10-Q 1 l96715ae10vq.txt WERNER HOLDINGS CO. 10-Q/QTR END 9-30-02 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 Commission File No. 333-46607-12 Commission File No. 333-46607 WERNER HOLDING CO. (PA), INC. WERNER HOLDING CO. (DE), INC. (EXACT NAME OF CO-REGISTRANT AS (EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER) SPECIFIED IN ITS CHARTER) PENNSYLVANIA 25-0906895 DELAWARE 25-1581345 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 93 WERNER RD. 16125 1105 NORTH MARKET ST., 19899 GREENVILLE, PENNSYLVANIA (ZIP CODE) SUITE 1300 (ZIP CODE) (ADDRESS OF PRINCIPAL WILMINGTON, DELAWARE EXECUTIVE OFFICES) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(724) 588-2550 (302) 478-5723 (CO-REGISTRANT'S TELEPHONE (CO-REGISTRANT'S TELEPHONE NUMBER NUMBER INCLUDING AREA CODE) INCLUDING AREA CODE) Indicate by check mark whether each of the Co-registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that each of the Co-registrants was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the Co-registrants' classes of common stock, as of September 30, 2002: Werner Holding Co. (PA), Inc. 1,879.5454 shares of Class A Common Stock 21,774.9346 shares of Class B Common Stock 5,465.7790 shares of Class C Common Stock 1,000 shares of Class D Common Stock 45,000 shares of Class E Common Stock Werner Holding Co. (DE), Inc. 1,000 shares of Common Stock INDEX WERNER HOLDING CO. (PA), INC. WERNER HOLDING CO. (DE), INC. FORM 10-Q PERIOD ENDED SEPTEMBER 30, 2002 PART I FINANCIAL INFORMATION Item 1. Financial Statements of Werner Holding Co. (PA), Inc. and Subsidiaries (Unaudited) Condensed Consolidated Balance Sheets--September 30, 2002 and December 31, 2001.................................................................... 1 Condensed Consolidated Statements of Income--Three and Nine Months Ended September 30, 2002 and 2001.......................................................... 2 Condensed Consolidated Statements of Changes in Shareholders' Equity (Deficit)--Three and Nine Months Ended September 30, 2002 and 2001............. 3 Condensed Consolidated Statements of Cash Flows--Nine Months Ended September 30, 2002 and 2001.......................................................... 5 Notes to Condensed Consolidated Financial Statements................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of Werner Holding Co. (PA), Inc. and Subsidiaries........................................................................... 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 20 Item 4. Controls and Procedures.................................................................. 20 PART II OTHER INFORMATION Item 1. Legal Proceedings........................................................................ 21 Item 6. Exhibits and Reports on Form 8-K......................................................... 21 SIGNATURES ......................................................................................... 22 CERTIFICATIONS ......................................................................................... 23

The financial statements included herein are that of Werner Holding Co. (PA), Inc. ("Holding (PA)"). The Co-registrants are Holding (PA) and Werner Holding Co. (DE), Inc. (the "Issuer"), which is a wholly-owned subsidiary of Holding (PA). Holding (PA) has no substantial operations or assets other than its investment in the Issuer. The consolidated financial condition and results of operations of Holding (PA) are substantially the same as those of the Issuer. As used herein and except as the context otherwise may require, the "Company" or "Werner" means, collectively, Holding (PA), the Issuer and all of their consolidated subsidiaries. PART I - FINANCIAL INFORMATION ITEM 1. WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)

See notes to unaudited condensed consolidated financial statements. 1 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (DOLLARS IN THOUSANDS)

See notes to unaudited condensed consolidated financial statements. 2 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (Unaudited) (DOLLARS IN THOUSANDS)

See notes to unaudited condensed consolidated financial statements. 3 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED) (DOLLARS IN THOUSANDS)

See notes to unaudited condensed consolidated financial statements. 4 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (DOLLARS IN THOUSANDS)

See notes to unaudited condensed consolidated financial statements. 5 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) A. GENERAL Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Werner Holding Co. (PA), Inc., ("Holding (PA)") include its accounts and the accounts of its wholly-owned subsidiary, Werner Holding Co. (DE), Inc. ("Issuer") and the Issuer's wholly-owned subsidiaries (collectively the "Company"). Holding (PA) has no substantial operations or assets, other than its investment in the Issuer. The consolidated financial condition and results of operations of Holding (PA) are substantially the same as those of the Issuer. Intercompany accounts and transactions have been eliminated. The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair financial presentation have been included. Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and notes thereto included in the Company's most recent Annual Report on Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the consolidated financial statements and notes. Actual results could differ from those estimates. Certain amounts for 2001 have been reclassified to conform to the 2002 interim period presentation. Derivative Commodity Instruments As more fully described in Note B to the consolidated financial statements included in the Company's most recent Annual Report on Form 10-K, the Company holds derivatives as part of a formal risk management policy. 