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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 2003
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
AS SPECIFIED IN ITS CHARTER) SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 25-0906895 DELAWARE 25-1581345
(STATE OR OTHER (IRS EMPLOYER (STATE OR OTHER (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION NO.) JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR INCORPORATION OR
ORGANIZATION) ORGANIZATION)
93 WERNER RD. 16125 1105 NORTH MARKET ST., 19899
GREENVILLE, PENNSYLVANIA (ZIP CODE) SUITE 1300 (ZIP CODE)
(ADDRESS OF PRINCIPAL WILMINGTON, DELAWARE
EXECUTIVE OFFICES) (ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
(724) 588-2550 (302) 478-5723
(CO-REGISTRANT'S TELEPHONE (CO-REGISTRANT'S TELEPHONE
NUMBER INCLUDING AREA CODE) NUMBER INCLUDING AREA CODE)
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 each of the Co-registrants 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 whether each of the Co-registrants is an accelerated
filer (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the
Co-registrants' classes of common stock, as of June 30, 2003:
Werner Holding Co. (PA), Inc. 1,134.0315 shares of Class A Common Stock
13,137.9952 shares of Class B Common Stock
3,315.9002 shares of Class C Common Stock
603.3543 shares of Class D Common Stock
27,150.9299 shares of Class E Common Stock
Werner Holding Co. (DE), Inc. 1,000 shares of Common Stock
INDEX
WERNER HOLDING CO. (PA), INC.
WERNER HOLDING CO. (DE), INC.
FORM 10-Q
PERIOD ENDED JUNE 30, 2003
PART I FINANCIAL INFORMATION
Item 1. Financial Statements of Werner Holding Co. (PA), Inc. and Subsidiaries (Unaudited)
Condensed Consolidated Balance Sheets--June 30, 2003 and
December 31, 2002.................................................................... 1
Condensed Consolidated Statements of Income--Three and Six Months Ended
June 30, 2003 and 2002............................................................... 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit)--Six Months Ended June 30, 2003 and 2002............................. 3
Condensed Consolidated Statements of Cash Flows--Six Months Ended
June 30, 2003 and 2002............................................................... 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 28
Item 4. Controls and Procedures.................................................................. 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 29
Item 4. Submission of Matters to a Vote of Security Holders...................................... 29
Item 6. Exhibits and Reports on Form 8-K......................................................... 29
SIGNATURES ......................................................................................... 32
The financial statements included herein are that of Werner Holding Co. (PA),
Inc. ("Holding (PA)"). The Co-registrants are Holding (PA) and Werner Holding
Co. (DE), Inc. (the "Issuer"), which is a wholly-owned subsidiary of Holding
(PA). Holding (PA) has no substantial operations or assets other than its
investment in the Issuer. The consolidated financial condition and results of
operations of Holding (PA) are substantially the same as those of the Issuer. As
used herein and except as the context otherwise may require, the "Company" or
"Werner" means, collectively, Holding (PA), the Issuer and all of their
consolidated subsidiaries.
PART I - FINANCIAL INFORMATION
ITEM 1.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30 DECEMBER 31
2003 2002
------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 10,844 $ 43,161
Accounts receivable 47,564 54,219
Allowance for doubtful accounts (1,689) (1,800)
Prepaid income taxes 717 1,748
Inventories 58,386 52,530
Deferred income taxes 856 1,062
Other 1,447 1,598
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 118,125 152,518
Property, plant and equipment, net 110,346 112,416
Other assets:
Deferred income taxes 19,829 18,521
Deferred financing fees, net 12,151 4,078
Other 10,778 10,710
- ---------------------------------------------------------------------------------------------------------------------
42,758 33,309
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 271,229 $ 298,243
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 18,322 $ 16,173
Accrued liabilities 27,657 33,655
Current maturities of long-term debt 15,580 27,622
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 61,559 77,450
Long-term obligations:
Long-term debt 304,108 233,954
Reserve for product liability and workers' compensation claims 49,336 48,205
Other long-term obligations 41,179 40,959
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 456,182 400,568
Convertible preferred stock 58,223 -
Shareholders' deficit:
Common stock 1 1
Additional paid-in-capital 204,513 200,872
Accumulated deficit (285,826) (287,078)
Treasury stock, at cost (146,983) -
Accumulated other non-owner changes in equity (13,582) (13,694)
Notes receivable arising from stock loan plan (1,299) (2,426)
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' deficit (243,176) (102,325)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 271,229 $ 298,243
=====================================================================================================================
See notes to unaudited condensed consolidated financial statements.
1
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------------------
Net sales $ 129,556 $ 136,922 $ 235,791 $ 247,563
Cost of sales 84,068 92,938 154,780 170,215
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 45,488 43,984 81,011 77,348
General and administrative expenses 6,954 6,879 13,294 14,371
Selling and distribution expenses 21,871 20,270 42,442 38,123
Recapitalization expense 10,117 - 10,117 -
Manufacturing and distribution
optimization costs 975 - 975 -
- -------------------------------------------------------------------------------------------------------------------------
Operating profit 5,571 16,835 14,183 24,854
Other income (expense), net 61 (17) 283 (361)
- -------------------------------------------------------------------------------------------------------------------------
Income before interest and taxes 5,632 16,818 14,466 24,493
Interest expense 7,483 5,228 12,577 11,004
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (1,851) 11,590 1,889 13,489
Income tax (benefit) (712) 4,257 637 4,928
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (1,139) 7,333 1,252 8,561
Convertible preferred stock accretion 64 - 64 -
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON SHAREHOLDERS $ (1,203) $ 7,333 $ 1,188 $ 8,561
=========================================================================================================================
See notes to unaudited condensed consolidated financial statements.
2
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
(DOLLARS IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER NON- TOTAL
COMMON PAID-IN ACCUMULATED TREASURY OWNER EQUITY SHAREHOLDERS'
STOCK CAPITAL DEFICIT STOCK CHANGES OTHER EQUITY (DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2003 $ 1 $ 200,872 $ (287,078) $ - $ (13,694) $ (2,426) $ (102,325)
Non-owner equity changes:
Net income 2,391 2,391
Derivative instruments-amounts
reclassified to income (net
of deferred tax of $89) (152) (152)
Change in fair value of
derivative commodity
instruments (net of
deferred tax of $4) 8 8
----------------
Total non-owner equity
changes 2,247
Reduction in notes receivable arising
from stock loan plan 247 247
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2003 $ 1 $ 200,872 $ (284,687) $ - $ (13,838) $ (2,179) $ (99,831)
=======================================================================================+===========================================
Non-owner equity changes:
Net loss (1,139) (1,139)
Derivative instruments-amounts
reclassified to income (net
of deferred tax of $108) (184) (184)
Change in fair value of derivative
commodity -
instruments (net of deferred
tax of $258) 440 440
Total non-owner equity changes ---------------
Redemption of common stock on (883)
Recapitalization date (146,983) (146,983)
Costs related to redemption of
common stock (825) (825)
Repurchase of common stock (60) (60)
Accretion of convertible preferred
stock (64) (64)
Noncash compensation associated with
Recapitalization 4,590 4,590
Reduction in notes receivable
arising from stock loan plan 880 880
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2003 $ 1 $ 204,513 $ (285,826) $(146,983) $ (13,582) $ (1,299) $ (243,176)
===================================================================================================================================
See notes to unaudited condensed consolidated financial statements.
