<PAGE> 1
Filed Pursuant To Rule 424(b)(4)
Registration No. 333-46607
PROSPECTUS
OFFER FOR ALL OUTSTANDING 10% SENIOR SUBORDINATED NOTES DUE 2007
IN EXCHANGE FOR
10% SERIES A SENIOR SUBORDINATED NOTES DUE 2007 OF
WERNER HOLDING CO. (DE), INC. WERNER LOGO
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON JUNE 16, 1998, UNLESS EXTENDED
------------------------
Werner Holding Co. (DE), Inc. (the "Issuer"), hereby offers to exchange an
aggregate principal amount of up to $135,000,000 of its 10% Series A Senior
Subordinated Notes due 2007 (the "New Notes") for a like principal amount of its
10% Senior Subordinated Notes due 2007 (the "Old Notes") outstanding on the date
hereof upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
"Exchange Offer"). The New Notes and the Old Notes are collectively hereinafter
referred to as the "Notes." The terms of the New Notes are identical in all
material respects to those of the Old Notes, except for certain transfer
restrictions and registration rights relating to the Old Notes. The New Notes
will be issued pursuant to, and entitled to the benefits of, the Indenture (as
defined) governing the Old Notes.
The New Notes will be unsecured and will be subordinated to all existing and
future Senior Indebtedness (as defined) of the Issuer. The New Notes will also
be guaranteed (the "Guarantees") fully, unconditionally and jointly and
severally by the Issuer's parent, Werner Holding Co. (PA) Inc. ("Holding"), and
substantially all of the Issuer's subsidiaries (collectively, the "Guarantors").
The Guarantees will be unsecured and will be subordinated to all existing and
future Senior Indebtedness of the Guarantors. The New Notes and the Guarantees
will rank pari passu with all future Pari Passu Indebtedness (as defined) of the
Issuer and the Guarantors, respectively, and will rank senior to all other
subordinated indebtedness of the Issuer and the Guarantors, respectively. The
Indenture permits the Issuer and the Guarantors, respectively, to incur
additional indebtedness, including Senior Indebtedness under the Issuer's $320.0
million Senior Credit Facility (as defined), subject to certain limitations. See
"Description of the New Notes." As of December 31, 1997, the aggregate amount of
the Issuer's Indebtedness was $317.5 million of which $186.5 million (exclusive
of unused commitments and comprised entirely of borrowings under the Senior
Credit facility) was the outstanding amount of the Issuer's aggregate Senior
Indebtedness, and the Issuer had no Pari Passu Indebtedness outstanding other
than the Notes of $131.0 million ($135.0 million, net of the unamortized
discount). As of December 31, 1997, the aggregate amount of the Guarantors'
Senior Indebtedness was $191.5 million (exclusive of unused commitments and
comprised of borrowings under the Senior Credit Facility of $186.5 million and
indebtedness under the Variable Rate Demand Industrial Building Revenue Bonds of
$5.0 million), and the Guarantors had no Pari Passu Indebtedness outstanding
other than the Guarantees. The total outstanding indebtedness of the Issuer and
the Guarantors as of December 31, 1997 was $322.5 consisting of $186.5 million
of indebtedness outstanding under the Senior Credit Facility, $131.0 million
outstanding under the Notes and $5.0 million outstanding under the Variable Rate
Demand Indebtedness Building Revenue Bonds.
The New Notes will bear interest from and including the date of consummation of
the Exchange Offer. Interest on the New Notes will be payable semi-annually on
May 15 and November 15 of each year, commencing May 15, 1998. Additionally,
interest on the New Notes will accrue from the last interest payment date on
which interest was paid on the Old Notes surrendered in exchange therefor or, if
no interest has been paid on the Old Notes, from the date of original issue of
the Old Notes.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Issuer contained in the Registration Rights Agreement dated
November 14, 1997 (the "Registration Rights Agreement"), among the Issuer, the
Guarantors and the Initial Purchasers (as defined), with respect to the initial
sale of the Old Notes. Neither the Issuer nor the Guarantors will receive any
proceeds from the Exchange Offer. The Issuer will pay all the expenses incident
to the Exchange Offer. Tenders of Old Notes pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration Date (as defined) for the
Exchange Offer. In the event the Issuer terminates the Exchange Offer and does
not accept for exchange any Old Notes with respect to the Exchange Offer, the
Issuer will promptly return such Old Notes to the holders thereof. See "The
Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivery of a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"). This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Issuer has agreed that, for a period
of 90 days after the Expiration Date, it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Prior to the Exchange Offer, there has been no public market for the Old Notes.
If a market for the New Notes should develop, such New Notes could trade at a
discount from their principal amount. The Issuer currently does not intend to
list the New Notes on any securities exchange or to seek approval for quotation
through any automated quotation system and no active public market for the New
Notes is currently anticipated. There can be no assurance that an active public
market for the New Notes will develop.
The Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange pursuant to the Exchange Offer.
SEE "RISK FACTORS" COMMENCING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 14, 1998.
<PAGE> 2
AVAILABLE INFORMATION
The Issuer and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") a registration statement relating to the New Notes
offered hereby (herein, together with all amendments and exhibits, referred to
as the "Registration Statement") under the Securities Act. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description thereof, and each such statement shall be deemed qualified in its
entirety by such reference.
Upon effectiveness of the Registration Statement, the Issuer and the
Guarantors will be subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith must file periodic reports and other information with the Commission.
The Registration Statement and the exhibits and schedules thereto and any
periodic reports or other information filed pursuant to the Exchange Act may be
inspected without charge and copies at prescribed rates at the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices at 7 World Trade Center, Suite
1300, New York, New York 10048, and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a website
that contains reports, proxy and information statements and other information
filed electronically with the Commission at http://www.sec.gov.
Pursuant to the Indenture, the Issuer and the Guarantors have agreed to
file with the Securities and Exchange Commission (the "Commission") and provide
to the holders of the Notes annual reports and the information, documents and
other reports (including quarterly reports) that are specified in Sections 13
and 15(d) of the Exchange Act. Such annual reports shall be certified if
required by the rules and regulations of the Commission by independent public
accountants. The Company has filed a letter with the Commission requesting that
the Guarantors not be required to comply separately with the reporting
requirements specified in Sections 13 and 15(d) of the Exchange Act. If this
request is granted, the Issuer will comply with such reporting requirements and
will include in its reports information with respect to the Guarantors on a
consolidated basis.
FORWARD LOOKING INFORMATION
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. THOSE
STATEMENTS INCLUDE, AMONG OTHER THINGS, THE DISCUSSIONS OF THE COMPANY'S (AS
DEFINED) BUSINESS STRATEGY AND EXPECTATIONS CONCERNING THE COMPANY'S POSITION IN
THE INDUSTRY AND MARKET SHARE, FUTURE OPERATIONS, MARGINS, PROFITABILITY,
LIQUIDITY AND CAPITAL RESOURCES, AS WELL AS STATEMENTS CONCERNING THE
DEVELOPMENT OF NEW PRODUCTS AND THE ACHIEVEMENT OF COST SAVINGS. ALL OF THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY
MANAGEMENT OF THE COMPANY THAT, ALTHOUGH BELIEVED TO BE REASONABLE, ARE
INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH
STATEMENTS AND ESTIMATES. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH STATEMENTS
OR ESTIMATES WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS
THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
IDENTIFIED IN THE RISK FACTORS DISCUSSED BELOW. IN LIGHT OF THESE AND OTHER
UNCERTAINTIES, THE INCLUSION OF A FORWARD-LOOKING STATEMENT HEREIN SHOULD NOT BE
REGARDED AS A REPRESENTATION BY THE COMPANY THAT THE COMPANY'S PLANS AND
OBJECTIVES WILL BE ACHIEVED.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 2
FORWARD LOOKING INFORMATION................................. 2
SUMMARY..................................................... 4
RISK FACTORS................................................ 17
THE TRANSACTIONS............................................ 24
USE OF PROCEEDS............................................. 26
CAPITALIZATION.............................................. 27
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS................................................ 28
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA............. 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS..................................... 38
THE EXCHANGE OFFER.......................................... 45
BUSINESS.................................................... 53
MANAGEMENT.................................................. 64
PRINCIPAL SHAREHOLDERS...................................... 72
CERTAIN TRANSACTIONS........................................ 74
THE SENIOR CREDIT FACILITY.................................. 75
DESCRIPTION OF THE NEW NOTES................................ 77
FEDERAL INCOME TAX CONSEQUENCES............................. 113
PLAN OF DISTRIBUTION........................................ 114
BOOK-ENTRY; DELIVERY AND FORM............................... 114
LEGAL MATTERS............................................... 116
EXPERTS..................................................... 116
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
</TABLE>
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES
WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY
REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A
FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER CHAPTER 421-B IS
TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN
EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT
THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS
OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT
IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER,
CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS
PARAGRAPH.
3
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and Consolidated Financial
Statements (including the notes thereto) appearing elsewhere in this Prospectus.
The consummation of the Old Notes Offering (as defined) occurred simultaneously
with, and was conditioned upon, the consummation of the Recapitalization (as
defined). As used herein and except as the context otherwise may require, the
"Issuer" means Werner Holding Co. (DE), Inc., "Holding" means Werner Holding Co.
(PA), Inc., and the "Company" or "Werner" means, collectively, Holding, the
Issuer and all of their consolidated subsidiaries. Holding has no substantial
operations or assets other than its investment in the Issuer. Unless otherwise
noted, all market share and industry data presented in this Prospectus is based
on Company research, estimates or studies commissioned by the Company and
conducted by third parties every three years, and as such, the most recent
market share and industry data relates to the year ended 1996.
THE COMPANY
OVERVIEW
Based on the Company's own research and studies commissioned by
professional research firms, management believes that Werner is the nation's
largest manufacturer and marketer of ladders and other climbing products.
Management estimates that in 1996 the Company's sales of climbing products
represented approximately 36% of the estimated $820 million total U.S. sales of
climbing products. Werner's climbing products include aluminum, fiberglass and
wood ladders, scaffolding, stages and planks. The Company markets its broad line
of innovative products across all major price points under the Werner name,
which management believes to be the most widely-recognized climbing products
brand name by both professional and consumer end-users of climbing products. The
Company sells its products through a variety of distribution channels, such as
home improvement retailers, hardware dealers, professional supply houses and
specialty wholesale distributors. Werner is committed to providing the highest
level of customer service and is a primary supplier of ladders to most of the
largest United States home improvement retailers, including power retailers
(e.g., The Home Depot and Lowe's), and to most of the major hardware
co-operatives, including ACE Hardware, Hardware Wholesalers, Inc. ("HWI") and
TruServ. In addition to climbing products, the Company 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. The Company's net sales have increased at a five-year
compound annual growth rate ("CAGR") of 11.9%, from 237.1 million in fiscal 1992
to $416.3 million in fiscal 1997.
