10-Q 1 l03520ae10vq.txt WERNER HOLDING CO (PA) AND (DE) 10-Q/9-30-2003 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 SEPTEMBER 30, 2003 Commission File No. 333-46607-12 WERNER HOLDING CO. (PA), INC. (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 25-0906895 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 93 WERNER RD. 16125 GREENVILLE, PENNSYLVANIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (724) 588-2550 (CO-REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE) Commission File No. 333-46607 WERNER HOLDING CO. (DE), INC. (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 25-1581345 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 1105 NORTH MARKET ST., 19899 SUITE 1300 (ZIP CODE) WILMINGTON, DELAWARE (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (302) 478-5723 (CO-REGISTRANT'S TELEPHONE 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 September 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 SEPTEMBER 30, 2003
PART I FINANCIAL INFORMATION Item 1. Financial Statements of Werner Holding Co. (PA), Inc. and Subsidiaries (Unaudited) Condensed Consolidated Balance Sheets -- September 30, 2003 and December 31, 2002.................................................................... 1 Condensed Consolidated Statements of Income -- Three and Nine Months Ended September 30, 2003 and 2002.......................................................... 2 Condensed Consolidated Statements of Changes in Shareholders' Equity (Deficit) -- Nine Months Ended September 30, 2003 and 2002.................... 3 Condensed Consolidated Statements of Cash Flows -- Nine Months Ended September 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.................................................................. 23 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 30 Item 4. Controls and Procedures.................................................................. 30 PART II OTHER INFORMATION Item 1. Legal Proceedings........................................................................ 31 Item 6. Exhibits and Reports on Form 8-K......................................................... 31 SIGNATURES ......................................................................................... 33
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)
SEPTEMBER 30 DECEMBER 31 2003 2002 -------- --------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 15,170 $ 43,161 Accounts receivable 59,871 54,219 Allowance for doubtful accounts (1,772) (1,800) Prepaid income taxes -- 1,748 Inventories 60,604 52,530 Deferred income taxes 487 1,062 Other 2,498 1,598 --------- --------- Total current assets 136,858 152,518 Property, plant and equipment, net 109,779 112,416 Other assets: Deferred income taxes 19,261 18,521 Deferred financing fees, net 11,658 4,078 Other 17,359 10,710 --------- --------- 48,278 33,309 --------- --------- TOTAL ASSETS $ 294,915 $ 298,243 ========= ========= LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable $ 17,413 $ 16,173 Accrued liabilities 41,125 33,655 Income taxes payable 2,543 -- Current maturities of long-term debt 15,607 27,622 --------- --------- Total current liabilities 76,688 77,450 Long-term obligations: Long-term debt 304,054 233,954 Reserve for product liability and workers' compensation claims 49,534 48,205 Other long-term obligations 41,382 40,959 --------- --------- Total liabilities 471,658 400,568 Convertible preferred stock 61,240 -- Shareholders' deficit: Common stock 1 1 Additional paid-in-capital 203,771 200,872 Accumulated deficit (280,329) (287,078) Treasury stock, at cost (146,983) -- Accumulated other non-owner changes in equity (13,144) (13,694) Notes receivable arising from stock loan plan (1,299) (2,426) --------- --------- Total shareholders' deficit (237,983) (102,325) --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 294,915 $ 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 NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------------- ---------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- Net sales $ 136,779 $ 134,635 $ 372,570 $ 382,198 Cost of sales 84,598 86,738 239,378 256,953 --------- --------- --------- --------- Gross profit 52,181 47,897 133,192 125,245 General and administrative expenses 8,506 7,012 21,800 21,383 Selling and distribution expenses 23,977 21,498 66,419 59,621 Recapitalization expense 81 -- 10,198 -- Manufacturing and distribution optimization costs 1,127 -- 2,102 -- --------- --------- --------- --------- Operating profit 18,490 19,387 32,673 44,241 Other income (expense), net 127 173 410 (188) --------- --------- --------- --------- Income before interest and taxes 18,617 19,560 33,083 44,053 Interest expense 6,068 5,278 18,645 16,282 --------- --------- --------- --------- Income before income taxes 12,549 14,282 14,438 27,771 Income tax 4,777 5,503 5,414 10,431 --------- --------- --------- --------- NET INCOME 7,772 8,779 9,024 17,340 Convertible preferred stock dividends and accretion 3,017 -- 3,081 -- --------- --------- --------- --------- NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 4,755 $ 8,779 $ 5,943 $ 17,340 ========= ========= ========= =========
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 OTHER TOTAL ADDITIONAL NON-OWNER SHAREHOLDERS' COMMON PAID-IN ACCUMULATED TREASURY EQUITY EQUITY STOCK CAPITAL DEFICIT STOCK CHANGES OTHER (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 (883) Redemption of common stock on 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) ========= ========= ========= ========= ========= ========= ========= Non-owner equity changes: Net income 7,772 7,772 Derivative instruments-amounts reclassified to income (net of deferred tax of $82) 140 140 Change in fair value of derivative commodity instruments (net of deferred tax of $175) 298 298 --------- Total non-owner equity changes 8,210 Convertible preferred stock dividends (2,275) (2,275) Accretion of convertible preferred stock (742) (742) --------- --------- --------- --------- --------- --------- --------- BALANCE AT SEPTEMBER 30, 2003 $ 1 $ 203,771 $(280,329) $(146,983) $ (13,144) $ (1,299) $(237,983) ========= ========= ========= ========= ========= ========= =========
