ITEM 1. BUSINESS.
OVERVIEW
Holding (PA), incorporated in 1945, and Holding (DE), incorporated in 1988, are the holding companies of Werner Co., a corporation engaged in the manufacture and sale of climbing products and aluminum extruded products. According to management's estimates, Werner is the nation's largest manufacturer and marketer of ladders and other climbing products. Werner's climbing products include aluminum, fiberglass and wood ladders, scaffolding, stages and planks. The Werner brand name has over a 50 year history and Werner is the most recognized name by both professional and consumer end-users of climbing products. In addition to climbing products, Werner manufactures and sells aluminum extruded products and more complex fabricated components to a number of industries, including the automotive, electronics, and architectural and construction industries.
DESCRIPTION OF THE BUSINESS
The Company operates in two business segments, Climbing Products and Extruded Products.
Climbing Products
Werner manufactures approximately 900 stock keeping units of fiberglass, aluminum, and wood climbing products and accessories primarily under the Werner brand and selectively under the Keller brand. The Company produces five principal categories of climbing equipment: (i) single and twin stepladders; (ii) extension, straight, and multipurpose ladders; (iii) attic ladders; (iv) stages, planks, work platforms, and scaffolds; and (v) assorted ladder accessories. The majority of the Company's climbing products sales are of either aluminum or fiberglass ladders. Through its development of proprietary aluminum extrusion and fiberglass pultrusion technology, and its broad sales and distribution system, the Company is a leader in the climbing products industry.
The Company's sales and marketing network is directed by an experienced in-house sales team of national and regional sales managers. The Company's climbing products are sold directly and through approximately 50 independent, commissioned manufacturer's representative organizations, which sell to three major distribution channels: (i) home improvement and other retail, (ii) hardware and (iii) professional. The Company's sales organization is further supported by field merchandisers who assist customers with product merchandising, point-of-purchase signage and sales techniques.
Extruded Products
The Company is also a manufacturer of lineal extruded products and highly-engineered fabricated parts. The Company targets extruded products customers who require special metallurgy, tight tolerances, unusual shapes, painting, finishing and fabrication requirements. Werner has implemented sophisticated quality systems, and has been awarded ISO-9002 and QS-9000 certifications by Underwriters Laboratories.
Werner sells aluminum extrusions to customers in the automotive, electronics, architectural and construction industries who use them in a broad range of products including garage door openers, bicycle frames, pneumatic cylinders, material handling systems, electrical connectors, curtain walls and office partitions.
The Company's extruded products sales organization is supplemented by approximately 10 independent manufacturer's representative organizations. The Company operates on a "make-to-order" basis with most extruded products customers.
SEGMENTS
See Note M entitled "Segment Information" in the Notes to Consolidated Financial Statements which is incorporated herein by reference.
RAW MATERIALS AND SUPPLIERS
The Company is a major consumer of aluminum and has implemented various hedging strategies to mitigate the impact of raw material price fluctuations. The Company has contracts to provide most of its estimated aluminum requirements with three principal suppliers. These contracts include stipulated prices with provisions for price adjustments based on market prices. One of these contracts will be renegotiable in 2002; one will be renegotiable in 2003; and one will be renegotiable in 2004. The Company has several alternative sources for its aluminum requirements and does not believe that any one of these contracts is material to the Company's operations.
To hedge the risk associated with price fluctuations for a certain percentage of its forecasted aluminum raw material requirements, the Company utilizes futures and option contracts. The Company's practice is not to hold derivative commodity instruments, including aluminum futures and option contracts, for trading purposes. These futures and option contracts are placed with established metal brokers and can range up to two years in duration. The Company has several alternative brokers and does not believe that any one of these contracts is material to the operations of the Company.
The Company also has contracts to purchase the basic materials required for fiberglass pultrusion with its principal suppliers. These contracts are typically one to three years in length. The Company has several alternative sources for these basic materials and does not believe that any one of these contracts is material to the operations of the Company.
PATENTS, TRADEMARKS AND LICENSES
No business segment is dependent, to any significant degree, on patents, licenses, franchises or concessions and the loss of these patents, licenses, franchises or concessions would not have a material adverse effect on any business segment. The Company owns numerous patents worldwide, none of which are material to the Company's operations as a whole. These patents expire from time to time over the next 20 years. The Company holds licenses, franchises and concessions, none of which individually or in the aggregate is material to the Company's operations as a whole. These licenses, franchises and concessions vary in duration from one to 15 years.
The Company has numerous trademarks that are utilized in its businesses worldwide. The Werner logo trademark is material to both of the Company's business segments. This well-known trademark enjoys a reputation for quality and value and, in the climbing products industry, is among the world's most trusted brand names. While the Company believes its other trademarks are important to its business operations, the loss of any of these other trademarks would not have a material adverse effect on the Company's operations as a whole.
SENSITIVITY TO ECONOMIC CYCLES AND WEATHER CONDITIONS
A significant percentage of the Company's sales of climbing products is attributable to new residential and nonresidential construction in the United States, which are affected by such cyclical factors as interest rates, inflation, consumer spending habits and employment. Similarly, a significant percentage of the Company's sales of extruded products is attributable to the new and used automobile and automotive parts markets, which are also affected by such cyclical factors. Sales of climbing equipment are also sensitive to prevailing weather conditions. Unusually severe weather can reduce or defer sales of climbing products by delaying home construction and elective home maintenance and discouraging do-it-yourself projects, which account for a growing portion of the Company's sales.
BACKLOG
Due to the Company's ability to quickly meet production orders and its production forecasting systems, the Company has no significant backlog in climbing products. Most extruded products are produced on a make-to-order basis.
COMPETITION
Management estimates that, while it is the largest U.S. producer of climbing products, there were approximately 12 principal competitors in 2001. The Company competes in its climbing products segment on the basis of its reputation for product quality, its well-known brands, its emphasis on customer service, the breadth of its product lines and its commitment to product innovation.
In its extruded products business, the Company competes with integrated primary aluminum producers, large independent producers and numerous small independent producers located throughout the United States. The Company competes in its extruded products segment on the basis of its specialized extrusion capabilities, customer service and price.
Some of the Company's competitors in the climbing products and the extruded products markets have greater financial resources and are less leveraged than the Company. Some of the Company's extruded products competitors are larger than the Company.
EMPLOYEES
The Company had approximately 3,000 salaried and hourly employees as of December 31, 2001. Of the 2,300 hourly employees, approximately 1,700 are covered by seven collective bargaining agreements which expire in 2002 through 2005. The Company plans to renegotiate and renew union contracts as they expire. The Company believes that its labor relations are satisfactory at all of its facilities.
DEPENDENCE ON KEY CUSTOMERS
The Company's 10 largest customers accounted for approximately 66% of the Company's 2001 total net sales. The Company's two largest climbing products customers, The Home Depot and Lowe's, accounted for approximately 32% and 16%, respectively, of the Company's 2001 total net sales. The Company does not have contractual agreements for the supply of products with most of its climbing products customers. The loss of certain key customers or a significant decrease in the volume of products supplied to any of such customers could have a material adverse effect on the Company. No extruded products customer accounted for more than 10% of the Company's 2001 total net sales.
ENVIRONMENTAL REGULATION
The Company's operations are subject to a wide variety of federal, state and local laws and regulations governing, among other things, emissions to air, discharge to waters, the generation, handling, storage, transportation, treatment and disposal of hazardous substances and other materials, and employee health and safety matters. Also, as an owner and/or operator of real property or a generator of hazardous substances, the Company may be subject to environmental cleanup liability, regardless of fault, pursuant to the Comprehensive Environmental Response Compensation and Liability Act or analogous state laws. The Company believes that its operations and facilities have been and are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations. However, the operation of manufacturing plants entails risks of financial exposure for environmental noncompliance and cleanup liabilities. Capital and operating expenditures for environmental compliance in 2001 were not material. There can be no assurance that the Company will not incur costs in the future for cleanup and other remedial activities that will have a material adverse effect on the Company. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future.
PREVIOUS TRANSACTIONS
The Recapitalization. On October 8, 1997, Holding (PA) entered into a recapitalization agreement, which was amended and restated on October 27, 1997 (the "Recapitalization Agreement") with certain affiliates of INVESTCORP S.A. ("Investcorp") and certain other international investors organized by Investcorp (such affiliates and investors are collectively referred to as the "Investors"). Pursuant to the Recapitalization Agreement on November 24, 1997 (the "Recapitalization Closing Date"), Holding (PA) amended and restated its Articles of Incorporation pursuant to which all of Holding (PA)'s issued and outstanding capital stock was reclassified. On the Recapitalization Closing Date, Holding (PA) then redeemed certain shares of the reclassified stock (representing approximately 85% of the then outstanding shares of Holding (PA)) for cash totaling in the aggregate approximately $330.7 million and the right to receive upon certain conditions, an additional, one-time, lump sum payment (the "Market Participation Right"). In addition, on the Recapitalization Closing Date, Holding (PA) sold to the Investors shares of the newly created Class C, D and E Common Stock of Holding (PA) for approximately $122.7 million (the "Cash Equity Investment"). The foregoing transactions are collectively referred to herein as the "Recapitalization". As a result of the Recapitalization, the pre-Recapitalization shareholders own approximately 33% of the outstanding voting equity of Holding (PA) and the Investors own approximately 67% of the outstanding voting equity of Holding (PA). Financing for the Recapitalization, together with the repayment of certain existing indebtedness of the Company was funded by (i) the Cash Equity Investment, (ii) the offering of $135.0 million principal of 10% Senior Subordinated Notes due 2007 of Holding (DE) (the "Notes") and (iii) $186.5 million of borrowings under a $320.0 million secured senior credit facility with a syndicate of banks and financial institutions which included two term loans, a revolving credit loan and a receivables line of credit (collectively, the "Senior Credit Facility"). In May 1998, the Company refinanced the outstanding amounts borrowed under the receivables line of credit with proceeds from a sale of its accounts receivable under a five-year Receivables Purchase Agreement which provides a maximum availability of $50 million. Upon such refinancing, the receivables line of credit was terminated.
The MIICA Insurance Transfer. Prior to March 31, 1998, the Company operated Manufacturers Indemnity and Insurance Company of America, a Colorado corporation ("MIICA"), as a captive insurance company to provide product liability, workers' compensation and environmental insurance to Holding (PA) and its subsidiaries. On March 31, 1998, the Company transferred MIICA's outstanding product and workers' compensation liabilities for losses incurred on or prior to March 31, 1998 to a commercial insurance provider in exchange for the payment of approximately $42.4 million (collectively, the "MIICA Insurance Transfer"). The Company paid this amount from the proceeds of the liquidation of a substantial portion of MIICA's insurance fund investments. Under the terms of the agreements governing the MIICA Insurance Transfer, the commercial insurance provider assumed all of MIICA's product and workers' compensation liabilities for losses incurred prior to March 31, 1998 up to an aggregate limit of $75 million. Holding (PA) has agreed to indemnify the commercial insurance company for losses in excess of this limit. In conjunction with the MIICA Insurance Transfer, the Company obtained product liability and workers' compensation insurance coverage for such losses which occur on or after April 1, 1998 from an external commercial insurance company. The Company believes that this insurance coverage is adequate for its current and future anticipated business needs. As a result of the MIICA Insurance Transfer, on July 8, 1998 the Company discontinued the operations of and dissolved MIICA.
Business Acquisition. In October 1999, Werner acquired certain assets of Keller Ladders, Inc. ("Keller") for a purchase price of approximately $12.2 million. The purchased assets related to three climbing products manufacturing facilities located in Merced, California, Swainsboro, Georgia, and Goshen, Indiana; the Keller, Columbia and Blue Ribbon brand names; and certain equipment, inventory, intellectual property and other assets used in Keller's climbing products business. No product or other significant liabilities were assumed in connection with this acquisition. The Goshen, Indiana, and Swainsboro, Georgia, facilities were subsequently closed to improve efficiency and reduce overall manufacturing and distribution costs.
ITEM 2.
ITEM 2. PROPERTIES.
The Company believes its manufacturing, warehouse and office facilities are suitable, adequate and have sufficient manufacturing capacity for its current requirements. The Company also believes that its facilities are being utilized consistently with the Company's plans and do not have substantial excess capacity. Werner's corporate headquarters offices are located at 93 Werner Rd., Greenville, Pennsylvania 16125. The Company's principal facilities consist of the following:
(1) Collateral for Variable Rate Industrial Building Revenue Bonds due 2015 issued by the County of Carroll, Kentucky. (2) Building and improvements owned by Werner, real property leased under 15 year ground lease with four 5 year renewals.
The Company's facilities at Greenville, Pennsylvania, Franklin Park, Illinois, Anniston, Alabama, and Merced, California, serve both the climbing products and extruded products segments of its business. All other facilities primarily serve the climbing products segment of the Company's business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved from time to time in various legal proceedings and claims incident to the normal conduct of its business. Although it is impossible to predict the outcome of any pending legal proceeding, the Company believes that such legal proceedings and claims, individually and in the aggregate, are either without merit, covered by insurance or adequately reserved for, and will not have a material adverse effect on its results of operations, financial position or cash flows.
In March 1998, an action was filed in the United States District Court for the Western District of Pennsylvania entitled Elizabeth Werner, et al v. Eric J. Werner, et al (Civil Action No. 98-503). The action purports, in part, to be brought derivatively on behalf of Holding (PA) and, in part, to be brought on behalf of plaintiffs individually against the Company and certain current and former officers and directors of the Company. The aspect of the case purportedly brought on behalf of Holding (PA) alleges breaches of fiduciary duty by various members of the Company's management arising out of, among other things, the issuance of restricted stock to management of the Company in 1992 and 1993. Holding (PA)'s Board of Directors referred the matter to a special committee of disinterested directors to investigate the merits of the claim and to take appropriate actions on behalf of Holding (PA). After a detailed investigation, the special committee recommended that the derivative claims not be pursued by or on behalf of Holding (PA). Accordingly, all the defendants made motions to dismiss the derivative claims. Pursuant to an amendment to the complaint filed by plaintiffs on March 29, 1999, the only remaining corporate defendant in this action is Holding (PA). Pursuant to the same amendment, the only remaining derivative claim asserted by the plaintiffs is a claim for excessive compensation, not relating to the restricted stock
issuances. The aspect of the case purportedly brought on behalf of plaintiffs individually against the Company appears to arise out of the 1992 and 1993 restricted stock issuances as well as certain alleged misrepresentations by representatives of the Company. The plaintiffs seek monetary damages in an unspecified amount. In May 1999, the magistrate judge issued a report and recommendation ruling that all of the Plaintiffs' claims be dismissed. The District Court issued a Memorandum Order on August 4, 1999 granting the motion to dismiss all remaining claims against all defendants without prejudice and adopted the magistrate judge's report as the opinion of the District Court. The plaintiffs filed an appeal on September 2, 1999. On September 27, 2001, the Court of Appeals for the Third Circuit affirmed the dismissal of all claims except for a claim relating to the Company's redemption of stock from the Elizabeth Werner trust and the Anne Werner estate. The Court of Appeals has remanded the claim relating to the stock redemption to the District Court with directions to allow the plaintiffs to file a second amended complaint with respect to that claim only. On December 18, 2001, the Estate and the Trust filed an amended complaint. Count I of the complaint alleges that Holding (PA) made material misrepresentations in connection with the redemption of shares of stock held by the Trust and the Estate. On February 8, 2002, Holding (PA) and the management defendants filed motions to dismiss the Amended Complaint. Those motions are currently pending. Management believes that the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's results of operations, financial position or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the common stock of either Holding (PA) or Holding (DE). As of December 31, 2001, all of the issued and outstanding shares of Holding (DE)'s common stock were held by Holding (PA). The number of shareholders of record of each class of common stock of Holding (PA) as of December 31, 2001 is as follows:
Class A Common Stock: 26 holders Class B Common Stock: 104 holders Class C Common Stock: 29 holders Class D Common Stock: 11 holders Class E Common Stock: 12 holders
No dividends have been paid to shareholders of Holding (PA) in the last two years and no dividends are expected to be declared in the near future. Holding (DE) declares and pays from time to time, certain cash dividends to its sole shareholder, Holding (PA), in order to allow Holding (PA) to pay certain obligations such as taxes and ordinary course operating expenses not exceeding $2,000,000 in any fiscal year. The Senior Credit Facility and the Indenture governing the Notes limit the Company's ability to pay dividends on its capital stock.