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 derivatives 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. Effective during the third quarter of 2002, the Company has determined that it will not purchase option contracts to hedge a portion of forecasted sales pending revision of its risk management policy. The revision of the Company's risk management policy is expected to be finalized by December 31, 2002. Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board (the "FASB") issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceased effective January 1, 2002. The adoption of Statement No. 142 did not impact the Company's results of operations, financial position or cash flows. In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15, 2002. The Statement provides accounting requirements for retirement obligations associated with tangible long-lived assets. The obligations affected are those for which there is a legal obligation to settle as a result of existing or enacted law. The adoption of Statement No. 143 will not have a significant impact on the Company's results of operations, financial position or cash flows. 6 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED (DOLLARS IN THOUSANDS) A. GENERAL--CONTINUED In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. The new rules on asset impairment supersede FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provide a single accounting model for long-lived assets to be disposed of. The adoption of Statement No. 144 did not impact the Company's results of operations, financial position or cash flows. In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Statement No. 145 rescinds previous accounting guidance which required all gains and losses from extinguishment of debt to be classified as an extraordinary item in the income statement. As a result, the criteria contained in Accounting Principles Board Opinion No. 30 will be used to classify those gains and losses. This statement also amends other existing authoritative pronouncements to make various technical corrections, eliminate inconsistencies, clarify meanings, or describe their applicability under changed conditions. Statement No. 145 is effective for fiscal years beginning after May 15, 2002. The Company does not expect Statement No. 145 to have a material impact on its results of operations, financial position or cash flows. In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Statement No. 146 will apply to all exit or disposal activities initiated after December 31, 2002. The Company has not yet completed its evaluation of the impact of adopting Statement No. 146. B. 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 $12,510 and $12,371 are included in the caption entitled, "Selling and distribution expenses" in the condensed consolidated statements of income for the three months ended September 30, 2002 and 2001, respectively, and $34,985 and $38,575 are included for the nine months ended September 30, 2002 and 2001, respectively. C. INVENTORIES Components of inventories are as follows: SEPTEMBER 30 DECEMBER 31 2002 2001 ------------------------------ Finished goods $ 35,832 $ 32,595 Work-in-process 13,264 11,436 Raw materials and supplies 19,221 17,564 ----------------------------------------------------------------------------- 68,317 61,595 Less excess of cost over LIFO stated values 9,596 8,679 ----------------------------------------------------------------------------- NET INVENTORIES $ 58,721 $ 52,916 ============================================================================= 7 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED (DOLLARS IN THOUSANDS) D. COMMITMENTS AND CONTINGENCIES The Company is involved from time to time in various legal proceedings and claims incident to the normal conduct of its business. Although it is impossible to predict the outcome of any pending legal proceeding, the Company believes that such legal proceedings and claims individually and in the aggregate are either without merit, covered by insurance or adequately reserved for, and will not have a material adverse effect on its results of operations, financial position or cash flows. 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. 8 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED (DOLLARS IN THOUSANDS) E. SEGMENT INFORMATION The Company classifies its business in two segments: Climbing Products, which includes aluminum, fiberglass and wood ladders, scaffolding, stages and planks; and Extruded Products, which includes aluminum extrusions and fabricated components. The Company's reportable segments are based on the characteristics of the product and the markets and distribution channels through which the products are sold. The composition of segments and measure of segment profitability are consistent with that used by the Company's management. The Company evaluates segment performance based on operating profit. There has not been a change in the basis of segmentation or the basis of measurement of segment profit or loss from that disclosed in the Company's most recent Annual Report on Form 10-K. Net sales and operating profit (loss) of the Company's segments for the three and nine months ended September 30, 2002 and 2001 are as follows:

Operating profit (loss) for Corporate and Other includes various corporate expenses not allocated to the reportable segments and eliminations. "Other income (expense), net" reflected in the condensed consolidated statements of income is also not allocated to the reportable segments. Operating profit (loss) for the nine months ended September 30, 2002 for the Climbing Products and Extruded Products segments includes the impact of severance costs of approximately $1,300 and $300, respectively, associated with the separation of a former executive officer. F. SALES OF ACCOUNTS RECEIVABLE The Company maintains a Receivables Purchase Agreement with a financial institution and its affiliate to provide additional financing capacity with a maximum availability of $50,000 depending upon the level of accounts receivable and certain other factors. As of September 30, 2002 and December 31, 2001, the Company had sold, on a recurring basis, $78,619 and $76,469 of accounts receivable in exchange for $20,000 in cash and an undivided interest in accounts receivable of $58,548 and $56,382, respectively. The ongoing cost associated with the Receivables Purchase Agreement, which represents a return to investors in the purchased interests, as well as the cost of implementation and the loss on the sale of accounts receivable, is reported in the accompanying condensed consolidated statements of income in "Other income (expense), net." 9 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED (DOLLARS IN THOUSANDS) G. DEBT In March 2002, the Company voluntarily repaid $15,000 of term loans, without premium or penalty, as permitted by the Senior Credit Agreement. Additional interest expense of $394 was recorded in the quarter ended March 31, 2002 due to the accelerated amortization of the deferred financing fees associated with the term loans voluntarily repaid. The Senior Credit Facility provides for the adjustment of future principal installments when voluntary payments are made. Effective September 30, 2002, Tranche B term loans are due in aggregate principal amounts of $200 for the remainder of 2002, $26,612 in 2003, and $49,233 in 2004, and Tranche C term loans are due in aggregate principal amounts of $122 for the remainder of 2002, $488 in 2003, $488 in 2004, and $45,374 in 2005. H. SUPPLEMENTAL GUARANTOR INFORMATION The Company's debt includes borrowings under the Senior Credit Facility and 10% Senior Subordinated Notes maturing November 15, 2007 (the "Notes"). The issuer of this debt is Werner Holding Co. (DE), Inc. (the "Issuer"). Werner Holding Co. (PA), Inc. (the "Parent Company") has provided a full, unconditional, joint and several guaranty of the Issuer's obligations under the Senior Credit Facility and the Notes. In addition, the Issuer's wholly-owned subsidiaries, except for Werner Funding Corporation, (collectively, the "Guarantor Subsidiaries") have provided full, unconditional, joint and several guarantees of the Senior Credit Facility and the Notes. Following is condensed consolidated information for the Parent Company, the Issuer, the Guarantor Subsidiaries, and Werner Funding Corporation (the "Non-Guarantor Subsidiary"). Separate financial statements of the Guarantor Subsidiaries are not presented because management has determined that they would not provide additional information that is material to investors. Therefore, each of the Guarantor Subsidiaries is combined in the presentation below. Further, separate financial statements of the Issuer have not been provided as management has determined that they would not provide information that is material to investors, as the Issuer has no substantial operations or assets, other than its investment in its subsidiaries. Investments in subsidiaries are accounted for on the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the respective investment accounts of the Parent Company and the Issuer. The investments in subsidiaries and intercompany balances and transactions have been eliminated. Income taxes are allocated generally on a separate return basis with reimbursement for losses utilized on a consolidated basis in accordance with a tax sharing agreement between the Company and each of its subsidiaries. 10 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED (DOLLARS IN THOUSANDS) H. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED

11 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED (DOLLARS IN THOUSANDS) H. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED

12 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED (DOLLARS IN THOUSANDS) H. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED

13 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED (DOLLARS IN THOUSANDS) H. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED

14 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this document and the Company's most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission. This document contains, in addition to historical information, forward-looking statements that are subject to risks and other uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements. In the text below, financial statement amounts have been rounded and the percentage changes are based on the financial statements. RESULTS OF OPERATIONS--QUARTER ENDED SEPTEMBER 30, 2002 AS COMPARED TO QUARTER ENDED SEPTEMBER 30, 2001 Net Sales. Net sales were up $1.6 million, or 1.2%, to $134.6 million for the quarter ended September 30, 2002 from $133.0 million for the quarter ended September 30, 2001. Net sales of climbing products increased by $2.0 million, or 1.8%, to $115.5 million for the quarter ended September 30, 2002 from $113.5 million for the quarter ended September 30, 2001 which primarily reflects modestly higher unit sales volumes. Net sales of extruded products of $19.1 million for the quarter ended September 30, 2002 declined by $0.4 million, or 2.1%, compared to the quarter ended September 30, 2001 which primarily reflects continued softness of the markets served by this segment of the Company's business. Gross Profit. Gross profit improved by $5.0 million, or 11.7%, to $47.9 million for the quarter ended September 30, 2002 from $42.9 million for the quarter ended September 30, 2001. Gross profit as a percentage of net sales in the quarter ended September 30, 2002 improved to 35.6% from 32.2% for the quarter ended September 30, 2001. The improved gross profit percentage primarily reflects the impact of manufacturing productivity improvements and lower aluminum and other material costs. General and Administrative Expenses. General and administrative expenses were $7.0 million for the quarter ended September 30, 2002 compared to $6.4 million for the quarter ended September 30, 2001, an increase of $0.6 million or 8.9%. The increase is primarily due to higher depreciation related to capitalized computer hardware and software. Selling and Distribution Expenses. Selling and distribution expenses increased by $1.2 million, or 5.7%, to $21.5 million for the quarter ended September 30, 2002 compared to $20.3 million for the quarter ended September 30, 2001 primarily due to the impact of higher warehousing and distribution costs. Operating Profit. Despite a modest improvement of $1.6 million in net sales, operating profit improved by $3.3 million, or 20.3%, to $19.4 million for the quarter ended September 30, 2002 from $16.1 million for the quarter ended September 30, 2001. Operating profit of the Climbing Products segment increased $2.8 million, or 17.6%, to $19.0 million in the third quarter of 2002. The improvement in the profitability of climbing products reflects lower material costs, manufacturing productivity improvements and other cost reduction initiatives partially offset by higher general and administrative expenses and higher selling and distribution expenses. The Extruded Products segment reported an operating profit of $0.7 million for the quarter ended September 30, 2002 which was equal to operating profit of the third quarter of the prior year. Operating profit was flat despite lower sales which reflects the impact of improved manufacturing performance. Corporate and Other expenses declined by $0.4 million for the quarter ended September 30, 2002 compared to the quarter ended September 30, 2001 primarily due to reduced manufacturing consulting expenses. Other Income (Expense), Net. Other income for the quarter ended September 30, 2002 was $0.5 million less than the same quarter of the prior year. The decline in income is primarily due to the absence of interest that was received in the third quarter of the prior year related to an overpayment of income tax liabilities partially offset by lower costs associated with the receivables purchase agreement resulting from lower utilization and lower interest rates during the current quarter. 15 Interest Expense. Interest expense declined by $1.5 million to $5.3 million for the quarter ended September 30, 2002 from $6.8 million for the quarter ended September 30, 2001. The decline in expense is due to lower interest rates and lower levels of debt in the current quarter. Income Taxes. In accordance with APB Opinion 28, at the end of each interim period the Company shall make its best estimate of the annual effective tax rate expected to be applicable for the full fiscal year. The rate so determined shall be used in providing for income taxes on a current year-to-date basis. The effective tax rate shall include the effect of any valuation allowance expected to be necessary at the end of the year for deferred tax assets related to originating deductible temporary differences and loss carryforwards during the year. Accordingly, the Company has estimated its annual effective tax rates as of September 30, 2002 and 2001, and appropriately provided for income taxes for the quarterly periods then ended. The effective tax rate for the quarter ended September 30, 2002 is approximately 39% compared to 40% for the same quarter of the prior year. The decrease in the effective tax rate is due to lower estimated income tax accruals. The difference between the statutory and effective tax rates at both September 30, 2002 and 2001 was primarily due to state taxes (net of federal benefit) and estimated income tax accruals. Net Income. Net income improved by $2.8 million to $8.8 million for the quarter ended September 30, 2002 from net income of $6.0 million for the quarter ended September 30, 2001 as a result of the factors described above. RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001 Net Sales. Net sales were down $19.3 million, or 4.8%, to $382.2 million for the nine months ended September 30, 2002 from $401.5 million for the nine months ended September 30, 2001. Net sales of climbing products decreased by $15.7 million, or 4.6%, to $323.7 million for the nine months ended September 30, 2002 from $339.4 million for the nine months ended September 30, 2001. The sales decline reflects lower unit sales volumes