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 OTHER TOTAL ADDITIONAL NON-OWNER SHAREHOLDERS' COMMON PAID-IN ACCUMULATED EQUITY EQUITY STOCK CAPITAL DEFICIT CHANGES OTHER (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)
NINE MONTHS ENDED SEPTEMBER 30 ---------------------------------- 2003 2002 --------- --------- OPERATING ACTIVITIES Net income $ 9,024 $ 17,340 Reconciliation of net income to net cash provided by operating activities: Noncash stock compensation charge associated with Recapitalization 4,590 -- Other Recapitalization expenses 5,607 -- Depreciation 9,566 8,763 Amortization of deferred financing fees and original issue discount 4,165 2,203 Amortization of deferred costs 3,521 2,771 Provision for losses on accounts receivable (24) 450 Provision for product liability and workers' compensation claims 9,513 10,826 Payment of product liability and workers' compensation claims (8,184) (5,871) Deferred income taxes (487) (3,031) Loss on disposition of property, plant and equipment 343 310 Changes in operating assets and liabilities: Accounts receivable (5,652) (907) Prepaid income taxes 1,748 1,501 Inventories (8,074) (5,805) Accounts payable 1,240 (1,949) Income taxes payable 2,543 1,533 Other assets and liabilities, net (2,352) (3,844) --------- --------- Net cash provided by operating activities 27,087 24,290 INVESTING ACTIVITIES Capital expenditures (6,879) (9,090) Proceeds from liquidation of investments 43 183 --------- --------- Net cash used by investing activities (6,836) (8,907) 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 (11,441) -- 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 (5,607) -- Issuance of common stock -- 157 Repurchase of common stock (60) (453) Repayments of long-term debt prior to Recapitalization (6,992) (16,403) Repayments of long-term debt after Recapitalization (199) -- Repayment of notes receivable arising from stock loan plan 1,127 140 --------- --------- Net cash used by financing activities (48,242) (16,559) --------- --------- Net decrease in cash and cash equivalents (27,991) (1,176) Cash and cash equivalents at beginning of period 43,161 30,473 --------- --------- Cash and cash equivalents at end of period $ 15,170 $ 29,297 ========= ========= SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Capital lease obligations incurred $ 394 $ 937 Issuance of common stock in exchange for notes receivable arising from stock loan plan $ -- $ 473 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 nine months ended September 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 did 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. 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 20,916 Employee repayment of stock loans 1,202 -------- TOTAL $287,118 ======== 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 21,697 -------- TOTAL $287,118 ========
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 $12,422. Recapitalization expense reflected on the income statement totals $10,198 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 option cancellations, transaction bonus payments totaling $1,725 and other miscellaneous costs totaling $866. 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) Preferred Dividends On September 30, 2003, a quarterly preferred dividend in the amount of $2,275 was paid and, in lieu of a cash dividend payment, the liquidation preference of the Series A Preferred Stock was increased by the amount of the dividend. The dividend was recorded by reducing retained earnings and increasing the balance of convertible preferred stock. The dividend, which increased the liquidation preference of preferred stock to $67,275, is presented as an adjustment to arrive at net income attributable to common shareholders in the consolidated statements of income. 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 September 30, 2003, 13,647 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. At the date of issuance, the preferred stock was recorded net of associated issuance costs of $6,841. 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 in calculating net income 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:
SEPTEMBER 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 $1,702 in 2003 and $2,007 in 2002 133,298 132,993 Variable Rate Demand Industrial Building Revenue Bonds, due 2015 5,000 5,000 Capital lease obligations 1,363 1,386 -------- -------- Total debt 319,661 261,576 Less current maturities 15,607 27,622 -------- -------- DEBT CLASSIFIED AS LONG-TERM $304,054 $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 (3.87% at September 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 September 30, 2003, is reduced by amounts issued under a letter of credit subfacility which totals $22,851 at September 30, 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 $7,165 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 $14,439 and $12,510 are included in the caption entitled, "Selling and distribution expenses" in the condensed consolidated statements of income for the three months ended September 30, 2003 and 2002, respectively, and $40,940 and $34,985 are included for the nine months ended September 30, 2003 and 2002, respectively. G. INVENTORIES Components of inventories are as follows:
SEPTEMBER 30 DECEMBER 31 2003 2002 ------- ------- Finished goods $36,193 $33,525 Work-in-process 13,668 11,770 Raw materials and supplies 20,539 17,085 ------- ------- 70,400 62,380 Less excess of cost over LIFO stated values 9,796 9,850 ------- ------- NET INVENTORIES $60,604 $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. Other letters of credit have been issued totaling $250. Letters of credit, which have a term of one year or less, total $22,851 at September 30, 2003. 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 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. On November 10, 2003, the Company and the individual defendants entered into a settlement agreement with the plaintiffs in this action. In exchange for the dismissal with prejudice of the lawsuit and the full release of claims, the plaintiffs will receive 100 shares of Class B common stock to be issued by the Company and 100 shares of Class B common stock to be transferred to the plaintiffs by the individual defendants. The Company has received a waiver of certain provisions of the Shareholder Agreement which is necessary in order to issue the shares of stock to the plaintiffs. 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 nine months ended September 30, 2003 and 2002 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------------------- ---------------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- NET SALES Climbing Products $ 119,766 $ 115,531 $ 320,485 $ 323,691 Extruded Products 17,013 19,104 52,085 58,507 --------- --------- --------- --------- $ 136,779 $ 134,635 $ 372,570 $ 382,198 ========= ========= ========= ========= OPERATING PROFIT (LOSS) Climbing Products $ 18,689 $ 18,950 $ 43,755 $ 45,175 Extruded Products 982 688 1,770 204 Corporate and Other (1,181) (251) (12,852) (1,138) --------- --------- --------- --------- $ 18,490 $ 19,387 $ 32,673 $ 44,241 ========= ========= ========= =========
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 Corporate and Other for the three and nine months ended September 30, 2003 includes Recapitalization expenses of $81 and $10,198, respectively (see Note B). Operating profit (loss) for the three and nine months ended September 30, 2003 for the Climbing Products segment includes $910 and $1,885, respectively, of costs related to manufacturing and distribution optimization and $934 and $1,729, respectively, of associated startup and realignment costs. For the Extruded Products segment, operating profit (loss) for both the three and nine months ended September 30, 2003 includes $217 of costs related to manufacturing and distribution optimization and $236 of associated startup and realignment costs (see Note L). Operating profit (loss) for the nine months ended September 30, 2002 for the Climbing Products and Extruded Products segments includes the impact of severance costs of approximately $1,300 and $300, respectively, associated with the separation of a former executive officer. 14 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 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 September 30, 2003 and December 31, 2002, the Company had sold, on a recurring basis, $88,181 and $78,765 of accounts receivable in exchange for $25,000 and $20,000 in cash and an undivided interest in accounts receivable of $63,102 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." 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 would have been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------- -------------------- 2003 2002 2003 2002 ------- ------- ------- ------- Net income, as reported $ 7,772 $ 8,779 $ 9,024 $17,340 Less total stock-based employee compensation costs determined using fair value method, net of related tax effects -- 100 103 293 ------- ------- ------- ------- PRO FORMA NET INCOME $ 7,772 $ 8,679 $ 8,921 $17,047 ======= ======= ======= =======
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 are zero for periods subsequent to March 31, 2003 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 September 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 during the second quarter to focus the Greenville facility on the Extruded Products segment of the Company's business. During the third quarter of 2003, the Company began manufacturing ladder components and accessories at a leased facility in Mexico. In addition, the Company announced on October 23, 2003 that it will close its manufacturing facility located in Carrollton, Kentucky. Additional Phase One initiatives have not yet been implemented. The Company currently anticipates that the total expense associated with Phase One of the optimization plan will approximate $8,000 and is expected to be completed in 2004. The costs incurred during the three and nine months ended September 30, 2003 relating to the optimization plan consist of the following:
Costs Incurred During --------------------------------------------- Three Months Ended Nine Months Ended September 30, 2003 September 30, 2003 ------------------ ------------------ Facility and other exit costs $ 332 $ 960 Employee severance and termination benefits 597 833 Other associated costs 198 309 ------ ------ Recorded as Manufacturing and distribution optimization costs 1,127 2,102 Startup and realignment costs included in: Cost of sales 1,132 1,852 Selling and distribution expenses 38 113 ------ ------ Total costs relating to optimization of manufacturing and distribution $2,297 $4,067 ====== ======
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 three and nine months ended September 30, 2003 is as follows:
Liability Liability Balance at Costs Costs Balance at June 30, 2003 Incurred Settled September 30, 2003 ------------- -------- ------- ------------------ Facility and other exit costs $ -- $ 332 $ 332 $ -- Employee severance and termination benefits 122 597 719 -- Other associated costs 10 198 198 10 ------ ------ ------ ------ $ 132 $1,127 $1,249 $ 10 ====== ====== ====== ======
Liability Liability Balance at Costs Costs Balance at March 31, 2003 Incurred Settled September 30, 2003 -------------- -------- ------- ------------------ Facility and other exit costs $ -- $ 960 $ 960 $ -- Employee severance and termination benefits -- 833 833 -- Other associated costs -- 309 299 10 ------ ------ ------ ------ $ -- $2,102 $2,092 $ 10 ====== ====== ====== ======