Holding (DE) has not issued or sold any equity securities within the past three years that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). Holding (PA) has not issued or sold any equity securities within the past three years that were not registered under the Securities Act, except as follows:
(a) On various dates from the Recapitalization Closing Date through December 31, 2001, pursuant to Holding (PA)'s Stock Option Plan, Holding (PA) has granted to key employees of Werner non-qualified incentive stock options, exercisable at prices ranging from $2,421.29 to $3,100.00 per share, to purchase up to an aggregate of 8,353 shares of Class C Common Stock. See Note G entitled "Stock Incentive Plans" in the Notes to Consolidated Financial Statements in this report.
(b) On various dates from January 1, 1999 to December 31, 2001, certain members of Werner's management purchased shares of Holding (PA)'s Class C Common Stock at purchase prices ranging from $2,421.29 to $3,100.00 per share, or an aggregate of approximately $5,098,000 pursuant to Management Stock Purchase Agreements. Certain of these individuals received secured loans from the Company pursuant to its Stock Loan Plan to finance a portion of the purchase price paid for the shares of Class C Common Stock in an aggregate amount of approximately $2,549,000. The balance of such loans, including interest thereon, is $2,383,000 at December 31, 2001. See Note G entitled "Stock Incentive Plans" in the Notes to Consolidated Financial Statements in this report.
The transactions set forth in paragraph (a) above were undertaken in reliance upon the exemption from the registration requirements of the Securities Act afforded by Rule 701 promulgated thereunder, as sales by an issuer to employees, directors or officers pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. The transactions set forth in paragraph (b) above were undertaken in reliance upon the exemption from the registration requirements of the Securities Act afforded by Section 4(2) thereof and/or Regulation D promulgated thereunder, as sales not involving a public offering. The Company believes that exemptions other than those specified above may exist with respect to the transactions set forth above.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data is that of Holding (PA). Holding (PA) is a guarantor of the Notes and has no substantial operations or assets other than its investment in Holding (DE). As a result, the consolidated financial condition and results of operations of Holding (PA) are substantially the same as those of Holding (DE). This table contains selected financial data and is qualified by the more detailed Consolidated Financial Statements and Notes thereto of Holding (PA). The selected financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
See Notes to Selected Consolidated Historical Financial Data.
NOTES TO SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA (DOLLARS IN MILLIONS)
(a) General and administrative expenses in 2001, 2000, 1999 and 1998 include $1.0, $1.0, $1.0 and $6.6, respectively, of amortization of certain nonrecurring expenses associated with the Recapitalization.
(b) Represents Recapitalization expense of $22.7 consisting of investment banker fees, transaction fees, legal and accounting fees, transaction bonuses paid to certain Company employees and other miscellaneous costs incurred in connection with the Recapitalization.
(c) Reflects the nonrecurring non-cash compensation charge (and a corresponding credit to shareholders' equity) of $78.5 associated with (a) the accelerated vesting, as a result of the Recapitalization, of outstanding restricted Pre-Recapitalization Class B Stock previously granted to certain key management employees; (b) the accelerated vesting, as a result of the Recapitalization, of outstanding restricted Pre-Recapitalization Class B Stock previously granted to a former key management employee upon his separation from the Company; and (c) changes in the terms of the plan under which such stock was granted.
(d) 1998 includes three months of MIICA investment losses (January 1, 1998 through March 31, 1998, the date of the MIICA Insurance Transfer). Net investment gains and (losses) related to the liquidation of investments previously associated with MIICA subsequent to March 31, 1998 are included in "Other income (expense) net."
(e) Reflects a full year of interest expense in years 1998 and thereafter on the debt incurred to finance the Recapitalization.
(f) Decreases in 1998 are primarily due to the MIICA Insurance Transfer which occurred on March 31, 1998.
(g) The shareholders' deficit at December 31, 1997 was the result of the Recapitalization and the recording of related expenses, net of income tax benefits. In connection with the Recapitalization, the Investors made an equity investment of approximately $122.7, representing approximately 67% of the outstanding capital stock and voting power of the Company.
(h) Depreciation and amortization is comprised of the following components in 2001, 2000, 1999 and 1998: depreciation of property, plant and equipment, $10.4, $9.1, $8.8 and $8.5, respectively; amortization of certain nonrecurring expenses associated with the Recapitalization, $1.0, $1.0, $1.0 and $6.6, respectively; and other amortization, $3.2, $2.7, $3.5 and $2.4, respectively. Depreciation and amortization excludes amortization of deferred financing fees and original issue discount.
(i) EBITDA represents earnings before interest, income taxes, depreciation and amortization. EBITDA is presented because it is commonly used by certain investors to analyze and determine a company's ability to service and/or incur debt. However, EBITDA should not be considered in isolation or as a substitute for net income, cash flows or other income or cash flows data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. EBITDA for 2001, 2000, 1999 and 1998 excludes $1.3, $1.9, $1.5 and $1.5 of accounts receivable securitization expense. EBITDA for 2001 includes: (a) costs for severance and related benefits of $0.9 in connection with a 10% reduction of the Company's salaried employees, (b) net investment income related to investments formerly held by MIICA of $0.7 and, (c) other nonrecurring income of $0.2. EBITDA for 2000 includes: (a) benefit plan curtailment and settlement gains of $6.1, (b) costs of $2.2 related to consulting and transition associated with former executive officers and other employees, (c) a credit loss related to a group credit arrangement of $1.4, (d) $1.2 of impairment losses related to investments formerly held by MIICA, (e) a plant shutdown provision of $1.1 related to the closing of two facilities associated with the Keller acquisition and, (f) other nonrecurring income totaling $1.2. EBITDA for 1999 includes: (a) nonrecurring recruiting, relocation and other costs of $2.2 due to the transition in chief executive officers of the Company, (b) costs of $2.1 related to the Keller business described in Note P to the Consolidated Financial Statements and, (c) other nonrecurring expenses of $1.2 primarily related to a former employee and the discontinued operations of a former subsidiary. EBITDA for 1998 includes nonrecurring expenses of $0.5 to shutdown an extrusion paint and thermal production line. EBITDA for 1997 includes: (a) the nonrecurring, non-cash compensation charge of $78.5; and (b) recapitalization expense of $22.7 and other nonrecurring adjustments.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected Consolidated Historical Financial Data," and the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Annual Report on Form 10-K. In the text below, financial statement amounts have been rounded and the percentage changes are based on the financial statements.
GENERAL
Werner is a manufacturer and marketer of ladders and other climbing products. Werner also manufactures and sells aluminum extruded products and more complex fabricated components.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Consolidated Financial Statements and Notes to Consolidated Financial Statements contain information that is pertinent to management's discussion and analysis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgement based on various assumptions and other factors such as historical experience, current and expected economic conditions, and in some cases, actuarial techniques. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above. The Company believes that the following accounting policies are critical due to the degree of estimation required.
The Company provides credit to its customers in the normal course of business, performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The allowance for doubtful accounts related to trade receivables is determined based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, an evaluation of specific accounts is conducted when information is available indicating a customer may not be able to meet its financial obligations. Judgements are made in these specific cases based on available facts and circumstances, and a specific reserve for that customer may be recorded to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. Second, a general reserve is established for all customers based on historical collection and write-off experience. The collectibility of trade receivables could be significantly reduced if default rates are greater than expected or if an unexpected material adverse change occurs in a major customer's ability to meet its financial obligations.
The Company must generate sufficient taxable income in future periods to realize the total value of its deferred tax assets. A valuation allowance that reduces deferred tax assets to the amount expected to be realized is determined based on projections of taxable income. If the level of projected taxable income used to determine the valuation allowance is not achieved, the carrying value of the deferred tax assets will not be realized.
The Company maintains third party insurance coverage, subject to certain deductible provisions, for product liability and workers' compensation claims which occur on or after March 31, 1998 and maintains a reserve for the insurance deductibles related to such claims. The reserve for product liability and workers' compensation claims is determined on an actuarial basis. The reserve includes an amount determined from loss reports for individual cases and an amount, based on past experience, for losses incurred but not reported. The determination of the reserve is primarily predicated on the assumption that selected claims reporting and payment patterns, and frequency and severity trends, will continue to apply. The methods and assumptions used to estimate the resulting reserve are continually reviewed, and any adjustments are reflected in earnings currently. Actual claims experience will affect the amount of expense ultimately recognized.
Pension assets and liabilities are determined on an actuarial basis and are affected by the market value of plan assets, estimates of the expected return on plan assets and the discount rate used to determine the present value of pension liabilities. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets, the expected return on plan assets and changes in the selected discount rate will affect the amount of pension expense ultimately recognized.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Sales. Net sales decreased $9.5 million, or 1.7%, to $535.7 million for 2001 from $545.2 million for 2000 which primarily reflects the impact of lower sales of extruded products partially offset by increased sales of climbing products.
Net sales of climbing products increased $13.7 million, or 3.1%, to $456.5 million for 2001 from $442.8 million for 2000. The increase is primarily due to improving the product mix of both the Werner and Keller brand product lines, in part due to amending the programs of selected accounts that did not meet the Company's profitability requirements, and redesigning the Keller brand product line.
Net sales of extruded products of $79.2 million for 2001 declined by $23.3 million, or 22.7%, compared to 2000 reflecting the impact of the slowing economy on the markets served by this segment of the Company's business and the allocation of more aluminum extrusion capacity to support the Climbing Products segment.
Gross Profit. Gross profit decreased by $4.2 million, or 2.6%, to $156.5 million for 2001 from $160.7 million for 2000 primarily reflecting the impact of lower sales of extruded products. Gross profit as a percentage of net sales for 2001 was 29.2% compared to 29.5% for 2000. The favorable impact on gross profit of the improving product mix for climbing products in 2001 was more than offset by the lower volume and less profitable mix of extruded product sales, additional costs at the Company's west coast manufacturing facility as capacity was added and volume was increased, and consulting expenses associated with implementing manufacturing productivity improvement initiatives.
General and Administrative Expenses. General and administrative expenses were $24.1 million for 2001 compared to $29.5 million for 2000, a reduction of $5.4 million or 18.4%. Factors contributing to the reduction include the absence of consulting, transition and employment termination costs recorded in 2000 associated with certain former executive officers and other employees, lower current year salaried payroll and related costs, and lower legal and professional expenses. These cost reductions were partially offset by increased amortization related to capitalized software costs and the severance and related expenses associated with the reduction in salaried employees. During the quarter ended June 30, 2001, the Company implemented several cost reduction initiatives as a result of the slowdown in the U.S. economy. These initiatives included reductions in discretionary spending and the reduction of approximately 6% in April, and an additional reduction of approximately 4% in June, of the Company's salaried employees. The pre-tax charge to provide severance and other benefits to the affected salaried employees of $0.9 million was recorded in the quarter ended June 30, 2001.
Selling and Distribution Expenses. Selling and distribution expenses declined by $2.5 million, or 2.9%, to $83.1 million for 2001 compared to $85.6 million for 2000 which primarily reflects the impact of lower sales volume and more productive warehousing and distribution in part related to operation of the west coast manufacturing facility.
Operating Profit. Operating profit declined by $1.1 million, or 2.2%, to $49.5 million for 2001 from $50.6 million for the year ended 2000. Operating profit of the Climbing Products segment increased $7.0 million, or 15.1%, to $53.1 million for 2001 from $46.1 million in 2000. The higher operating profit of the Climbing Products segment primarily reflects the impact of improvements in product mix in part relating to the redesigned Keller brand product line, the absence of a $1.1 million charge related to plant shutdown costs that was recorded
in 2000 and the higher manufacturing costs at those facilities, and lower selling, general and administrative expenses. Operating profit of the Climbing Products segment also improved due to utilizing internal aluminum extrusion capacity to produce more extrusions for ladders rather than purchase them from outside suppliers at a premium over the Company's manufacturing costs. The Extruded Products segment operated at break-even for 2001 compared to operating profit of $6.9 million for 2000. The decline is due to the lower unit sales volumes and a less profitable product mix partially offset by lower selling, general and administrative expenses. Corporate and Other expenses increased $1.2 million for 2001 compared to 2000 primarily due to consulting expenses associated with implementing manufacturing productivity improvement initiatives.
Other Income (Expense) Net. Other income (expense), net increased by $3.1 million from net expense of $2.2 million in 2000 to net income of $0.9 million in 2001. The increase is primarily due to increased net investment income associated with investments formerly held by MIICA of $0.7 million in 2001 compared to a net investment loss of $1.2 million in 2000, and the absence of a $1.4 million charge which was recorded in 2000 associated with non-performance of another participant in a group credit arrangement.
Interest Expense. Interest expense declined by $1.8 million to $26.1 million for 2001 from $27.9 million for 2000 reflecting the impact of lower interest rates in 2001 which more than offset the accelerated amortization of the deferred financing fees of $0.7 million associated with the reduction in borrowing capacity resulting from the amendment of the Senior Credit Facility effective July 24, 2001.
Income Taxes. Income taxes increased $0.5 million to $8.7 million for 2001 from $8.2 million for 2000 reflecting higher pre-tax income in 2001 partially offset by a decrease in the effective tax rate to 36% from 40% in 2000. The decrease in the effective tax rate is due to lower estimated income tax accruals.
Net Income. Net income increased by $3.3 million to $15.6 million for the year ended December 31, 2001 from net income of $12.3 million for the year ended December 31, 2000 as a result of all of the above factors.
YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Sales. Net sales increased $41.5 million, or 8.3%, to $545.2 million for 2000 from $503.7 million for 1999.
Net sales of climbing products increased $46.9 million, or 11.8%, to $442.8 million in 2000 from $395.9 million in 1999. Approximately $26.1 million of the increase in net sales of climbing products was attributable to Keller brand ladders sales arising from the acquisition of certain assets of Keller Ladders, Inc. in the fourth quarter of 1999 (the "Keller acquisition"). Excluding sales of the Keller brand, net sales of climbing products increased by $20.8 million, or 5.3%, which was primarily due to higher unit sales volumes of fiberglass and aluminum ladders.
Net sales of extruded products of $102.5 million for 2000 declined by $5.3 million, or 4.9%, compared to 1999 primarily due to lower unit sales volumes.
Gross Profit. Gross profit increased to $160.7 million for 2000 from $155.0 million for 1999 primarily due to the impact of higher sales volumes and lower product liability costs partially offset by the impact of higher raw material costs. Gross profit margin was 29.5% for 2000 and 30.8% for 1999. The decrease in the gross profit margin percentage resulted principally from the impact of sales of Keller brand ladders manufactured at the facilities included in the Keller acquisition and higher raw material costs.
General and Administrative Expenses. General and administrative expenses decreased $0.3 million, or 1.2%, to $29.5 million for 2000 from $29.8 million for 1999. The decrease was primarily due to reduced recruiting and relocation expenses and reduced consulting expenses incurred in 1999 related to certain cost reduction initiatives partially offset by increased consulting, transition and employment termination costs in 2000 associated with certain former executive officers and other employees.
Selling and Distribution Expenses. Selling and distribution expenses increased $8.6 million, or 11.2%, to $85.6 million for 2000 from $77.0 million for 1999 primarily due to increased distribution expenses resulting from higher freight rates on shipments to customers and on inventory transfers, the start-up of a new warehouse facility and higher sales volumes partially attributable to the Keller acquisition.