3
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
(DOLLARS IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER NON- TOTAL
COMMON PAID-IN ACCUMULATED OWNER EQUITY SHAREHOLDERS'
STOCK CAPITAL DEFICIT CHANGES OTHER EQUITY (DEFICIT)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 $ 1 $ 200,947 $ (314,506) $ (7,882) $ (2,383) $ (123,823)
Non-owner equity changes:
Net income 1,228 1,228
Derivative instruments-amounts reclassified
to income (net of deferred tax of $251) 428 428
Change in fair value of derivative commodity
instruments (net of deferred tax of $182) 311 311
-----------
Total non-owner equity changes 1,967
Reduction in notes receivable arising from
stock loan plan 140 140
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2002 $ 1 $ 200,947 $ (313,278) $ (7,143) $ (2,243) $ (121,716)
===============================================================================================================================
Non-owner equity changes:
Net income 7,333 7,333
Derivative instruments-amounts reclassified
to income (net of deferred tax of $201) 342 342
Change in fair value of derivative commodity
instruments (net of deferred tax of $4) (6) (6)
-----------
Total non-owner equity changes 7,669
Notes receivable arising from stock loan
plan (23) (23)
Issuance of common stock 30 30
Repurchase of common stock (855) (855)
Reduction in notes receivable arising from
stock loan plan 402 402
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 $ 1 $ 200,122 $ (305,945) $ (6,807) $ (1,864) $ (114,493)
===============================================================================================================================
Non-owner equity changes:
Net income 8,779 8,779
Derivative instruments-amounts reclassified
to income (net of deferred tax of $212) 360 360
Change in fair value of derivative commodity
instruments (net of deferred tax of $778) (1,326) (1,326)
-----------
Total non-owner equity changes 7,813
Notes receivable arising from stock loan
plan (450) (450)
Issuance of common stock 600 600
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2002 $ 1 $ 200,722 $ (297,166) $ (7,773) $ (2,314) $ (106,530)
===============================================================================================================================
Non-owner equity changes:
Net income 10,088 10,088
Derivative instruments-amounts reclassified
to income (net of deferred tax of $143) 243 243
Change in fair value of derivative commodity
instruments (net of deferred tax of $311) 529 529
Adjustment to minimum pension liability
(net of deferred tax of $3,930) (6,693) (6,693)
-----------
Total non-owner equity changes 4,167
Notes receivable arising from stock loan
plan (112) (112)
Issuance of common stock 150 150
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 $ 1 $ 200,872 $ (287,078) $ (13,694) $ (2,426) $ (102,325)
===============================================================================================================================
See notes to unaudited condensed consolidated financial statements.
4
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30
--------------------------
2003 2002
--------------------------
OPERATING ACTIVITIES
Net income $ 1,252 $ 8,561
Reconciliation of net income to net cash provided by operating activities:
Noncash stock compensation charge associated with Recapitalization 4,590 -
Other Recapitalization expenses 5,527 -
Depreciation 6,151 5,615
Amortization of deferred financing fees and original issue discount 3,448 1,611
Amortization of deferred costs 2,198 1,696
Provision for losses on accounts receivable (77) 300
Provision for product liability and workers' compensation claims 6,334 8,332
Payment of product liability and workers' compensation claims (5,203) (3,881)
Deferred income taxes (1,168) (1,626)
Loss on disposition of property, plant and equipment 343 310
Changes in operating assets and liabilities:
Accounts receivable 6,655 (11,080)
Prepaid income taxes 1,031 1,501
Inventories (5,856) (3,114)
Accounts payable 2,149 (75)
Income taxes payable - 1,999
Other assets and liabilities, net (7,772) (10,868)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 19,602 (719)
INVESTING ACTIVITIES
Capital expenditures (4,101) (6,356)
Proceeds from liquidation of investments 23 183
- --------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (4,078) (6,173)
FINANCING ACTIVITIES
Issuance of convertible preferred stock 65,000 -
Costs related to issuance of convertible preferred stock (6,841) -
Issuance of long-term debt at Recapitalization 180,000 -
Payment of deferred financing fees (11,318) -
Redemption of common stock at Recapitalization (146,983) -
Costs related to redemption of common stock (825) -
Repayments of long-term debt at Recapitalization (115,421) -
Payment of other Recapitalization expenses (5,527) -
Issuance of common stock - 7
Repurchase of common stock (60) (453)
Repayments of long-term debt prior to Recapitalization (6,992) (15,959)
Repayment of notes receivable arising from stock loan plan 1,126 140
- --------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (47,841) (16,265)
- --------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (32,317) (23,157)
Cash and cash equivalents at beginning of period 43,161 30,473
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 10,844 $ 7,316
==========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Capital lease obligations incurred $ 323 $ 717
Issuance of common stock in exchange for notes receivable arising
from stock loan plan $ - $ 23
Cancellation of notes receivable arising from stock loan plan in connection
with repurchase of common stock $ (15) $ (402)
See notes to unaudited condensed consolidated financial statements.
5
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
A. BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING STANDARDS
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Werner Holding Co. (PA), Inc., ("Holding (PA)") include its accounts and the
accounts of its wholly-owned subsidiary, Werner Holding Co. (DE), Inc.
("Issuer") and the Issuer's wholly-owned subsidiaries (collectively the
"Company"). Holding (PA) has no substantial operations or assets, other than its
investment in the Issuer. The consolidated financial condition and results of
operations of Holding (PA) are substantially the same as those of the Issuer.
Intercompany accounts and transactions have been eliminated. The unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair financial presentation have been included.
Operating results for the three and six months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's most recent Annual Report
on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in certain circumstances that affect amounts reported in the
consolidated financial statements and notes. Actual results could differ from
those estimates.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 143, Accounting for Asset Retirement Obligations, which
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 effective as of January 1, 2003 did not have a
material impact on 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. The
adoption of Statement No. 145 effective as of January 1, 2003 did not have a
material 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 applies to all exit or disposal activities initiated on or
after January 1, 2003. The adoption of Statement No. 146 impacted the timing of
liability recognition associated with such activities (see Note L).
6
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 H). The initial measurement and recognition
provisions are required to be applied on a prospective basis to guarantees
issued or modified effective as of January 1, 2003. The adoption of the
requirements of the interpretation did not have a material impact on the
Company's 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 provided the applicable disclosures in Note K.
In April 2003, the FASB issued Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. The Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement No. 133. This Statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The adoption of Statement No. 149 will not have a material impact
on the Company's results of operations, financial position or cash flows.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. The
Statement changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The new Statement
requires that those instruments be classified as liabilities in statements of
financial position. Most of the guidance in Statement 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. For nonpublic companies, mandatorily redeemable financial instruments
are subject to the provisions of this Statement for the fiscal period beginning
after December 15, 2003. Effective during the quarter ended June 30, 2003, the
Company classified its newly issued Convertible Preferred Stock (see Note C)
consistent with the provisions of Statement No. 150.
B. RECAPITALIZATION
On June 11, 2003, the previously announced recapitalization of the
Company (the "Recapitalization") was completed. On May 7, 2003, The Company
entered into a Recapitalization and Stock Purchase Agreement (the
"Recapitalization Agreement") with Green Equity Investors III, L.P. ("GEI"), an
affiliate of Leonard Green & Partners L.P. ("Leonard Green"), and certain
shareholders of the Company. Pursuant to the Recapitalization Agreement (i) GEI
invested $65,000 in the Company in exchange for 65,000 shares of Series A
Preferred Stock (see Note C), (ii) the Company redeemed 39.66% of its
outstanding shares of capital stock for payments totaling $146,983 and (iii) the
Company made certain other payments including $3,017 to the holders of options
to purchase the Company's Class C Common Stock in consideration for the
cancellation of certain of their vested options (collectively, the
"Recapitalization"). The Series A Preferred Stock represents approximately 22%
of the outstanding voting shares of capital stock as of the date of the
Recapitalization. The Recapitalization was accounted for as a leveraged
recapitalization at historical cost principally due to the fact that less than
80% of the voting securities were acquired.
7
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
As part of the Recapitalization, the Company entered into a new
$230,000 credit facility (see Note E) with a syndicate of banks consisting of a
$180,000 Term Loan and a $50,000 Revolving Credit Facility. The Revolving Credit
facility was not utilized on the date of the Recapitalization. The Company used
$115,421 to repay in full its existing senior credit facility which was
terminated as of the date of the Recapitalization.
Additional sources of cash to complete the Recapitalization included
the Company's Receivables Purchase Agreement, existing cash on-hand and employee
stock loan repayments related to the capital stock redeemed. The following is a
summary of the sources and uses of cash resulting from, and in connection with,
the Recapitalization:
SOURCES OF CASH:
Term Loan proceeds $ 180,000
Issuance of convertible preferred stock 65,000
Additional borrowings under Receivables Purchase Agreement 20,000
Existing cash 20,713
Employee repayment of stock loans 1,202
- ------------------------------------------------------------------------------------------------------
TOTAL $ 286,915
======================================================================================================
USES OF CASH:
Redemption of common stock $ 146,983
Repay existing term loans 115,421
Payments in connection with stock option cancellations 3,017
Costs associated with Recapitalization 21,494
- ------------------------------------------------------------------------------------------------------
TOTAL $ 286,915
======================================================================================================
Costs associated with the Recapitalization include $4,050 to obtain the
consent of holders of the Company's 10% Notes (see Note E), a one-time Leonard
Green equity commitment fee of $2,500, transaction bonuses of $1,725 paid to
certain officers and employees of the Company, a $1,000 credit refinance
advisory services fee paid to INVESTCORP S.A. ("Investcorp") and other fees
primarily related to investment banking, legal and accounting services and other
associated costs totaling $13,204.