related primarily to a major customer lowering its inventory levels primarily during the first quarter. Net sales of extruded products of $58.5 million for the nine months ended September 30, 2002 declined by $3.6 million, or 5.8%, compared to the nine months ended September 30, 2001. The markets served by this segment of the Company's business remained soft during the current period. Gross Profit. Gross profit improved by $6.7 million, or 5.7%, to $125.2 million for the nine months ended September 30, 2002 from $118.5 million for the nine months ended September 30, 2001 despite lower net sales. Gross profit as a percentage of net sales in the nine months ended September 30, 2002 improved to 32.8% from 29.5% for the nine months ended September 30, 2001. The negative effect of the lower production levels on the Company's gross profit percentage as a result of the lower unit sales volumes was more than offset by product mix improvements, manufacturing productivity improvements and lower aluminum and other material costs. General and Administrative Expenses. General and administrative expenses were $21.4 million for the nine months ended September 30, 2002 compared to $17.6 million for the nine months ended September 30, 2001, an increase of $3.8 million or 21.5%. The increase is due, in part, to severance cost of $1.6 million recognized in the current period associated with the separation of a former executive officer. Excluding this one-time severance cost, general and administrative expenses increased by $2.2 million, or 12.4%, in the current period. The increase reflects higher performance based compensation and related expense accruals associated with improved profitability and higher depreciation related to capitalized computer hardware and software costs. These increases more than offset the absence of severance and related expenses associated with the reduction in salaried employees that occurred during the second quarter of the prior year. Selling and Distribution Expenses. Selling and distribution expenses declined by $3.5 million, or 5.5%, to $59.6 million for the nine months ended September 30, 2002 compared to $63.1 million for the nine months ended September 30, 2001 primarily reflecting the impact of lower unit sales volumes, changes in customer mix and lower freight rates. Operating Profit. Operating profit improved by $6.4 million, or 17.1%, to $44.2 million for the nine months ended September 30, 2002 from $37.8 million for the nine months ended September 30, 2001. Operating profit of the Climbing Products segment increased $5.8 million, or 14.7%, to $45.2 million in the first nine months of 2002 16 including a charge of $1.3 million for an allocated portion of severance costs related to the separation of a former executive officer. Excluding the one-time severance cost allocation, operating profit of the Climbing Products segment in the current period would have increased by $7.1 million, or 18.0%, from $39.4 million in the first nine months of 2001. The improvement in the profitability of climbing products reflects product mix improvements, lower material costs, manufacturing productivity improvements and other cost reduction initiatives. Operating income of the Extruded Products segment was $0.2 million for the nine months ended September 30, 2002 compared to an operating profit of $1.4 million for the nine months ended September 30, 2001. The decline in operating profit of $1.2 million is primarily due to the decline in unit sales volumes and the resulting lower absorption of fixed manufacturing costs in addition to increased general and administrative expenses. Corporate and Other expenses declined by $1.9 million for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001 primarily due to reduced manufacturing consulting expenses. Other Income (Expense), Net. Net expense of $0.2 million for the nine months ended September 30, 2002 was equal to net expense for the first nine months of 2001. Expense declined in the current period due to lower costs associated with the receivables purchase agreement resulting from lower utilization and lower interest rates during the current period and the absence of a charge of $0.3 million recorded in the quarter ended June 30, 2001 related to the impairment of an investment formerly held by MIICA, the Company's captive insurance subsidiary that was dissolved in 1998. The decline in expense in the current period was offset by a loss on the disposal of an asset recorded in the quarter ended March 31, 2002 and the absence of interest received in the third quarter of the prior year related to an overpayment of income tax liabilities. Interest Expense. Interest expense declined by $3.9 million to $16.3 million for the nine months ended September 30, 2002 from $20.2 million for the nine months ended September 30, 2001. The favorable impact of lower interest rates and lower levels of debt in the current period was partially offset by the accelerated amortization of deferred financing fees of $0.4 million as a result of a $15 million voluntary repayment of term loans under the Senior Credit Facility made by the Company in March 2002. Income Taxes. In accordance with APB Opinion 28, at the end of each interim period the Company shall make its best estimate of the annual effective tax rate expected to be applicable for the full fiscal year. The rate so determined shall be used in providing for income taxes on a current year-to-date basis. The effective tax rate shall include the effect