COMPETITIVE STRENGTHS
Recognized Industry Leader. Management estimates that in 1996, Werner
generated approximately three times the revenue of its largest competitor in the
domestic climbing products market and increased its percentage of the total U.S.
sales of climbing products from approximately 32% in 1993 to approximately 36%
in 1996. Management believes that the Company's combination of (i) market
leadership, (ii) breadth of product line, (iii) nationwide production and
distribution, (iv) reputation for high quality and (v) superior customer service
have enabled the Company to attract and retain many of the largest distributors
across the United States as its customers. Management believes that these
factors also enable the Company to serve its customer base on a broad geographic
basis and benefit from economies of scale in manufacturing, purchasing and
distribution. Werner serves all segments of the climbing products market.
Strong Brand Name. The Werner brand name has a nearly 50-year history, and
management believes Werner is the most recognized name by both professional and
consumer end-users of climbing products. The Company has established its leading
brand name primarily by providing high-quality products and strong customer
service. Werner has successfully used the strength of its brand name to expand
its product offerings, particularly in the fiberglass ladder category, and to
expand its market
4
<PAGE> 5
coverage by partnering with the leading home improvement retailers, hardware
dealers and professional supply houses to distribute Werner products.
High-Quality, Innovative Product Line. Management believes that the
Company's products are regarded as the most innovative and highest quality in
the industry. The Company has consistently introduced improvements to the
climbing products market, from the early development of the ALFLO(R)
Twist-Proof(R) rung-to-side rail technology, which significantly increased the
structural integrity of lightweight aluminum ladders, to the more recent
introduction of premium quality and visually-appealing fiberglass ladders.
Management believes that Werner has successfully generated incremental new sales
and encouraged end-users to purchase ladders at higher price points by
continually introducing innovative, new products. Management estimates that new
or substantially improved products introduced since 1990 accounted for
approximately 48% of the Company's climbing products sales in 1997.
Superior Customer Service. The Company's strategically located
manufacturing and distribution facilities, coupled with a broad offering of
high-quality products, allow the Company to provide its customers throughout the
United States with one-stop shopping on a cost-effective and timely basis.
Werner's strong relationships with its customers are supported by innovative
sales and marketing programs tailored to serve specific channels of
distribution. The Company has found that by educating and working closely with
its customers it has been able to increase their effectiveness in selling the
Company's products. To this end, the Company has developed innovative marketing
and category management services for its climbing products customers, which
include (i) product mix optimization, (ii) effective point-of-purchase
merchandising and signage, (iii) training programs, (iv) aggressive application
of electronic commerce and (v) customer inventory management programs.
Management believes that these services allow the Company to assist its
customers in maximizing sales. The Company's superior customer service has been
consistently recognized in awards granted to Werner by its customers and
industry organizations.
Loyal and Diverse Customer Relationships. The Company has a broad and well
established customer base of more than 17,000 customers across all major
climbing products distribution channels. Its customer network encompasses
relationships with the major home improvement retailers, hardware dealers,
professional supply houses and wholesale distributors. Werner is a primary
supplier of ladders to most of the largest United States home improvement
retailers, including power retailers, (e.g., The Home Depot and Lowe's), and to
most of the largest hardware co-operatives, including ACE Hardware, HWI and
TruServ. Werner is also a primary supplier to most of the major paint retailers,
such as Sherwin Williams and ICI. Werner attributes its ability to establish
such relationships with its customers primarily to the Company's broad offering
of high-quality products and high level of customer service. These factors have
resulted in a loyal customer base, characterized by low turnover. The Company
has had relationships with many of its major customers for over 20 years.
Vertically Integrated, Cost-Efficient Manufacturing. Werner operates
vertically integrated manufacturing facilities, which allow the Company to
cost-efficiently manufacture consistent, premium quality products as well as to
respond quickly to customer requirements. The Company believes it is the most
vertically integrated company in the climbing products industry. In the last
five years, Werner has invested more than $45 million in its facilities to
increase quality and capacity and to reduce total product and distribution
costs.
Experienced and Committed Management Team. Werner has assembled a strong
and experienced management team at both the corporate and operating levels. The
top fifteen members of Werner's senior management team have an average of over
20 years of experience with the Company. The Management Shareholders (as
defined) own approximately 13% of the outstanding shares of Holding with an
opportunity to own up to approximately 22% of the shares of Holding through
participation in employee incentive plans.
5
<PAGE> 6
BUSINESS STRATEGY
The Company intends to enhance its market leadership position and maximize
profitability and cash flow by implementing the following business strategies:
Increase Penetration of the Domestic Climbing Products Market. The Company
believes it is well positioned to continue to increase its share of the domestic
climbing products market and intends to use its strong brand name, broad product
line and established distribution network to increase sales through existing
customers and to develop new customer relationships. The Company also believes
that its strong strategic relationships with leading climbing products
distributors in each channel will facilitate continued market share gains as
such customers further consolidate and expand their channels. Furthermore,
management believes that as distributors continue to consolidate their vendor
bases, the Company's broad product line and ability to supply distributors
throughout the United States provide significant opportunities for domestic
growth. The Company plans to further extend its domestic market coverage by
entering new product categories within the climbing products industry in which
it does not significantly participate at this time, such as domestic platform
ladders and step stools.
Achieve Cost Reductions. Management has identified a number of cost
reduction opportunities from which the Company expects to realize up to
approximately $20 million in annual savings over the next five years, at an
estimated cost of up to approximately $49 million. These include: (i) adding
aluminum remelting capability to certain of the Company's manufacturing sites,
(ii) modernizing a number of extrusion presses, (iii) consolidating warehouses,
and (iv) constructing a new extension ladder production line. Management
believes that these capital investments will significantly enhance the Company's
vertically integrated manufacturing capabilities, thus allowing Werner to reduce
costs, improve productivity and achieve greater economies of scale.
Continue New Product Development. Werner has invested significant resources
in research and development. The Company has expended approximately 0.6% of net
sales in 1995 and 1996, and 0.5% of net sales in 1997 on product development.
The Company continues to introduce new products while focusing on higher margin
products. For example, in the third quarter of 1997, the Company introduced the
Penguin(TM), an attractive, lightweight, consumer-oriented platform ladder for
household chores. Werner's commitment to product development includes the
application of further advancements in fiberglass pultrusion technology to
climbing products as well as the introduction of new products for the stage and
scaffold markets. Management believes that Werner's cost-efficient production
capability, well recognized brand name and loyal, diverse customer relationships
will enable the Company to continue to successfully introduce new products and
to increase per capita ladder ownership.
Pursue Complementary Acquisitions and International Expansion. Werner
intends to pursue acquisitions which complement its existing manufacturing and
distribution capabilities, provide opportunities to add capacity, expand product
offerings and achieve further economies of scale. Management believes that the
international climbing products market offers significant growth opportunities
for the Company. Compared to the United States market, the international
climbing products market is highly fragmented and regionally-focused, with
smaller companies offering narrower product lines and limited marketing and
customer service support. Furthermore, management believes that as the major
United States hardware and home improvement chains expand internationally, there
will be a growing need for high-quality, dependable suppliers such as Werner to
establish a direct presence overseas. The Company has licenses in the following
countries: United Kingdom, the Netherlands, South Africa, New Zealand, Brazil,
Australia, Japan, Chile, Canada and Italy. The Company sells its products to
customers in over 60 countries around the world.
THE TRANSACTIONS
On October 8, 1997, Holding 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
6
<PAGE> 7
(such affiliates and investors, the "Investors"). On November 24, 1997 (the
"Recapitalization Closing Date"), pursuant to the Recapitalization Agreement,
Holding reclassified all of the outstanding shares of its Class A Common Stock,
par value $1.00 per share ("Pre-Recapitalization Class A Stock"), and its Class
B Common Stock, par value $1.00 per share ("Pre-Recapitalization Class B
Stock"). The Pre-Recapitalization Class A Stock was reclassified into shares of
Class A Common Stock, par value $0.01 per share ("Class A Stock"), and Class A-I
Common Stock, par value $0.01 per share ("Class A-I Stock"), and the
Pre-Recapitalization Class B Stock was reclassified into shares of Class B
Common Stock, par value $0.01 per share ("Class B Stock"), and Class B-I Common
Stock, par value $0.01 per share ("Class B-I Stock"). On the Recapitalization
Closing Date, Holding redeemed all outstanding shares of Class A-I Stock and
Class B-I Stock, representing approximately 85% of the then outstanding shares
of Holding, in exchange for (i) $2,421.29 per share (the "Cash Redemption
Price"), with an aggregate Cash Redemption Price of approximately $330.7 million
and (ii) the right to receive, upon certain conditions, an additional, one-time,
lump sum payment (the "Market Participation Right"). Simultaneously therewith,
the Investors purchased from Holding for approximately $122.7 million (the "Cash
Equity Investment") shares representing approximately 67% of the shares of
Holding outstanding immediately after the Recapitalization. The foregoing
transactions are collectively referred to herein as the "Recapitalization." The
Class A Stock and the Class B Stock were retained by two categories of pre-
Recapitalization shareholders: (1) Donald M. Werner, Howard L. Solot, Michael E.
Werner, Eric J. Werner, Michael J. Solot, Craig R. Werner and Bruce D. Werner,
who were active in the management of the Company at the time of the Transactions
(collectively, the "Management Shareholders") and (2) shareholders who were not
active in the management of the Company at the time of the Transactions,
including Werner family members and certain other individuals (collectively, the
"Non-Management Shareholders"). Following the Recapitalization, the
pre-Recapitalization shareholders continue to own approximately 33% of the
outstanding equity of Holding, with a value of $59.3 million based on the price
paid by the Investors. Included in this group are the Management Shareholders,
who continue to manage and operate the business, and who continue to own
approximately 13% of Holding's capital stock. See "The Transactions -- The
Recapitalization."
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 amount of privately
placed Notes (the "Old Notes") and (iii) 186.5 million of borrowings under a
$320.0 million senior credit facility (the "Senior Credit Facility"). See "The
Transactions -- The Recapitalization" and "The Senior Credit Facility." The
offering of the Old Notes (the "Old Notes Offering") and the Senior Credit
Facility are collectively referred to herein as the "Recapitalization Financing"
and, together with the Recapitalization, the "Transactions."
RECENT DEVELOPMENT
Prior to March 31, 1998, the Company operated Manufacturers Indemnity and
Insurance Company of America ("MIICA") as a Colorado captive insurance company,
to provide product liability, workers compensation and environmental insurance
to Holding and its subsidiaries. MIICA maintained an insurance fund consisting
of investments in debt and equity securities, real estate and other investments
to pay claims associated with these insurance policies. In the first quarter of
1998, the Company undertook an extensive evaluation of the cost and efficiency
of providing such insurance through MIICA. As a result of this evaluation, the
Company decided to obtain such insurance coverage from an external commercial
insurance company and to discontinue the operations of MIICA.