Benefit Plan Curtailment and Settlement Gains, Net. During 2000, the Company initiated changes to its retirement programs to provide appropriate levels of retirement benefits in a more cost-effective manner.
Effective December 31, 2000, future benefit accrual under all but one of the Company's defined benefit pension plans was eliminated and Company contributions under certain defined contribution plans were expanded. In addition, the Company's liability for certain postretirement life insurance benefits for certain prior and current key employees was settled or eliminated. The impact of these actions was a net gain of $6.1 million.
Plant Shutdown Costs. During the quarter ended September 30, 2000, the Company began implementing a plan to improve efficiency and reduce overall manufacturing and distribution costs by closing its Goshen, Indiana, and Swainsboro, Georgia, facilities. The production at these facilities, which were leased as part of the Keller acquisition in the fourth quarter of 1999, is being absorbed by the Company's other manufacturing facilities. Plant shutdown costs of $1.4 million to cover the estimated costs associated with closing these facilities were recorded in the quarter ended June 30, 2000 when the plan was adopted. In the fourth quarter of 2000, the plant shutdown reserve was reduced by $0.3 million reflecting the impact of the temporary re-opening of the Swainsboro facility to meet production schedules for certain products. The plan reflects the elimination of approximately 240 jobs primarily in manufacturing functions.
Operating Profit. Operating profit increased $2.5 million, or 5.2%, to $50.6 million for 2000 from $48.1 million in 1999. Operating profit of the Climbing Products segment increased $2.8 million, or 6.5%, to $46.1 million in 2000 from $43.3 million in 1999. Excluding the effects of benefit plan curtailment and settlement gains of $4.9 million and the charge of $1.1 million related to plant shutdown costs, operating profit of climbing products decreased by $1.0 million mostly because the effects of inflation on the Company's raw material and manufacturing costs were not entirely offset by higher unit sales volumes and selective price increases. Operating profit of the Extruded Products segment decreased $1.7 million, or 19.8%, to $6.8 million from $8.5 million in 1999. Excluding the effect of benefit plan curtailment and settlement gains of $1.2 million, operating profit of the Extruded Products segment decreased $2.9 million which was primarily attributable to the lower level of sales. Corporate and Other expenses decreased $1.3 million from $3.7 million in 1999 to $2.4 million in 2000 primarily due to decreased general and administrative expenses.
Other Income (Expense), Net. Other income (expense), net increased by $0.1 million from net expense of $2.1 million for 1999 to net expense of $2.2 million in 2000. During 2000, the Company incurred expense of $1.4 million due to non-performance by another participant in a group credit arrangement related to certain employee insurance coverage. Also in the year 2000, the Company recorded $1.2 million of non-cash expense to recognize the impairment of certain investments formerly held by MIICA. During 2000, the costs associated with the receivables purchase agreement increased by $0.5 million due to higher interest rates and greater utilization as compared to 1999. Expenses in 1999 included certain nonrecurring expenses with respect to a former employee and expenses associated with the discontinued operations of a former subsidiary.
Interest Expense. Interest expense increased $0.8 million to $27.9 million for 2000 from $27.1 million for 1999. The increase was primarily due to higher interest rates charged on Term Loans which more than offset the reduction in expense due to an increase of $0.6 million in interest capitalized during the year 2000.
Income Taxes. Income taxes increased $0.6 million to $8.2 million for 2000 from $7.6 million for 1999. This increase was primarily due to an increase in income before income taxes in 2000 as compared to 1999.
Net Income. Net income was $12.3 million for 2000 compared to net income of $11.3 million for 1999. The change was due to a combination of the above factors.
LIQUIDITY AND CAPITAL RESOURCES
Debt and Other Contractual Obligations
The following table provides a summary of the Company's contractual obligations by due date as of December 31, 2001.
(1) The payments due by period reflected for the Senior Credit Term Loan Facilities represent the contractually committed obligations for principal payments during the term of the facility. The Company has the option to repay term loans from time to time, in whole or in part, without premium or penalty. The Company has voluntarily elected to repay a minimum of $15 million of term loans in 2002. The minimum voluntary repayment, which is reflected as a current liability as of December 31, 2001, will represent approximately 11% of the balance of term loans outstanding at the date of repayment. Based on the provisions of the Senior Credit Facility, the repayment will result in a reduction of approximately 11% in all future obligations for principal payments under the term loans. Neither the minimum voluntary repayment nor the anticipated reduction in future principal payments has been reflected in the table above.
(2) The Company maintains a $50 million receivables purchase agreement with a financial institution and its affiliate (the "Receivables Purchase Agreement") which will expire in May 2003. As of December 31, 2001, the Company utilized $20 million of this facility.
(3) Available borrowings under the Company's Revolving Credit Facility are reduced by amounts issued under a letter of credit subfacility. The Company executes letters of credit in the normal course of business that ensure payments to third parties. The aggregate amount of letters of credit issued at December 31, 2001 was $16.4 million which results in reducing the amount available under the Revolving Credit Facility from $70.0 million to $53.6 million. Each letter of credit has an expiration date of one year or less. Management believes the likelihood of demand for payment under these instruments is minimal and expects no material cash outlays to occur in connection with these instruments.
At December 31, 2001, the Company had $277.4 million of consolidated indebtedness, including $132.6 million of indebtedness, net of unamortized original issue discount, pursuant to the $135 million principal of 10% Senior Subordinated Notes due 2007 (the "Notes"), and $138.5 million of Term Loans under the Senior Credit Facility. The Senior Credit Facility provides for Term Loans and a $70 million Revolving Facility of which $53.6 million was available for borrowing at December 31, 2001.
The Senior Credit Facility and the Notes contain various restrictive covenants including restrictions on additional indebtedness, mergers, asset dispositions, restricted payments, prepayment and amendments of subordinated indebtedness. These covenants also prohibit, among other things, the payment of dividends. The financial covenants of the Senior Credit Facility require the Company to meet specific interest coverage, maximum leverage, minimum EBITDA, and capital expenditure requirements. On July 24, 2001, the financial covenants of the Senior Credit Facility were amended effective as of June 30, 2001 in anticipation of the Company not complying with its increasing minimum EBITDA covenant due to changing business conditions.
The amendment reduced the minimum EBITDA requirement through June 30, 2004 and amended the financial covenants requiring the Company to meet specific minimum interest coverage and maximum leverage requirements to be more restrictive. The Company is in compliance with all its debt covenants, as amended, effective December 31, 2001. The Company anticipates that it will continue to comply with its debt covenants in 2002; however, continued compliance is primarily based on its future financial and operating performance, which to a certain extent is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control.
The Company maintains a Receivables Purchase Agreement with a financial institution and its affiliate to provide additional financing capacity with a maximum availability of $50 million depending upon the level of accounts receivable and certain other factors. Under the Receivables Purchase Agreement, which will expire in May 2003, the Company established a consolidated wholly-owned subsidiary, Werner Funding Corporation ("Funding"), which is a special purpose bankruptcy-remote entity that acquires, on a daily basis, a variable percentage interest of certain eligible trade receivables generated by the Company. The purchases by Funding are financed through the sale of an undivided percentage ownership interest in such receivables to the affiliate of the financial institution. The Receivables Purchase Agreement represents "off-balance sheet financing" since the ownership interest of the affiliate in Funding's accounts receivable results in assets being removed from the balance sheet rather than resulting in a liability to the affiliate of the financial institution. The Company has agreed to continue servicing the sold receivables for the financial institution at market rates, therefore no servicing asset or liability has been recorded. As of December 31, 2001, the Company sold $76.5 million of accounts receivable in exchange for $20.0 million in cash and an undivided interest in the accounts receivable of $56.4 million. An additional $20.1 million of financing was available under the Receivables Purchase Agreement at December 31, 2001.
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.
Cash Flows
Net cash flows from operating activities increased $9.5 million to $44.1 million for 2001 from $34.6 million for 2000. The increase is primarily due to an increase in net income and a reduction in cash used for inventories, accounts payable and deferred income taxes partially offset by increases in cash used for accounts receivable, payment of product liability and workers' compensation claims and other assets and liabilities. Also affecting the comparability of cash flows from operating activities in 2001 compared to the prior year is the absence of a non-cash benefit plan curtailment and settlement gains, net of $6.1 million recognized in 2000. Net cash flows from operating activities increased $7.0 million to $34.6 million for 2000 from $27.6 million for 1999. The increase is primarily attributable to a reduction in cash used for accounts receivable, deferred income taxes and inventories partially offset by increased cash used for accounts payable and accrued liabilities. Also affecting cash flows from operating activities in 2000 is a reduction in the non-cash provision for product liability and workers' compensation claims and non-cash benefit plan curtailment and settlement gains, net of $6.1 million recognized in 2000.
Cash flows used in investing activities decreased $10.7 million to $16.0 million in 2001 from $26.7 million in 2000 primarily due to lower capital expenditures and the sale or liquidation of investments formerly held by MIICA. Cash used in investing activities declined by $5.8 million to $26.7 million in 2000 from $32.5 million in 1999. Excluding the reduction due to the acquisition of certain assets of Keller Ladders, Inc. for $12.2 million in
1999, cash used for investing activities increased by $6.4 million mostly due to an increase in capital expenditures.
Cash flows used in financing activities were $3.2 million in 2001 compared to $3.3 million in 2000. Repayments of long-term debt increased in 2001. Unscheduled debt payments of $0.7 million were made in 2001 as required by the Company's Senior Credit Facility with the net proceeds received from the sale of an investment formerly held by MIICA. There were no cash overdrafts in the current year and repurchases of common stock were lower in both 2001 and 2000 when compared to the prior year.
Capital Expenditures
The Company's capital expenditures were $19.4 million, $26.7 million and $20.5 million, in 2001, 2000 and 1999, respectively. Approximately $5 million of the amount expended in each of such years has been for the renewal and replacement of existing facilities and equipment; thus in an economic downturn, the Company believes it will be able to adjust the amount spent on capital expenditures without compromising the base need of its operations. The Company expects to spend approximately $15 million in 2002 for various capital projects, including information systems, cost reduction and product development, and maintenance capital projects.
Seasonality, Working Capital and Cyclicality
Sales of certain products of the Company are subject to seasonal variation. Demand for the Company's ladder products is affected by residential housing starts and existing home sales, commercial construction activity, and overall home improvement expenditures. Due to seasonal factors associated with the construction industry, sales of products and working capital are typically higher during the second and third quarters than at other times of the year. The Company expects to use the Senior Credit Facility and/or the Receivables Purchase Agreement to meet any seasonal variations in its working capital requirements. The residential and commercial construction markets are sensitive to cyclical changes in the economy.
Raw Material Costs and Inflation
The Company purchases aluminum, resins, fiberglass and other raw materials from various suppliers. While all such materials are available from numerous independent suppliers, commodity raw materials are subject to price fluctuations. There have been historical periods of rapid and significant movements in the price of aluminum, both upward and downward. Historically, the Company has entered into futures and option contracts with respect to its purchases of aluminum to minimize or hedge commodity price fluctuations. See "Item 1. Business - Raw Materials and Suppliers" and "Item 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk Disclosures. The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates, foreign currency exchange rates and commodity prices. The Company does not use derivative financial instruments for speculative or trading purposes.
The Company is exposed to market risk from changes in interest rates on long-term debt obligations. The Company manages such risk through the use of a combination of fixed and variable rate debt. Currently, the Company does not use derivative financial instruments to manage its interest rate risk.
The following table provides information about the Company's debt obligations and financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates or applicable floating rate index.
(1) Average interest rate is equal to LIBOR plus 2.00% to 2.25%. (2) Average interest rate on Variable Rate Industrial Building Revenue Bonds during 2001 was approximately 3.7%.
The Company's operations in foreign countries are not significant. International sales were not material to the Company's operations for the year ended December 31, 2001. Accordingly, the Company is not subject to material foreign currency exchange rate risk. To date, the Company has not entered into any foreign currency forward exchange contracts or other derivative financial instruments relative to foreign currency exchange rates.
The Company is exposed to market risk from changes in the price of aluminum. The Company manages such risk through the use of aluminum futures and option contracts. These derivative instruments are financial hedges. The Company does not actually take delivery of aluminum that is the subject of the futures contracts.
In the case of futures contracts, the Company agrees to purchase aluminum in the future at a set price in connection with a customer firm order commitment. The futures contract is liquidated prior to settlement. The difference between the price of aluminum on the date the Company enters into the contract and the price on the settlement date represents the financial gain or loss on the contract. The gain or loss on the futures contract is recognized in earnings, together with the offsetting gain or loss due to the changes in the fair value of the firm commitment, in the period the customer order attributed to the firm commitment is shipped.
In the case of option contracts, the Company creates a collar by purchasing call options and selling put option contracts for aluminum with a net initial investment near zero to hedge its exposure to variable cash flows of forecasted sales. Therefore, price movement inside the collar is not protected by the derivatives. Whereas, price movement outside the collar or strike price provides either a financial gain or loss (depending upon price movement) if the option is exercised. The gain or loss on the option contract is recognized in earnings, together with the offsetting gain or loss due to the changes in the actual purchase price of aluminum outside the collar, in the period that the forecasted sale affects earnings.
At December 31, 2001, the Company had purchased futures contracts, maturing in 2002, for the delivery of 13.9 million pounds of aluminum at a weighted average settlement price of $.658 per pound. The unrecognized loss for the change in fair value of such futures contracts was $0.3 million at December 31, 2001. At December 31, 2001, the Company had purchased call option contracts and sold put option contracts, maturing in 2002, covering 61.8 million pounds of aluminum at strike prices ranging from $.622 to $.713 per pound. The Company had net option contract obligation liabilities of $1.8 million at December 31, 2001. At December 31, 2000, the Company had purchased futures contracts, maturing in 2001, for the delivery of 5.5 million pounds of aluminum at a weighted average settlement price of $.721 per pound. The unrecognized loss for the change in fair value of such futures contracts was $0.06 million at December 31, 2000. At December 31, 2000, the Company had purchased call option contracts and sold put option contracts, maturing in 2001, covering 55.9 million pounds of aluminum at strike prices ranging from $.646 to $.754 per pound. The Company had net option contract obligation liabilities of $0.2 million at December 31, 2000.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants 21 Consolidated Balance Sheets 22 Consolidated Statements of Income 24 Consolidated Statements of Changes in Shareholders' Equity (Deficit) 25 Consolidated Statements of Cash Flows 26 Notes to Consolidated Financial Statements 27
REPORTS OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Werner Holding Co. (PA), Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in shareholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Werner Holding Co. (PA), Inc. and subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note B to the consolidated financial statements, the Company changed its method of accounting for derivatives effective January 1, 2001.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, PA March 1, 2002
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
See notes to consolidated financial statements.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A. DESCRIPTION OF BUSINESS
Werner Holding Co. (PA), Inc. through its subsidiaries is a manufacturer of climbing equipment which includes aluminum, fiberglass and wood ladders, scaffolding, stages and planks, and aluminum extruded products. The Company operates in two business segments, Climbing Products and Extruded Products, which are located in the United States.
B. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements of Werner Holding Co. (PA), Inc. include its accounts and the accounts of its wholly-owned subsidiary, Werner Holding Co. (DE), Inc., and its wholly-owned subsidiaries (collectively the "Company"). Werner Holding Co. (PA), Inc. has no substantial operations or assets, other than its investment in Werner Holding Co. (DE), Inc. The consolidated financial position and results of operations of Werner Holding Co. (PA), Inc. are substantially the same as those of Werner Holding Co. (DE), Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition - Sales are recorded when product is shipped and when title and risk of loss transfer to the customer. Effective in the fourth quarter of 2000, the Company modified its revenue recognition policies to be consistent with the guidance provided by the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. The impact of the modification on the Company's results of operations was not material.
