incorporated herein by
reference).
65
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ------------------------
10.28 Commutation Agreement, dated March 31, 1998, between Insurance
Company of North America, Pacific Employers Insurance Company and
CIGNA Insurance Company of Illinois, and Manufacturers Indemnity
and Insurance Company of America (filed as Exhibit No. 10.28 to
Holding (DE)'s Amendment No. 1 to Form S-4 Registration Statement
No. 333-46607 and incorporated herein by reference).
10.29 Indemnity Agreement, dated March 31, 1998, between National Union
Fire Insurance Company of Pittsburgh, PA, and Werner Holding Co.
(PA), Inc. (filed as Exhibit No. 10.29 to Holding (DE)'s Amendment
No. 1 to Form S-4 Registration Statement No. 333-46607 and
incorporated herein by reference).
10.30 Novation Agreement, dated March 31, 1998, among The Travelers
Indemnity Company of Hartford, Connecticut, certain of its
subsidiaries and affiliates, Werner Holding Co. (PA), Inc. and
certain of its subsidiaries, and National Union Fire Insurance
Company of Pittsburgh, PA (filed as Exhibit No. 10.30 to Holding
(DE)'s Amendment No. 1 to Form S-4 Registration Statement No.
333-46607 and incorporated herein by reference).
10.31 Receivables Purchase Agreement, dated as of May 29, 1998, among
Werner Funding Corporation, Werner Co., Market Street Funding
Corporation and PNC Bank, National Association (filed as Exhibit
10.1 to Holding (DE)'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference).
10.32 Purchase and Sale Agreement, dated as of May 29, 1998, between
Werner Funding Corporation and Werner Co. (filed as Exhibit 10.2 to
Holding (DE)'s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 and incorporated herein by reference).
10.33 Consulting and Separation Agreement between Werner Holding Co.
(PA), Inc., Werner Co. and Michael E. Werner dated January 24, 2001
(filed as Exhibit 10.33 to Holding (DE)'s Annual Report on Form
10-K for the year ended December 31, 2000 and incorporated herein
by reference).
10.34 Amendment No. 1 to Werner Holding Co. (PA), Inc. Stock Loan Plan
(filed as Exhibit 10.1 to Holding (DE)'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 and incorporated herein
by reference).
10.35 Amendment No. 2 to Employment Agreement, dated as of September 1,
2000, between Werner Co. and Eric J. Werner (filed as Exhibit 10.1
to Holding (DE)'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000 and incorporated herein by reference).
10.36 Premium Conversion Plan of Werner Holding Co. (DE), Inc. (filed as
Exhibit 10.36 to Holding (DE)'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and incorporated herein by
reference).
10.37 Employment Agreement, dated as of May 26, 1999, between Werner Co.
and Dennis G. Heiner (filed as Exhibit 10.2 to Holding (DE)'s
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999
and incorporated herein by reference).
10.38 Amendment No. 3 to Werner Holding Co. (PA), Inc. Stock Incentive
Plan (filed as Exhibit 10.1 to Holding (DE)'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000 and incorporated
herein by reference).
10.39 Employment Agreement dated as of April 5, 1999, as amended by
Amendment No. 1 dated May 31, 2000 and Amendment No. 2 dated
October 31, 2001, between Werner Co. and Larry V. Friend (filed as
Exhibit 10.40 to Holding (DE)'s Annual Report on Form 10K for the
fiscal year ended December 31, 2001 incorporated herein by
reference).
66
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ------------------------
10.40 Amendment No. 1 to Werner Holding Co. (PA), Inc. Stock Incentive
Plan (filed as Exhibit 10.40 to Holding (DE)'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 and
incorporated herein by reference).
10.41 Werner Co. Deferred Stock Plan (filed as Exhibit 10.41 to Holdings
(DE)'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and incorporated herein by reference).
10.42 Management Stock Purchase Agreement between Investcorp Werner
Holdings, L.P., Werner Holding Co. (PA), Inc. and Dennis G. Heiner
dated December 30, 1999 (filed as Exhibit 10.42 to Holding (DE)'s
Annual Report on Form 10-K for the fiscal year ended December 31,
1999 incorporated herein by reference).
10.43 Stock Option Agreement between Werner Holding Co. (PA), Inc. and
Dennis G. Heiner dated December 30, 1999 (filed as Exhibit 10.43 to
Holding (DE)'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 incorporated herein by reference).
10.44 Amendment No. 2 to Werner Holding Co. (PA), Inc. Stock Incentive
Plan (filed as Exhibit 10.44 to Holding (DE)'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 incorporated
herein by reference).