Recapitalization expense reflected on the income statement totals
$10,117 and includes a noncash compensation charge of $4,590 associated with the
accelerated vesting of stock options (see Note K), payments totaling $3,017 in
connection with stock options cancellations, transaction bonus payments totaling
$1,725 and other miscellaneous costs totaling $785.
C. CONVERTIBLE PREFERRED STOCK
Ranking and Liquidation Preference
The $65,000 of Series A Preferred Stock issued in connection with the
Recapitalization ranks senior to all outstanding classes of common stock of the
Company with respect to dividends and as to distributions upon the liquidation,
winding-up and dissolution of the Company. Each share will have an initial
liquidation preference of $1,000 and the holders thereof will be entitled to
receive dividends thereon at an annual rate equal to 14%, payable quarterly,
from the date the Series A Preferred Stock is first issued until December 31,
2008. The dividends may be paid in cash or at the election of the Company in
lieu of cash by increasing the liquidation preference by the amount of unpaid
dividends. The Company's debt covenants prohibit the payment of cash dividends
(see Note E).
8
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Conversion into Common Stock
Holders of the Series A Preferred Stock will be able to convert all or
any of the shares of the Series A Preferred Stock into shares of Class F Common
Stock of the Company, at any time or from time to time, at a conversion rate
equal to the liquidation preference divided by $4,929.66 (such multiple, the
"Conversion Rate"). If dividends are unpaid at the election of the Company, the
Conversion Rate will increase by 14% per year, compounded quarterly from the
date of issue through the third anniversary. Therefore, over time (but in any
event not beyond the third anniversary of the date issued), each share of Series
A Preferred Stock will be convertible into a greater number of shares of Class F
Common Stock. If all of the Series A Preferred shares had been converted as of
June 30, 2003, 13,185 shares of Class F Common Stock would have been issued.
Redemption
Each holder of Series A Preferred Stock will have the right to require
the Company to redeem, in whole or in part, such holder's shares if certain
events occur (the "Put Events"). Put Events include a change of control, the
sale of all or substantially all the assets of the Company, or an initial public
offering (each as specifically defined by the Recapitalization Agreement). On or
after January 1, 2007 and prior to December 31, 2008, any or all holders of
Series A Preferred Stock may elect to have their shares redeemed, in whole or in
part, (the "Elective Put"). The redemption pricing for the Put Events and the
Elective Put will be 130.8% of the liquidation preference if the event giving
rise to the redemption right occurs prior to the first anniversary of the date
issued or, if the event giving rise to the redemption right occurs on or after
the first anniversary of the date issued, at a redemption price equal to 112% in
2004, 110% in 2005, 108% in 2006 and, 106% in 2007 and thereafter.
Preferred Stock Accretion
As a result of the Elective Put discussed above, the Series A Preferred
Stock will have a redemption value equal to 106% of the liquidation preference
effective on January 1, 2007. The recorded value of the preferred stock will be
accreted to its fair value through December 31, 2006 using the effective
interest method. The accretion of preferred stock is subtracted from net income
(loss) in calculating net income (loss) attributable to common shareholders for
purposes of presenting the consolidated statements of income.
Voting Rights
The holders of Series A Preferred Stock will be entitled to vote on all
matters which the holders of common stock of the Company are entitled to vote,
and will be accorded such number of votes per share of Series A Preferred Stock
as the number of common shares then issuable upon such share's conversion.
As long as any shares of Series A Preferred Stock remain outstanding,
the Company will not amend its charter so as to affect adversely the special
rights, powers, preferences, privileges or voting rights of the Series A
Preferred Stock without the consent of the holders of at least a majority of the
then outstanding shares of Series A Preferred Stock.
9
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
D. SHAREHOLDERS' EQUITY
Shareholder Agreement
At closing of the Recapitalization, the Company, Investcorp and certain
affiliates (the "Investcorp Investors"), GEI (with its affiliates, the "GEI
Investors"), and certain members of the Werner and Solot families (the "Family
Shareholders") entered into an amended and restated shareholder agreement (the
"Shareholder Agreement") to provide, among other things, that the Board of
Directors of the Company will consist of nine members initially, consisting of
not less than four designated by the Investcorp Investors, two designated by the
Family Shareholders and two designated by the GEI Investors, with the ninth
director being the Company's Chief Executive Officer. On June 11, 2006, the GEI
Investors will have the right to designate a third member to the Board of
Directors, bringing the total at such time to ten directors. The right of the
Investcorp Investors, the Family Shareholders or the GEI Investors to appoint
directors under the Shareholder Agreement will terminate as to any such group if
it ceases to own at least 50% of the aggregate equity position that it owned
immediately after the closing of the Recapitalization.
Other Agreements
In connection with the Recapitalization, the Company's agreement for
management and consulting services with Investcorp International, Inc. ("III")
was amended to provide consulting services through November 24, 2007. The
amended agreement provides for the Company to pay III an annual fee of $1,500
for the annual period ending November 24, 2003 and $1,000 for each annual period
thereafter. The agreement will terminate on the earlier of November 24, 2007,
the date on which III ceases to own at least 50% of the aggregate equity of the
Company or on the date of an initial public offering, as defined.
The Company entered into a management and consulting agreement with
Leonard Green in connection with the Recapitalization. The agreement provides
for the Company to pay Leonard Green $455 for services for the period through
November 23, 2003 and $1,000 for each annual period thereafter through November
25, 2008. The agreement will terminate on the earlier of November 25, 2008, the
date on which Leonard Green ceases to own at least 50% of the Company's Series A
Preferred Stock (including any shares of common stock issued upon conversion) or
on the date of an initial public offering, as defined.
10
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
E. DEBT
As part of the Recapitalization (see Note B), the Company entered into
a new $230,000 senior credit facility with a syndicate of banks consisting of a
$180,000 Term Loan and a $50,000 Revolving Credit Facility. The new Senior
Credit Facility will mature in May 2007 in the event the Company's existing 10%
Senior Subordinated Notes maturing November 15, 2007 (the "Notes") are not
refinanced or extended by May 2007. Otherwise, if the Notes are refinanced or
extended by May 2007, the maturity date of the Senior Credit Facility will be
the earlier of (i) six months prior to the new maturity date of the Notes and
(ii) (A) for the Revolving Credit Facility, June 11, 2008 and (B) for the Term
Loan, December 31, 2009. A summary of debt outstanding is as follows:
JUNE 30 DECEMBER 31
2003 2002
---------------------------------
Senior Credit Term Loans repaid on June 11, 2003 $ 122,197
Senior Credit Term Loan issued June 11, 2003 $ 180,000
Senior Subordinated Notes, due 2007, net of unamortized
original issue discount of $1,804 in 2003 and $2,007 in 2002 133,196 132,993
Variable Rate Demand Industrial Building Revenue Bonds,
due 2015 5,000 5,000
Capital lease obligations 1,492 1,386
- -------------------------------------------------------------------------------------------------------------------
Total debt 319,688 261,576
Less current maturities 15,580 27,622
- -------------------------------------------------------------------------------------------------------------------
DEBT CLASSIFIED AS LONG-TERM $ 304,108 $ 233,954
===================================================================================================================
Senior Credit Facility
Subject to refinancing or extension of the Notes as discussed above,
the $180,000 Term Loan is payable in aggregate principal amounts of $7,500 in
2003, $17,500 in 2004, $22,500 in 2005, $27,500 in 2006, $32,500 in 2007,
$45,000 in 2008 and $27,500 in 2009. Borrowings under the Senior Credit Facility
bear interest at alternative floating rate structures at management's option
(3.97% at June 30, 2003) and are collateralized by the capital stock of each of
the Company's subsidiaries and substantially all the assets of the Company and
its subsidiaries, except for Werner Funding Corporation.
The Company is entitled to draw amounts under the Revolving Credit
Facility for general corporate purposes and working capital requirements. The
availability under the $50,000 Revolving Credit Facility, under which no amount
was outstanding as of June 30, 2003, is reduced by amounts issued under a letter
of credit subfacility which totals $22,600 at August 1, 2003. An annual
commitment fee of 0.50% is paid on the average daily unused amount of the
Revolving Credit Facility.