As a result of its decision, on March 31, 1998, the Company effectively
completed the transfer of MIICA's outstanding product and workers compensation
liabilities for losses incurred on or prior to March 31, 1998 to a commercial
insurance company in exchange for the payment by MIICA of premiums of
approximately $41.5 million (the "Insurance Transfer"). MIICA liquidated a
substantial portion of its investment portfolio to pay this premium. Immediately
prior to the Insurance Transfer, the Company had a reserve for such liabilities
of approximately $48.5 million as of March 31, 1998. This reserve was
established in conjunction with external independent actuaries. As a result of
the Insurance Transfer,
7
<PAGE> 8
MIICA ceded and the commercial insurance company assumed MIICA's product and
workers' compensation liabilities for losses incurred prior to March 31, 1998.
Under the terms of the agreements governing the Insurance Transfer, the
aggregate limit of all such liabilities assumed by the commercial insurance
company for losses incurred on or prior to March 31, 1998 is $75 million. The
Company has agreed to indemnify the commercial insurance company for any losses
in excess of this limit.
Because MIICA is a captive insurance company licensed in Colorado, the
cessation of MIICA's operations and dissolution requires pre-approval of the
Colorado Division of Insurance ("CDI"). The Company believes it will obtain such
approval in the second quarter of 1998. Upon receipt of this approval, it is
expected that the remaining assets of MIICA will be distributed to the Issuer
and will be sold or liquidated as soon as practicable. As required by the Senior
Credit Facility, the net cash proceeds from the disposition of these remaining
assets of MIICA will be used to pay indebtedness under the Senior Credit
Facility.
In conjunction with the Insurance Transfer, the Company has now obtained
product liability and workers' compensation insurance coverage for such losses
which occur on or after April 1, 1998. This insurance coverage is at guaranteed
rates over a rolling five year period and is subject to certain deductible
provisions. The Company believes that this insurance coverage is adequate for
its current and future anticipated business needs.
RISK FACTORS
Holders of Old Notes should consider carefully all of the information set
forth in this Prospectus and, in particular, the information set forth under
"Risk Factors," beginning on page 14, including, among others risks relating to:
substantial existing and potential future leverage, debt service obligations and
liquidity; the subordination of New Notes and asset encumbrance; restrictive
loan covenants; the conduct of substantially all of the Issuer's operations
through its subsidiaries; the control of Werner by a small group of
shareholders; dependence on key customers; the uncertainty of anticipated cost
savings; competition; legal proceedings; the Company's sensitivity to economic
cycles and weather conditions; availability and pricing of raw materials;
environmental regulation; MIICA's investment portfolio; the potential inability
of the Company to fund a change of control offer; the Company's dependence on
key personnel; fraudulent conveyances and preferential transfers; the absence of
a public market for the New Notes and the impact of the year 2000.
------------------------
The Issuer is a Delaware corporation. Its principal offices are located at
1105 North Market Street, Suite 1300, Wilmington, Delaware 19899, and its
telephone number is (302) 478-5732. Holding's principal offices are located at
93 Werner Road, Greenville, Pennsylvania 16125 and its telephone number is (724)
588-2550.
THE EXCHANGE OFFER
Issuer........................ Werner Holding Co. (DE), Inc.
Securities Offered............ Up to $135,000,000 in aggregate principal
amount of 10% Series A Senior Subordinated
Notes due 2007 of the Issuer (the "New Notes").
The terms of the New Notes and Old Notes are
identical in all material respects, except for
certain transfer restrictions and registration
rights relating to the Old Notes.
The Exchange Offer............ The New Notes are being offered in exchange for
a like principal amount of Old Notes. Old Notes
may be exchanged only in integral multiples of
$1,000. The issuance of the New Notes is
intended to satisfy obligations of the Company
contained in the Registration Rights Agreement
(as defined).
8
<PAGE> 9
Expiration Date; Withdrawal of
Tender...................... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on June 16, 1998, or such
later date and time to which it is extended by
the Company but in no event later than 30
business days after the date on which the
Commission declares the Registration Statement
to be effective. The tender of Old Notes
pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. Any
Old Notes not accepted for exchange for any
reason will be returned without expense to the
tendering holder thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer.
Certain Conditions to the
Exchange Offer.............. The Issuer's obligation to accept for exchange,
or to issue New Notes in exchange for, any Old
Notes is subject to certain customary
conditions relating to compliance with any
applicable law, order of any governmental
agency or any applicable interpretation by any
staff of the Commission, which may be waived by
the Issuer in its reasonable discretion. The
Issuer currently expects that each of the
conditions will be satisfied and that no
waivers will be necessary. See "The Exchange
Offer -- Certain Conditions to the Exchange
Offer."
Procedures to Tendering
Old Notes................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with such Old Notes and any
other required documentation, to the Exchange
Agent (as defined) at the address set forth
herein. See "The Exchange Offer -- Procedures
for Tendering Old Notes."
Use of Proceeds............... There will be no use of proceeds to the Company
from the exchange of Notes pursuant to the
Exchange Offer.
Exchange Agent................ IBJ Schroder Bank & Trust Company is serving as
the Exchange Agent in connection with the
Exchange Offer.
Federal Income Tax
Consequences................ The exchange of Notes pursuant to the Exchange
Offer will not be a taxable event for federal
income tax purposes. See "Certain Federal
Income Tax Consequences."
CONSEQUENCES OF EXCHANGING OLD NOTES PURSUANT TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, holders of Old Notes (other than any
holder who is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act) who exchange their Old Notes for New Notes pursuant to the
Exchange Offer generally may offer such New Notes for resale, resell such New
Notes, and otherwise transfer such New Notes without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
such New Notes are acquired in the ordinary course of the holder's business and
such holders have no arrangement or understanding with any person to participate
in a distribution of such New Notes. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a
9
<PAGE> 10
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdiction or an
exemption from registration or qualification is available and is complied with.
The Issuer has agreed, pursuant to the Registration Rights Agreement and subject
to certain specified limitations therein, to register or qualify the New Notes
for offer or sale under the securities or blue sky laws of such jurisdictions as
any holder of the Notes reasonably requests in writing. If a holder of Old Notes
does not exchange such Old Notes for New Notes pursuant to the Exchange Offer,
such Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old Notes may not be offered or
sold, unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "The Exchange Offer -- Consequences of
Failure to Exchange; Resales of New Notes."
The Old Notes are currently eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. Following
commencement of the Exchange Offer but prior to its consummation, the Old Notes
may continue to be traded in the PORTAL market. Following consummation of the
Exchange Offer, the New Notes will not be eligible for PORTAL trading.
THE NEW NOTES
The terms of the New Notes are identical in all material respect to the Old
Notes, except for certain transfer restrictions and registration rights relating
to the Old Notes. For purposes of this Prospectus, the term "Notes" shall refer
collectively to the New Notes and the Old Notes.
Issuer........................ Werner Holding Co. (DE), Inc.
Securities Offered............ $135,000,000 in aggregate principal amount of
10% Series A Senior Subordinated Notes due 2007
of the Issuer.
Maturity Date................. November 15, 2007.
Interest Payment Dates........ May 15 and November 15 of each year, commencing
on May 15, 1998.
Note Guarantees............... The Issuer's payment obligations under the
Notes are jointly and severally guaranteed on a
senior subordinated basis by Holding and each
of the Issuer's Restricted Subsidiaries other
than any Foreign Subsidiary (as defined) or
Insurance Subsidiary (as defined) (the
"Subsidiary Guarantors" and, together with
Holding, the "Guarantors"). The Note Guarantees
are subordinated in right of payment to all
existing and future Senior Debt of the
Guarantors, including the guarantees of Senior
Debt issued by the Guarantors under the Senior
Credit Facility. See "Description of the New
Notes -- Note Guarantees."
Optional Redemption........... Except as described below, the Notes are not
redeemable at the Issuer's option prior to
November 15, 2002. Thereafter, the Notes will
be subject to redemption at any time at the
option of the Issuer, in whole or in part, upon
not less than 30 nor more than 60 days' notice,
at the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated
Damages thereon, if any, to the applicable
redemption date. In addition, at any time and
from time to time, prior to November 15, 2000,
the Issuer may redeem up to 35% of the original
aggregate principal amount of Notes at a
redemption price of 110% of the principal
amount thereof, plus accrued and unpaid
interest and Liquidated Damages thereon, if
any, to the redemption date, with the net cash
proceeds of a public offering of common stock
of the Issuer or Holding; provided that at
least 65% of the
10
<PAGE> 11
original aggregate principal amount of Notes
remains outstanding immediately after the
occurrence of such redemption; and provided
further that such redemption shall occur within
60 days of the date of the closing of such
public offering. See "Description of the New
Notes -- Optional Redemption."
Change of Control............. Upon the occurrence of a Change of Control, (i)
the Issuer will have the option, at any time on
or prior to November 15, 2002, to redeem the
Notes in whole, but not in part, at a
redemption price equal to 100% of the principal
amount of the Notes plus the Applicable Premium
as of, and accrued but unpaid interest and
Liquidated Damages thereon, if any, to, the
date of redemption, and (ii) if the Issuer does
not so redeem the Notes, or if a Change of
Control occurs after November 15, 2002, each
holder of Notes will have the right to require
the Issuer to repurchase all or any part of
such holder's Notes at a price equal to 101% of
the aggregate principal amount thereof plus
accrued and unpaid interest and Liquidated
Damages thereon, if any, to the date of
purchase. There can be no assurance that the
Issuer will have sufficient funds available or
will be permitted by its other debt agreements
to repurchase the Notes upon the occurrence of
a Change of Control. See "Description of the
New Notes -- Optional Redemption" and
"Description of the New Notes -- Repurchase at
the Option of Holders -- Change of Control."
Ranking....................... The Notes are general unsecured obligations of
the Issuer that are subordinated to all Senior
Debt (as defined) of the Issuer. The Note
Guarantees are general unsecured obligations of
the Guarantors that are subordinated to all
Senior Debt of the Guarantors. At December 31,
1997, (i) the outstanding Senior Debt of the
Issuer was $186.5 million, all of which was
Secured Debt (as defined), (ii) the Issuer had
no Pari Passu Indebtedness outstanding and no
indebtedness that would be subordinate or
junior in right of payment to the Notes, (iii)
the outstanding Senior Debt of the Guarantors
was $191.5 million, all of which was Secured
Debt, and (iv) the Guarantors had no Pari Passu
Indebtedness and no indebtedness that would be
subordinate or junior in right of payment to
the Note Guarantees. Of the $322.5 million of
consolidated indebtedness of the Company, the
Notes (representing $131 million ($135 million,
net of the unamortized discount) of such
indebtedness) rank junior in the right of
payment to all other indebtedness. See
"Description of the New Notes --
Subordination."