Shipping and Handling Fees and Expenses - Pursuant to the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") Issue 00-10, Accounting for Shipping and Handling Fees and Costs, all shipping and handling fees billed to customers are classified as revenues and all shipping and handling costs are removed from revenues when presenting the income statement. Shipping and handling costs represent costs associated with shipping products to customers and handling finished goods. Shipping and handling costs of $50,330, $51,559, and $44,012 are included in the caption entitled, "Selling and distribution expenses" in the consolidated statements of income for the years ended December 31, 2001, 2000 and 1999, respectively.
Accounts Receivable - The Company provides credit to its customers in the normal course of business. The Company's customers are not concentrated in any specific geographic region. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses which, when realized, have been within the range of management's expectations. Write-offs of uncollectible accounts receivable have totaled $616, $561 and $621 in 2001, 2000 and 1999, respectively.
Inventories - Inventories are stated at the lower of cost or market (net realizable value). Cost was determined by the last-in, first-out (LIFO) method for approximately 89% and 91% of the inventories at December 31, 2001 and 2000, respectively.
Derivative Commodity Instruments - Derivatives are held as part of a formal risk management policy and are held for purposes other than trading. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis by formally assessing the historical and probable future high correlation of changes in the fair value or expected future cash flows of the hedged item. The ineffective portions, which were immaterial for the year ended December 31, 2001, are included in the
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Company's results of operations in the period in which the ineffectiveness occurs. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, gains or losses on the derivative are included in the Company's results of operations. The amount of such gains or losses were immaterial for the year ended December 31, 2001. Prior to January 1, 2001, all gains and losses on qualifying hedge transactions were deferred and were reported as a component of the underlying transaction.
The Company's derivatives consist of aluminum futures and options contracts that are designated either as fair value or cash flow hedges. The Company utilizes aluminum commodity futures and option contracts to hedge the market risk of changing prices associated with customer firm order commitments and a certain percentage of its forecasted sales. Generally, these contracts cover exposures of one year or less. Futures contracts obligate the Company to make or receive a payment equal to the net change in value of the contract at its maturity. In the case of option contracts, the Company creates a price risk tolerance range (referred to as a "collar") by purchasing call option contracts and selling put option contracts with a minimal net initial investment. Price movement inside the collar is not protected by the derivatives, whereas, price movement outside the collar or strike price provides either a financial gain or loss (depending upon price movement) if the option is exercised. Such contracts are designated as hedges, correspond to the commitment or forecasted sales period, and are effective in hedging the Company's exposure to changes in aluminum prices during that cycle. At December 31, 2001 and 2000, the Company had futures contracts to purchase aluminum totaling $9,137 and $3,972, respectively. The unrecognized loss for the change in fair value of these contracts was $293 and $64 at December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, the Company had purchased call option contracts and sold put option contracts covering 61.8 and 55.9 million pounds of aluminum, respectively. The net option contract obligation liabilities were $1,804 and $225 at December 31, 2001 and 2000, respectively.
Changes in the fair value of derivatives are recorded in results of operations or in other comprehensive income, depending on whether a derivative is designated as a fair value or cash flow hedge. For cash flow hedges, the effective portion of the change in fair value is recorded in other comprehensive income and is reclassified to the results of operations in the period in which earnings are impacted by the hedged item or in the period that the transaction no longer qualifies as a cash flow hedge. No derivative initially designated as a cash flow hedge ceased to qualify as a cash flow hedge during the year ended December 31, 2001. As of December 31, 2001, all of the $1,137 net of tax loss recognized in other comprehensive income is expected to be recognized in the Company's results of operations over the next twelve months.
Property, Plant and Equipment - Property, plant and equipment are recorded at cost. Maintenance and repair costs are charged to expense as incurred. Expenditures that increase capacities or extend useful lives are capitalized. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. The estimated useful lives for buildings range from 40 to 45 years and for machinery and equipment range from 3 to 14 years. The net book value of capitalized lease assets, which primarily consist of machinery and equipment, was $1,041 and $1,526 at December 31, 2001 and 2000, respectively.
Interest is capitalized in connection with major capital projects. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. In 2001, 2000 and 1999, interest costs of $1,273, $1,152 and $555, respectively, were capitalized. Interest costs incurred in 2001, 2000 and 1999 totaled $27,421, $29,039 and $27,657, respectively.
Long-lived assets are periodically reviewed for impairment. Impairment is recognized when events or changes in circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time. Measurement of impairment may be based upon appraisals, market values of similar assets or discounted cash flows.
Internal Use Software - Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, requires the capitalization of certain costs applicable to internal use software, including external direct material and service costs, employee payroll and payroll related costs. Amortization of capitalized software costs was $1,042, $650 and $202 in 2001, 2000 and 1999, respectively. The unamortized balance of computer software costs capitalized was $15,597 and $12,081 at December 31, 2001 and 2000, respectively. Capitalized computer software costs, which are included in machinery and equipment in the accompanying balance sheet, are amortized over periods ranging from 3 to 7 years.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reserve for Product Liability and Workers' Compensation Claims - The Company maintains third party insurance coverage, subject to certain deductible provisions, for product liability and workers' compensation claims which occur on or after March 31, 1998 and maintains a reserve for the insurance deductibles related to such claims which totals $44,069 and $37,995 at December 31, 2001 and 2000, respectively. The reserve for product liability and workers' compensation claims includes an amount determined from loss reports for individual cases and an amount, based on past experience, for losses incurred but not reported. Such reserve is necessarily based on estimates and, while management believes that the amount is adequate, the ultimate liability may be in excess of or less than the amount provided. The methods for making such estimates and for establishing the resulting reserve are continually reviewed, and any adjustments are reflected in earnings currently. Prior to March 31, 1998, the Company operated a captive insurance company that maintained reserves for product liability and workers' compensation claims of the Company (see Note J).
Deferred Financing Fees - Amortization of deferred financing fees is computed using the effective interest method. Amortization of $716 of deferred financing fees was accelerated during 2001 (see Note D).
Advertising - The Company expenses all advertising as incurred. These expenses for the years ended December 31, 2001, 2000 and 1999 totaled $13,992, $12,730 and $12,858, respectively.
Stock-Based Compensation - The Company accounts for stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Statement of Cash Flows - Cash and cash equivalents include cash on hand, demand deposits and short-term highly liquid debt instruments purchased with an original maturity of three months or less.
Fair Values of Financial Instruments - The Company's disclosures for financial instruments are as follows:
Cash and cash equivalents - The carrying amounts reported in the balance sheet for cash and cash equivalents bear interest at prevailing market rates and therefore approximate fair value.
Long-term debt - The carrying amounts of the Company's borrowings under its credit agreements and the Variable Rate Demand Industrial Building Revenue Bonds, bear interest at prevailing market rates and therefore approximate their fair value at December 31, 2001 and 2000. The fair value (based upon prevailing market rates) of the outstanding borrowings of the Senior Subordinated Notes at December 31, 2001 and 2000 was $130,950 and $124,875, respectively.
Derivative instruments - Effective January 1, 2001, the fair value of the Company's derivative instruments is recorded in the balance sheet.
Reclassification - Certain prior year amounts have been reclassified to conform to the current year presentation in the consolidated financial statements.
Recently Issued Accounting Standards - Effective January 1, 2001, the Company adopted the Financial Accounting Standards Board's (the "FASB") Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement No. 137 and No. 138. The fair value of all outstanding derivatives is recorded on the balance sheet at December 31, 2001. The adoption of Statement No. 133 resulted in a net of tax transition loss of $118 recorded by the Company effective on January 1, 2001 as a cumulative-effect adjustment to accumulated other comprehensive income to recognize the fair value of all derivatives.
In September 2000, the FASB issued Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of Statement No. 125. Statement No. 140, which was effective for transactions occurring after March 31, 2001, did not have a significant impact on the Company's results of operations, financial position or cash flows.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that all business combinations be accounted for under the purchase method. Use of the pooling-of-interests method is no longer permitted. Statement No.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
141 requires that the purchase method be used for business combinations initiated after June 30, 2001. The adoption of Statement No. 141 did not impact the Company's results of operations, financial position or cash flows. Statement No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon the adoption of Statement No. 142 effective January 1, 2002. The adoption of Statement No. 142 will not impact the Company's results of operations, financial position or cash flows.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15, 2002. The Statement provides accounting requirements for retirement obligations associated with tangible long-lived assets. The obligations affected are those for which there is a legal obligation to settle as a result of existing or enacted law. The adoption of Statement No. 143 will not have a significant impact on the Company's results of operations, financial position or cash flows.
In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. The new rules on asset impairment supersede FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provide a single accounting model for long-lived assets to be disposed of. The adoption of Statement No. 144 will not have a significant impact on the Company's results of operations, financial position or cash flows.
C. INVENTORIES
Inventories are as follows:
DECEMBER 31 2001 2000 ---------------------- Finished goods $ 32,595 $ 37,198 Work-in-process 11,436 11,810 Raw materials and supplies 17,564 21,185 ----------------------------------------------------------------------------- Total inventories, which approximates replacement cost 61,595 70,193 Less excess of cost over LIFO stated values 8,679 9,574 ----------------------------------------------------------------------------- NET INVENTORIES $ 52,916 $ 60,619 =============================================================================
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
D. DEBT
Debt consists of the following:
(1) Includes $15,000 at December 31, 2001 related to planned voluntary repayments of Senior Credit Term Loans in 2002 as further described below.
The Company maintains a Senior Credit Facility and, pursuant to an indenture dated November 24, 1997, issued the Senior Subordinated Notes (the "Notes"). Each of the Company's subsidiaries (except for Werner Funding Corporation) has guaranteed the Senior Credit Facility and the Notes. Such guarantee of the Notes is subordinate to the guarantee of the Senior Credit Facility.
Senior Credit Facility:
The Senior Credit Facility was entered into on November 24, 1997 and originally consisted of $145,000 in term loan facilities; a $100,000 revolving credit facility; and a $75,000 receivables credit facility which was terminated in 1998. On July 24, 2001, the financial covenants of the Senior Credit Facility were amended effective as of June 30, 2001 in anticipation of the Company not complying with its increasing minimum EBITDA covenant due to changing business conditions. The amount available under the revolving credit facility was reduced from $100,000 to $70,000 and the financial covenants were amended to reduce the minimum EBITDA requirement and to make the maximum leverage and interest coverage covenants more restrictive. Pursuant to EITF Issue 98-14, Debtor's Accounting for Changes in Line-of-Credit or Revolving Debt Arrangements, additional interest expense of $716 was recorded in the quarter ended September 30, 2001 due to the accelerated amortization of the deferred financing fees associated with the reduction in the amount available under the revolving credit facility.
Term Loan Facilities. The Term Loan Facilities consist of two tranches of term loans in an original aggregate principal amount of $145,000. The Tranche B term loans were in an original aggregate principal amount of $90,000, and the Tranche C term loans were in an original aggregate principal amount of $55,000. The Tranche B and C term loans mature on November 30, 2004 and 2005, respectively. A provision of the Senior Credit Facility requires that net proceeds from certain asset sales be used to reduce debt when the aggregate of such net proceeds since inception of the facility exceeds $2,000. Pursuant to this provision, $683 was used to reduce term loans during the quarter ended June 30, 2001 as a result of the sale of an investment formerly held by Manufacturers Indemnity and Insurance Company of America ("MIICA"), the Company's captive insurance company which was dissolved in 1998. Effective June 30, 2001, installments of the Tranche B term loans are due in aggregate principal amounts of $896 per annum through 2002, $29,854 in 2003, and $55,230 in 2004. Installments of the Tranche C term loans are due in aggregate principal amounts of $547 per annum through 2004 and $50,901 in 2005. The Company has the option to repay the principal amount of term loans from time to time, in whole or in part, without premium or penalty. In connection with this option, the Company plans to repay a minimum of $15,000 of term loans in 2002.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revolving Credit Facility. The Revolving Credit Facility consists of a revolving credit facility in an aggregate principal amount of $70,000 under which no amounts were borrowed at December 31, 2001 or 2000. The Company is entitled to draw amounts under the Revolving Facility for general corporate purposes and working capital requirements. The Revolving Facility includes sub-limits for letters of credit and swing line loans available on same-day notice. The Revolving Facility matures on November 30, 2003. Available borrowings under this arrangement are reduced by amounts issued under a letter of credit subfacility which totaled $16,359 and $6,471 at December 31, 2001 and 2000, respectively.
Borrowings under the Senior Credit Facility bear interest at alternative floating rate structures at management's option (ranging from 3.88% to 5.82% and 4.13% to 6.07% at December 31, 2001 on Tranche B Term Loans and Tranche C Term Loans, respectively, and ranging from 8.45% to 8.80% and 8.70% to 9.05% at December 31, 2000 on Tranche B Term Loans and Tranche C Term Loans, respectively) and are collateralized by all of the capital stock of each of the Company's subsidiaries and substantially all of the inventory and property, plant and equipment of the Company and its subsidiaries, except for Werner Funding Corporation. The Senior Credit Facility requires an annual commitment fee of 0.3% on the average daily unused amount of the Revolving Credit Facility.
The Notes:
The principal amount of the Notes is $135,000 and they mature on November 15, 2007. Interest at 10% on the Notes is payable semi-annually in arrears on May 15 and November 15. The Notes are general unsecured obligations of the Company ranking subordinate in right of payment to all existing and future senior indebtedness of the Company. The Notes rank pari passu in right of payment with all other indebtedness of the Company that is subordinated to the senior indebtedness of the Company.
The Notes are not redeemable at the Company's option prior to November 15, 2002. The Notes are redeemable at the Company's option at 105.000% during the twelve months beginning November 15, 2002, 103.333% during the twelve months beginning November 15, 2003, 101.667% during the twelve months beginning November 15, 2004 and at 100% thereafter (expressed as a percentage of principal amount). In addition, prior to November 15, 2002, up to 35% of the Notes may be redeemed at 110% of the principal amount out of the proceeds of certain equity offerings.
Industrial Building Revenue Bonds:
Variable Rate Demand Industrial Building Revenue Bonds were issued in order to finance the Company's acquisition of land and equipment and the subsequent construction of a climbing products manufacturing facility. Under a lease agreement, the Company makes rental payments to the issuer in amounts sufficient to meet the debt service payments on the bonds. The bonds bear interest at a variable rate established weekly which may not exceed 15% per annum (2.1% and 5.3% at December 31, 2001 and 2000, respectively). The interest rate on the bonds may be converted to a fixed rate upon the satisfaction of certain conditions. Prior to a conversion to a fixed rate, the bonds are subject to purchase from the holder upon demand at a price equal to principal plus accrued interest. On or prior to the date of conversion to a fixed rate, the bonds are subject to redemption, in whole or in part, at the option of the Company. After conversion to a fixed rate, the bonds are subject to redemption, as a whole or in part, at the Company's option, on or after the tenth anniversary of the conversion, at annual redemption prices varying from 103% to 100% of the principal outstanding. Certain property and equipment having an original cost of $3,889 are pledged as collateral for the bonds.
Covenants:
The Senior Credit Facility and the Notes contain various restrictive covenants including restrictions on additional indebtedness, mergers, asset dispositions, restricted payments, prepayment and amendments of subordinated indebtedness. These covenants also prohibit, among other things, the payment of dividends. The financial covenants of the Senior Credit Facility require the Company to meet specific interest coverage, maximum leverage, minimum EBITDA, and capital expenditure requirements.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Other:
No short-term borrowings were outstanding at December 31, 2001 or 2000.
Future minimum lease payments under capital leases are as follows:
2002 $ 476 2003 550 2004 259 2005 96 Thereafter - ------------------------------------------------------------- Total minimum payments 1,381 Less amount representing interest 128 ------------------------------------------------------------- Capital lease obligations 1,253 Less current maturities 464 ------------------------------------------------------------- Long-term capital lease obligations $ 789 =============================================================
The aggregate amount of contractually scheduled principal payments, excluding obligations under capital leases, for the five years after December 31, 2001 are $1,443, $30,401, $55,777, $50,901, zero and $140,000 thereafter.
E. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31 2001 2000 ------------------------------ Advertising, promotions and allowances $ 16,554 $ 15,971 Payroll 8,219 8,330 Interest 2,794 3,510 Net option contract obligation liabilities 1,804 295 Other 6,666 12,867 --------------------------------------------------------------------------- $ 36,037 $ 40,973 ===========================================================================
F. SHAREHOLDERS' EQUITY
In October 1997, the Company entered into a recapitalization agreement (the "Recapitalization Agreement") with certain affiliates of INVESTCORP S.A. ("Investcorp") and certain other international investors organized by Investcorp (collectively the "Investors"). Pursuant to the Recapitalization Agreement, on November 24, 1997, (the "Recapitalization Closing Date") the Company (a) amended and restated its Articles of Incorporation pursuant to which the Company's capital stock was reclassified, (b) redeemed for cash and the Market Participation Right (as hereinafter described) certain shares of the reclassified stock and (c) sold to the Investors shares of newly created Class C, D and E Common Stock of the Company (all of which actions together constituted the "Recapitalization"). As a result of the Recapitalization, the Pre-Recapitalization shareholders continue to own approximately 33% of the outstanding voting equity of the Company and the Investors own approximately 67% of the outstanding voting equity of the Company. The transaction was accounted for as a recapitalization and, as such, the historical basis of the Company's assets and liabilities was not affected.
Market Participation Right - If, prior to the tenth anniversary of the Recapitalization Closing Date: (i) there is an initial underwritten public offering of at least 10% of the common equity of the Company, or the Investors sell a majority of their shares of the Company and (ii) at the time of such initial public offering or sale of shares, the Company's equity value equals or exceeds certain target values that imply significant annual compound rates
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
of return (between 20% and 40%) to the Post-Recapitalization shareholders, then those persons who have the Market Participation Right shall be entitled to receive an aggregate amount equal to up to 5% of the Company's equity value (the "Payment"). The Payment will be payable in cash, provided that the Company, in its discretion, may make up to half of the Payment in notes or similar obligations with market terms which the Company's Board of Directors in good faith believes are of equivalent value. The Payment will be treated as an equity distribution to those persons who have the Market Participation Right.
Voting Rights - Holders of the Class A Common Stock and Class B Common Stock are entitled to one vote per share and holders of the Class D Common Stock are entitled to approximately 50.7 votes per share. Class C Common Stock and Class E Common Stock have no voting rights. Upon the occurrence of a sale of 100% of the outstanding equity securities of the Company, a sale of substantially all the assets of the Company or a public offering of any equity securities of the Company ("Triggering Event"), each outstanding share of Class A Common Stock, Class B Common Stock, Class C Common Stock, Class D Common Stock and Class E Common Stock will convert into one share of Common Stock of the Company. This additional class of common stock with a par value of $.01 per share is authorized (131,000 shares under the Company's Articles of Incorporation), but no shares were issued or outstanding at December 31, 2001 and 2000. When issued, this class of Common Stock of the Company will have one vote per share.
Other Arrangements - In connection with the Recapitalization, the Company entered into an agreement for management and consulting services for a five-year term with Investcorp International, Inc., pursuant to which the Company prepaid Investcorp International, Inc. $5,000 upon the consummation of the Recapitalization. This amount is being amortized to expense over the five-year period.
G. STOCK INCENTIVE PLANS
The Werner Holding Co. (PA), Inc. 1997 Stock Incentive Plan, as amended, (the "Stock Option Plan") is administered by the Company's Board of Directors. Pursuant to the Stock Option Plan, certain directors, employees and officers of the Company are given an opportunity to acquire shares of the Company's Class C Common Stock (the "Class C Stock") through the grant of non-qualified and qualified stock options, stock appreciation rights and restricted stock. The options granted under the Stock Option Plan are exercisable at no less than the fair market value of the Class C Stock at the time of grant and vest upon the seventh anniversary of the grant with the possibility for accelerated vesting based, in part, on the achievement of certain financial targets as provided for in the Stock Option Plan. The Stock Option Plan also provides for vesting of certain percentages of the options in the event of an Initial Public Offering or Approved Sale as defined in the Stock Option Plan. Options issued pursuant to the Stock Option Plan expire on the thirtieth day following the seventh anniversary of the grant date. A total of 8,353 shares of Class C Stock have been reserved for issuance under the Plan.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Presented below is a summary of the Stock Option Plan activity:
WEIGHTED AVERAGE STOCK EXERCISE OPTIONS PRICE ---------------------------------- Outstanding at January 1, 1999 4,955 $ 2,421.29 Granted 2,065 $ 2,421.29 Exercised - - Forfeited 570 $ 2,421.29 - ------------------------------------------------------------------------------ Outstanding at December 31, 1999 6,450 $ 2,421.29 Granted 760 $ 2,564.18 Exercised - - Forfeited 905 $ 2,421.29 - ------------------------------------------------------------------------------ Outstanding at December 31, 2000 6,305 $ 2,427.75 Granted 935 $ 2,450.00 Exercised 48 $ 2,421.29 Forfeited 1,072 $ 2,459.28 - ------------------------------------------------------------------------------ Outstanding at December 31, 2001 6,120 $ 2,425.68 ==============================================================================
The weighted average remaining contractual life of the options at December 31, 2001, 2000 and 1999 was approximately 4.0, 4.6 and 5.3 years, respectively. The weighted average fair value of the options granted during 2001, 2000 and 1999 was $725.81, $724.42 and $798.13 per share, respectively. As of December 31, 2001, 2000 and 1999, options totaling 930, 522 and 460, respectively, were exercisable. During 2001, options for 48 shares, which were exercised by employees upon termination of employment, were repurchased by the Company.
The Company measures compensation cost using the intrinsic value method of accounting pursuant to Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Had the compensation cost for options granted subsequent to January 1, 1999 been determined using the fair market value method of FASB Statement No. 123, Accounting for Stock Based Compensation, compensation expense (net of related taxes) would have been $422, $328 and $479 resulting in pro forma net income of $15,133, $11,940 and $10,838, respectively.
For purposes of fair market value disclosures, the fair market value of an option grant is determined on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
2001 2000 1999 ---- ---- ---- Risk-free interest rate 5.07% 5.15% 6.54% Average life of options (years) 7.1 7.1 6.3 Volatility 0% 0% 0% Dividend yield 0% 0% 0%
The Company has entered into certain Management Stock Purchase Agreements, pursuant to which certain members of the Company's management were given the opportunity to purchase shares of the Company's Class C Stock from either the Company or certain of the Investors (the "Stock Purchase Plan"). In 2001, 2000 and 1999, shares of Class C Stock purchased under the Stock Purchase Plan were 60, 1,237 and 773 shares, respectively. As required by the Stock Purchase Plan, 193 and 220 shares were repurchased during 2001 and 2000, respectively, from participants who terminated employment. The Class C Stock purchased pursuant to the Stock Purchase Plan carries certain restrictions. In conjunction with the adoption of the Stock Purchase Plan, the Company also adopted the Werner Holding Co. (PA), Inc. Stock Loan Plan (the "Stock Loan Plan") to finance a portion of the purchase price paid for the shares acquired under the Stock Purchase Plan. At December 31, 2001 and 2000, notes outstanding under the Stock Loan Plan were $2,383 and $2,468,
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
respectively. The notes bear interest at rates determined based on interest rates paid on the Company's third party credit arrangements and are due no later than November 24, 2004 or upon sale of the shares. All shares purchased pursuant to the terms of the Stock Loan Plan are pledged to the Company. The notes are classified as a reduction of shareholders' equity in the Company's consolidated balance sheet.
H. INCOME TAXES
The components of income taxes (benefit) are as follows:
Income taxes (benefit) for financial reporting purposes varied from income taxes (benefit) at the federal statutory rate as follows:
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Significant components of the Company's deferred tax assets and liabilities are as follows:
FASB Statement No. 109, Accounting for Income Taxes, requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. As realization of deferred tax assets relating to certain capital losses is considered uncertain, a valuation allowance has been recorded. The Company believes that it will have taxable income in future periods sufficient to fully recognize its remaining deferred tax assets.
The Company has state net operating loss carryforwards of $5,254 and $5,109 which expire in 2008 and 2018, respectively.
I. OPERATING LEASES
The Company leases certain real estate and various equipment under long-term operating leases. Total rent expense amounted to $3,690, $5,910 and $5,156 for 2001, 2000 and 1999, respectively.
Future minimum rental commitments as of December 31, 2001 for all noncancellable operating leases are as follows:
2002 $ 2,185 2003 1,722 2004 1,406 2005 1,058 2006 604 Thereafter 2,857 -------------------------------------------------------------------- TOTAL $ 9,832 ====================================================================
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
J. COMMITMENTS AND CONTINGENCIES
The Company has contracts to provide most of its estimated aluminum requirements with three principal suppliers. These contracts include stipulated prices, with provisions for price adjustments based on market. The three contracts are renegotiable, one each in 2002, 2003 and 2004, respectively.
Until March 31, 1998, the Company provided insurance for its product liability and workers' compensation claims through MIICA. On March 31, 1998, the Company transferred MIICA's outstanding product and workers' compensation liabilities for losses incurred on or prior to March 31, 1998 to a commercial insurance provider (the "MIICA Insurance Transfer"). Under the terms of the agreements governing the MIICA Insurance Transfer, the commercial insurance provider assumed all of MIICA's product and workers' compensation liabilities for losses incurred prior to March 31, 1998 up to an aggregate limit of $75,000. Holding (PA) has agreed to indemnify the commercial insurance company for losses in excess of this limit. Based on information known to date, the Company believes that the ultimate amount of such losses will not exceed $75,000.
The Company is involved from time to time in various legal proceedings and claims incident to the normal conduct of its business. Although it is impossible to predict the outcome of any pending legal proceeding, the Company believes that such legal proceedings and claims individually and in the aggregate are either without merit, covered by insurance or adequately reserved for, and will not have a material adverse effect on its results of operations, financial position or cash flows.
In March 1998, an action was filed in the United States District Court for the Western District of Pennsylvania entitled Elizabeth Werner, et al v. Eric J. Werner, et al (Civil Action No. 98-503). The action purports, in part, to be brought derivatively on behalf of Holding (PA) and, in part, to be brought on behalf of plaintiffs individually against the Company and certain current and former officers and directors of the Company. The aspect of the case purportedly brought on behalf of Holding (PA) alleges breaches of fiduciary duty by various members of the Company's management arising out of, among other things, the issuance of restricted stock to management of the Company in 1992 and 1993. Holding (PA)'s Board of Directors referred the matter to a special committee of disinterested directors to investigate the merits of the claim and to take appropriate actions on behalf of Holding (PA). After a detailed investigation, the special committee recommended that the derivative claims not be pursued by or on behalf of Holding (PA). Accordingly, all the defendants made motions to dismiss the derivative claims. Pursuant to an amendment to the complaint filed by plaintiffs on March 29, 1999, the only remaining corporate defendant in this action is Holding (PA). Pursuant to the same amendment, the only remaining derivative claim asserted by the plaintiffs is a claim for excessive compensation, not relating to the restricted stock issuances. The aspect of the case purportedly brought on behalf of plaintiffs individually against the Company appears to arise out of the 1992 and 1993 restricted stock issuances as well as certain alleged misrepresentations by representatives of the Company. The plaintiffs seek monetary damages in an unspecified amount. In May 1999, the magistrate judge issued a report and recommendation ruling that all of the Plaintiffs' claims be dismissed. The District Court issued a Memorandum Order on August 4, 1999 granting the motion to dismiss all remaining claims against all defendants without prejudice and adopted the magistrate judge's report as the opinion of the District Court. The plaintiffs filed an appeal on September 2, 1999. On September 27, 2001, the Court of Appeals for the Third Circuit affirmed the dismissal of all claims except for a claim relating to the Company's redemption of stock from the Elizabeth Werner trust and the Anne Werner estate. The Court of Appeals has remanded the claim relating to the stock redemption to the District Court with directions to allow the plaintiffs to file a second amended complaint with respect to that claim only. On December 18, 2001, the Estate and the Trust filed an amended complaint. Count I of the complaint alleges that Holding (PA) made material misrepresentations in connection with the redemption of shares of stock held by the Trust and the Estate. On February 8, 2002, Holding (PA) and the management defendants filed motions to dismiss the Amended Complaint. Those motions are currently pending. Management believes that the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's results of operations, financial position or cash flows.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
K. EMPLOYEE RETIREMENT AND BENEFIT PLANS
The Company sponsors a non-contributory defined benefit plan that covers certain hourly employees and certain other plans under which benefit accruals are frozen. Prior to December 31, 2000, the Company sponsored two non-contributory defined benefit pension plans which provided retirement benefits to substantially all employees and two unfunded non-qualified supplemental retirement plans which provided a defined pension benefit in excess of limits imposed by federal tax law to certain key employees. Effective December 31, 2000, the Company froze benefit accruals under all but one of the plans resulting in recognition of a curtailment gain of $7,905. Also effective December 31, 2000, the two non-contributory defined benefit plans were merged. Pension benefits were not affected by the merger.
The Company sponsors postretirement life insurance plans which cover substantially all employees and postretirement health-care and other benefit plans which provide benefits to certain key employees. Effective December 31, 2000, the Company's obligation to provide certain postretirement life insurance benefits to certain key employees was settled for vested participants and eliminated for non-vested participants. As a result, the Company recognized a settlement loss of $2,034 and a curtailment gain of $448. At December 31, 2001, the remaining liability related to vested participants totals $1,492 and is included in Accrued Liabilities in the accompanying consolidated balance sheet.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans:
As of December 31, 2001, the accumulated benefit obligations for all pension plans exceeded the fair value of plan assets. The projected benefit obligation, the accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $12,877, $12,877 and zero, respectively, as of December 31, 2000.
The assumed health care trend rate for 2002 is 7.3% decreasing ratably to 5.0% in the year 2008. The effect of a one percentage point increase (decrease) in the accrued health-care cost trend rate assumption would increase (decrease) the accumulated postretirement benefit obligation by $125 and ($109), respectively, at December 31, 2001. The effect on the postretirement benefit cost would not be material.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net periodic pension and other postretirement benefit costs consist of the following components:
The benefit curtailment and settlement gains, net of $6,104 reflected in the consolidated statement of income for year 2000 includes associated professional fees of $215.
The Company also sponsors a defined contribution plan which covers substantially all of its employees. For certain employees covered by a collective bargaining agreement, contributions are based on negotiated rates and hours worked; for others, contributions are based on a percentage of employees' contributions and, effective January 1, 2001, were increased based on a combination of the participant's age and length of service. The expense related to these plans was $2,774, $1,485 and $1,270 in 2001, 2000 and 1999, respectively.
The Company also participates in various multi-employer plans pursuant to collective bargaining agreements. In connection with these plans, the Company contributed and charged to expense $441, $392, and $424 in 2001, 2000, and 1999, respectively.
The Company has employment contracts with several key employees the most significant of which is the contract with the Company's chief executive officer that provides for deferred incentive compensation associated with a deferred stock plan and retention incentive compensation.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
L. OTHER INCOME (EXPENSE), NET
Other income (expense), net is comprised of the following:
Prior to December 31, 2000, the Company participated in a group credit arrangement related to certain employee insurance coverage whereby the group collectively provided the insurer with credit assurance through letters of credit issued by the participants. The Company was contingently liable up to the amount of its letters of credit totaling $1,362 which were issued under the credit arrangement. As a result of non-performance by one of the other participants, the total amount of the Company's letters of credit were drawn upon by the issuer in January 2001. The credit loss is included in Miscellaneous income (expense), net in year 2000.