of any valuation allowance expected to be necessary at the end of the year for deferred tax assets related to originating deductible temporary differences and loss carryforwards during the year. Accordingly, the Company has estimated its annual effective tax rates as of September 30, 2002 and 2001, and appropriately provided for income taxes for the nine months then ended. The effective tax rate for the nine months ended September 30, 2002 is approximately 38% compared to 40% for the first nine months of the prior year. The decrease in the effective tax rate is due to lower estimated income tax accruals. The difference between the statutory and effective tax rates at both September 30, 2002 and 2001 was primarily due to state taxes (net of federal benefit) and estimated income tax accruals. Net Income. Net income improved by $6.9 million to $17.3 million for the nine months ended September 30, 2002 from net income of $10.4 million for the nine months ended September 30, 2001 as a result of the factors described above. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2002, the Company had $262.2 million of consolidated indebtedness that includes $132.9 million of indebtedness (net of unamortized original issue discount) pursuant to the $135 million principal of 10% Senior Subordinated Notes due 2007 (the "Notes"); $122.5 million of Term Loans under the Senior Credit Facility; and $6.8 million of other debt. The Senior Credit Facility provides for Term Loans and a $70 million Revolving Facility of which $44.9 million was available for borrowing at September 30, 2002. The available borrowings under the Revolving Facility, which expires on November 30, 2003, are reduced by amounts issued under a letter of credit subfacility which totaled $25.1 million at September 30, 2002. The Company maintains a Receivables Purchase Agreement with a financial institution and its affiliate which expires in May 2003. The agreement provides additional financing capacity with a maximum availability of $50 million depending upon the level of accounts receivable and certain other factors. As of September 30, 2002, the Company sold $78.6 million of accounts receivable in exchange for $20.0 million in cash and an undivided 17 interest in the accounts receivable of $58.5 million. An additional $21.0 million of financing was available under the Receivables Purchase Agreement at September 30, 2002. The Company satisfies its working capital needs and capital expenditure requirements primarily through a combination of operating cash flow, borrowings under the Senior Credit Facility and sales of accounts receivable under the Receivables Purchase Agreement. The Company believes it has sufficient funds available in the next twelve months to support debt service requirements, projected capital expenditures and working capital needs based on projected results of operations and availability under both the Senior Credit Facility and the Receivables Purchase Agreement. The Receivables Purchase Agreement and the $70 million Revolving Facility expire in May 2003 and November 2003, respectively. The Company may need to renew or replace one or both of these to satisfy its future working capital needs. The Company currently anticipates that it will be able to extend or replace both of these facilities if it elects to do so; however, there can be no assurance that the Company will be able to effect a renewal or a replacement on commercially reasonable terms, or at all. The Senior Credit Facility, as amended effective June 30, 2001, and the Notes contain various restrictive covenants including restrictions on additional indebtedness, mergers, asset dispositions, restricted payments, prepayment and amendments of subordinated indebtedness. These covenants also prohibit, among other things, the payment of dividends. The financial covenants of the Senior Credit Facility require the Company to meet specific interest coverage, maximum leverage, minimum EBITDA, and capital expenditure requirements. The Company is in compliance with all its debt covenants effective September 30, 2002. 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. Net cash flows provided by operating activities were $24.3 million for the nine months ended September 30, 2002 compared to $9.6 million provided by operating activities for the nine months ended September 30, 2001. Cash flows from operating activities were $14.7 million greater in the current period largely due to reducing year-over-year inventory levels and reductions in cash used for accounts receivable and other assets and liabilities. The increase in cash flows from operating activities during the period was partially offset by an increase in cash used for accounts payable and income taxes. Net cash used for investing activities was $8.9 million for the nine months ended September 30, 2002 compared to $12.2 million for the nine months ended September 30, 2001 primarily reflecting lower capital expenditures during the current period partially offset by lower proceeds received on the disposal of investments formerly held by MIICA. Net cash used for financing activities was $16.6 million for the nine months ended September 30, 2002 compared to $2.6 million for the nine months ended September 30, 2001 which primarily reflects increased repayments of debt in the current period. The Senior Credit Facility allows the Company to voluntarily repay the principal amount of Term Loans from time to time, in whole or in part, without premium or penalty. In March 2002 the Company voluntarily repaid $15 million of Term Loans. 