Restrictive Covenants......... The Indenture contains certain covenants that,
among other things, limit the ability of the
Issuer and/or its Restricted Subsidiaries to
(i) incur additional indebtedness, (ii) pay
dividends or make certain other restricted
payments, (iii) make investments, (iv) enter
into transactions with affiliates, (v) make
certain asset dispositions and (vi) merge or
consolidate with, or transfer substantially all
of its assets to, another person. The Indenture
also limits the ability of the Issuer to create
restrictions on the ability of Restricted
Subsidiaries to pay dividends or make any other
distributions. In addition, the Issuer is
obligated, under certain circumstances, to
offer to repurchase the Notes with the net cash
proceeds of certain sales or other
11
<PAGE> 12
dispositions of assets. However, all of these
limitations and prohibitions are subject to a
number of important qualifications. See
"Description of the New Notes."
Absence of a Public Market for
the New Notes................. The New Notes are new securities and there is
currently no established market for the New
Notes. Accordingly, there can be no assurance
as to the development or liquidity of any
market for the New Notes. The Company does not
intend to apply for listing of the New Notes on
a securities exchange.
12
<PAGE> 13
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following summary historical and pro forma financial information is
that of Werner Holding Co. (PA), Inc., the Issuer's parent company. Holding is a
guarantor of the debt of the Issuer and has no substantial operations or assets
other than its investment in the Issuer. As a result, the consolidated financial
condition and results of operations of Holding are substantially the same as
those of the Issuer. The summary historical financial information for each of
the years in the two-year period ended December 31, 1994 and the balance sheet
information at December 31, 1995 have been derived from the audited historical
consolidated financial statements of the Company. The summary historical
financial information for each of the years in the three-year period ended
December 31, 1997 and the pro forma financial information for the year ended
December 31, 1997 have been derived from, and should be read in conjunction
with, the audited Consolidated Financial Statements (including the notes
thereto) appearing elsewhere in this Prospectus. The unaudited pro forma
operating data reflects the Transactions as if they had occurred on January 1,
1997. The pro forma financial information does not purport to represent what the
Company's results of operations would actually have been had the Transactions in
fact occurred on the assumed date or to project the Company's results of
operations for any future date or period. The following table should also be
read in conjunction with "Selected Consolidated Historical Financial Data,"
"Unaudited Pro Forma Condensed Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
13
<PAGE> 14
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
----------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $277.9 $328.8 $336.0 $366.9 $416.3
Cost of sales.......................... 208.4 241.4 248.9 265.0 300.1
------ ------ ------ ------ ------
Gross profit........................... 69.5 87.4 87.1 101.9 116.2
General and administrative expense..... 18.3 22.1 25.0 27.0 31.2
Selling and distribution expense....... 33.8 37.9 47.1 47.9 48.9
Recapitalization expense............... -- -- -- -- 22.7
Non-cash compensation charge........... -- -- -- -- 78.5
------ ------ ------ ------ ------
Operating profit (loss)................ 17.4 27.4 15.0 27.0 (65.1)
MIICA investment gains (losses)........ 4.2 (4.0) 1.3 9.5 (14.6)
Interest expense....................... 6.6 5.5 7.2 7.5 9.0
Net income (loss)...................... 4.6 11.3 6.3 19.4 (90.5)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and equivalents................... $ 7.8 $ 0.1 $ 0.6 $ 1.0 $ 3.1
Insurance fund investments............. 44.2 46.1 68.2 80.9 58.6
Working capital........................ 47.7 42.5 59.4 49.2 30.1
Total assets........................... 183.7 199.8 234.6 261.2 288.2
Reserve for losses and loss adjustment
expenses............................ 33.7 36.7 41.5 45.3 49.6
Total debt (including current
maturities)......................... 73.1 60.4 83.5 83.4 322.5
Common shareholders' equity
(deficit)(a)........................ 41.3 49.8 62.1 75.1 (153.7)
OTHER FINANCIAL DATA:
Cash flows provided by (used in)
operating activities................ $ 17.5 $ 18.3 $ (1.4) $ 19.5 $ 17.2
Cash flows used in investing
activities.......................... (10.0) (11.1) (18.9) (15.8) (3.6)
Cash flows (used in) provided by
financing activities................ (2.0) (15.0) 20.8 (3.3) (11.5)
EBITDA(b).............................. 30.2 32.0 27.2 46.1 (69.3)
Pro forma Adjusted EBITDA(b)........... -- -- -- -- 58.3
Depreciation and amortization.......... 6.9 7.4 8.0 9.2 11.5
Net cash interest expense(c)........... 6.6 5.0 6.9 7.5 8.7
Capital expenditures................... 3.5 8.1 12.5 13.0 11.7
Dividends declared per share........... -- 14.75 10.20 11.25 10.50
Ratio of earnings to fixed
charges(d).......................... 3.0x 3.7x 2.2x 3.9x --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
PRO FORMA OPERATING DATA:
Net sales................................................. $416.3
Interest expense.......................................... 31.9
Net cash interest expense(c).............................. 29.2
Ratio of earnings to fixed charges(d)..................... --
</TABLE>
See Notes to Summary Historical and Pro Forma Financial Information.
14
<PAGE> 15
NOTES TO SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(DOLLARS IN MILLIONS)
(a) 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.
(b) EBITDA represents earnings before interest, income taxes, depreciation and
amortization.
The following table presents a reconciliation of EBITDA to Pro forma
Adjusted EBITDA:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
----- ----- ----- ----- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
EBITDA..................................... $30.2 $32.0 $27.2 $46.1 $(69.3)
Reduction in management compensation(i)...................................... 4.3
Non-recurring expenses(ii)................................................... 0.9
MIICA investment income(iii)................................................. 4.6
Exclusion of historic MIICA (income) loss.................................... 14.6
Non-recurring private company expenses(iv)................................... 2.0
Non-cash compensation charge(v).............................................. 78.5
Recapitalization expense(vi)................................................. 22.7
------
Pro forma Adjusted EBITDA.................................................... $ 58.3
======
</TABLE>
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. Pro forma
Adjusted EBITDA is presented because it gives the Holders of the Notes the
ability to determine the Company's compliance with certain of the covenants of
the Indenture and the Senior Credit Facility (because of cross default
provisions, defaults under the Senior Credit Facility are also defaults under
the Indenture). These covenants are based on defined terms that incorporate
adjustments based on the reconciling items listed below. While these adjustments
required by the Indenture and Senior Credit Facility are only applicable to
periods prior to the Recapitalization Closing Date, they remain relevant to
Holders of the Notes as a meaningful historical and comparative measure. In
addition, certain covenants in the Senior Credit Facility require a
determination of Consolidated EBITDA for the trailing four quarters (which until
the first quarter of 1999 will include pre-Recapitalization periods). Thus,
management of the Company believes that the Pro forma Adjusted EBITDA measure
provides relevant and useful information to investors. However, EBITDA and Pro
forma Adjusted 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. In addition, EBITDA and Pro forma Adjusted
EBITDA, as described above, may not be comparable to such measurements as used
by other companies. An explanation of the reconciling items from EBITDA to Pro
forma Adjusted EBITDA follows:
(i) The reduction in management compensation relates to agreed upon
reductions to certain benefits paid to family members employed by the
Company. Such benefits have not continued subsequent to the
Recapitalization.
(ii) Non-recurring expenses consist of $0.7 relating to the costs of
temporary warehousing space that was not utilized (and is no longer
being maintained) and costs of start-up and incremental inventory
carrying costs associated with the modernization of the Company's
Greenville remelt operation (which are no longer being incurred) and
$0.2 relating to the closing of certain wood ladder production
facilities and related warehouse facilities.
(iii) For purposes of computing Pro forma Adjusted EBITDA, the Company has
assumed a 7.7% return on the investment portfolio of MIICA. Such 7.7%
return represents the five-year average return on investment assets
for commercial casualty lines as reported by "Best's Aggregates &
15
<PAGE> 16
NOTES TO SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION -- CONTINUED
Averages," 1997 Edition. The balance of the investment portfolio used
in computing the 7.7% return is the December 31, 1997 investment
balance of $58.6.
(iv) Private company expenses consist of items that have not continued
following the Recapitalization. These expenses include family-related
charitable contributions and research and development grants to
educational institutions.
(v) The non-recurring non-cash compensation charge (and a corresponding
credit to shareholders' equity) of $78.5 is 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.
(vi) Recapitalization expense of $22.7 represents 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) Net cash interest expense is defined as interest expense less amortization
of deferred financing costs and original issue discount.
(d) For purposes of the computation, the ratio of earnings to fixed charges has
been calculated by dividing (i) income before income taxes and extraordinary
charge plus fixed charges by (ii) fixed charges. Fixed charges are equal to
interest expense plus the portion of the rent expense estimated to represent
interest. The ratio of earnings to fixed charges is not meaningful for
periods that result in a deficit. For the historical and pro forma year
ended December 31, 1997, the deficiency of earnings to fixed charges was
$89.9 and $108.1, respectively.
16
<PAGE> 17
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
risk factors, as well as the other information set forth elsewhere in this
Prospectus. This Prospectus contains, in addition to historical information,
certain 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. Factors that might cause such a
difference include those discussed below, as well as general economic and
business conditions, competition and other factors discussed elsewhere in this
Prospectus. All forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements set forth herein.
SUBSTANTIAL LEVERAGE; DEBT SERVICE OBLIGATIONS; LIQUIDITY
In connection with the Transactions, the Company incurred a significant
amount of indebtedness, the effect of which was to increase the Company's
indebtedness from December 31, 1996 by $239.1 million. At December 31, 1997, the
Company had $322.5 million of consolidated indebtedness, of which $191.5 million
was Senior Debt. Scheduled payments of principal due in each of the years 1998
through 2000 are $1.5 million. Projected interest requirements for the same
period, assuming current interest rates, range from $26.3 million to $28.3
million annually.