Deferred financing fees totaling $7,043 were incurred in connection
with obtaining the new Senior Credit Facility. These costs will be deferred and
amortized over the life of the facility using the effective interest method. The
remaining unamortized deferred financing fees totaling $2,356 associated with
the credit facility terminated on the date of the Recapitalization were expensed
in June 2003.
The Notes
In connection with the Recapitalization, consent fees totaling $4,050
were paid to the holders of the Notes and certain other costs totaling $226 were
incurred in connection with the modification of the Indenture to permit the
redemption of common stock on the date of the Recapitalization. These fees and
costs have been deferred and will be amortized over the remaining life of the
Notes using the effective interest method.
11
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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
cash dividends. The financial covenants of the Senior Credit Facility require
the Company to meet specific interest coverage, maximum leverage, and capital
expenditure requirements.
F. SHIPPING AND HANDLING FEES AND EXPENSES
Pursuant to the FASB'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 statement of
income. Shipping and handling costs represent costs associated with shipping
products to customers and handling finished goods. Shipping and handling costs
of $13,590 and $11,812 are included in the caption entitled, "Selling and
distribution expenses" in the condensed consolidated statements of income for
the three months ended June 30, 2003 and 2002, respectively, and $26,501 and
$22,475 are included for the six months ended June 30, 2003 and 2002,
respectively.
G. INVENTORIES
Components of inventories are as follows:
JUNE 30 DECEMBER 31
2003 2002
-------------------------------
Finished goods $ 35,126 $ 33,525
Work-in-process 13,871 11,770
Raw materials and supplies 19,141 17,085
- -----------------------------------------------------------------------------------------------------------------------------
68,138 62,380
Less excess of cost over LIFO stated values 9,752 9,850
- -----------------------------------------------------------------------------------------------------------------------------
NET INVENTORIES $ 58,386 $ 52,530
=============================================================================================================================
12
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
H. COMMITMENTS AND CONTINGENCIES
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.
Letters of credit are issued to guarantee the Company's performance
under certain contractual obligations. A letter of credit in the amount of
$17,492 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 $5,109. An additional letter of credit in
the amount of $5,211 was issued on the date of the Recapitalization to guarantee
the interest of the previous letter of credit issuer during the period the
Company was replacing the previous letter of credit. This back-up letter of
credit was cancelled effective on August 1, 2003 following the completion of the
letter of credit replacement process. Letters of credit, which have a term of
one year or less, total $22,601 at August 1, 2003 following the completion of
the letter of credit replacement process. 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.
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 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.
13
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
I. SEGMENT INFORMATION
The Company classifies its business in 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 composition of segments and measure of segment
profitability are consistent with that used by the Company's management. The
Company evaluates segment performance based on operating profit. There has not
been a change in the basis of segmentation or the basis of measurement of
segment profit or loss from that disclosed in the Company's most recent Annual
Report on Form 10-K. Net sales and operating profit (loss) of the Company's
segments for the three and six months ended June 30, 2003 and 2002 are as
follows:
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------------------------
NET SALES
Climbing Products $ 112,284 $ 116,285 $ 200,719 $ 208,160
Extruded Products 17,272 20,637 35,072 39,403
- -------------------------------------------------------------------------------------------------------------------------
$ 129,556 $ 136,922 $ 235,791 $ 247,563
=========================================================================================================================
OPERATING PROFIT (LOSS)
Climbing Products $ 15,775 $ 17,274 $ 25,066 $ 26,225
Extruded Products 673 123 788 (484)
Corporate and Other (10,877) (562) (11,671) (887)
- -------------------------------------------------------------------------------------------------------------------------
$ 5,571 $ 16,835 $ 14,183 $ 24,854
=========================================================================================================================
Operating profit (loss) for Corporate and Other includes various
corporate expenses not allocated to the reportable segments and eliminations.
"Other income (expense), net" reflected in the condensed consolidated statements
of income is also not allocated to the reportable segments. Operating profit
(loss) for the three and six months ended June 30, 2003 for the Climbing
Products segment includes $975 of costs related to manufacturing and
distribution optimization and $795 of associated startup and realignment costs
(see Note L). Operating profit (loss) for the six months ended June 30, 2002 for
the Climbing Products and Extruded Products segment includes the impact of
severance costs of approximately $1,300 and $300, respectively, associated with
the separation of a former executive officer. Operating profit (loss) for
Corporate and Other for the three and six months ended June 30, 2003 includes
Recapitalization expenses of $10,117 (see Note B).
J. SALES OF ACCOUNTS RECEIVABLE
The Company maintains a Receivables Purchase Agreement with a financial
institution and its affiliate to provide additional financing capacity with a
maximum availability of $50,000 depending upon the level of accounts receivable
and certain other factors. As of June 30, 2003 and December 31, 2002, the
Company had sold, on a recurring basis, $91,730 and $78,765 of accounts
receivable in exchange for $40,000 and $20,000 in cash and an undivided interest
in accounts receivable of $51,595 and $58,704, respectively. 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
condensed consolidated statements of income in "Other income (expense), net."
14
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
K. STOCK-BASED COMPENSATION
The Company measures stock-based compensation costs associated with its
Stock Option Plan 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 (loss) would
have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------
Net income (loss), as reported $ (1,139) $ 7,333 $ 1,252 $ 8,561
Less total stock-based employee
compensation costs determined
using fair value method, net of
related tax effects - 94 103 193
- --------------------------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME (LOSS) $ (1,139) $ 7,239 $ 1,149 $ 8,368
==========================================================================================================================
In connection with the Recapitalization (see Note B) the Company
accelerated the vesting of 2,368 options, paid option holders $3,017 in
consideration for the cancellation of 1,235 vested options and cancelled the
remaining 3,007 issued and outstanding unvested options. A noncash compensation
charge totaling $4,590 associated with the accelerated vesting was recorded
effective on the date of the Recapitalization. The charge was determined based
on the excess of the fair value of the Company's common stock on the date of the
Recapitalization compared to the exercise price of the options. Pro forma
compensation costs for the three months ended June 30, 2003 are zero in the
above table because all such costs have been recorded as expense in the
consolidated statement of income as a result of recording the noncash
compensation charge of $4,590. At June 30, 2003, options outstanding total 1,863
all of which are vested.
15
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
L. MANUFACTURING AND DISTRIBUTION OPTIMIZATION COSTS
The Company's strategic plan includes several initiatives intended to
optimize its manufacturing and distribution operations to improve productivity
and reduce costs. During the second quarter of 2003, the Company commenced the
first phase of the optimization plan and transferred all ladder fabrication and
assembly operations in Greenville, Pennsylvania to other lower cost Company
facilities. The Company also began an initiative as part of Phase I to focus the
Greenville facility on the Extruded Products segment of the Company's business.
Additional Phase I initiatives have not yet been implemented. The Company
currently anticipates that the total expense associated with Phase I of the
optimization plan will approximate $8,000 and is expected to be completed in
2004.
The costs incurred during the second quarter of 2003 relating to the
optimization plan consist of the following:
Costs Incurred
During the Three
Months Ended
June 30, 2003
----------------
Facility and other exit costs $ 628
Employee severance and termination benefits 236
Other associated costs 111
- -------------------------------------------------------------------------------------------------------
Recorded as Manufacturing and distribution optimization costs 975
Startup and realignment costs included in:
Cost of sales 720
Selling and distribution expenses 75
- -------------------------------------------------------------------------------------------------------
Total costs relating to optimization of manufacturing and distribution $ 1,770
=======================================================================================================
A reconciliation of the beginning and ending liability balances showing
the manufacturing and distribution optimization costs incurred and charged to
expense, and related amounts paid or otherwise settled during the second quarter
ended June 30, 2003 follows:
Liability Liability
Balance at Costs Costs Balance at
March 31, 2003 Incurred Settled June 30, 2003
---------------------------------------------------------------
Facility and other exit costs $ - $ 628 $ 628 $ -
Employee severance and termination benefits - 236 114 122
Other associated costs - 111 101 10
- ----------------------------------------------------------------------------------------------------------------
$ - $ 975 $ 843 $ 132
================================================================================================================
16
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
M. SUPPLEMENTAL GUARANTOR INFORMATION
The Company's debt includes borrowings under the Senior Credit Facility
and 10% Senior Subordinated Notes maturing November 15, 2007 (the "Notes"). The
issuer of this 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 obligations 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 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 of subsidiaries are, therefore, reflected in the respective
investment accounts of the Parent Company and the Issuer. The investments 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.