M. SEGMENT INFORMATION
The Company classifies its business into two segments: Climbing Products, which includes aluminum, fiberglass and wood ladders, scaffolding, stages and planks, and Extruded Products, which includes aluminum extrusions and fabricated components. The Company's reportable segments are based on the characteristics of the product and the markets and distribution channels through which the products are sold. The Company evaluates segment performance based on operating earnings. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31 2001 2000 1999 ---------------------------------------------- NET SALES Climbing Products $ 456,515 $ 442,772 $ 395,886 Extruded Products 79,170 102,454 107,779 - ------------------------------------------------------------------------------- $ 535,685 $ 545,226 $ 503,665 =============================================================================== OPERATING PROFIT (LOSS) Climbing Products $ 53,115 $ 46,134 $ 43,309 Extruded Products (27) 6,853 8,548 Corporate & Other (3,599) (2,363) (3,722) - ------------------------------------------------------------------------------- $ 49,489 $ 50,624 $ 48,135 =============================================================================== DEPRECIATION AND AMORTIZATION Climbing Products $ 12,011 $ 10,342 $ 10,767 Extruded Products 1,114 1,325 1,358 Corporate & Other 4,830 3,824 3,799 - ------------------------------------------------------------------------------- $ 17,955 $ 15,491 $ 15,924 =============================================================================== IDENTIFIABLE ASSETS Climbing Products $ 201,559 $ 198,151 $ 189,636 Extruded Products 37,926 39,859 39,396 Corporate & Other 45,524 31,864 26,408 - ------------------------------------------------------------------------------- $ 285,009 $ 269,874 $ 255,440 =============================================================================== CAPITAL EXPENDITURES Climbing Products $ 10,422 $ 11,009 $ 14,259 Extruded Products 3,039 1,250 3,641 Corporate & Other 5,941 14,486 2,552 - ------------------------------------------------------------------------------- $ 19,402 $ 26,745 $ 20,452 ===============================================================================
Operating profit (loss) for Corporate & Other includes other income (expense), net; Recapitalization expense amortization; various corporate expenses not allocated to the reportable segments and eliminations. Operating profit for the year 2000 for the Climbing Products and Extruded Products segments includes the impact of benefit plan curtailment and settlement gains of $4,881 and $1,223, respectively, - see Note K. Operating profit for the Climbing Products segment for 2000 also includes the impact of a $1,093 charge related to plant shutdown costs - see Note Q.
Climbing Products net sales to two significant customers individually exceeded 10% of the Company's total net sales in 2001, 2000 and 1999 as follows: 32% and 16%, 24% and 14%, 23% and 21% of net sales, respectively. No customer included in the Extruded Products segment accounted for more than 10% of the Company's net sales in those years.
Revenues included in the consolidated financial statements of the Company are primarily derived from customers domiciled in the United States. Substantially all of the Company's long-lived assets are located in the United States.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
N. SALE OF ACCOUNTS RECEIVABLE
The Company maintains a Receivables Purchase Agreement (the "Receivables Purchase Agreement") with a financial institution and its affiliate to provide additional financing capacity with a maximum availability of $50,000 depending upon the level of accounts receivable and certain other factors. Under the Receivables Purchase Agreement, which will expire in May 2003, the Company established a consolidated wholly-owned subsidiary, Werner Funding Corporation ("Funding"), which is a special purpose bankruptcy-remote entity that acquires, on a daily basis, a variable percentage interest of certain eligible trade receivables generated by the Company. The purchases by Funding are financed through the sale of an undivided percentage ownership interest in such receivables to the affiliate of the financial institution. The Company has agreed to continue servicing the sold receivables for the financial institution at market rates, therefore no servicing asset or liability has been recorded.
As of December 31, 2001 and 2000 the Company had transferred, on a recurring basis, $76,469 and $83,109 of accounts receivable in exchange for $20,000 in cash and an undivided interest in accounts receivable of $56,382 and $62,870, respectively. In accordance with the provisions of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, the transactions have been recorded as a sale of receivables to a qualified special purpose entity. The ongoing cost associated with the Receivables Purchase Agreement, which represents a return to investors in the purchased interests, as well as the cost of implementation and the loss on the sale of accounts receivable, is reported in the accompanying consolidated statements of income in Other income (expense), net. These costs totaled $1,289, $1,919 and $1,458 in 2001, 2000 and 1999, respectively. The interest rates on the purchased interests at December 31, 2001 and 2000 were 1.96% and 6.53%, respectively. As of December 31, 2001, $20,100 was available but unused under the Receivables Purchase Agreement.
The key economic assumptions used to measure the undivided interest at the date of the securitization for securitizations completed in 2001 were a discount rate of 2.72% and an estimated life of approximately two months. At December 31, 2001 an immediate adverse change in the discount rate or estimated life of 10% and 20% would not result in a significant reduction in the fair value of the undivided interest. These sensitivities are hypothetical and should be used with caution. Changes in fair value based on changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another.
The accompanying consolidated balance sheets at December 31, 2001 and 2000 reflect an allowance for doubtful accounts that relates, in large part, to accounts receivable representing the undivided interest in the assets of the financial institution affiliate.
O. OTHER LONG-TERM OBLIGATIONS
Other long-term obligations are comprised of the following:
DECEMBER 31 2001 2000 ------------------------------------- Accrued employee retirement benefits $ 14,364 $ 15,357 Minimum pension liability adjustment 10,817 - Deferred incentive compensation 3,792 2,549 Other 1,375 1,487 - ------------------------------------------------------------------------------- $ 30,348 $ 19,393 ===============================================================================
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
P. BUSINESS ACQUISITION
In October 1999, the Company acquired certain assets of Keller Ladders, Inc. in a business combination accounted for as a purchase. No product or other significant liabilities were assumed in connection with this acquisition. The results of operations of the Keller business are included in the accompanying consolidated financial statements since the date of acquisition. The total cost of the acquisition was $12,209, which approximated the fair value of the assets acquired.
Had the acquisition been made at the beginning of 1999, the Company's pro forma unaudited results for the year ended December 31, 1999 would have been:
Net sales $ 548,183 Net income $ 11,047
The above amounts reflect adjustments for depreciation on revalued property, plant and equipment, the use of the LIFO method to determine inventory costs, interest related to the cost of the acquisition, and taxes at an estimated effective tax rate of 38%. The unaudited pro forma results are not necessarily indicative of the results that would have been attained had the acquisition occurred at the beginning of 1999 or of results which may occur in the future.
Q. PLANT SHUTDOWN RESERVE
During the quarter ended June 30, 2000, the Company recorded plant shutdown costs of $1,400 associated with a plan to improve efficiency and reduce overall manufacturing and distribution costs by closing its Goshen, Indiana and Swainsboro, Georgia facilities. During the quarter ended December 31, 2000, the charge was reduced by $307 to $1,093 due to reopening a portion of the Swainsboro, Georgia facility. The plan reflected the elimination of approximately 240 jobs primarily in manufacturing functions. The affected employees were paid severance, vacation and other benefits totaling approximately $372. Plant shutdown costs also include other estimated exit costs of $721, including continuing lease payments, security and other costs applicable to the leased facilities through the end of the respective non-cancelable lease periods. During the fourth quarter of 2001, the estimate of other exit costs was reduced by $148 from $721 to $573 and were paid as of Janaury 31, 2002.
R. SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in Note D, the Company's debt includes borrowings under the Senior Credit Facility and the Notes. The issuer of the debt is Werner Holding Co. (DE), Inc. (the "Issuer"). Werner Holding Co. (PA), Inc. (the "Parent Company") has provided a full, unconditional, joint and several guaranty of the Issuer's obligation under the Senior Credit Facility and the Notes. In addition, the Issuer's wholly-owned subsidiaries, except for Werner Funding Corporation, (collectively, the "Guarantor Subsidiaries") have provided full, unconditional, joint and several guarantees of the Senior Credit Facility and the Notes.
Following is condensed consolidated financial information for the Parent Company, the Issuer, the Guarantor Subsidiaries and Werner Funding Corporation (the "Non-Guarantor Subsidiary"). Separate financial statements of the Guarantor Subsidiaries are not presented because management has determined that they would not provide additional information that is material to investors. Therefore, each of the Guarantor Subsidiaries is combined in the presentation below. Further, separate financial statements of the Issuer have not been provided as management has determined that they would not provide information that is material to investors, as the Issuer has no substantial operations or assets, other than its investment in its subsidiaries.
Investments in subsidiaries are accounted for on the equity method of accounting. Earnings at subsidiaries are, therefore, reflected in the respective investment accounts of the Parent Company and the Issuer. The investment in subsidiaries and intercompany balances and transactions have been eliminated. Income taxes are allocated generally on a separate return basis with reimbursement for losses utilized on a consolidated basis in accordance with a tax sharing agreement between the Company and each of its subsidiaries.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The following table sets forth the name, age and principal position of each of the directors of Holding (PA), Holding (DE) and the executive officers of the Company. The individuals who constitute the Board of Directors of Holding (PA) also constitute the Board of Directors of Holding (DE) except as noted below.
Each director of Holding (PA) and Holding (DE) will hold office until the next annual meeting of shareholders of Holding (PA) and Holding (DE), respectively, or until his successor has been elected and qualified. Officers of the Company are appointed by the respective Boards of Directors of Holding (PA) and its subsidiaries and serve at the discretion of such Boards, subject to any applicable employment agreements.
NAME AGE POSITION(S) ---- --- -----------
Donald M. Werner 68 Chairman of the Board of Directors Michael E. Werner 42 Vice Chairman of the Board of Directors (1) Dennis G. Heiner 58 President and Chief Executive Officer, and Director Robert P. Tamburrino 45 Vice President, Chief Operating Officer (2) Peter R. O'Coin 55 Senior Vice President, Operations (3) Larry V. Friend 55 Vice President, Chief Financial Officer and Treasurer Edward W. Gericke 44 Senior Vice President, Sales Eric J. Werner 39 Vice President, Secretary and General Counsel Mamoun Askari 38 Director James O. Egan 53 Director Charles L. Griffith 47 Director (4) James F. Hardymon 67 Director Charles K. Marquis 59 Director Howard L. Solot 64 Director Christopher J. Stadler 37 Director Thomas J. Sullivan 39 Director Stephen Tempini 42 Director (5)
(1) Mr. Werner is a director of Holding (PA) only. (2) Mr. Tamburrino announced his resignation as an officer of the Company in March 2002. (3) Mr. O'Coin was appointed Senior Vice President, Operations of the Company in March 2002. (4) Mr. Griffith resigned from the Board of Directors on January 17, 2002. (5) Mr. Tempini was appointed to the Board of Directors on January 17, 2002 to replace Mr. Griffith.
Donald M. Werner served as President and Chief Executive Officer of Holding (PA) from May 1997 until his retirement in January 2000. From 1995 to 1997, Mr. Werner was President of Werner Ladder Co. Prior to 1995, Mr. Werner served in various positions with the Company including Sales Manager, Vice President-Marketing and Senior Vice President-Corporate Sales and Marketing. Mr. Werner also holds various directorships at subsidiaries of Holding (PA). Prior to commencing his 42 year career with the Company, Mr. Werner was an aircraft structural design engineer for Grumman Aircraft Co. Mr. Werner served as Chairman of the American Hardware Manufacturers Association and served on the boards of directors of the Scaffolding Industry Association and the Hardware Group Association. Mr. Werner is the father of Eric J. Werner, the uncle of Michael E. Werner and the cousin of Howard L. Solot.
Michael E. Werner was appointed Vice Chairman of the Board of Directors in January 2001. Mr. Werner is the Managing Partner of Generation Capital Partners I, LLC, a private equity investment firm, since November 2001. Previously, he served as President of the Company's Werner Ladder Co. business unit from 1997 until
January 2001. Mr. Werner joined the Company in 1988 and has held several positions including Vice President-National Accounts and Vice President-Sales & Marketing. Prior to joining the Company, Mr. Werner served as Vice President for Mergers, Acquisitions and Investments at Pacific Holding Co. and, prior to that, as an associate in the Mergers & Acquisitions Department of Goldman, Sachs & Co. Mr. Werner is the nephew of Donald M. Werner and the cousin of Eric J. Werner.
Dennis G. Heiner has served as President and Chief Executive Officer of Holding (PA) since January 1, 2000 and Holding (DE) and Werner since June 1999. Prior to joining the Company, Mr. Heiner served as Executive Vice President of Black & Decker Corporation since 1989 and was its President-Hardware & Building Products Group Worldwide from 1998 to 1999. Mr. Heiner was President-Security Hardware Worldwide from 1992 to 1998, President-Household Products Worldwide from 1986 to 1992 and Group Vice President-U.S. Household Products from 1985 to 1986. Prior to Black & Decker, Mr. Heiner served as Division President for Beatrice Companies Inc. Window Coverings Division and as Vice President-Finance and then President for their Del Mar Window Coverings Division. Mr. Heiner holds various directorships and officerships at subsidiaries of Holding (PA) and is a director of Franklin Covey Co.
Robert P. Tamburrino was appointed Vice President, Chief Operating Officer in November 2000 and, in March 2002, announced his resignation from all officer positions of the Company. He joined the Company as Vice President, Chief Financial Officer and Treasurer in December 1998, a position he held until January 2001. Prior to joining the Company, Mr. Tamburrino served as Chief Financial Officer for the steel service center group of Usinor from 1997 to 1998. From 1991 to 1997, he served Usinor subsidiaries as Senior Vice President and Chief Financial Officer of Francosteel Corporation and Executive Vice President and Chief Financial Officer of Edgcomb Metals Company. Mr. Tamburrino held financial and chief executive officer positions with Rome Cable Corp., a manufacturer and distributor of copper electrical wire and cable from 1984 to 1990 and was employed by KPMG Peat Marwick from 1978 to 1984.
Peter R. O'Coin was appointed Senior Vice President, Operations in March 2002. Mr. O'Coin also holds various officerships at subsidiaries of Holding (PA). Prior to joining the Company he was President and Chief Executive Officer of West American Rubber Company from 2000 to 2001. From 1993 to 1999, Mr. O'Coin was Vice President, Manufacturing of Kwikset Corporation, a division of Black & Decker. Prior to that, Mr. O'Coin held various positions at General Electric Company, the most recent of which was General Manager of General Electric Lighting.
Larry V. Friend was appointed Vice President, Chief Financial Officer and Treasurer in January 2001. He joined the Company in April 1999 as Vice President and Controller and was appointed Vice President-Finance in June 2000. Mr. Friend also holds various officerships at subsidiaries of Holding (PA). Prior to joining the Company, Mr. Friend was an independent financial consultant in 1998 and 1999. During 1996 and 1997, he served as President and CEO of the North and Central American operations of Ceramicas Industriales, S. A. Mr. Friend was Vice President and Chief Financial Officer of Universal Rundle Corporation from 1990 until 1996 and held Vice President, Controller and other finance positions at National Forge Company from 1982 until 1990. Between 1968 and 1981, Mr. Friend was employed by Price Waterhouse (now PricewaterhouseCoopers LLP).
Edward W. Gericke was appointed Senior Vice President, Sales for Werner Ladder Co. in January 2001. He joined the Company in January 1998 as Vice President, Sales. Prior to joining the Company, Mr. Gericke was employed by Huffy/True Temper from May 1987 to January 1998 where he held multiple positions in sales, marketing and operations; the most recent of which was Vice President, Sales and Marketing.
Eric J. Werner joined the Company in 1988 as Secretary and Corporate Counsel. He has served as Vice President of the Company since 1999 and General Counsel of the Company since 1993. Mr. Werner also holds various officerships at subsidiaries of Holding (PA). Prior to joining the Company, Mr. Werner was an associate at the law firm of O'Connor, Broude, Snyder and Aronson. Mr. Werner also serves as a director of FNB Corporation. Mr. Werner is the son of Donald M. Werner and the cousin of Michael E. Werner.
Mamoun Askari became a director of Holding (PA) in November 2000. Mr. Askari has been an executive of Investcorp or one or more of its wholly-owned subsidiaries since September 1990. Prior to joining Investcorp,
Mr. Askari was an Associate with Deloitte, Haskins & Sells (now Deloitte & Touche LLP). Mr. Askari is a director of CSK Auto Corporation and Independent Wireless One Corporation.