The Company's ability to make scheduled payments of principal of, or to pay
the interest, if any, on, or to refinance, its indebtedness (including the
Notes), or to fund planned capital expenditures or finance 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 flows from
operations and available cash, together with available borrowings under the
Senior Credit Facility, will be adequate to meet the Company's anticipated
future requirements for working capital, budgeted capital expenditures,
acquisition financing and scheduled payments of principal and interest on its
indebtedness, including the Notes, for the next 12 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 in an amount sufficient to enable the
Company to service its indebtedness, including the Notes, or make anticipated
capital expenditures and to fund future acquisitions. In addition, there can be
no assurance that the Company will be able to effect any refinancing on
commercially reasonable terms, or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including the following: (i) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii) a
substantial portion of the Company's cash flow from operations is required to be
dedicated to the payment of interest on the Notes and the Company's other
existing indebtedness, thereby reducing the funds available to the Company for
other purposes; (iii) the agreements governing the Company's long-term
indebtedness contain certain restrictive financial and operating covenants; (iv)
certain indebtedness under the $320 million Senior Credit Facility, of which
$186.5 million was outstanding at December 31, 1997, is at variable rates of
interest which could cause the Company to be vulnerable to increases in interest
rates; (v) all of the indebtedness outstanding under the Senior Credit Facility
is secured by substantially all of the assets of the Company and will become due
prior to the time the principal on the Notes will become due; (vi) the Company
is substantially more leveraged than certain of its competitors, which might
place the Company at a competitive disadvantage; (vii) the Company may be
hindered in its ability to adjust rapidly to changing market conditions; and
(viii) the Company's substantial degree of leverage could make it more
vulnerable in the event of a downturn in general economic conditions or in its
business. In addition, the degree to which the Company is leveraged could
prevent it from repurchasing all of the Notes tendered to it upon the occurrence
of a Change of Control. See "Description of the
17
<PAGE> 18
New Notes -- Change of Control," "The Senior Credit Facility" and "-- Potential
Inability to Fund a Change of Control Offer."
SUBORDINATION OF NEW NOTES; ASSET ENCUMBRANCE
The New Notes will be general unsecured obligations of the Issuer that will
be subordinated to all Senior Debt of the Issuer. The Note Guarantees will be
general unsecured obligations of the Guarantors that will be subordinated to all
Senior Debt of the Guarantors. At December 31, 1997, (i) the outstanding Senior
Debt of the Issuer was $186.5 million, all of which was Secured Debt, (ii) the
Issuer had no Pari Passu Indebtedness outstanding and no indebtedness that would
be subordinate or junior in right of payment to the Notes, (iii) the outstanding
Senior Debt of the Guarantors was $191.5 million, all of which was Secured Debt,
and (iv) the Guarantors had no Pari Passu Indebtedness and no indebtedness that
was subordinate or junior in right of payment to the Note Guarantees. Although
the Indenture contains limitations on the amount of additional indebtedness
which the Issuer and the Subsidiary Guarantors may incur, under certain
circumstances the amount of such Indebtedness could be substantial and such
Indebtedness may be Senior Debt. See "Description of the New Notes." The
Indenture provides that the Issuer and the Restricted Subsidiaries may not incur
or otherwise become liable for any indebtedness that is subordinate or junior in
right of payment to any Senior Debt and senior in any respect in right of
payment to the Notes.
The Issuer may not pay principal of, premium on, or interest or Liquidated
Damages on, the Notes, make any deposit pursuant to defeasance provisions or
repurchase or redeem or otherwise retire any Notes (i) if any Designated Senior
Debt (as defined) is not paid when due or any other default on Designated Senior
Debt occurs and the maturity of such Designated Senior Debt is accelerated in
accordance with its terms or (ii) if any other default on Designated Senior Debt
occurs that permits the holders of such Designated Senior Debt to accelerate the
maturity of such Senior Debt in accordance with its terms and the Trustee
received notice of such default, unless, in either case, the default has been
cured or waived, any such acceleration has been rescinded or such Senior Debt
has been paid in full or, in the case of any non-payment default, 179 days have
passed since the default notice was given. Upon any payment or distribution to
creditors of the Issuer in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Issuer or its property, the
holders of Senior Debt will be entitled to receive payment in full in cash or
Cash Equivalents (as defined) before the holders of the Notes will be entitled
to receive any payment (other than in the form of Permitted Junior Securities
(as defined)). See "Description of the New Notes -- Subordination."
Substantially similar provisions are applicable to the Note Guarantees. The New
Notes and the Note Guarantees will also be unsecured and thus, in effect, will
rank junior to any Secured Debt of the Issuer or the Guarantors. The
indebtedness outstanding under the Senior Credit Facility is secured by liens on
substantially all of the assets of the Company.
In addition, under certain circumstances, the Note Guarantee provided by
any Guarantor could be set aside under fraudulent conveyance or similar laws.
See "-- Fraudulent Conveyance; Preferential Transfer." In any such case, the
Notes would be effectively subordinated to all liabilities of such Guarantor,
including trade debt.
RESTRICTIVE LOAN COVENANTS
The Senior Credit Facility includes certain covenants that, among other
things, restrict: (i) the making of investments, loans and advances and the
paying of dividends and other restricted payments; (ii) the incurrence of
additional indebtedness; (iii) the granting of liens, other than liens created
pursuant to the Senior Credit Facility and certain permitted liens; (iv)
mergers, consolidations, and sales of all or a substantial part of the Company's
business or property; (v) the sale of assets; and (vi) the making of capital
expenditures. The Senior Credit Facility also requires the Company to maintain
certain financial ratios, including interest coverage and leverage ratios. All
of these restrictive covenants may restrict the Company's ability to expand or
to pursue its business strategies. The ability of the Company to comply with
these and other provisions of the Senior Credit Facility may be affected by
changes in economic or
18
<PAGE> 19
business conditions, results of operations or other events beyond the Company's
control. The breach of any of these covenants could result in a default under
the Senior Credit Facility, in which case, depending on the actions taken by the
lenders thereunder or their successors or assignees, such lenders could elect to
declare all amounts borrowed under the Senior Credit Facility, together with
accrued interest, to be due and payable, and the Company could be prohibited
from making payments with respect to the Notes until the default is cured or all
Senior Debt is paid or satisfied in full. If the Company were unable to repay
such borrowings, such lenders could proceed against their collateral. If the
indebtedness under the Senior Credit Facility were to be accelerated, there can
be no assurance that the assets of the Company would be sufficient to repay in
full such indebtedness and the other indebtedness of the Company, including the
Notes. See "The Senior Credit Facility," "Description of the New
Notes -- Subordination."
OPERATION THROUGH SUBSIDIARIES
The Issuer conducts substantially all of its operations through its
subsidiaries. As a result, the Issuer is required to rely upon repayment from
its subsidiaries for the funds necessary to meet its obligations, including the
payment of interest on and principal of the Notes. The ability of the
subsidiaries to make such payments will be subject to, among other things,
applicable state laws including laws that restrict the amount of a corporation's
dividends to the amount of such corporation's capital surplus. In addition, for
so long as MIICA remains in existence, the Issuer's ability to receive dividends
or loans from MIICA will be strictly limited by applicable insurance company
laws and regulations. Claims of creditors of the Issuer's subsidiaries will
generally have priority as to the assets of such subsidiaries over claims of the
Issuer.
Although the Note Guarantees provide the holders of the Notes with a direct
claim against the assets of the Subsidiary Guarantors, enforcement of the Note
Guarantees against any Subsidiary Guarantor may be subject to legal challenge in
a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of
such Subsidiary Guarantor and would be subject to certain defenses available to
guarantors generally, including defenses to the effect that a creditor must
proceed against the primary obligor (the Issuer) prior to proceeding against any
Guarantor and that the obligation of a Guarantor can be no greater than the
obligation of the Issuer, as well as typical suretyship defenses. See
"-- Fraudulent Conveyance; Preferential Transfer." Although the Indenture
contains waivers of most guarantor defenses, certain of those waivers may not be
enforced by a court in a particular case. To the extent that the Note Guarantees
are not enforceable, the Notes would be effectively subordinated to all
liabilities of the Subsidiary Guarantors, including trade payables of such
Subsidiary Guarantors, whether or not such liabilities constitute Senior Debt
under the Indenture. In addition, the payment of dividends to the Issuer by its
subsidiaries is contingent upon the earnings of those subsidiaries and subject
to various business considerations and, for certain subsidiaries, the Indenture
will permit restrictive loan covenants to be contained in the instruments
governing the indebtedness of such subsidiaries, including the covenants which
restrict in certain circumstances the payment of dividends and distributions and
the transfer of assets to the Issuer. See "The Senior Credit Facility," and
"Description of the New Notes -- Certain Covenants -- Dividend and Other Payment
Restrictions Affecting Subsidiaries."
The Company is currently undertaking a review of the desirability of
operating through all the Issuer's direct and indirect subsidiaries, including
the Subsidiary Guarantors. In the event certain of the Issuer's subsidiaries are
deemed no longer necessary, it is expected that such subsidiaries will be
consolidated into the Issuer or one of its remaining subsidiaries. Such
consolidation will have no impact however upon holders of the Notes or the
consolidated results of operations of the Company.
CONTROL OF WERNER
Approximately 67% of the outstanding shares of voting capital stock of
Holding are held by a subsidiary of Investcorp and affiliates of Investcorp
which have entered into revocable management services or similar agreements with
an affiliate of Investcorp, pursuant to which such affiliate has the authority
to direct the voting of such shares for as long as such agreements are in
effect. Accordingly,
19
<PAGE> 20
Investcorp and its affiliates control Holding and have the power to elect the
majority of its directors, to appoint new management and to approve any action
requiring the approval of the holders of its capital stock voting as a single
class, including adoption of most amendments to Holding's articles of
incorporation and approval of mergers or sales of substantially all of Werner's
assets. The directors so elected will have the authority to effect decisions
affecting the capital structure of both Holding and the Issuer, including the
issuance of additional capital stock, the implementation of stock repurchase
programs and the declaration of dividends.
DEPENDENCE ON KEY CUSTOMERS
The Company's 10 largest customers accounted for 48.1% of the Company's
1997 net sales. The Company's largest customer, The Home Depot, accounted for
18.0% of the Company's 1997 net sales. The Company does not have contractual
agreements with most of these key climbing products customers, including The
Home Depot, for the supply of products. The loss of certain of these 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. See
"Business -- Marketing and Distribution."
ANTICIPATED COST SAVINGS
Management has identified a number of cost reduction opportunities from
which the Company expects to realize up to approximately $20 million in annual
savings over the next five years, at an estimated cost of up to approximately
$49 million. These include: (i) adding aluminum remelting capability to certain
of the Company's manufacturing sites, (ii) modernizing a number of extrusion
presses, (iii) consolidating warehouses and production facilities and (iv)
constructing a new extension ladder production line. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General," "Business -- Overview" and "Business -- Business
Strategy -- Achieve Cost Reductions."
These cost savings and capital expenditure estimates were prepared solely
by members of the management of the Company. The estimates necessarily reflect
numerous assumptions as to future sales levels and other operating results, the
availability of funds for capital expenditures as well as general industry and
business conditions and other matters, many of which are beyond the control of
the Company. All of these forward-looking statements are based on estimates and
assumptions made by management of the Company, which although believed to be
reasonable, are inherently uncertain and difficult to predict. There can be no
assurance that the savings anticipated in these forward-looking statements will
be achieved despite incurring the planned capital expenditures. In addition,
there can be no assurance that unforeseen costs and expenses or other factors
will not offset the estimated cost savings or other components or the Company's
plan in whole or in part.