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 --------- --------- ------------ ---------- ------------ ------------ SEPTEMBER 30, 2003 ASSETS Current assets: Accounts receivable $ -- $ -- $ -- $ 59,871 $ -- $ 59,871 Inventories, net -- -- 60,604 -- -- 60,604 Other current assets 59 151 16,005 168 -- 16,383 --------- --------- --------- --------- --------- --------- Total current assets 59 151 76,609 60,039 -- 136,858 Property, plant and equipment, net -- 1 109,778 -- -- 109,779 Investment in subsidiaries (191,167) (113,985) 7,672 -- 297,480 -- Other assets -- 10,745 37,529 4 -- 48,278 --------- --------- --------- --------- --------- --------- TOTAL ASSETS $(191,108) $(103,088) $ 231,588 $ 60,043 $ 297,480 $ 294,915 ========= ========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Other current liabilities $ (807) $ 23,639 $ 53,971 $ (115) $ -- $ 76,688 Intercompany payable (receivable) (13,558) (233,858) 194,930 52,486 -- -- --------- --------- --------- --------- --------- --------- Total current liabilities (14,365) (210,219) 248,901 52,371 -- 76,688 Long-term debt -- 298,298 5,756 -- -- 304,054 Other long-term liabilities -- -- 90,916 -- -- 90,916 Convertible preferred stock 61,240 -- -- -- -- 61,240 Total equity (deficit) (237,983) (191,167) (113,985) 7,672 297,480 (237,983) --------- --------- --------- --------- --------- --------- TOTAL LIABILITIES AND EQUITY (DEFICIT) $(191,108) $(103,088) $ 231,588 $ 60,043 $ 297,480 $ 294,915 ========= ========= ========= ========= ========= ========= 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 NINE MONTHS ENDED SEPTEMBER 30, 2003 Net sales $ -- $ -- $ 372,570 $ -- $ -- $ 372,570 Cost of sales -- -- 239,378 -- -- 239,378 --------- --------- --------- --------- --------- --------- Gross profit -- -- 133,192 -- -- 133,192 Selling, general and administrative expenses -- 11 88,208 -- -- 88,219 Recapitalization expense -- -- 10,198 -- -- 10,198 Manufacturing and distribution optimization costs -- -- 2,102 -- -- 2,102 --------- --------- --------- --------- --------- --------- Operating (loss) profit -- (11) 32,684 -- -- 32,673 Other income (expense), net 8,675 10,825 (1,279) 1,965 (19,776) 410 Interest income (expense) 655 (3,609) (13,750) (1,941) -- (18,645) --------- --------- --------- --------- --------- --------- Income (loss) before income taxes (benefit) 9,330 7,205 17,655 24 (19,776) 14,438 Income taxes (benefit) 306 (1,387) 6,487 8 -- 5,414 --------- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ 9,024 $ 8,592 $ 11,168 $ 16 $ (19,776) $ 9,024 ========= ========= ========= ========= ========= ========= FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 Net sales $ -- $ -- $ 136,779 $ -- $ -- $ 136,779 Cost of sales -- -- 84,598 -- -- 84,598 --------- --------- --------- --------- --------- --------- Gross profit -- -- 52,181 -- -- 52,181 Selling, general and administrative expenses -- 4 32,479 -- -- 32,483 Recapitalization expense -- -- 81 -- -- 81 Manufacturing and distribution optimization costs -- -- 1,127 -- -- 1,127 --------- --------- --------- --------- --------- --------- Operating (loss) profit -- (4) 18,494 -- -- 18,490 Other income (expense), net 7,640 8,927 (405) 716 (16,751) 127 Interest income (expense) 239 (2,073) (3,640) (594) -- (6,068) --------- --------- --------- --------- --------- --------- Income (loss) before income taxes (benefit) 7,879 6,850 14,449 122 (16,751) 12,549 Income taxes (benefit) 107 (770) 5,398 42 -- 4,777 --------- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ 7,772 $ 7,620 $ 9,051 $ 80 $ (16,751) $ 7,772 ========= ========= ========= ========= ========= =========
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 NINE MONTHS ENDED SEPTEMBER 30, 2002 Net sales $ -- $ -- $ 382,198 $ -- $ -- $ 382,198 Cost of sales -- -- 256,953 -- -- 256,953 --------- --------- --------- --------- --------- --------- Gross profit -- -- 125,245 -- -- 125,245 Selling, general and administrative expenses 4 4 80,996 -- -- 81,004 --------- --------- --------- --------- --------- --------- Operating (loss) profit (4) (4) 44,249 -- -- 44,241 Other income (expense), net 17,003 18,133 (2,136) 2,341 (35,529) (188) Interest income (expense) 627 (2,055) (12,599) (2,255) -- (16,282) --------- --------- --------- --------- --------- --------- Income (loss) before income taxes (benefit) 17,626 16,074 29,514 86 (35,529) 27,771 Income taxes (benefit) 286 (862) 10,977 30 -- 10,431 --------- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ 17,340 $ 16,936 $ 18,537 $ 56 $ (35,529) $ 17,340 ========= ========= ========= ========= ========= ========= FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 Net sales $ -- $ -- $ 134,635 $ -- $ -- $ 134,635 Cost of sales -- -- 86,738 -- -- 86,738 --------- --------- --------- --------- --------- --------- Gross profit -- -- 47,897 -- -- 47,897 Selling, general and administrative expenses 3 2 28,505 -- -- 28,510 --------- --------- --------- --------- --------- --------- Operating (loss) profit (3) (2) 19,392 -- -- 19,387 Other income (expense), net 8,676 9,113 (496) 803 (17,923) 173 Interest income (expense) 203 (800) (3,921) (760) -- (5,278) --------- --------- --------- --------- --------- --------- Income (loss) before income taxes (benefit) 8,876 8,311 14,975 43 (17,923) 14,282 Income taxes (benefit) 97 (330) 5,721 15 -- 5,503 --------- --------- --------- --------- --------- --------- NET INCOME (LOSS) $ 8,779 $ 8,641 $ 9,254 $ 28 $ (17,923) $ 8,779 ========= ========= ========= ========= ========= =========
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 NINE MONTHS ENDED SEPTEMBER 30, 2003 Net cash from operating activities $ 5,182 $ 560 $ 21,346 $ (1) $ 27,087 Net cash from investing activities (2,083) (766) (3,987) -- (6,836) Net cash from financing activities (3,099) 206 (45,349) -- (48,242) -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents -- -- (27,990) (1) (27,991) Cash and cash equivalents at beginning of period -- 1 43,158 2 43,161 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ 1 $ 15,168 $ 1 $ 15,170 ======== ======== ======== ======== ======== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 Net cash from operating activities $ 595 $ 2,258 $ 21,439 $ (2) $ 24,290 Net cash from investing activities (439) 13,744 (22,212) -- (8,907) Net cash from financing activities (156) (16,004) (399) -- (16,559) -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents -- (2) (1,172) (2) (1,176) Cash and cash equivalents at beginning of period -- 4 30,465 4 30,473 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ 2 $ 29,293 $ 2 $ 29,297 ======== ======== ======== ======== ========