James O. Egan has served as director of Holding (PA) since May 1999. Mr. Egan has been an executive officer of Investcorp or one of its wholly-owned subsidiaries since January 1999. Prior to joining Investcorp, Mr. Egan was a partner in the accounting firm of KPMG from October 1997 to December 1998. Prior to that, Mr. Egan was a Senior Vice President and Chief Financial Officer of Riverwood International, a paperboard, packaging and machinery company, from May 1996 to September 1997. Prior to that, Mr. Egan was a partner in the accounting firm of Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP). Mr. Egan is a director of CSK Auto Corporation, Harborside Healthcare Corporation, Independent Wireless One Corporation and Jostens, Inc.
Charles L. Griffith became a director of Holding (PA) in May 2001 and resigned in January 2002. Mr. Griffith had been an executive of Investcorp or one or more of its wholly-owned subsidiaries from 2000 until his resignation from Investcorp in December 2001. Prior to joining Investcorp, Mr. Griffith was President and Chief Executive Officer of Ingersoll-Dresser Pump Company.
James F. Hardymon became a director of Holding (PA) in May 2001. Mr. Hardymon had been an executive of Investcorp or one or more of its wholly-owned subsidiaries since 2001. Prior to joining Investcorp, Mr. Hardymon was Chairman and Chief Executive Officer of Textron, Inc. Mr. Hardymon is a director of Air Products & Chemicals, Inc., Fleet Boston Corporation, Lexmark International, Inc., Circuit City Stores, Inc., Schneider Electric, S.A., American Standard Companies, Inc. and Championship Auto Racing Teams, Inc.
Charles K. Marquis has served as director of Holding (PA) since May 1999. Mr. Marquis has been a senior advisor to Investcorp or one or more of its wholly-owned subsidiaries since January 1999. Prior to joining Investcorp, Mr. Marquis was a partner in the law firm of Gibson, Dunn & Crutcher, LLP. Mr. Marquis is a director of CSK Auto Corporation, Independent Wireless One Corporation, Jostens, Inc. and Tiffany & Co.
Howard L. Solot has served as director of Holding (PA) since 1974. He recently served as Executive Vice President and Chief Operating Officer of Holding (PA) from 1995 to his retirement in March of 1999. He joined the Company in 1959 and has held various planning, systems, engineering and manufacturing related positions, including Plant Manager, Division General Manager, Vice President-Engineering and Corporate Planning and Senior Vice President-Manufacturing. Mr. Solot also holds various director positions at subsidiaries of Holding (PA). Mr. Solot served as a member of the board of directors of the Aluminum Extruders Council. Mr. Solot is the cousin of Donald M. Werner.
Christopher J. Stadler has served as director of Holding (PA) since November 1997. He has been an executive of Investcorp or one or more of its wholly-owned subsidiaries since April 1996. Prior to joining Investcorp, Mr. Stadler was a director with CS First Boston Corporation. Mr. Stadler is a director of CSK Auto Corporation, Independent Wireless One Corporation and Saks Incorporated.
Thomas J. Sullivan has served as director of Holding (PA) since July 1999. Mr. Sullivan has been an executive of Investcorp or one or more of its wholly-owned subsidiaries since April 1996. Prior to joining Investcorp, Mr. Sullivan was Vice President and Treasurer of the Leslie Fay Companies, Inc. (now Leslie Fay Company, Inc.). Mr. Sullivan is a director of Independent Wireless One Corporation.
Stephen Tempini became a director of Holding (PA) in January 2002. Mr. Tempini has been an executive of Investcorp or one or more of its wholly-owned subsidiaries since April 2001. Prior to joining Investcorp, Mr. Tempini was Senior Vice President of Proxicom, Inc. from 1998 to 2000 (later acquired by Data Dimensions Holdings plc). Mr. Tempini was First Vice President and Senior Director of Merrill Lynch from 1995 to 1998 and the Manager of Emerging Technology at General Electric Company from 1991 to 1995.
DIRECTOR COMPENSATION
Neither Holding (PA) nor Holding (DE) pays any additional remuneration to its employees or to executives of Investcorp for serving as directors. Holding (PA) and Holding (DE) do reimburse their respective directors for any expenses incurred in attending meetings.
SHAREHOLDER RIGHTS AGREEMENT
Pursuant to the Shareholder Rights Agreement entered into in November 1997, (i) Class D Investors have a right to designate at least a majority of Holding (PA)'s Board, (ii) the Chief Executive Officer of Holding (PA) shall be a director, and, (iii) the Management Shareholders are entitled to designate a minimum of one director and up to that number of directors equal to one third of the authorized number of directors minus one. See "Certain Relationships and Related Transactions - Agreements with Certain Shareholders and Directors - Shareholder Rights Agreement."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth information concerning annual and long-term compensation for the last three fiscal years awarded to, earned by or paid to the Chief Executive Officer of the Company and each of the other four most highly compensated executive officers whose remuneration exceeded $100,000 (collectively, the "Named Executive Officers"). The current compensation arrangements for certain of these officers are described in "Employment Arrangements" below.
(a) See the following section "Deferred Stock Plan" for a detailed explanation of amounts in this column.
(1) The amount shown for Mr. Heiner under Salary and Bonus for 1999 was not paid but was deferred by Mr. Heiner under the Deferred Stock Plan for which he received 275 Stock Units. The amount shown for Mr. Heiner under Other Annual Compensation reflects payments of $10,966, $6,350 and $1,101 in respect of life insurance premiums paid by the Company in 2001, 2000 and 1999, respectively, $26,250 in respect of Company contributions made under the 401(k) Plan in 2001, $9,187, $13,143 and $1,032 of imputed income arising from the personal use of a Company provided automobile in 2001, 2000 and 1999, respectively, and retention incentive compensation as set forth in his employment contract of $404,103, $373,308 and $208,000 in 2001, 2000 and 1999, respectively, and $67,007 for moving expenses in 1999.
(2) The amount shown for Mr. Tamburrino under Other Annual Compensation reflects payments of $1,103, $703 and $746 in respect of life insurance premiums paid by the Company in 2001, 2000 and 1999, respectively, $14,323, $3,879 and $2,308 in respect of Company contributions made under the 401(k) Plan in 2001, 2000 and 1999, respectively, $4,030, $3,737 and $4,307 in respect of accrual under postretirement benefit plans in 2001, 2000 and 1999, respectively, and $5,040, $169 and $129 of imputed income arising from the personal use of a Company provided automobile in 2001, 2000 and 1999, respectively.
(3) The amount shown for Mr. Friend under Other Annual Compensation reflects payments of $2,103, $955, $919 in respect of life insurance premiums paid by the Company in 2001, 2000 and 1999, respectively, $12,323 and $1,002 in respect of Company contributions made under the 401 (k) Plan in 2001 and 2000, respectively, $7,000 and $8,349 of imputed income arising from the personal use of a Company provided automobile in 2001 and 2000, respectively, and $38,692 for moving expenses in 2000.
(4) The amount shown for Mr. Gericke under Other Annual Compensation reflects payments of $391 and $291, $346 in respect of life insurance premiums paid by the Company in 2001, 2000 and 1999, respectively, $9,861, $2,558 and $2,999 in respect of Company contributions made under the 401(k) Plan in 2001, 2000 and 1999, respectively, $1,674, $1,784 and $1,222 of imputed income arising from the personal use of a Company provided automobile in 2001, 2000 and 1999, respectively, and $434 of financial planning services in 1999.
(5) The amount shown for Mr. Werner under Other Annual Compensation reflects payments of $14,483, $448 and $7,471 in respect of life insurance premiums paid by the Company in 2001, 2000 and 1999, respectively, $11,855, $3,820 and $3,484 in respect of Company contributions made under the 401(k) Plan in 2001, 2000 and 1999, respectively, $3,850, $3,567 and $4,208 in respect of accruals under postretirement benefit plans in 2001, 2000 and 1999, respectively, $7,203, $8,310 and $6,363 of imputed income arising from the personal use of a Company provided automobile in 2001, 2000 and 1999, respectively, and $2,362, $7,114 and $2,372 of financial planning services in 2001, 2000 and 1999, respectively.
EMPLOYMENT ARRANGEMENTS
In November 1997, Holding (PA) entered into a three-year employment agreement with Eric J. Werner which was renewed for another three-year term in December 2000. In December 1998, the Company entered into a two-year employment agreement with Robert P. Tamburrino which was amended for an additional two- year period and restated effective January 2001. In April 1999, the Company entered into a three-year employment agreement with Larry V. Friend which was amended in October 2001 to extend the term for an additional three and one-half years. In June 1999, the Company entered into a five and one-half year employment agreement with Dennis G. Heiner. In September 2001, the Company entered into a three-year employment agreement with Edward W. Gericke. The employment agreements for all of these officers are collectively referred to as the "Employment Agreements." The Employment Agreements provide for a base annual salary in the following amounts: $525,000 for Dennis G. Heiner, $300,000 for Robert P. Tamburrino, $200,000 for Edward W. Gericke, $183,000 for Eric J. Werner, and $160,000 for Larry V. Friend. In addition to such executive's salary, the Employment Agreements also provide for an annual bonus payment up to a maximum of 100% of annual salary for Dennis G. Heiner, 70% of annual salary for Robert P. Tamburrino, 60% of annual salary for Edward W. Gericke and Eric J. Werner and 40% of annual salary for Larry V. Friend. This bonus is reduced, within a range of board discretion, to the extent that the Company falls short of EBITDA
targets specified in the Employment Agreements. The Employment Agreements further provide for an additional cash bonus payable at the discretion of the Company's Board of Directors. The employment agreement for Dennis G. Heiner also provides for retention incentive compensation each year up to an additional $360,000, plus interest on amounts unpaid, contingent upon Mr. Heiner remaining in the employ of the Company until the fifth anniversary of his commencement date. Under the Employment Agreements, Holding (PA) may only terminate such executives' employment, without obligation for severance, for cause. Except with respect to Dennis G. Heiner and Robert P. Tamburrino, if an executive's employment is terminated without cause or if an executive terminates his employment for good reason, the Company must (i) pay such executive a lump sum equal to 12 months' base salary, and the most recent annual bonus paid (or earned but not yet paid) prior to termination of employment, and (ii) continue such executive's employee benefits for 12 months. With respect to Dennis G. Heiner, if Mr. Heiner's employment is terminated without cause or if he terminates his employment for good reason, the Company must (i) pay Mr. Heiner a lump sum equal to the sum of $1,050,000 and two times the most recent annual bonus paid (or earned but not yet paid) prior to his termination of employment and (ii) continue his employee benefits for a period of 24 months or until Mr. Heiner receives similar benefits from subsequent employment whichever occurs earlier. With respect to Robert P. Tamburrino, if Mr. Tamburrino's employment is terminated without cause or if he terminates his employment for good reason, the Company must (i) pay Mr. Tamburrino a lump sum equal to the sum of two times his base salary and two times the most recent annual bonus paid (or earned but not yet paid) prior to his termination of employment and (ii) continue his employee benefits for a period of 12 months or until Mr. Tamburrino receives similar benefits from subsequent employment whichever occurs earlier. The Employment Agreements define "cause" as conviction of embezzlement or other felony involving fraud with respect to performance of duties and, subject to notice and opportunity to cure, willful engagement in gross misconduct concerning duties. "Good reason" is defined as a reduction in salary, bonus opportunities or employee benefits from the level in effect as of the commencement date of the respective employment contract, adverse changes in duties and forced relocation.
MANAGEMENT STOCK INCENTIVE PLAN
In November 1997, Holding (PA) adopted a stock incentive plan, pursuant to which options to purchase Class C Common Stock may be granted to employees and directors of the Company. From December 1998 through July 2001 the Company issued options representing approximately 12% of the outstanding post- Recapitalization common stock to certain members of senior management, including certain of the Named Executive Officers. Awards granted under the plan to employees include a provision terminating the award upon termination of employment under certain circumstances or accelerating the receipt of benefits upon the occurrence of specified events, including any change of control of Holding (PA). Each option is subject to certain vesting provisions. To the extent not earlier vested or terminated, all options will vest on the seventh anniversary of the date of grant and will expire 30 days thereafter if not exercised. Upon the termination of an optionee's employment with the Company, Holding (PA) has certain rights to repurchase, and the optionee has certain rights to require an affiliate of Investcorp to repurchase (subject to the right, granted to Holding (PA), to repurchase such shares instead of the Investcorp affiliate), the Class C Common Stock purchased by the optionee pursuant to the exercise of his option(s).
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(1) For purposes of fair market value disclosures, the fair market value of an option grant is determined using the Black-Scholes option pricing model. See Note G of the Company's Consolidated Financial Statements.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTIONS/SAR VALUES
In November 1997, Holding (PA) adopted a Stock Loan Plan in order to make loans to certain members of management entering into certain stock purchase agreements between management participants and the Investors (the "Loan Participants"). Loans made pursuant to the Stock Loan Plan mature in seven years, and bear interest at the Company's effective borrowing rate using the rates under the Revolving Facility of the Senior Credit Facility and the Receivables Purchase Agreement. Holding (PA) negotiates with each Loan Participant the amount of principal to be paid from such Loan Participant's annual bonus. The Stock Loan Plan requires each Loan Participant to enter into a pledge agreement and to execute a secured promissory note. Shares with an aggregate fair market value of $147,000, $3,019,000 and $1,932,000 were purchased in 2001, 2000 and 1999, respectively, pursuant to the Stock Loan Plan and management stock purchase agreements.
DEFERRED STOCK PLAN
Effective August 1999, the Company adopted the Werner Co. Deferred Stock Plan (the "Deferred Stock Plan"). The Deferred Stock Plan is administered by a committee of the Board of Directors of the Company (the "Committee"). Pursuant to the Deferred Stock Plan, Dennis G. Heiner (the "Participant") is given the opportunity on or before December 31 of each year to make an irrevocable election to defer all or part of his salary and/or bonus for the next year subject to the approval of the Committee. If the Participant makes, and the Committee approves, such an election, the Committee shall grant to the Participant Stock Units (as hereinafter defined) determined by dividing the portion of the Participant's deferred salary and/or bonus by the fair market value of a share of Class C Common Stock as of the applicable pay date. Under the Deferred Stock Plan, the Participant is entitled to receive Stock Units which are defined as non-voting units of measurement which are deemed for recordkeeping purposes to be equivalent to shares of Class C Common Stock, such that, one Stock Unit is equal to one outstanding share of the Company's Class C Common Stock. Distribution of benefits under the Deferred Stock Plan shall be made to the Participant on the first business day of the first month following his termination of service, or immediately upon a change in control, and shall be made in an equivalent whole number of shares of Class C Common Stock. The Company has certain rights to repurchase the shares of Class C Common Stock distributed to the Participant upon the cessation of his employment or upon a sale or initial public offering of the Company as defined in the Deferred Stock Plan. Under the Deferred Stock Plan as of December 31, 1999, Mr. Heiner has earned 275 Stock Units from salary and bonus compensation. In addition, Mr. Heiner is entitled to receive 1,033 Stock Units pursuant to his employment agreement. Such Stock Units will be vested over a three-year period from the date of his employment through June 15, 2002 and the Company recognizes the related compensation expense over the three-year vesting period. In 2001, 2000 and 1999, the Company recognized $840,000, $840,000 and $455,000, respectively, of compensation expense related to Mr. Heiner's Stock Units.