10.45 Independent Contractor/Consulting Agreement between Werner Holding
Co. (PA), Inc. and Donald M. Werner, dated January 1, 2000 (filed
as Exhibit 10.46 to Holdings (DE)'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 and incorporated herein by
reference).
21 Subsidiaries of the Company.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Co-registrants have duly caused this report to be
signed on their behalf by the undersigned, thereunto duly authorized.
WERNER HOLDING CO. (PA), INC. WERNER HOLDING CO. (DE), INC
By: /s/ DENNIS G. HEINER By: /s/ DENNIS G. HEINER
---------------------------------- ---------------------------------
Dennis G. Heiner Dennis G. Heiner
President President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Co-registrants and in the capacities indicated on March 31, 2003.
/s/ DONALD M. WERNER Chairman of the Board of
- ----------------------------------- Directors of Co-registrants
Donald M. Werner
/s/ MICHAEL E. WERNER Vice Chairman of the Board
- ----------------------------------- of Directors of Co-registrants
Michael E. Werner
/s/ DENNIS G. HEINER President and Chief Executive Officer of
- ----------------------------------- Holding (PA) and Holding (DE) (Principal
Dennis G. Heiner Executive Officer of Co-registrants),
Director
/s/ LARRY V. FRIEND Vice President, Chief Financial
- ----------------------------------- Officer and Treasurer (Principal Financial
Larry V. Friend Officer and Principal Accounting Officer
of Co-registrants)
/s/ MAMOUN ASKARI Director
- -----------------------------------
Mamoun Askari
/s/ JAMES O. EGAN Director
- -----------------------------------
James O. Egan
/s/ JAMES F. HARDYMON Director
- -----------------------------------
James F. Hardymon
/s/ CHARLES K. MARQUIS Director
- -----------------------------------
Charles K. Marquis
/s/ DANA R. SNYDER Director
- -----------------------------------
Dana R. Snyder
/s/ HOWARD L. SOLOT Director
- -----------------------------------
Howard L. Solot
/s/ CHRISTOPHER J. STADLER Director
- -----------------------------------
Christopher J. Stadler
/s/ THOMAS J. SULLIVAN Director
- -----------------------------------
Thomas J. Sullivan
/s/ STEPHEN TEMPINI Director
- -----------------------------------
Stephen Tempini
68
CERTIFICATIONS
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Dennis G. Heiner, the Chief Executive Officer of Werner Holding Co.
(PA), Inc. and Werner Holding Co. (DE), Inc. (the "Co-registrants"), certify
that:
1. I have reviewed this annual report on Form 10-K of the
Co-registrants;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Co-registrants as of, and for, the periods presented in this annual report;
4. The Co-registrants' other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Co-registrants and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Co-registrants,
including their consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
b) evaluated the effectiveness of the Co-registrants'
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Co-registrants' other certifying officer and I have disclosed,
based on our most recent evaluation, to the Co-registrants' auditors and the
audit committee of Co-registrants' board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Co-registrants'
ability to record, process, summarize, and report financial data
and have identified for the Co-registrants' auditors any material
weaknesses in internal controls;
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Co-registrants' internal controls; and
6. The Co-registrants' other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
WERNER HOLDING CO. (PA), INC.
Date: March 31, 2003 /s/ DENNIS G. HEINER
-----------------------------------------
Chief Executive Officer
WERNER HOLDING CO. (DE), INC.
Date: March 31, 2003 /s/ DENNIS G. HEINER
-----------------------------------------
Chief Executive Officer
69
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Larry V. Friend, the Chief Financial Officer of Werner Holding Co.
(PA), Inc. and Werner Holding Co. (DE), Inc. (the "Co-registrants"), certify
that:
1. I have reviewed this annual report on Form 10-K of the
Co-registrants;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Co-registrants as of, and for, the periods presented in this annual report;
4. The Co-registrants' other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Co-registrants and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Co-registrants,
including their consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
b) evaluated the effectiveness of the Co-registrants'
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation
Date");
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Co-registrants' other certifying officer and I have disclosed,
based on our most recent evaluation, to the Co-registrants' auditors and the
audit committee of Co-registrants' board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Co-registrants'
ability to record, process, summarize, and report financial data
and have identified for the Co-registrants' auditors any material
weaknesses in internal controls;
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Co-registrants' internal controls; and
6. The Co-registrants' other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
WERNER HOLDING CO. (PA), INC.
Date: March 31, 2003 /s/ LARRY V. FRIEND
-----------------------------------------
Chief Financial Officer
WERNER HOLDING CO. (DE), INC.
Date: March 31, 2003 /s/ LARRY V. FRIEND
-----------------------------------------
Chief Financial Officer
70