COMPETITION
The Company competes in the climbing product market with a number of
national and regional manufacturers. The Company competes in the extruded
products market with several integrated primary aluminum producers and various
independent producers of aluminum extruded products. 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. The Company
competes on the basis of, among other things, competitive prices, prompt
availability, product differentiation, quality products and services, and a
broad product offering. See "Business -- Competition."
POTENTIAL FOR FUTURE LEVERAGE
Although the Indenture and the Senior Credit Facility contain limitations
on the amount of additional indebtedness which the Issuer and the Subsidiary
Guarantors may incur, under certain circumstances the Company could incur
substantial additional indebtedness, some or all of which could be senior in
20
<PAGE> 21
right of payment to the Notes. While the Company has no plans to incur
additional debt for any purposes other than to fund its working capital needs,
its incurrence of additional debt in the future, as part of a capitalized lease
transaction, leveraged acquisition or otherwise, could be permitted if the
Company satisfied the restrictive covenants under the Indenture, the Senior
Credit Facility and any other material agreements it enters into from time to
time relating to the incurrence of indebtedness. See "The Senior Credit
Facility," "Description of the New Notes -- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock."
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, are covered by insurance or are adequately reserved for,
and will not have a material adverse effect on its financial condition or
results of operations.
Due to the nature of the Company's products, the Company is subject to
product liability claims involving personal injuries allegedly related to the
Company's products. The Company believes that its insurance is generally
adequate to cover product liability claims. Nevertheless, currently pending
claims and any future claims are subject to the uncertainties related to
litigation and the ultimate outcome of any such proceedings or claims cannot be
predicted. Due to uncertainty with respect to the nature and extent of
manufacturer's and distributors' liability for personal injuries, there is also
no assurance that the product liability insurance of the Company is or will be
adequate to cover such claims. Furthermore, there can be no assurance that
insurance will remain available or, if available, that it will not be
prohibitively expensive. The loss of insurance coverage could have a material
adverse effect on the Company's results of operations and financial condition.
In addition, an action was recently filed, purporting in part to be brought
derivatively on behalf of the Company alleging breach of fiduciary duty by
various members of the Company's management and in part to be brought by the
plaintiffs individually against the Company, certain affiliated entities and
certain current and former officers and directors of the Company. The plaintiffs
seek money damages in an unspecified amount. Management believes that the
ultimate resolution of this lawsuit will not have a material adverse effect on
the Company's financial condition. See "Business -- Legal Proceedings."
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 constructions, 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 automobile 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 elective home maintenance and discouraging
do-it-yourself projects, which account for a growing portion of the Company's
sales.
AVAILABILITY AND PRICING OF RAW MATERIALS
The Company purchases aluminum, glass 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 contracts with respect to its purchases of aluminum to minimize or hedge
commodity price fluctuations. However, the Company's results of operations and
financial condition have in the past been, and may again in the future be,
adversely affected by increases in raw material or component costs or their lack
of availability. See "Business -- Industry" and "Business -- Raw Materials and
Suppliers."
21
<PAGE> 22
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, many of which provide for
substantial fines and criminal sanctions for violations. However, the operation
of manufacturing plants entails risks of financial exposure for environmental
noncompliance and cleanup liabilities. 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. See "Business -- Environmental
Matters."
MIICA INVESTMENT PORTFOLIO
In connection with the Insurance Transfer, MIICA liquidated a substantial
portion of its insurance fund investments, the proceeds of which were used to
pay insurance premiums and fees associated with the Insurance Transfer of
approximately $41.5 million. The remainder of MIICA's investment portfolio
consists of "small cap" stocks, non-investment grade securities and real estate
investments, the value of which may fluctuate depending upon economic and market
conditions. Because the majority of MIICA's investment portfolio has been
liquidated, the Company believes that any such fluctuations will not have a
material impact upon the operations and financial condition of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER
A Change of Control could require the Issuer to refinance substantial
amounts of indebtedness. Upon the occurrence of a Change of Control each holder
of Notes would have the right to require the Issuer to repurchase all or a
portion of such holder's Notes at a price equal to 101% of the aggregate
principal amount of the Notes, together with accrued and unpaid interest, and
Liquidated Damages if any, to the date of repurchase. However, the Senior Credit
Facility prohibits the purchase of the Notes by the Issuer in the event of a
Change of Control, unless and until such time as the indebtedness under the
Senior Credit Facility is repaid in full. The Issuer's failure to purchase the
Notes would result in a default under the Indenture and the Senior Credit
Facility, which, in turn, could result in amounts outstanding under the Senior
Credit Facility being declared due and payable. Any such declaration could have
adverse consequences to the Company and the holders of the Notes. In the event
of a Change of Control, there can be no assurance that the Issuer would have
sufficient assets to satisfy all of its obligations under the Senior Credit
Facility and the Notes. See "The Transactions," "The Senior Credit Facility" and
"Description of the New Notes -- Repurchase at the Option of Holders -- Change
of Control."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success is largely dependent upon the
abilities and experience of its senior management team, including the Management
Shareholders. The loss of the services of one or more of these senior executives
without a suitable replacement could have a material adverse effect on the
Company's business and future operations. The Company has entered into
employment arrangements with the Management Shareholders which expire in
November 2000. The Company does not
22
<PAGE> 23
maintain key man life insurance with respect to any of its executive officers.
See "Management -- Employment Arrangements Following Consummation of the
Recapitalization."
In April 1998, Howard L. Solot, Chief Operating Officer of the Company,
announced his intention to retire from the Company by the end of 1999, or sooner
if a suitable replacement Chief Operating Officer can be found, although he will
continue to be a Director of the Company. In May 1998, Donald W. Resnick, Chief
Financial Officer and Treasurer of the Company, announced his intention to
resign from the Company by the end of 1998, or sooner if a suitable replacement
Chief Financial Officer can be found.
FRAUDULENT CONVEYANCE; PREFERENTIAL TRANSFER
If the court in a lawsuit brought by an unpaid creditor or representative
of creditors, such as a trustee in bankruptcy, were to find under relevant
federal and state fraudulent conveyance statutes that the Issuer or any
Guarantor did not receive fair consideration or reasonably equivalent value for
incurring the indebtedness represented by the Notes or its Note Guarantee, and
that, at the time of such incurrence, the Issuer or such Guarantor (i) was
insolvent, (ii) was rendered insolvent by reason of such incurrence, (iii) was
engaged in a business or transaction for which the assets remaining with the
Issuer or such Guarantor constituted unreasonably small capital or (iv) intended
to incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, such court, subject to applicable statutes of limitation,
could avoid the Issuer's obligations under the Notes or the Guarantor's
obligations under the Note Guarantees, subordinate the Notes or the Note
Guarantees to other indebtedness of the Issuer or the Guarantors or take other
action detrimental to the holders of the Notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than all of that company's assets at a fair valuation, or if the present
fair salable value of that company's assets is less than the amount that will be
required to pay its probable liability on its existing debts as they become
absolute and matured. Moreover, regardless of solvency, a court could avoid an
incurrence of indebtedness, including the Notes, if it determined that such
transaction was made with intent to hinder, delay or defraud creditors, or a
court could subordinate the indebtedness, including the Notes, to the claims of
all existing and future creditors on similar grounds. Based upon financial and
other information currently available to it, management believes the Issuer was
solvent at the time of the Transactions and continues to be solvent. However,
there can be no assurance as to what standard a court would apply in order to
determine whether the Issuer or the Guarantors were "insolvent" upon
consummation of the sale of the Notes and the Note Guarantees.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Issuer or any Guarantor within 90 days after any payment by the Issuer or any
Guarantor with respect to the Notes or the Note Guarantees or the incurrence of
any future Note Guarantee or if the Issuer or any Guarantor anticipated becoming
insolvent at the time of such payment or incurrence, all or a portion of such
payment or such future Note Guarantee could be avoided as a preferential
transfer and the recipient of such payment could be required to return such
payment.
LACK OF PUBLIC MARKET
The Notes are new securities for which there currently is no market.
Although the Initial Purchasers (as defined) have informed the Issuer that they
currently intend to make a market in the Notes, they are not obligated to do so
and any such market making may be discontinued at any time without notice. In
addition, such market making activity may be limited during the pendency of this
Exchange Offer. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Notes. The Old Notes are eligible for trading by
qualified buyers in the PORTAL market. Following consummation of the Exchange
Offer, the New Notes will not be eligible for PORTAL trading. The Issuer does
not intend to apply for listing of the Notes on any securities exchange or for
quotation through The Nasdaq National Market.
23
<PAGE> 24
This Exchange Offer is not conditioned upon any minimum or maximum
aggregate principal amount of Notes being tendered for exchange. No assurance
can be given as to the liquidity of the trading market for the Exchange Notes,
or, in the case of non-tendering holders of Notes, the trading market for the
Notes following the Exchange Offer.
The liquidity of, and trading market for, the Notes also may be adversely
affected by general declines in the market for similar securities. Such a
decline may adversely affect such liquidity and trading markets independent of
the financial performance of, and prospects for, the Company.
IMPACT OF THE YEAR 2000
Based on recent assessments, the Company has determined that it will be
required to modify certain portions of its software so that its computer systems
will function properly with respect to dates in the Year 2000 and thereafter.
The Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if such modifications
are not made, or are not timely completed, the Year 2000 issue could have a
material adverse impact on the operations of the Company.
The Company has also initiated communications with its significant
suppliers and customers regarding the Year 2000 issue. However, there can be no
guarantee that the systems of these other companies will be timely converted and
the failure of the Company's significant suppliers and customers to make
necessary Year 2000 modifications could have a material adverse impact on the
Company's results and operations.
The Company will primarily utilize internal resources to reprogram, or
replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project by
December 31, 1998, which is prior to any impact of the Year 2000 on its
operating systems. The Company estimates the cost of the project to be
approximately $1 million.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates
which were derived utilizing numerous assumptions of future events. However,
there can be no guarantee that these estimates and the timetable will be
achieved and actual results could differ materially from those anticipated. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Impact of the Year 2000."
THE TRANSACTIONS
On October 8, 1997, Holding entered into the Recapitalization Agreement,
which was amended and restated on October 27, 1997, with the Investors. On
November 24, 1997, pursuant to the Recapitalization Agreement, Holding redeemed
approximately $330.7 million of its outstanding equity and the Investors
invested approximately $122.7 million in new equity of Holding. The remainder of
the funds used to redeem the then current shareholders' equity interests were
provided by the Old Notes Offering and the Senior Credit Facility.