17
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS)
M. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
-------------------------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------------
JUNE 30, 2003
ASSETS
Current assets:
Accounts receivable $ - $ - $ - $ 47,564 $ - $ 47,564
Inventories, net - - 58,386 - - 58,386
Other current assets 39 230 11,746 160 - 12,175
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 39 230 70,132 47,724 - 118,125
Property, plant and equipment, net - 1 110,345 - - 110,346
Investment in subsidiaries (199,226) (123,471) 7,592 - 315,105 -
Other assets - 11,266 31,486 6 - 42,758
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $(199,187) $(111,974) $ 219,555 $ 47,730 $ 315,105 $ 271,229
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Other current liabilities $ (862) $ 19,879 $ 42,689 $ (147) $ - $ 61,559
Intercompany payable (receivable) (13,372) (230,823) 203,910 40,285 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities (14,234) (210,944) 246,599 40,138 - 61,559
Long-term debt - 298,196 5,912 - - 304,108
Other long-term liabilities - - 90,515 - - 90,515
Convertible preferred stock 58,223 - - - - 58,223
Total equity (deficit) (243,176) (199,226) (123,471) 7,592 315,105 (243,176)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY
(DEFICIT) $(199,187) $(111,974) $ 219,555 $ 47,730 $ 315,105 $ 271,229
===============================================================================================================================
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
===============================================================================================================================
18
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS)
M. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF INCOME
-------------------------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2003
Net sales $ - $ - $ 235,791 $ - $ - $ 235,791
Cost of sales - - 154,780 - - 154,780
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit - - 81,011 - - 81,011
Selling, general and administrative
expenses - 7 55,729 - - 55,736
Recapitalization expense - - 10,117 - - 10,117
Manufacturing and distribution
optimization costs - - 975 - - 975
- -------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit - (7) 14,190 - - 14,183
Other income (expense), net 1,035 1,898 (874) 1,249 (3,025) 283
Interest income (expense) 416 (1,536) (10,110) (1,347) - (12,577)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 1,451 355 3,206 (98) (3,025) 1,889
Income taxes (benefit) 199 (617) 1,089 (34) - 637
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,252 $ 972 $ 2,117 $ (64) $ (3,025) $ 1,252
===============================================================================================================================
FOR THE THREE MONTHS ENDED
JUNE 30, 2003
Net sales $ - $ - $ 129,556 $ - $ - $ 129,556
Cost of sales - - 84,068 - - 84,068
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit - - 45,488 - - 45,488
Selling, general and administrative
expenses - 4 28,821 - - 28,825
Recapitalization expense - - 10,117 - - 10,117
Manufacturing and distribution
optimization costs - - 975 - - 975
- -------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit - (4) 5,575 - - 5,571
Other income (expense), net (1,244) (721) (469) 591 1,904 61
Interest income (expense) 202 (901) (6,180) (604) - (7,483)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) (1,042) (1,626) (1,074) (13) 1,904 (1,851)
Income taxes (benefit) 97 (352) (453) (4) - (712)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (1,139) $ (1,274) $ (621) $ (9) $ 1,904 $ (1,139)
===============================================================================================================================
19
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS)
M. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF INCOME
-------------------------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2002
Net sales $ - $ - $ 247,563 $ - $ - $ 247,563
Cost of sales - - 170,215 - - 170,215
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit - - 77,348 - - 77,348
Selling, general and administrative
expenses 1 2 52,491 - - 52,494
- -------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (1) (2) 24,857 - - 24,854
Other income (expense), net 8,327 9,020 (1,640) 1,538 (17,606) (361)
Interest income (expense) 424 (1,255) (8,678) (1,495) - (11,004)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 8,750 7,763 14,539 43 (17,606) 13,489
Income taxes (benefit) 189 (532) 5,256 15 - 4,928
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 8,561 $ 8,295 $ 9,283 $ 28 $ (17,606) $ 8,561
===============================================================================================================================
FOR THE THREE MONTHS ENDED
JUNE 30, 2002
Net sales $ - $ - $ 136,922 $ - $ - $ 136,922
Cost of sales - - 92,938 - - 92,938
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit - - 43,984 - - 43,984
Selling, general and administrative
expenses 1 1 27,147 - - 27,149
- -------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (1) (1) 16,837 - - 16,835
Other income (expense), net 7,218 7,528 (669) 804 (14,898) (17)
Interest income (expense) 214 (589) (4,097) (756) - (5,228)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 7,431 6,938 12,071 48 (14,898) 11,590
Income taxes (benefit) 98 (257) 4,399 17 - 4,257
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 7,333 $ 7,195 $ 7,672 $ 31 $ (14,898) $ 7,333
===============================================================================================================================
20
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS)
M. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY CONSOLIDATED
-------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2003
Net cash from operating activities $ 4,995 $ (2,596) $ 17,204 $ (1) $ 19,602
Net cash from investing activities (1,897) 2,248 (4,429) - (4,078)
Net cash from financing activities (3,100) 376 (45,117) - (47,841)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (2) 28 (32,342) (1) (32,317)
Cash and cash equivalents at
beginning of period - 1 43,158 2 43,161
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ (2) $ 29 $ 10,816 $ 1 $ 10,844
==========================================================================================================================
FOR THE SIX MONTHS ENDED
JUNE 30, 2002
Net cash from operating activities $ 537 $ (932) $ (322) $ (2) $ (719)
Net cash from investing activities (231) 16,639 (22,581) - (6,173)
Net cash from financing activities (306) (15,684) (275) - (16,265)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents - 23 (23,178) (2) (23,157)
Cash and cash equivalents at
beginning of period - 4 30,465 4 30,473
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ - $ 27 $ 7,287 $ 2 $ 7,316
==========================================================================================================================
21
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Unaudited Condensed Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this document and the Company's most recent
Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
This document contains, in addition to historical information, forward-looking
statements that are subject to risks and other uncertainties. The Company's
actual results may differ materially from those anticipated in these
forward-looking statements. In the text below, financial statement amounts have
been rounded and the percentage changes are based on the financial statements.
GENERAL
The Recapitalization. On June 11, 2003, the previously announced
Recapitalization of the Company was completed. On May 7, 2003, the Company
entered into a Recapitalization Agreement with Green Equity Investors III, L.P.
("GEI"), an affiliate of Leonard Green & Partners L.P. ("Leonard Green"), and
certain shareholders of the Company. Pursuant to the Recapitalization Agreement
(i) GEI invested $65.0 million in the Company in exchange for 65,000 shares of
newly issued convertible preferred stock, (ii) the Company redeemed 39.66% of
its outstanding shares of capital stock for payments totaling $147.0 million and
(iii) the Company made certain other payments including $3.0 million to the
holders of options to purchase the Company's capital stock in consideration for
the cancellation of certain of their vested options (collectively, the
"Recapitalization"). The convertible preferred shares represent approximately
22% of the outstanding voting shares of capital stock as of the date of the
Recapitalization.
As part of the Recapitalization, the Company entered into a new $230
million senior credit facility with a syndicate of banks consisting of a $180
million Term Loan and a $50 million Revolving Credit Facility. The Revolving
Credit facility was not utilized on the date of the Recapitalization. The
Company paid $115.4 million to repay in full its existing senior credit facility
which was terminated as of the date of the Recapitalization.
The Recapitalization was accounted for as a leveraged recapitalization
at historical cost principally due to the fact that less than 80% of the voting
securities were acquired.
RESULTS OF OPERATIONS--QUARTER ENDED JUNE 30, 2003 AS COMPARED TO QUARTER ENDED
JUNE 30, 2002
Net Sales. Net sales were down $7.3 million, or 5.4%, to $129.6 million
for the quarter ended June 30, 2003 from $136.9 million for the quarter ended
June 30, 2002. Net sales of climbing products decreased by $4.0 million, or
3.4%, to $112.3 million for the quarter ended June 30, 2003 from $116.3 million
for the quarter ended June 30, 2002. The sales decline primarily reflects lower
unit sales volumes of aluminum stepladders offset, in part, by an improvement in
the product mix mostly due to higher unit sales of fiberglass stepladders. Net
sales of extruded products of $17.3 million for the quarter ended June 30, 2003
declined by $3.4 million, or 16.3%, compared to the quarter ended June 30, 2002
primarily reflecting lower unit sales volumes due to the continued softness in
the markets served by this segment of the Company's business.