21 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED (DOLLARS IN THOUSANDS) N. SUBSEQUENT EVENT As previously reported, the Company has been informed by its largest customer, Home Depot, that it will no longer purchase aluminum and fiberglass stepladders from the Company. Home Depot has opted to purchase these products directly from China. Stepladder sales to Home Depot in year 2002 and the first nine months of 2003 represented 16% and 12%, respectively, of the Company's total net sales. The Company is also participating in an extension ladder supplier line review with Home Depot that has not yet been completed. This line review process has several potential outcomes, which include losing or gaining additional business. Management is unable to make any forward-looking statements or estimates as to potential outcomes of the line review at this time. 22 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. RECENT DEVELOPMENTS Update of Customer Status. As previously reported, the Company has been informed by its largest customer, Home Depot, that it will no longer purchase aluminum and fiberglass stepladders from the Company effective during the fourth quarter of 2003. Home Depot has opted to purchase these products directly from China. Stepladder sales to Home Depot in the year 2002 and the first nine months of 2003 represented 16% and 12%, respectively, of the Company's total net sales. The Company is also included in an extension ladder line review with Home Depot that began in late October. This line review process has several potential outcomes, which include losing or gaining additional business. The Company has not yet been informed by Home Depot about the outcome of the line review process. Management is currently evaluating other initiatives to increase sales, restructure operations and re-engineer its selling, general and administrative functions to offset the effects of the lost sales volume at Home Depot. Such initiatives may include accelerating implementation of Phase Two of the Company's strategic plans to optimize manufacturing and distribution operations to reduce costs. 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. Strategic Initiatives. As previously disclosed, the Company transferred all ladder fabrication and assembly operations in Greenville, Pennsylvania to other lower cost Company facilities beginning in the second quarter of 2003. The Company also began an initiative to focus the Greenville facility on the Extruded Products segment of the Company's business. During the third quarter of 2003, the Company began manufacturing ladder components and accessories at a leased facility located in Mexico and expects to further expand its manufacturing activities in Mexico in the future. On October 23, 2003, the Company announced that it will close its manufacturing facility located in Carrollton, Kentucky where it manufactures wood stepladders and attic ladders, due to the declining demand for 23 wood stepladders. Wood stepladder sales were approximately 1% of the Company's net sales for the nine months ended September 30, 2003. Production at the facility is expected to cease by mid-2004. The Company will continue to serve its wood stepladder customers by outsourcing production to a third party. Wood attic ladders will continue to be manufactured by the Company at one of its other manufacturing facilities. RESULTS OF OPERATIONS Regulation G, "Conditions for Use of Non-GAAP Financial Measures", and other provisions of the Securities Exchange Act of 1934, as amended, define and prescribe the conditions for use of certain financial information that is not in accordance with generally accepted accounting principles ("GAAP"). EBITDA and Adjusted EBITDA presented below are financial measures which are neither calculated nor presented in accordance with GAAP. EBITDA represents earnings before interest, income taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude certain costs or transactions considered by management not to be indicative of the on-going operating performance of the Company. EBITDA and Adjusted EBITDA are presented below because they are measures commonly used by some investors to analyze a company's performance and to determine a company's ability to service and/or incur debt. These non-GAAP financial measures should be considered in addition to, not as a substitute for, the Company's net income or cash flows as well as other measures of financial performance in accordance with accounting principles generally accepted in the United States.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------- -------------------- 2003 2002 2003 2002 ----- ----- ----- ----- (DOLLARS IN MILLIONS) NET INCOME $ 7.7 $ 8.7 $ 9.0 $17.3 Interest expense 6.0 5.3 18.6 16.3 Income tax expense 4.8 5.5 5.4 10.4 Depreciation and amortization expense 4.8 4.2 13.1 11.5 Accounts receivable securitization expense 0.1 0.2 0.5 0.5 ----- ----- ----- ----- EBITDA 23.4 23.9 46.6 56.0 Recapitalization expense 0.1 -- 10.2 -- Manufacturing and distribution optimization costs 1.1 -- 2.1 -- Startup and realignment costs included in: Cost of sales 1.2 -- 1.9 -- Selling and distribution expenses -- -- 0.1 -- Severance cost associated with separation of a former executive officer -- -- -- 1.6 ----- ----- ----- ----- ADJUSTED EBITDA $25.8 $23.9 $60.9 $57.6 ===== ===== ===== =====