PENSION PLANS
The benefits for all salaried employees under the Retirement Plan for Employees of Werner Holding Co. (DE), Inc. (the "Retirement Plan"), a funded, tax-qualified defined benefit pension plan, and for certain stated executives under the Werner Holding Co. (DE), Inc. Supplemental Pension Plan A and/or the Werner Holding Co. (DE), Inc. Supplemental Pension Plan B (the "Supplemental Pension Plans") were frozen as of December 31, 2000. Effective January 1, 2001, Company contributions under the 401(k) Plan were increased. No further benefits will accrue under the Retirement Plan or the Supplemental Pension Plans for service after December 31, 2000. The following table shows the annual benefits accrued as of December 31, 2000 for each of the Named Executive Officers. These amounts would be payable at age 65.
SUPPLEMENTAL RETIREMENT PENSION NAME PLAN PLAN TOTAL - ------------------------- -------------- -------------- -------------- Dennis G. Heiner $ 3,562 $ - $ 3,562 Robert P. Tamburrino 4,599 6,446 11,045 Larry V. Friend 3,891 1,770 5,661 Edward W. Gericke 6,017 - 6,017 Eric J. Werner 29,000 25,698 54,698
The Supplemental Pension Plans are unfunded, non-qualified plans which provide lifetime annual pension benefits to certain stated executives in excess of benefits payable under the Retirement Plan, due to Retirement Plan limitations imposed by the Employee Retirement Income Security Act ("ERISA"), plus additional other benefits. Supplemental Pension Plan A covers all members of the Company's former Management Committee and Supplemental Pension Plan B covers most of the elected corporate officers. Supplemental Pension Plan benefits are a function of service and final average compensation (both frozen as of December 31, 2000). Executives must have spent at least ten years of service as either an elected salaried corporate officer or a member of the former Management Committee of the Company and retire from the Company after age 55 to be eligible. Eligibility for the supplemental plans is conditioned upon participants' compliance with a non-competition agreement.
CONSULTING AND SEPARATION AGREEMENT
On January 24, 2001, in connection with Michael E. Werner's resignation as an officer and employee of the Company, the Company entered into an agreement regarding Mr. Werner's termination of employment and future consulting services. Pursuant to the agreement, Mr. Werner serves as a Director and Vice Chairman of the Board of Holding (PA) and was paid a separation payment of $500,000 and benefits as set forth in the agreement. In addition, the Company engaged Mr. Werner to provide consulting services to the Company for a one-year period commencing February 19, 2001, in return for monthly payments of approximately $22,083 during the term of the consulting arrangement. Mr. Werner was also paid an incentive payment of $250,000 on February 18, 2002 with an opportunity to receive an additional amount at the Board of Directors' discretion as set forth in the agreement. During 2001 Mr. Werner received payments of $16,709 in respect of life insurance premiums paid by the Company, $4,036 in respect of Company contributions made under the 401(k) Plan, $2,288 for financial planning services and $2,700 for moving expenses.
COMMITTEES OF THE BOARD OF DIRECTORS; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The full Board of Directors of Werner determines the compensation for management of Werner. Dennis G. Heiner is a member of the Board of Directors of Werner. The compensation for the Named Executive Officers is determined under each such officer's employment agreement.
None of the executive officers of the Company served on the Board of Directors or on the compensation committee of any other entity, the officers of which served on any of the Boards of Directors of the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
All of the outstanding voting stock of Holding (DE) is owned by Holding (PA). The following table sets forth certain information regarding the beneficial ownership of the capital stock of Holding (PA).
The Class A Stock, Class B Stock and Class D Common Stock are the only classes of Holding (PA)'s capital stock that have the power to vote. The Class A Stock and Class B Stock each possesses the right to one vote per share. The Class D Common Stock possesses the right to 50.6818 votes per share. Investcorp and the Investors beneficially own approximately 67% of the outstanding voting stock of Holding (PA). In addition, the Investors own 3,952 shares of Class C Common Stock and 45,000 shares of Class E Common Stock. See "Certain Relationships and Related Transactions-Agreements with Certain Shareholders and Directors."
The table sets forth as of December 31, 2001 (i) each person known by the Company to be the beneficial owner of more than 5% of each class of voting stock of Holding (PA), (ii) each person who is a director of Holding (PA) or Named Executive Officer of the Company who is known to beneficially own shares of voting stock of Holding (PA) and (iii) all directors of Holding (PA) and executive officers of the Company as a group. Unless otherwise indicated, each of the shareholders shown in the table below has sole voting and investment power with respect to the shares beneficially owned.
NUMBER OF PERCENT SHARES (1) OF CLASS ------------ ------------- CLASS A VOTING STOCK Noel Berk-Rauch 142 7.6% Aleena R. Shapiro (2) 110 5.9% Howard L. Solot (3) 277 14.7% Donald M.Werner 304 16.2% Richard L. Werner (4) 331 17.6% Ronald E. Werner (5) 240 12.8% All directors and executive officers as a group, including certain of the above named persons 716 38.1%
NUMBER OF PERCENT SHARES (1) OF CLASS ------------ ------------- CLASS B VOTING STOCK Howard L. Solot (6) 1,083 5.0% Bruce D. Werner Trust (7) 1,399 6.4% Craig R. Werner Trust (8) 1,508 6.9% Michael E. Werner Revocable Trust (9) 1,496 6.9% Donald M. Werner (10) 601 2.8% Eric J. Werner (11) 1,384 6.4% Ronald E. Werner (12) 1,856 8.5% All directors and executive officers as a group, including certain of the above named persons 4,564 21.0%
NUMBER OF PERCENT SHARES (1) OF CLASS ------------ ------------- CLASS D VOTING STOCK INVESTCORP S.A. (13) (14) 1,000 100.0% SIPCO Limited (15) 1,000 100.0% CIP Limited (16) (17) 920 92.0% Ballet Limited (16) (17) 92 9.2% Denary Limited (16) (17) 92 9.2% Gleam Limited (16) (17) 92 9.2% Highlands Limited (16) (17) 92 9.2% Noble Limited (16) (17) 92 9.2% Outrigger Limited (16) (17) 92 9.2% Quill Limited (16) (17) 92 9.2% Radial Limited (16) (17) 92 9.2% Shoreline Limited (16) (17) 92 9.2% Zinnia Limited (16) (17) 92 9.2% INVESTCORP Investment Equity Limited (14) 80 8.0%
(1) As used in the table above, a beneficial owner of a security includes any person who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise has or shares (i) the power to vote, or direct the voting of, such security or (ii) investment power which includes the power to dispose, or to direct the disposition of, such security. In addition, a person is deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days.
(2) Ms. Shapiro does not directly own any stock in Holding (PA). The number of shares shown as owned are held in the name of Rauch Trust of which Aleena R. Shapiro is Trustee. Ms. Shapiro disclaims the beneficial ownership of such shares.
(3) Includes 36.47 shares of Class A Stock held in the name of Mr. Solot's spouse, Janet F. Solot.
(4) Includes 331.05 shares of Class A Stock held in the name of Richmond Drive Enterprises, L.P., a limited partnership, the general partners of which are Mr. Werner and Lois S. Werner. Lois S. Werner is the spouse of Mr. Werner.
(5) Includes 238.85 shares of Class A Stock held in the name of the Florence J. Werner Irrevocable Trust of which Ronald E. Werner is the trustee. Mr. Werner disclaims the beneficial ownership of such shares.
(6) Includes 826 shares of Class B Stock held in the name of Alligator Partners, L.P., a limited partnership, the general partners of which are Mr. Solot and Janet F. Solot, and 212.17 shares of Class B Stock held in the name of Mr. Solot's spouse, Janet F. Solot.
(7) Includes 17.30 shares of Class B Stock held as joint tenant with Tammy H. Werner and 391.01 shares of Class B Stock held in the name of the Bruce D. Werner Family Limited Partnership.
(8) Includes 925.40 shares of Class B Stock owned by the Craig R. Werner Family Limited Partnership.
(9) Includes 179.98 shares of Class B Stock held in the name of the Laura W. Werner Revocable Trust, 102.92 shares of Class B Stock held in the name of the Jonathan C. Werner Gift Trust, 57.65 shares of Class B Stock held in the name of the Margot A. Werner Gift Trust and 102.92 shares of Class B Stock held in the name of the Stephanie N. Werner Gift Trust.
(10) Includes 22 shares of Class B Stock owned with Barbara Werner as joint tenants and 88 shares of Class B Stock held in the name of Barbara Werner.
(11) Includes 29.48 shares of Class B Stock owned with Melanie R. Werner as joint tenants, 274.56 shares of Class B Stock held in the name of Melanie R. Werner, Custodian for Isabelle N. Werner and 274.56 shares of Class B Stock held in the name of Melanie R. Werner, Custodian for Sophia K. Werner.
(12) Includes 1,145.74 shares of Class B Stock held in the name of the Robert I. Werner Irrevocable Trust and 200.17 shares of Class B Stock held in the name of the Florence J. Werner Irrevocable Trust. Mr. Werner disclaims the beneficial ownership of all of these shares.
(13) Investcorp does not directly own any stock in Holding (PA). The number of shares shown as owned by Investcorp includes all of the shares owned by INVESTCORP Investment Equity Limited (see (14) below). Investcorp owns no stock in Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited, Zinnia Limited, or in the beneficial owners of these entities (see (17) below). Investcorp may be deemed to share beneficial ownership of the shares of voting stock held by these entities because the entities have entered into revocable management services or similar agreements with an affiliate of Investcorp, pursuant to which each such entity has granted such affiliate the authority to direct the voting and disposition of the Holding (PA) voting stock owned by such entity for so long as such agreement is in effect. Investcorp is a Luxembourg corporation with its address at 37 rue Notre-Dame, Luxembourg.
(14) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and a wholly-owned subsidiary of Investcorp, with its address at P.O. Box 1111, West Wind Building, George Town, Grand Cayman, Cayman Islands.
(15) SIPCO Limited may be deemed to control Investcorp through its ownership of a majority of a company's stock that indirectly owns a majority of Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind Building, George Town, Grand Cayman, Cayman Islands.
(16) CIP Limited ("CIP") owns no stock in Holding (PA). CIP indirectly owns less than 0.1% of the stock in each of Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited and Zinnia Limited (see (17) below). CIP may be deemed to share beneficial ownership of the shares of voting stock of Holding (PA) held by such entities because CIP acts as a director of such entities and the ultimate beneficial shareholders of each of those entities have granted to CIP revocable proxies in companies that own those entities' stock. None of the ultimate beneficial owners of such entities beneficially owns individually more than 5% of Holding (PA)'s voting stock.
(17) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited and Zinnia Limited is a Cayman Islands corporation with its address at P.O. Box 2197, West Wind Building, George Town, Grand Cayman, Cayman Islands.
Right of First Offer, Tag-Along Rights
Pursuant to the Restated Articles, prior to an initial public offering of the capital stock of Holding (PA), any holder of Class A Stock or Class B Stock that intends to sell any shares of such stock will be required to furnish notice to Holding (PA) of such holder's intent to sell such shares. Following the receipt of such notice, Holding (PA) will have the option to purchase such stock on the same terms as the proposed sale. In addition, if any holder of Class D Common Stock proposes to transfer shares of such stock, holders of the other classes of Holding (PA) capital stock will have certain tag-along rights with respect thereto. Any shares for which any holders elect to exercise such tag-along rights but whose shares are not sold in connection therewith will have such shares redeemed by Holding (PA), to the extent it is legally permitted to do so.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
AGREEMENTS WITH CERTAIN SHAREHOLDERS AND DIRECTORS
Consulting and Financial Services Agreements
In November 1997, the Company entered into an agreement for management advisory and consulting services for a five-year term with Investcorp International, Inc. ("III"), pursuant to which the Company prepaid III $5.0 million.
On January 1, 2000, in connection with Donald M. Werner's retirement, the Company entered into a consulting agreement with Mr. Werner. Pursuant to this consulting agreement, Mr. Werner will provide certain consulting services to the Company for a period of one year in exchange for payment at a rate of $150,000 per year. The consulting agreement is automatically renewed for successive one-year periods unless either party provides written notice thirty (30) days prior to the expiration of the current term.
In connection with Michael E. Werner's resignation as an officer and employee of the Company effective January 24, 2001, the Company entered into a consulting and separation agreement with Mr. Werner. Pursuant to the consulting and separation agreement, Mr. Werner provided consulting services to the Company for a one-year period commencing February 19, 2001, in exchange for monthly payments of approximately $22,083 during the term of the consulting arrangement. The Company and Mr. Werner have not extended the consulting arrangement.
Shareholder Rights Agreement
In November 1997, Holding (PA) executed the Shareholder Rights Agreement with each of the Management Shareholders and each holder of Class D Common Stock ("Class D Investors"). The Shareholder Rights Agreement contains the following provisions: (i) the right, following an initial public offering of Holding (PA)'s capital stock, in favor of the Class D Investors to require the Management Shareholders to sell their remaining equity interests in Holding (PA) if the Class D Investors decide to sell as a group 85% or more of their remaining equity interests in the Company and the Class D Investors hold at that time (prior to giving effect to the proposed sale) more than 80% of the shares of Class D Common Stock purchased by the Investors in November 1997, (ii) the right in favor of all holders of Holding (PA)'s capital stock, during the period until, but ending prior to, an initial public offering, to participate on a pro rata basis in equity financings by the Company (other than issuances of equity securities in connection with stock incentive or compensation plans approved by Holding (PA)'s Board of Directors or in connection with business acquisitions by Holding (PA)) if the securities to be issued by the Company are not being issued at fair market value as determined in good faith by Holding (PA)'s Board of Directors, (iii) certain demand and piggy-back registration rights in favor of the Class D Investors and certain piggy-back registration rights in favor of all other shareholders of Holding (PA), (iv) the obligation of the Management Shareholders to enter into certain customary "lock-up" agreements with underwriters in future public offerings, and (v) an agreement by the Class D Investors and the Management Shareholders to vote their respective shares such that (a) at least a majority of Holding (PA)'s Board will consist of persons designated by the Class D Investors, (b) the Chief Executive Officer of Holding (PA) shall be a director and (c) the Management Shareholders shall be entitled to designate a minimum of one director and up to that number of directors equal to one third of the authorized number of directors (rounded to the nearest whole number) minus one.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements:
The financial statements set forth in the Index are filed as part of this Annual Report on Form 10-K.
(2) Financial Statement Schedules:
The information required by schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission is provided elsewhere herein or is either not required or is inapplicable and therefore has been omitted.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Co-registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
WERNER HOLDING CO. (PA), INC. WERNER HOLDING CO. (DE), INC
By: /s/ DENNIS G. HEINER By: /s/ DENNIS G. HEINER ------------------------------- ---------------------------- Dennis G. Heiner Dennis G. Heiner President President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Co-registrants and in the capacities indicated on March 29, 2002.
/s/ DONALD M. WERNER Chairman of the Board of - ---------------------------- Directors of Co-registrants Donald M. Werner
/s/ MICHAEL E. WERNER Vice Chairman of the - ---------------------------- Board of Directors of Co-registrants Michael E. Werner
/s/ DENNIS G. HEINER President and Chief Executive Officer of - ---------------------------- Holding (PA) and Holding (DE) (Principal Dennis G. Heiner Executive Officer of Co-registrants), Director
/s/ LARRY V. FRIEND Vice President, Chief Financial Officer and - ---------------------------- Treasurer (Principal Financial Officer and Larry V. Friend Principal Accounting Officer of Co-registrants)
/s/ MAMOUN ASKARI Director - ---------------------------- Mamoun Askari
/s/ JAMES O. EGAN Director - ---------------------------- James O. Egan
/s/ JAMES F. HARDYMON Director - ---------------------------- James F. Hardymon
/s/ CHARLES K. MARQUIS Director - ---------------------------- Charles K. Marquis
/s/ HOWARD L. SOLOT Director - ---------------------------- Howard L. Solot
/s/ CHRISTOPHER J. STADLER Director - ---------------------------- Christopher J. Stadler
/s/ THOMAS J. SULLIVAN Director - ---------------------------- Thomas J. Sullivan
/s/ STEPHEN TEMPINI Director - ---------------------------- Stephen Tempini