Gross Profit. Gross profit improved by $1.5 million, or 3.4%, to $45.5
million for the quarter ended June 30, 2003 from $44.0 million for the quarter
ended June 30, 2002 despite lower net sales. Gross profit as a percentage of net
sales in the quarter ended June 30, 2003 improved to 35.1% from 32.1% for the
quarter ended June 30, 2002. The higher gross profit margin is due to lower
product liability and workers' compensation costs as well as on-going
manufacturing productivity improvements and other manufacturing cost reduction
initiatives that more than offset the effects of lower aluminum extrusion
production volumes. Cost of sales for the current quarter includes costs of
approximately $0.7 million related to manufacturing inefficiencies associated
with the start-up and realignment of ladder fabrication and assembly operations.
General and Administrative Expenses. General and administrative
expenses were $7.0 million for the quarter ended June 30, 2003 compared to $6.9
million for the quarter ended June 30, 2002, an increase of $0.1
22
million. The increase is primarily due to higher pension expense, higher
depreciation related to capitalized computer hardware and software costs and
higher professional and consulting fees related, in part, to new product
development. The increase in expense was mostly offset by lower provisions for
performance based incentive compensation accruals. Pension expense increased in
the current quarter due to lower than expected returns on plan investments and a
decrease in the discount rate used to value pension liabilities.
Selling and Distribution Expenses. Selling and distribution expenses
increased by $1.6 million, or 7.9%, to $21.9 million for the quarter ended June
30, 2003 compared to $20.3 million for the quarter ended June 30, 2002 primarily
reflecting higher shipping and handling expenses to support supply chain
initiatives to continue reducing cycle times and improving order fill rates.
These cost increases more than offset the impact of lower unit sales volumes.
Recapitalization Expense. Recapitalization expense for the quarter
ended June 30, 2003 totals $10.1 million and includes a noncash compensation
charge of $4.6 million associated with the accelerated vesting of stock options
in connection with the Recapitalization. Recapitalization expense also includes
a compensation charge of $3.0 million related to cancellation payments for
certain vested options, transaction bonus payments totaling $1.7 million paid to
certain officers and employees of the Company and, other professional fees and
miscellaneous expenses totaling $0.8 million.
Manufacturing and Distribution Optimization Costs. During the second
quarter of 2003, the Company transferred all ladder fabrication and assembly
operations in Greenville, Pennsylvania to other lower cost Company facilities.
The Company also began an initiative to focus the Greenville facility on the
Extruded Products segment of the Company's business. The total costs incurred
during the second quarter relating to the optimization of the Company's
manufacturing and distribution operations were $1.8 million which includes $0.7
million recorded in Cost of sales and $0.1 million in Selling and distribution
expenses.
Operating Profit. Operating profit declined by $11.2 million to $5.6
million for the quarter ended June 30, 2003 from $16.8 million for the quarter
ended June 30, 2002 primarily due to the recognition of $10.1 million of
Recapitalization expense and $1.8 million of costs relating to Phase I of the
Company's plan to optimize its manufacturing and distribution operations. If the
impact of the Recapitalization expense and optimization costs is removed,
operating profit would have been $17.5 million in the quarter which is $0.7
million, or 3.7%, more than operating profit for the quarter ended June 30,
2002.
Operating profit of the Climbing Products segment declined $1.5 million
to $15.8 million for the quarter ended June 30, 2003. If the impact of
optimization costs totaling $1.8 million is removed, operating profit would have
been $17.6 million which is $0.3 million, or 1.6%, more than operating profit
for the second quarter of the prior year. The increase primarily reflects the
improvement in gross profit partially offset by the negative impact of higher
selling and distribution expenses.
Operating profit of the Extruded Products segment was $0.7 million for
the quarter ended June 30, 2003 compared to $0.1 million for the quarter ended
June 30, 2002. The improvement in operating profit of $0.6 million is primarily
due to improvements in the profitability of the segment's sales mix which more
than offset the effects of lower aluminum extrusion production volumes.
Corporate and Other expenses increased by $10.3 million for the quarter
ended June 30, 2003 compared to the quarter ended June 30, 2002 primarily due to
Recapitalization expense of $10.1 million recorded in the current quarter in
addition to higher management advisory and consulting fees and higher legal and
professional expenses.
Other Income (Expense), Net. Other income (expense) was net income of
$0.1 million for the quarter ended June 30, 2003, an increase in income of $0.1
million compared to the second quarter of 2002.
Interest Expense. Interest expense increased by $2.3 million to $7.5
million for the quarter ended June 30, 2003 from $5.2 million for the quarter
ended June 30, 2002. The increase is primarily due to the recognition of $2.4
million of unamortized deferred financing fees in the current quarter which was
associated with the senior credit facility that was repaid and terminated
effective on the date of the Recapitalization.
23
Income Tax (Benefit). In accordance with APB Opinion 28, at the end of
each interim period the Company makes its best estimate of the annual effective
tax rate expected to be applicable for the full fiscal year. The rate so
determined is used in providing for income taxes on a current year-to-date
basis. The effective tax rate includes the effect of any valuation allowance
expected to be necessary at the end of the year for deferred tax assets related
to originating deductible temporary differences and loss carryforwards during
the year. The effective tax rate for the quarter ended June 30, 2003 is
approximately 38% compared to 37% for the second quarter of the prior year. The
difference between the statutory and effective tax rates at both June 30, 2003
and 2002 was primarily due to state taxes (net of federal benefit).
Net Income (Loss). Net loss was $1.1 million for the quarter ended June
30, 2003 which is $8.4 million less than net income of $7.3 million for the
quarter ended June 30, 2002 as a result of all the above factors.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 2003 AS COMPARED TO SIX MONTHS
ENDED JUNE 30, 2002
Net Sales. Net sales were down $11.8 million, or 4.8%, to $235.8
million for the six months ended June 30, 2003 from $247.6 million for the six
months ended June 30, 2002. Net sales of climbing products decreased by $7.5
million, or 3.6%, to $200.7 million for the six months ended June 30, 2003 from
$208.2 million for the first six months of the prior year. The sales decline
primarily reflects lower unit sales volumes of aluminum stepladders offset, in
part, by an improved sales mix mostly due to higher sales of fiberglass
stepladders and extension ladders. Net sales of extruded products of $35.1
million for the six months ended June 30, 2003 declined by $4.3 million, or
11.0%, compared to the six months ended June 30, 2002 primarily reflecting lower
unit sales volumes due to the continued softness in the markets served by this
segment of the Company's business.
Gross Profit. Despite lower sales, gross profit improved by $3.7
million, or 4.7%, to $81.0 million for the six months ended June 30, 2003 from
$77.3 million for the six months ended June 30, 2002. Gross profit as a
percentage of net sales in the six months ended June 30, 2003 improved to 34.4%
from 31.2% for the first six months of 2002. The higher gross profit margin is
due to lower product liability and workers' compensation costs as well as
on-going manufacturing productivity improvements and other manufacturing cost
reduction initiatives that more than offset the effects of lower aluminum
extrusion production volumes. Cost of sales for the current period includes
costs of approximately $0.7 million related to manufacturing inefficiencies
associated with the start-up and realignment of ladder fabrication and assembly
operations that was initiated in the second quarter of 2003.
General and Administrative Expenses. General and administrative
expenses were $13.3 million for the six months ended June 30, 2003 compared to
$14.4 million for the six months ended June 30, 2002, a decrease of $1.1 million
or 7.5%. The decrease is primarily due to the severance cost recognized in the
first quarter of 2002 of $1.6 million associated with the separation of a former
executive officer. Excluding this one-time severance cost, general and
administrative expenses were $0.5 million higher in the current period than the
prior year period due to higher pension expense, higher depreciation related to
capitalized computer hardware and software costs and higher professional and
consulting fees related, in part, to new product development. The increase in
expense in the current period was partially offset by lower provisions for
performance based incentive compensation accruals. Pension expense increased in
the current period due to lower than expected returns on plan investments and a
decrease in the discount rate used to value pension liabilities.
Selling and Distribution Expenses. Selling and distribution expenses
increased by $4.3 million, or 11.3%, to $42.4 million for the six months ended
June 30, 2003 compared to $38.1 million for the six months ended June 30, 2002
primarily reflecting higher shipping and handling expenses to support supply
chain initiatives to continue reducing cycle times and improving order fill
rates. These cost increases more than offset the impact of lower unit sales
volumes.