QUARTER ENDED SEPTEMBER 30, 2003 AS COMPARED TO QUARTER ENDED SEPTEMBER 30, 2002 Net Sales. Net sales increased by $2.2 million, or 1.6%, to $136.8 million for the quarter ended September 30, 2003 from $134.6 million for the quarter ended September 30, 2002. Net sales of climbing products increased by $4.3 million, or 3.7%, to $119.8 million for the quarter ended September 30, 2003 from $115.5 million for the quarter ended September 30, 2002. The sales increase primarily reflects an improvement in product mix mostly due to higher unit sales of fiberglass ladders and aluminum extension ladders which more than offset the impact of lower unit sales of aluminum stepladders at the Company's largest customer. Net sales of extruded products of $17.0 million for the quarter ended September 30, 2003 declined by $2.1 million, or 10.9%, compared to the quarter ended September 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. 24 Gross Profit. Gross profit improved by $4.3 million, or 8.9%, to $52.2 million for the quarter ended September 30, 2003 from $47.9 million for the quarter ended September 30, 2002. Gross profit as a percentage of net sales in the quarter ended September 30, 2003 improved to 38.1% from 35.6% for the quarter ended September 30, 2002. The higher gross profit margin is due to the realignment of ladder fabrication and assembly operations in Greenville, Pennsylvania to lower cost facilities and improvements in the mix of products sold as well as on-going manufacturing productivity improvements and other manufacturing cost reduction initiatives. Cost of sales for the current quarter also includes costs of $1.1 million primarily 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 $8.5 million for the quarter ended September 30, 2003 compared to $7.0 million for the quarter ended September 30, 2002, an increase of $1.5 million. The increase is primarily due to increases in legal, professional, management advisory and consulting expenses (related, in part, to new product development), pension expense and depreciation related to capitalized computer hardware and software costs. 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 $2.5 million to $24.0 million for the quarter ended September 30, 2003 compared to $21.5 million for the quarter ended September 30, 2002 primarily reflecting higher shipping and handling expenses to support supply chain initiatives to continue reducing cycle times and improving order fill rates. Manufacturing and Distribution Optimization Costs. Beginning in 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. During the third quarter, the Company began manufacturing component parts and accessories at a leased facility in Mexico. The total costs incurred during the third quarter relating to the optimization of the Company's manufacturing and distribution operations were $2.3 million which includes $1.1 million recorded in Cost of sales and $0.1 million in Selling and distribution expenses. Operating Profit. Operating profit declined by $0.9 million to $18.5 million for the quarter ended September 30, 2003 from $19.4 million for the quarter ended September 30, 2002 primarily due to the recognition of $2.3 million of costs relating to the Company's plan to optimize its manufacturing and distribution operations. If the impact of optimization costs is removed, operating profit would have been $20.8 million in the quarter which is $1.4 million, or 7.2%, more than operating profit for the quarter ended September 30, 2002. Operating profit of the Climbing Products segment declined $0.3 million to $18.7 million for the quarter ended September 30, 2003. If the impact of optimization costs totaling $1.8 million is removed, operating profit would have been $20.5 million which is $1.5 million, or 8.4%, more than operating profit for the third quarter of the prior year. The increase primarily reflects the improvement in gross profit partially offset by higher selling and distribution expenses. Operating profit of the Extruded Products segment improved by $0.3 million to $1.0 million for the quarter ended September 30, 2003. If the impact of optimization costs totaling $0.5 million is removed, operating profit would have been $1.5 million which is $0.8 million more than operating profit for the third quarter of the prior year. The improvement in operating profit of $0.8 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 $0.9 million for the quarter ended September 30, 2003 compared to the quarter ended September 30, 2002 primarily due to higher legal and professional expenses and higher management advisory and consulting fees. Other Income (Expense), Net. Other income (expense) was net income of $0.1 million for the quarter ended September 30, 2003, a decrease in income of $0.1 million compared to the third quarter of 2002. 25 Interest Expense. Interest expense increased by $0.8 million to $6.1 million for the quarter ended September 30, 2003 from $5.3 million for the quarter ended September 30, 2002. The increase is primarily due to higher debt levels in the current quarter. 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 September 30, 2003 is approximately 38% compared to 39% for the third quarter of the prior year. The difference between the statutory and effective tax rates at both September 30, 2003 and 2002 was primarily due to state taxes (net of federal benefit). Net Income. Net income was $7.8 million for the quarter ended September 30, 2003 which is $1.0 million less than net income of $8.8 million for the quarter ended September 30, 2002 as a result of all the above factors. NINE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002 Net Sales. Net sales were down $9.6 million, or 2.5%, to $372.6 million for the nine months ended September 30, 2003 from $382.2 million for the nine months ended September 30, 2002. Net sales of climbing products decreased by $3.2 million, or 1.0%, to $320.5 million for the nine months ended September 30, 2003 from $323.7 million for the first nine months of the prior year. The sales decline primarily reflects lower unit sales volumes of aluminum and wood stepladders offset, for the most part, by higher sales of fiberglass ladders. Net sales of extruded products of $52.1 million for the nine months ended September 30, 2003 declined by $6.4 million, or 11.0%, compared to the nine