THE RECAPITALIZATION
Pursuant to the closing of the Recapitalization, Holding filed Restated
Articles of Incorporation of Holding (the "Restated Articles") with the
Department of State of the Commonwealth of Pennsylvania. The Restated Articles
reclassified all of Holding's capital stock as follows: (i) each share of Pre-
Recapitalization Class A Stock held by Non-Management Shareholders were
reclassified into the right to retain 0.1376 of a fully paid and non-assessable
share of Class A Stock and the right to receive 0.8624 of a fully paid and
non-assessable share of Class A-I Stock, and each share of Pre-Recapitalization
Class B Stock held by Non-Management Shareholders was reclassified into the
right to retain 0.1376 of a fully paid and non-assessable share of Class B Stock
and the right to receive 0.8624 of a
24
<PAGE> 25
fully paid and non-assessable share of Class B-I Stock; (ii) each share of Class
A Stock and Class B Stock held by Management Shareholders was reclassified into
the fractions of fully paid and non-assessable shares of Class A Stock and Class
A-I Stock, and Class B Stock and Class B-I Stock, respectively, as described
below and (iii) Class C Common Stock, Class D Common Stock, Class E Common Stock
and Common Stock was newly authorized for issuance.
On the Recapitalization Closing Date, (i) the Class A-I Stock and the Class
B-I Stock was redeemed at the cash redemption price of $2,421.29 per share, plus
the Market Participation Right; (ii) the pre-Recapitalization shareholders
retained the outstanding shares of Class A Stock and Class B Stock; and (iii)
the Investors purchased approximately $122.7 million of Holding's Class C Common
Stock, Class D Common Stock and Class E Common Stock.
Prior to the Recapitalization, Non-Management Shareholders held an
aggregate of 106,894 shares of Pre-Recapitalization Class A Stock and
Pre-Recapitalization Class B Stock. In connection with the Recapitalization,
these shares were reclassified such that these Non-Management Shareholders
retained Class A Stock and Class B Stock at a ratio of 13.76%. Thus, following
the Recapitalization, Non-Management Shareholders hold 14,708 shares of Class A
Stock and Class B Stock, representing approximately 20% of the outstanding
voting equity of Holding.
Management Shareholders held an aggregate of 54,177 shares of
Pre-Recapitalization Class A Stock and Pre-Capitalization Class B Stock prior to
the Recapitalization. Because the Investors wanted a significant portion of the
personal net worth of each Management Shareholder to be tied to the future
performance of the Company, the Investors required, as a condition to the
Recapitalization, that a larger percentage of these shares be reclassified into
shares of Class A Stock and Class B Stock than that required of the
Non-Management Shareholders. Thus, in connection with the Recapitalization,
shares owned by Management Shareholders were reclassified such that these
shareholders (including their spouses and minor issue) retained Class A Stock
and Class B Stock at an average ratio of 18.07%. The ratio for each Management
Shareholder was determined in discussions between the Management Shareholders
and Investcorp. For the seven Management Shareholders, the ratios were 17.60%
for Donald M. Werner, 17.97% for Howard L. Solot, 16.65% for Craig R. Werner,
21.38% for Michael E. Werner, 18.39% for Eric J. Werner, 17.30% for Bruce D.
Werner and 17.44% for Michael J. Solot. As a result, following the
Recapitalization, Management Shareholders hold 9,970 shares of Class A Stock and
Class B Stock, representing approximately 13% of the outstanding voting equity
of Holding.
Thus, following the Recapitalization, pre-Recapitalization shareholders
continue to own approximately 33% of the outstanding voting equity of Holding.
Immediately following the Recapitalization, the Investors owned approximately
67% of the outstanding voting equity of Holding.
The terms of the Recapitalization, including the amount of the Cash
Redemption Price and $122.7 million equity investment amount, were based on the
equity value of the Company at the time of the Recapitalization, as agreed
between the Investors and the Company. Reasons for the Recapitalization included
meeting certain Pre-Recapitalization shareholder needs and giving the Company
resources to support its growth, new product development and market expansion.
Market Participation Right. If, prior to the tenth anniversary of the
Closing Date (i) there is an initial underwritten public offering of at least
10% of the common equity of Holding, or the Investors sell a majority of their
shares of Holding (which sale may or may not result in a Change of Control under
the terms of the Notes), and (ii) at the time of such initial public offering or
sale of shares, Holding's equity value equals or exceeds certain target values
that imply significant annual compound rates 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 Holding's equity value (the "Payment"). The Payment will be payable in
cash, provided that Holding, in its discretion, may make up to half of the
Payment in notes or similar obligations with market terms which Holding's Board
of Directors in good faith believes are of equivalent value.
25
<PAGE> 26
CAPITAL STOCK FOLLOWING THE RECAPITALIZATION
The following table sets forth the authorized and outstanding shares of
capital stock of Holding following the consummation of the Recapitalization:
<TABLE>
<CAPTION>
SHARES OUTSTANDING
AS OF THE RECAPITALIZATION
TITLE AUTHORIZED SHARES CLOSING DATE
----- ----------------- --------------------------
<S> <C> <C>
Class A Common Stock, par value $0.01 per share... 5,000 2,058.6786
Class A-I Common Stock, par value $0.01 per
share........................................... 13,000 --
Class B Common Stock, par value $0.01 per share... 25,000 22,438.0969
Class B-I Common Stock, par value $0.01 per
share........................................... 140,000 --
Class C Common Stock, par value $0.01 per share... 45,000 4,681.7850
Class D Common Stock, par value $0.01 per share... 1,000 1,000.0000
Class E Common Stock, par value $0.01 per share... 50,000 45,000.0000
Common Stock, par value $0.01 per share........... 131,000 --
------- -----------
Total........................................... 410,000 75,178.5605
------- -----------
</TABLE>
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
50.6818 votes per share on all matters as to which shareholders may be entitled
to vote pursuant to the Pennsylvania Business Corporation Law of 1988. 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 Holding, a sale of
substantially all the assets of the Company or a public offering of any equity
securities of Holding, 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 Holding. When issued,
Common Stock of Holding will have one vote per share.
THE SENIOR CREDIT FACILITY
As part of the Transactions, the Issuer entered into the Senior Credit
Facility with Bankers Trust Company ("BT"), as administrative agent and
co-arranger, Merrill Lynch Capital Corporation, as syndication agent and
co-arranger, The Chase Manhattan Bank, as documentation agent, Goldman Sachs
Credit Partners L.P., as co-agent, and the several lenders parties thereto. The
Senior Credit Facility consists of two term loan facilities in an aggregate
principal amount of $145.0 million (the "Term Loan Facilities"), a revolving
credit facility in an aggregate principal amount of up to $100.0 million (the
"Revolving Facility"), and a revolving credit facility which is subject to a
borrowing base amount not to exceed 80% of eligible receivables in an aggregate
principal amount of up to $75.0 million (the "Receivables Facility"). See "The
Senior Credit Facility."
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange of Notes
pursuant to the Exchange Offer.
26
<PAGE> 27
CAPITALIZATION
The following table sets forth the unaudited consolidated cash and
equivalents and the capitalization of the Company at December 31, 1997. This
table should be read in conjunction with "Summary Historical and Pro Forma
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
(including the notes thereto) appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(DOLLARS IN MILLIONS)
<S> <C>
Cash and equivalents (excluding MIICA)...................... $ 3.1
=======
Short-term debt:
Receivables Facility(a)................................... $ 41.5
Long-term debt (including current portion):
Senior Credit Facility:
Revolving Facility(b).................................. --
Term Loan Facilities................................... 145.0
Variable Rate Industrial Building Revenue Bonds due
2015................................................... 5.0
10% Senior Subordinated Notes due 2007, net of unamortized
discount............................................... 131.0
-------
Total debt............................................. 322.5
Total shareholders' (deficit)(c)....................... (153.7)
-------
Total capitalization................................... $ 168.8
=======
</TABLE>
- ---------------
(a) Permits maximum borrowings of 80% of eligible receivables as defined in the
Senior Credit Facility agreement, up to an aggregate amount of $75.0.
(b) Permits maximum borrowings of $100.0.
(c) 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.
27
<PAGE> 28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements (the "Unaudited Pro Forma Condensed Consolidated Financial
Statements") are those of Werner Holding Co. (PA), Inc., the Issuer's parent
company. Holding is a guarantor of the debt of the Issuer and has no substantial
operations or assets other than its investment in the Issuer. As a result, the
consolidated financial condition and results of operations of Holding are
substantially the same as those of the Issuer.
The Unaudited Pro Forma Condensed Consolidated Financial Statements have
been prepared by applying pro forma adjustments to the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus. The Unaudited
Pro Forma Statement of Operations for the year ended December 31, 1997 gives pro
forma effect to (i) the Transactions, (ii) the Insurance Transfer, consisting of
the transfer of MIICA's outstanding product and workers compensation liabilities
for losses incurred on or prior to March 31, 1998 to a commercial insurance
company in exchange for the payment by MIICA of premiums of approximately $41.5
million and (iii) the discontinuance of the operations of MIICA as if they were
consummated as of January 1, 1997 and excludes certain nonrecurring items
directly attributable to the Transactions, the Insurance Transfer and the
discontinuance of MIICA. The Unaudited Pro Forma Balance Sheet gives pro forma
effect to the Insurance Transfer and the discontinuance of the operations of
MIICA as if they were consummated as of December 31, 1997. The adjustments are
described in the accompanying notes. The Unaudited Pro Forma Condensed
Consolidated Financial Statements should not be considered indicative of actual
results that would have been achieved had the Transactions, the Insurance
Transfer and the discontinuance of MIICA been consummated on the date or for the
period indicated and does not purport to indicate results of operations as of
any future date or for any future period. The Unaudited Pro Forma Condensed
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements (including the notes thereto) appearing
elsewhere in this Prospectus.
28
<PAGE> 29
WERNER HOLDING CO. (PA), INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
INSURANCE TRANSFER
AND MIICA
DISCONTINUANCE
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------------ ---------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents............................... $ 3.1 $ 3.1
Accounts receivable................................ 62.9 62.9
Refundable income taxes............................ 0.8 0.8
Inventories........................................ 44.7 44.7
Deferred income taxes.............................. 4.5 4.5
Other current assets............................... 6.9 6.9
------- ------ ------
Total current assets....................... 122.9 122.9
Insurance fund investments........................... 58.6 $(41.5)(a) 17.1
Deferred income taxes................................ 11.6 (2.7)(b) 8.9
Property, plant and equipment, net................... 65.8 65.8
Other assets......................................... 29.3 29.3
------- ------ ------
Total Assets............................... $ 288.2 $ (44.2) $244.0
======= ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term bank debt............................... $ 41.5 $ 41.5
Accounts payable................................... 24.9 24.9
Accrued liabilities................................ 24.9 24.9
Current maturities of long-term debt............... 1.5 1.5
------- ------ ------
Total current liabilities.................. 92.8 92.8
Long-term debt -- less current maturities............ 279.5 279.5
Reserve for losses and loss adjustment expenses...... 49.6 (48.5)(c) 1.1
Other................................................ 19.9 19.9
------- ------ ------
Total Liabilities.......................... 441.8 $ (48.5) 393.3
Shareholders' equity (deficit):
Common stock....................................... -- --
Paid-in capital.................................... 198.8 198.8
Retained earnings (deficit)........................ (351.7) 4.3 (d) (347.4)
Other.............................................. (0.7) (0.7)
------- ------ ------
(153.6) 4.3 (149.3)
------- ------ ------
Total Liabilities and Shareholders' Equity
(Deficit)................................ $ 288.2 $ (44.2) $244.0
======= ====== ======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet.