Recapitalization Expense. Recapitalization expense for the six months
ended June 30, 2003 totals $10.1 million and includes a noncash compensation
charge of $4.6 million associated with the accelerated vesting of stock options
in connection with the Recapitalization. Recapitalization expense also includes
a compensation charge of $3.0 million related to cancellation payments for
certain vested options, transaction bonus payments totaling $1.7 million paid to
certain officers and employees of the Company and, other professional fees and
miscellaneous expenses totaling $0.8 million.
24
Manufacturing and Distribution Optimization Costs. During the second
quarter of 2003, the Company transferred all ladder fabrication and assembly
operations in Greenville, Pennsylvania to other lower cost Company facilities.
The Company also began an initiative to focus the Greenville facility on the
Extruded Products segment of the Company's business. The total costs incurred
during the first six months of 2003 relating to the optimization of the
Company's manufacturing and distribution operations were $1.8 million which
includes $0.7 million recorded in Cost of sales and $0.1 million in Selling and
distribution expenses.
Operating Profit. Operating profit declined by $10.7 million to $14.2
million for the six months ended June 30, 2003 from $24.9 million for the six
months ended June 30, 2002 primarily due to the recognition of $10.1 million of
Recapitalization expense and $1.8 million of costs related to Phase I of the
Company's plan to optimize its manufacturing and distribution operations. If the
impact of the Recapitalization expense and optimization costs is removed, in
addition to removal of the prior period impact of the one-time severance cost of
$1.6 million associated with the separation of a former executive officer,
operating profit would have been $26.1 million in the current period which is
$0.4 million, or 1.5%, less than the prior year period.
Operating profit of the Climbing Products segment decreased $1.1
million to $25.1 million in the first six months of 2003. If the impact of
optimization costs totaling $1.8 million is removed, in addition to removal of
the prior period impact of a one-time severance cost allocation of $1.3 million,
operating profit of the Climbing Products segment would have declined by $0.6
million, or 2.5%, to $26.9 million in the current period compared to the first
six months of 2002. The decline primarily reflects the negative impact of higher
selling and distribution expenses which more than offset the improvement in
gross profit.
Operating profit of the Extruded Products segment was $0.8 million for
the six months ended June 30, 2003 compared to an operating loss of $0.5 million
for the six months ended June 30, 2002. The improvement in operating profit of
$1.3 million is primarily due to improvements in the profitability of the
segment's sales mix and lower allocated severance costs more than offsetting the
effects of lower aluminum extrusion production volumes.
Corporate and Other expenses increased by $10.8 million for the six
months ended June 30, 2003 compared to the six months ended June 30, 2002
primarily due to Recapitalization expense of $10.1 million recorded in the
current period in addition to higher management advisory and consulting fees and
higher legal and professional expenses.
Other Income (Expense), Net. Other income (expense) was net income of
$0.3 million for the six months ended June 30, 2003, an increase in income of
$0.6 million compared to the first six months 2002. The increase in income is
primarily due to the absence of a charge recorded in the first quarter of the
prior year related to a loss on the disposal of an asset of $0.3 million.
Interest Expense. Interest expense increased by $1.6 million to $12.6
million for the six months ended June 30, 2003 from $11.0 million for the six
months ended June 30, 2002. The increase is primarily due to the recognition of
$2.4 million of unamortized deferred financing fees in the current period which
was associated with the senior credit facility that was repaid and terminated
effective on the date of the Recapitalization. The increase in interest expense
was partially offset by lower average debt levels and lower interest rates in
the current period. In addition, the first quarter of 2002 included a charge of
$0.4 million related to the accelerated amortization of deferred financing fees
as a result of a voluntary repayment of debt that occurred in March 2002.
Income Tax (Benefit). In accordance with APB Opinion 28, at the end of
each interim period the Company makes its best estimate of the annual effective
tax rate expected to be applicable for the full fiscal year. The rate so
determined is used in providing for income taxes on a current year-to-date
basis. The effective tax rate includes the effect of any valuation allowance
expected to be necessary at the end of the year for deferred tax assets related
to originating deductible temporary differences and loss carryforwards during
the year. The effective tax rate for the six months ended June 30, 2003 is
approximately 34% compared to 37% for the prior year period. The lower effective
tax rate in the current period is primarily due to lower state taxes. The
difference between the statutory and effective tax rates at both June 30, 2003
and 2002 was primarily due to state taxes (net of federal benefit).
Net Income. Net income declined by $7.3 million to $1.3 million for the
six months ended June 30, 2003 from net income of $8.6 million for the six
months ended June 30, 2002 as a result of all the above factors.
25
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources were significantly
impacted as a result of the Recapitalization. Total long-term debt and related
current maturities increased by $58.1 million to $319.7 million as of June 30,
2003 compared to the amounts at December 31, 2002. Other significant changes in
capital resources and liquidity in connection with the Recapitalization are
summarized in the following sources and uses of cash (in thousands of dollars):
SOURCES OF CASH:
Term Loan proceeds $ 180,000
Issuance of convertible preferred stock 65,000
Additional borrowings under Receivables Purchase Agreement 20,000
Existing cash 20,713
Employee repayment of stock loans 1,202
- ------------------------------------------------------------------------------------------------------
TOTAL $ 286,915
======================================================================================================
USES OF CASH:
Redemption of common stock $ 146,983
Repay existing term loans 115,421
Payments in connection with stock option cancellations 3,017
Costs associated with Recapitalization 21,494
- ------------------------------------------------------------------------------------------------------
TOTAL $ 286,915
======================================================================================================
The balance of long-term debt and current maturities which totals
$319.7 million at June 30, 2003 includes $133.2 million of Senior Subordinated
Notes reflected net of unamortized original issue discount; $180.0 million
related to a Term Loan issued on the date of the Recapitalization under the new
Senior Credit Facility; and $6.5 million of other debt. The new Senior Credit
Facility provides for the Term Loan and a $50 million Revolving Facility of
which $27.4 million was available for borrowing at August 1, 2003 after a letter
of credit replacement process was completed. The available borrowings under the
Revolving Facility are reduced by amounts issued under a letter of credit
subfacility which totals $22.6 million at August 1, 2003.
The Company maintains a Receivables Purchase Agreement with a financial
institution and its affiliate which originally was to expire in May 2003.
Effective in May 2003, the Company and the financial institution agreed to
extend the Receivables Purchase Agreement for a period of three years, subject
to the approval of annual renewals by both the Company and the financial
institution. The agreement provides additional financing capacity with a maximum
availability of $50 million depending upon the level of accounts receivable and
certain other factors. As of June 30, 2003, the Company sold $91.7 million of
accounts receivable in exchange for $40.0 million in cash and an undivided
interest in the accounts receivable of $51.6 million. An additional $10.0
million of financing was available under the Receivables Purchase Agreement at
June 30, 2003.
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 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
cash dividends. The financial covenants of the Senior Credit Facility require
the Company to meet specific interest coverage, maximum leverage, and capital
expenditure requirements. The Company is in compliance with all its debt
covenants effective June 30, 2003. The Company anticipates that it will continue
to comply with its debt covenants
26
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.
Net cash provided by operating activities was $19.6 million for the six
months ended June 30, 2003 compared to net cash used by operating activities of
$0.7 million for the six months ended June 30, 2002. The increase is primarily
due to net proceeds of $20.0 million from the sale of accounts receivable under
the Receivables Purchase Agreement during the current period and reductions in
cash used for other assets and liabilities; however, more cash was used in the
current period to increase year-over-year inventory and accounts receivable. In
addition, $3.3 million less cash was generated in the current period due to
lower product liability and workers' compensation noncash expense provisions and
higher claims payments in the current period compared to the prior year period.
Net cash used for investing activities was $4.1 million for the six months ended
June 30, 2003 compared to $6.2 million for the prior year period which primarily
reflects lower capital expenditures during the current period. Net cash used for
financing activities was $47.8 million for the six months ended June 30, 2003
compared to net cash used of $16.3 million for the prior year period. As
previously described, financing activities for the first six months of 2003
reflects transactions that occurred on the date of the Recapitalization
including proceeds from issuance of convertible preferred stock of $65.0
million, Term Loan proceeds of $180.0 million, payments of $147.0 million to
redeem common stock, repayment of debt totaling $115.4 million and other
payments totaling $24.5 million which includes payments of $3.0 million in
connection with stock option cancellations. Debt repayments for the first six
months of the prior year include a voluntarily repayment of $15 million.