months ended September 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 $8.0 million, or 6.3%, to $133.2 million for the nine months ended September 30, 2003 from $125.2 million for the nine months ended September 30, 2002. Gross profit as a percentage of net sales in the nine months ended September 30, 2003 improved to 35.7% from 32.8% for the first nine months of 2002. The higher gross profit margin is largely due to the realignment of ladder fabrication and assembly operations in Greenville, Pennsylvania to lower cost facilities as well as on-going manufacturing productivity improvements and other manufacturing cost reduction initiatives. An improvement in the profitability of the product mix also contributed to the higher gross profit margin. These improvements more than offset the effects of lower aluminum extrusion production volumes. Cost of sales for the current period includes costs of $1.9 million primarily 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 $21.8 million for the nine months ended September 30, 2003 compared to $21.4 million for the nine months ended September 30, 2002, an increase of $0.4 million or 2.0%. Expenses of the first nine months of the prior year include severance cost of $1.6 million associated with the separation of a former executive officer. Excluding this one-time severance cost, general and administrative expenses were $2.0 million higher in the current period than the prior year period due to higher pension expense, higher management advisory and consulting fees, higher legal and professional expenses (related, in part, to new product development) and higher depreciation related to capitalized computer hardware and software costs. 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. These increases in expense in the current period were partially offset by a lower provision for performance based incentive compensation. Selling and Distribution Expenses. Selling and distribution expenses increased by $6.8 million, or 11.4%, to $66.4 million for the nine months ended September 30, 2003 compared to $59.6 million for the nine months ended September 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. 26 Recapitalization Expense. Recapitalization expense for the nine months ended September 30, 2003 totals $10.2 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 $0.9 million. Manufacturing and Distribution Optimization Costs. Beginning in 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. During the third quarter, the Company began manufacturing component parts and accessories at a leased facility in Mexico. The total costs incurred during the first nine months of 2003 relating to the optimization of the Company's manufacturing and distribution operations were $4.1 million which includes $1.9 million recorded in Cost of sales and $0.1 million in Selling and distribution expenses. Operating Profit. Operating profit declined by $11.5 million to $32.7 million for the nine months ended September 30, 2003 from $44.2 million for the nine months ended September 30, 2002 primarily due to the recognition of $10.2 million of Recapitalization expense and $4.1 million of costs related to 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 year 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 $47.0 million in the current period which is $1.2 million, or 2.4%, more than the prior year period. Operating profit of the Climbing Products segment decreased $1.4 million to $43.7 million in the first nine months of 2003. If the impact of optimization costs totaling $3.6 million is removed, in addition to removal of the prior year impact of a one-time severance cost allocation of $1.3 million, operating profit of the Climbing Products segment would have increased by $0.9 million, or 1.9%, to $47.3 million in the current period compared to the first nine months of 2002. The increase primarily reflects the improvement in gross profit which more than offset the negative impact of higher selling and distribution expenses. Operating profit of the Extruded Products segment was $1.8 million for the nine months ended September 30, 2003 compared to $0.2 million for the nine months ended September 30, 2002. If the impact of optimization costs totaling $0.5 million is removed, operating profit would have been $2.3 million which is $2.1 million more than operating profit for the prior year period. The improvement in operating profit of $2.1 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 $11.7 million for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 primarily due to Recapitalization expense of $10.2 million recorded in the current period in addition to higher legal and professional expenses, and higher management advisory and consulting fees. Other Income (Expense), Net. Other income (expense) was net income of $0.4 million for the nine months ended September 30, 2003, an increase in income of $0.6 million compared to the first nine months 2002. The expense last year included a charge recorded in the first quarter of 2002 relating to the loss on disposal of an asset of $0.3 million. Interest Expense. Interest expense increased by $2.3 million to $18.6 million for the nine months ended September 30, 2003 from $16.3 million for the nine months ended September 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. 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. After removing the impact of accelerating the recognition of unamortized deferred financing fees, interest expense is $0.3 million greater in the current period primarily due to the higher average debt levels in the current period resulting from the Recapitalization. 27 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 nine months ended September 30, 2003 is approximately 37% compared to 38% 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 September 30, 2003 and 2002 was primarily due to state taxes (net of federal benefit). Net Income. Net income declined by $8.3 million to $9.0 million for the nine months ended September 30, 2003 from net income of $17.3 million for the nine months ended September 30, 2002 as a result of all the above factors. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity and capital resources were significantly impacted as a result of the Recapitalization that occurred on June 11, 2003. Total long-term debt and related current maturities increased by $58.1 million to $319.7 million as of September 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 millions of dollars):