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. Recent declines in equity markets have had a negative impact on the fair value of the Company's pension plan assets. In addition, interest rate declines that have occurred during the year will result in an increased valuation of pension liabilities as of December 31, 2002. As a result of declining equity markets and interest rates, 18 the excess of the accumulated pension benefit obligation over the fair value of plan assets for the Company's defined benefit pension plans is expected to increase as of December 31, 2002 compared to the excess that existed at December 31, 2001. As required by Financial Accounting Standards Board (the "FASB") Statement No. 87, Employers' Accounting for Pensions, additional pension liabilities equal to the amount of the increase will be recorded as of December 31, 2002 and an offsetting reduction of shareholders' equity will be reflected net of applicable income taxes. The amount of the adjustment to be recorded as of December 31, 2002 will not impact the Company's results of operations or cash flows for year ended December 31, 2002. Based on the current fair value of plan assets and current interest rates, the anticipated charge to shareholders' equity is expected to range from $6 million to $10 million. The reduction in shareholders' equity to be recorded at December 31, 2002 is subject to changes in market conditions during the remainder of the year and completion of an actuarial valuation by the Company's independent actuaries. SEASONALITY, WORKING CAPITAL AND CYCLICALITY Sales of certain products of the Company are subject to seasonal variation. Demand for the Company's climbing products is affected by residential housing starts and existing home sales, commercial construction activity and overall home improvement expenditures. The residential and commercial construction markets are sensitive to cyclical changes in the economy. Due to seasonal factors associated with the construction industry, sales of climbing products and working capital requirements are typically higher during the second and third quarters than at other times of the year. The Company expects to use the Senior Credit Facility and the Receivables Purchase Agreement to meet any seasonal variations in its working capital requirements. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceased effective January 1, 2002. The adoption of Statement No. 142 did not impact the Company's results of operations, financial position or cash flows. In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations, effective for fiscal years beginning after June 15, 2002. The Statement provides accounting requirements for retirement obligations associated with tangible long-lived assets. The obligations affected are those for which there is a legal obligation to settle as a result of existing or enacted law. The adoption of Statement No. 143 will not have a significant impact on the Company's results of operations, financial position or cash flows. In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. The new rules on asset impairment supersede FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provide a single accounting model for long-lived assets to be disposed of. The adoption of Statement No. 144 did not impact the Company's results of operations, financial position or cash flows. In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Statement No. 145 rescinds previous accounting guidance which required all gains and losses from extinguishment of debt to be classified as an extraordinary item in the income statement. As a result, the criteria contained in Accounting Principles Board Opinion No. 30 will be used to classify those gains and losses. This statement also amends other existing authoritative pronouncements to make various technical corrections, eliminate inconsistencies, clarify meanings, or describe their applicability under changed conditions. Statement No. 145 is effective for fiscal years beginning after May 15, 2002. The Company does not expect Statement No. 145 to have a material impact on its results of operations, financial position or cash flows. In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Statement No. 146 will apply to all exit or disposal activities initiated after December 31, 2002. The Company has not yet completed its evaluation of the impact of adopting Statement No. 146. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates, foreign currency exchange rates and commodity prices. The Company does not use derivative financial instruments for speculative or trading purposes. The Company is exposed to market risk from changes in interest rates on long-term debt obligations. The Company manages such risk through the use of a combination of fixed and variable rate debt. Currently, the Company does not use derivative financial instruments to manage its interest rate risk. There have been no material changes in market risk from changes in interest rates from that disclosed in the Company's most recent Annual Report on Form 10-K. The Company does not have material operations in foreign countries. International sales were not material to the Company's operations for the nine months ended September 30, 2002. Accordingly, the Company is not subject to material foreign currency exchange risk. To date, the Company has not entered into any foreign currency forward exchange contracts or