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.
SEASONALITY, WORKING CAPITAL AND CYCLICALITY
Sales of certain products of the Company are subject to seasonal
variation. Demand for the Company's climbing products is affected by residential
housing starts and existing home sales, commercial construction activity and
overall home improvement expenditures. The residential and commercial
construction markets are sensitive to cyclical changes in the economy. Due to
seasonal factors associated with the construction industry, sales of climbing
products and working capital requirements are typically higher during the second
and third quarters than at other times of the year. The Company expects to use
the Senior Credit Facility and the Receivables Purchase Agreement to meet any
seasonal variations in its working capital requirements.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. There have
been no material changes in market risk from changes in interest rates from that
disclosed in the Company's most recent Annual Report on Form 10-K.
The Company does not have material operations in foreign countries.
International sales were not material to the Company's operations for the six
months ended June 30, 2003. Accordingly, the Company is not subject to material
foreign currency exchange 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 also exposed to market risk from changes in the price of
aluminum. The Company manages such risk through the use of aluminum futures and
options contracts. There have been no material changes in market risk from
changes in the price of aluminum from that disclosed in the Company's most
recent Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Within ninety days prior to the filing of this quarterly 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.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings
and claims incident to the normal conduct of its business. In the opinion of
management, the amount of any ultimate liability with respect to these
proceedings and claims will not have a material adverse effect on its results of
operations, financial position or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on April 9, 2003.
The size of the Board of Directors of Holding (PA) was set at twelve (12)
persons and the following twelve (12) persons were elected as directors: Mamoun
Askari, James O. Egan, James F. Hardymon, Dennis G. Heiner, Charles K. Marquis,
Dana R. Snyder, Howard L. Solot, Christopher J. Stadler, Thomas J. Sullivan,
Stephen J. Tempini, Donald M. Werner and Michael E. Werner. Of the total shares
of stock voted, all were cast for these twelve (12) persons with the exception
that 1,472.4686 shares of voting stock were withheld for all directors. In
addition, at the meeting, PricewaterhouseCoopers LLP was approved as the
Company's independent auditors for the upcoming year. Of the total shares of
stock voted, 70,537.5536 were cast for, 189.3486 were cast against and 21.6032
were withheld, with respect to the selection of PricewaterhouseCoopers LLP as
the Company's independent auditors.
A special meeting of shareholders of the Company was held on May 30,
2003. As required by Pennsylvania law, all holders of stock received notice and
were eligible to vote at the special meeting. At the meeting, an amendment to
the Company's Articles of Incorporation (the "Amended Articles") and the
Recapitalization Agreement were adopted and approved, thereby authorizing the
Recapitalization. The Amended Articles authorized (i) the Company's Board of
Directors to provide for the issuance of shares of preferred stock, including
the Series A Preferred Stock, (ii) a new class of common stock into which the
Series A Preferred Stock will be convertible, and (iii) reclassified each
outstanding share of the Company's common stock into 0.396646 shares of a new
class of redeemable common stock and 0.603354 of a retained share of the
relevant class of common stock. Of the total shares of stock voted, all were
cast for the approval and adoption of the Amended Articles and the
Recapitalization Agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificate of Incorporation of Werner Holding Co. (DE), Inc.
(filed as Exhibit 3.1 to Issuer'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 Issuer'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 Issuer's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000 and incorporated herein by reference).
3.4 Articles of Amendment of the Amended and Restated Articles of
Incorporation of Werner Holding Co. (PA), Inc.
3.5 Werner Holding Co. (PA), Inc. Statement with Respect to the
Powers, Preferences and Relative, Optional and Other Special
Rights of Series A Participating Convertible Preferred Stock
and Qualifications, Limitations and Restrictions Thereof.
3.6 Amended and Restated By-laws of Werner Holding Co. (PA), Inc.
29
(a) Exhibits (continued):
10.1 First Amendment to Receivables Purchase Agreement, dated as of
May 28, 2003, among Werner Funding Corporation, Werner Co.,
Market Street Funding Corporation and PNC Bank, National
Association.
10.2 First Amendment to Purchase and Sale Agreement, dated as of
May 28, 2003, among Werner Funding Corporation and Werner Co.
10.3 Recapitalization and Stock Purchase Agreement, dated as of May
7, 2003, among Werner Holding Co. (PA), Inc., Green Equity
Investors III, L.P., and certain shareholders of Werner
Holding Co. (PA), Inc., including Exhibit C thereto (filed as
Exhibit 99.1 to Issuer's Current Report on Form 8-K filed May
8, 2003).
10.4 Supplemental Indenture dated as of June 11, 2003, by and among
Werner Holding Co. (DE), Inc., The Bank of New York (as
successor trustee to IBJ Schroder Bank & Trust Company) and
the guarantors under the Indenture dated as of November 24,
1997.
10.5 Amendment No. 5 to Werner Holding Co. (PA), Inc. Stock
Incentive Plan.
10.6 Management Services Agreement, dated as of June 11, 2003,
among Werner Holding Co. (DE), Inc. and Leonard Green &
Partners, L.P.
10.7 Credit Agreement, dated as of June 11, 2003, among Werner
Holding Co. (DE), Inc.,Citigroup Global Markets Inc., as
Syndication Agent, Citigroup Global Markets Inc. and J. P.
Morgan Securities, Inc, as Joint Lead Arrangers and Joint
Bookrunners, and JPMorgan Chase Bank as Administrative Agent.
10.8 Amended and Restated Agreement for Management Advisory,
Strategic Planning and Consulting Services between Werner
Holding Co. (DE), Inc. and Investcorp International Inc.
effective as of June 11, 2003.
10.9 Amended and Restated Werner Co. Deferred Stock Plan, effective
as of May 2003.
10.10 Consent to Stock Unit Adjustment, by Dennis G. Heiner, dated
June 2, 2003.
10.11 Amended and Restated Shareholder Agreement, dated as of June
11, 2003, by and among Werner Holding Co. (PA), Inc.,
Investcorp Investment Equity Limited, the other holders of
shares of Class D Common Stock of Holding PA and the other
individuals listed on the signature pages thereto.
10.12 Registration Rights Agreement, dated as of June 11, 2003, by
Werner Holding Co. (PA), Inc for the benefit of certain
shareholders.
10.13 Option Cancellation Agreement, dated as of May 20, 2003, by
and between Werner Holding Co. (PA), Inc. and Dennis G.
Heiner.
10.14 Option Cancellation Agreement, dated as of May 15, 2003, by
and between Werner Holding Co. (PA), Inc. and Peter R. O'Coin.
10.15 Option Cancellation Agreement, dated as of May 20, 2003, by
and between Werner Holding Co. (PA), Inc. and Eric J. Werner.
10.16 Option Cancellation Agreement, dated as of May 19, 2003, by
and between Werner Holding Co. (PA), Inc. and Larry V. Friend.
30
(a) Exhibits (continued):
10.17 Option Cancellation Agreement, dated as of May 20, 2003, by
and between Werner Holding Co. (PA), Inc. and Steven R.
Bentson.
10.18 Bonus Agreement, dated as of May 20, 2003, by and between
Werner Holding Co. (PA), Inc. and Dennis G. Heiner.
10.19 Bonus Agreement, dated as of May 15, 2003, by and between
Werner Holding Co. (PA), Inc. and Peter R. O'Coin.
10.20 Bonus Agreement, dated as of May 20, 2003, by and between
Werner Holding Co. (PA), Inc. and Eric J. Werner.
10.21 Bonus Agreement, dated as of May 19, 2003, by and between
Werner Holding Co. (PA), Inc. and Larry V. Friend.
10.22 Bonus Agreement, dated as of May 20, 2003, by and between
Werner Holding Co. (PA), Inc. and Steven R. Bentson.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
The Company filed Current Reports on Form 8-K on May 8 and May 29, 2003
relating to the Recapitalization.
31
SIGNATURES
Pursuant to the requirements 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.
Date: August 12, 2003 /s/ LARRY V. FRIEND
-----------------------------------------------------
Larry V. Friend
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting
Officer)
WERNER HOLDING CO. (DE), INC.
Date: August 12, 2003 /s/ LARRY V. FRIEND
-----------------------------------------------------
Larry V. Friend
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting
Officer)
32