SOURCES OF CASH: Term Loan proceeds $180.0 Issuance of convertible preferred stock 65.0 Additional borrowings under Receivables Purchase Agreement 20.0 Existing cash 20.9 Employee repayment of stock loans 1.2 ------ TOTAL $287.1 ====== USES OF CASH: Redemption of common stock $147.0 Repay existing term loans 115.4 Payments in connection with stock option cancellations 3.0 Costs associated with Recapitalization 21.7 ------ TOTAL $287.1 ======
The balance of long-term debt and current maturities which totals $319.7 million at September 30, 2003 includes $133.3 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 $6.4 million of other debt. The new Senior Credit Facility provides for the Term Loan and a $50 million Revolving Facility of which $27.1 million was available for borrowing at September 30, 2003. The available borrowings under the Revolving Facility are reduced by amounts issued under a letter of credit subfacility which totals $22.9 million at September 30, 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 September 30, 2003, the Company sold $88.2 million of accounts receivable in exchange for $25.0 million in cash and an undivided interest in the accounts receivable of $63.1 million. An additional $25.0 million of financing was available under the Receivables Purchase Agreement at September 30, 2003. In October 2003, the 28 Company reduced the utilization of the facility to $20.0 million which increased the availability under the facility to $30.0 million. 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 of its debt covenants as of September 30, 2003. The previously-described loss of the stepladder business at the Company's largest customer will adversely impact future sales and earnings. The outcome of the extension ladder line review process currently in progress at Home Depot could also impact future sales and earnings. The Company anticipates that it will continue to comply with its debt covenants for the next twelve months; 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 $27.1 million for the nine months ended September 30, 2003 compared to $24.3 million for the nine months ended September 30, 2002. The increase is primarily due to net proceeds of $5.0 million from the sale of accounts receivable under the Receivables Purchase Agreement during the current period and reductions in cash used for accounts payable, deferred income taxes and other assets and liabilities. However, more cash was used in the current period to increase year-over-year accounts receivable and inventories. In addition, $3.6 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 $6.8 million for the nine months ended September 30, 2003 compared to $8.9 million for the prior year period which primarily reflects lower capital expenditures during the current period. Net cash used for financing activities was $48.2 million for the nine months ended September 30, 2003 compared to net cash used of $16.6 million for the prior year period. As previously described, financing activities for the first nine 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 $24.7 million which includes payments of $3.0 million in connection with stock option cancellations. Debt repayments for the first nine 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. 29 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. 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 operations in foreign countries subject to material foreign currency exchange risk. International sales were not material to the Company's operations for the nine months ended September 30, 2003. 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 because its foreign currency exchange risk is minimal. 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. 30 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. 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 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. On November 10, 2003, the Company and the individual defendants entered into a settlement agreement with the plaintiffs in this action. In exchange for the dismissal with prejudice of the lawsuit and the full release of claims, the plaintiffs will receive 100 shares of Class B common stock to be issued by the Company and 100 shares of Class B common stock to be transferred to the plaintiffs by the individual defendants. The Company has received a waiver of certain provisions of the Shareholder Agreement which is necessary in order to issue the shares of stock to the plaintiffs. 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. (filed as Exhibit 3.4 to Issuer's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference). 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 (filed as Exhibit 3.5 to Issuer's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference). 3.6 Amended and Restated By-laws of Werner Holding Co. (PA), Inc. (filed as Exhibit 3.6 to Issuer's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference). 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. 31 (b) Reports on Form 8-K: The Company filed a Current Report on Form 8K dated October 17, 2003 reporting the current status of the Company's business relationship with its largest customer, Home Depot, under Item 12. Results of Operations and Financial Condition. 32 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: November 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: November 12, 2003 /s/ LARRY V. FRIEND ----------------------------------------- Larry V. Friend Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) 33