other derivative financial instruments relative to foreign currency exchange rates. The Company is also exposed to market risk from changes in the price of aluminum. The Company manages such risk through the use of aluminum futures and options contracts. There have been no material changes in market risk from changes in the price of aluminum from that disclosed in the Company's most recent Annual Report on Form 10-K. ITEM 4. CONTROLS AND PROCEDURES Within ninety days prior to the filing of this quarterly report, an evaluation was performed under the supervision and with the participation of the Company's management, including the President and Chief Executive Officer (the "CEO") and the Vice President, Chief Financial Officer and Treasurer (the "CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved from time to time in various legal proceedings and claims incident to the normal conduct of its business. In the opinion of management, the amount of any ultimate liability with respect to these proceedings and claims will not have a material adverse effect on its results of operations, financial position or cash flows. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Certificate of Incorporation of Werner Holding Co. (DE), Inc. (filed as Exhibit 3.1 to Issuer's Form S-4 Registration Statement No. 333-46607 and incorporated herein by reference). 3.2 By-laws of Werner Holding Co. (DE), Inc. (filed as Exhibit 3.2 to Issuer's Form S-4 Registration Statement No. 333-46607 and incorporated herein by reference). 3.3 Amended and Restated Articles of Incorporation of Werner Holding Co. (PA), Inc. (filed as Exhibit 3.3 to Issuer's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference). 3.4 Amended and Restated By-laws of Werner Holding Co. (PA), Inc. (filed as Exhibit 3.4 to Issuer's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference). (b) Reports on Form 8-K: None. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Co-registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. WERNER HOLDING CO. (PA), INC. Date: November 13, 2002 /s/ LARRY V. FRIEND -------------------------------------------- Larry V. Friend Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) WERNER HOLDING CO. (DE), INC. Date: November 13, 2002 /s/ LARRY V. FRIEND -------------------------------------------- Larry V. Friend Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) 22 CERTIFICATIONS CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Dennis G. Heiner, the Chief Executive Officer of Werner Holding Co. (PA), Inc. and Werner Holding Co. (DE), Inc. (the "Co-registrants"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Co-registrants; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Co-registrants as of, and for, the periods presented in this quarterly report; 4. The Co-registrants' other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Co-registrants and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Co-registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Co-registrants' disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Co-registrants' other certifying officer and I have disclosed, based on our most recent evaluation, to the Co-registrants' auditors and the audit committee of Co-registrants' board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Co-registrants' ability to record, process, summarize, and report financial data and have identified for the Co-registrants' auditors any material weaknesses in internal controls; b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Co-registrants' internal controls; and 6. The Co-registrants' other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. WERNER HOLDING CO. (PA), INC. Date: November 13, 2002 /s/ DENNIS G. HEINER ------------------------------------------ Chief Executive Officer WERNER HOLDING CO. (DE), INC. Date: November 13, 2002 /s/ DENNIS G. HEINER ------------------------------------------ Chief Executive Officer 23 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Larry V. Friend, the Chief Financial Officer of Werner Holding Co. (PA), Inc. and Werner Holding Co. (DE), Inc. (the "Co-registrants"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Co-registrants; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Co-registrants as of, and for, the periods presented in this quarterly report; 4. The Co-registrants' other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Co-registrants and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Co-registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Co-registrants' disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Co-registrants' other certifying officer and I have disclosed, based on our most recent evaluation, to the Co-registrants' auditors and the audit committee of Co-registrants' board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Co-registrants' ability to record, process, summarize, and report financial data and have identified for the Co-registrants' auditors any material weaknesses in internal controls; b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Co-registrants' internal controls; and 6. The Co-registrants' other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. WERNER HOLDING CO. (PA), INC. Date: November 13, 2002 /s/ LARRY V. FRIEND -------------------------------------- Chief Financial Officer WERNER HOLDING CO. (DE), INC. Date: November 13, 2002 /s/ LARRY V. FRIEND -------------------------------------- Chief Financial Officer 24

WERNER HOLDING CO INC /DE/ 10-Q