29
<PAGE> 30
WERNER HOLDING CO. (PA), INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(a) Reflects the liquidation of certain MIICA investments, the proceeds of
which were used to pay insurance premiums and fees associated with the
Insurance Transfer.
(b) Reflects the income tax effect of the Insurance Transfer.
(c) Reflects the extinguishment of product liability and workers
compensation liabilities existing as of March 31, 1998 in conjunction
with the Insurance Transfer.
(d) Represents the effect on retained earnings of (a), (b) and (c) above.
30
<PAGE> 31
WERNER HOLDING CO. (PA), INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------
INSURANCE TRANSFER
AND MIICA
HISTORICAL TRANSACTION DISCONTINUANCE PRO FORMA
---------- ----------- ------------------ ---------
<S> <C> <C> <C> <C>
Net sales................................ $ 416.3 $ 416.3
Cost of sales............................ 300.1 300.1
------- ------- ------- -------
Gross profit............................. 116.2 116.2
General and administrative expense....... 31.2 $ (3.4)(a) $ (1.4)(b) 26.4
Selling and distribution expense......... 48.9 48.9
Recapitalization expense................. 22.7 22.7
Non-cash compensation charge............. 78.5 78.5
------- ------- ------- -------
Operating loss........................... (65.1) 3.4 1.4 (60.3)
Other expense, net....................... (15.7) (15.7)
------- ------- ------- -------
Loss before interest and taxes........... (80.8) 3.4 1.4 (76.0)
Interest expense......................... 9.0 22.9(c) 31.9
------- ------- ------- -------
Loss before income taxes................. (89.8) (19.5) 1.4 (107.9)
Provision (benefit) for income taxes..... 0.7 (7.4)(d) 0.5(d) (6.2)
------- ------- ------- -------
Net loss................................. $ (90.5) (12.1) $ 0.9 $(101.7)
======= ======= ======= =======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations.
31
<PAGE> 32
WERNER HOLDING CO. (PA), INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS)
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1997 reflects the Transactions and certain aspects
of the Insurance Transfer and the discontinuance of the operations of MIICA as
if they had occurred on January 1, 1997. The pro forma adjustments are based on
available information and certain assumptions that management believes are
reasonable.
<TABLE>
<CAPTION>
FISCAL
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
(a) Reflects the following:
Reduction of management compensation as a result of
agreements signed in connection with the
Transactions.......................................... $(4.3)
Amortization of prepaid management fees ($1.0 less $0.1
which is included in historical operating results).... 0.9
-----
$(3.4)
=====
(b) Reflects the reduction in product liability and workers compensation
insurance expense resulting from the new insurance arrangements entered
into with a commercial insurance company in conjunction with the
Insurance Transfer and the elimination of MIICA's historical operating
expenses.
</TABLE>
<TABLE>
<CAPTION>
FISCAL
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
(c) Reflects the following:
Elimination of historical net interest expense including
amortization of debt issuance costs on retired debt... $(9.0)
Interest relating to $5.0 of Industrial Revenue Bonds... 0.2
Interest resulting from borrowings under the $100.0
Revolving Facility under the Senior Credit Facility at
an interest rate of LIBOR +2.25% (8.15%)(1)........... --
Interest resulting from borrowings under the Receivables
Facility at an assumed interest rate of LIBOR +1.50%
(7.40%)(2)............................................ 3.1
Interest resulting from $90.0 Tranche B term loan under
the Senior Credit Facility at an assumed interest rate
of LIBOR +2.50% (8.40%)............................... 7.6
Interest resulting from $55.0 Tranche C term loan under
the Senior Credit Facility at an assumed interest rate
of LIBOR +2.75% (8.65%)............................... 4.8
Interest resulting from $135.0 of debt issued under the
Notes, at an interest rate of 10.00%.................. 13.5
Amortization of debt issuance costs and original issue
discount of $19.3 associated with the Senior Credit
Facility and the Notes over the respective term of
indebtedness.......................................... 2.7
-----
$22.9
=====
A 25 basis point increase or decrease in the assumed average interest rate
on the variable rate debt issued in connection with the Recapitalization
Financing would change the pro forma annual interest expense by
approximately $0.5 and the pro forma annual net income by approximately
$0.3.
</TABLE>
- ---------------
(1) No amounts were borrowed under the Revolving Facility in 1997 except for
amounts issued under the letter of credit subfacility.
32
<PAGE> 33
WERNER HOLDING CO. (PA), INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED -- (CONTINUED)
STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS)
(2) Interest calculated using the $41.5 outstanding balance established in
connection with the Recapitalization. The Company intends to refinance the
Receivables Facility with an accounts receivables securitization facility
with an interest rate that is expected to be less than that of the
Receivables Facility in 1998.
<TABLE>
<S> <C>
(d) Reflects the tax effect of items (a), (b) and (c) above at an assumed
effective tax rate of 38.0%.
</TABLE>
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1997 includes the following nonrecurring items that are
directly attributable to the Recapitalization and were charged to historical
results of operations for the year ended December 31, 1997:
(1) Recapitalization expenses of $22.7 including investment banker fees,
transaction fees, legal and accounting fees, transaction bonuses paid to
certain employees and other miscellaneous transaction related expenses.
(2) Non-recurring non-cash compensation charge (and a corresponding credit to
shareholders' equity) of $78.5 for the historical and pro forma year ended
December 31, 1997 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.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations does not
reflect (i) the elimination of certain investment gains and losses related to
insurance fund investments that would not have occurred if such investments
would actually have been liquidated on January 1, 1997 to fund the payment of
insurance premiums in connection with the Insurance Transfer and (ii) the
effects of certain non-recurring charges and credits directly resulting from the
Insurance Transfer and discontinuance of MIICA as follows:
(1) A gain of approximately $7.0 resulting from the Insurance Transfer.
(2) Charges relating primarily to legal fees, employee separation and severance
costs, the write-off of certain of its fixed assets and other related
expenses totaling $0.7 resulting from the discontinuance of MIICA.
33
<PAGE> 34
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following selected consolidated historical financial data is that of
Werner Holding Co. (PA), Inc., the Issuer's parent company. Holding is a
guarantor of the debt of the Issuer and has no substantial operations or assets
other than its investment in the Issuer. As a result, the consolidated financial
condition and results of operations of Holding are substantially the same as
those of the Issuer. The selected consolidated historical financial data for
each of the years in the two-year period ended December 31, 1994 and the balance
sheet information at December 31, 1995 have been derived from the audited
historical consolidated financial statements of the Company. The selected
consolidated historical and pro forma financial data for each of the years in
the three-year period ended December 31, 1997 have been derived from, and should
be read in conjunction with, the audited Consolidated Financial Statements
(including the notes thereto) appearing elsewhere in this Prospectus. The
unaudited pro forma operating data reflects the Transactions as if they had
occurred on January 1, 1997 and excludes certain nonrecurring items directly
attributable to the Transactions. The pro forma financial information does not
purport to represent what the Company's results of operations would actually
have been had the Transactions in fact occurred on the assumed date or to
project the Company's results of operations for any future date or period. The
following table should also be read in conjunction with "Unaudited Pro Forma
Condensed Consolidated Financial Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales................................... $277.9 $328.8 $336.0 $366.9 $416.3
Cost of sales............................... 208.4 241.4 248.9 265.0 300.1
------ ------ ------ ------ ------
Gross profit............................. 69.5 87.4 87.1 101.9 116.2
General and administrative expenses......... 18.3 22.1 25.0 27.0 31.2
Selling and distribution expenses........... 33.8 37.9 47.1 47.9 48.9
Recapitalization expense.................... -- -- -- -- 22.7
Non-cash compensation charge................ -- -- -- -- 78.5
------ ------ ------ ------ ------
Operating profit (loss)..................... 17.4 27.4 15.0 27.0 (65.1)
MIICA investment gains (losses)............. 4.2 (4.0) 1.3 9.5 (14.6)
Other income (expense), net................. 1.7 1.2 2.9 0.4 (1.1)
------ ------ ------ ------ ------
Income (loss) before interest and taxes..... 23.3 24.6 19.2 36.9 (80.8)
Interest expense............................ 6.6 5.5 7.2 7.5 9.0
------ ------ ------ ------ ------
Income (loss) before provision for income
taxes.................................... 16.7 19.1 12.0 29.4 (89.8)
Income taxes................................ 5.7 7.8 5.1 10.0 0.7
------ ------ ------ ------ ------
Income (loss) before discontinued operations
and extraordinary charge................. 11.0 11.3 6.9 19.4 (90.5)
------ ------ ------ ------ ------
Loss from discontinued operations(a)........ 6.4 -- -- -- --
------ ------ ------ ------ ------
Income (loss) before extraordinary charge... 4.6 11.3 6.9 19.4 (90.5)
Extraordinary charge(b)..................... -- -- 0.6 -- --
------ ------ ------ ------ ------
Net income (loss)........................... $ 4.6 $ 11.3 $ 6.3 $ 19.4 $(90.5)
====== ====== ====== ====== ======
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and equivalents........................ $ 7.8 $ 0.1 $ 0.6 $ 1.0 $ 3.1
Insurance fund investments.................. 44.2 46.1 68.2 80.9 58.6
Working capital............................. 47.7 42.5 59.4 49.2 30.1
Total assets................................ 183.7 199.8 234.6 261.2 288.2
Reserve for losses and loss adjustment
expenses................................. 33.7 36.7 41.5 45.3 49.6
Total debt (including current maturities)... 73.1 60.4 83.5 83.4 322.5
Common shareholders' equity (deficit)(c).... 41.3 49.8 62.1 75.1 (153.7)
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash flow provided by (used in) operating
activities............................... $ 17.5 $ 18.3 $ (1.4) $ 19.5 $ 17.2
Cash flows used in investing activities..... (10.0) (11.1) (18.9) (15.8) (3.6)
Cash flows (used in) provided by financing
activities............................... (2.0) (15.0) 20.8 (3.3) (11.5)
EBITDA(d)................................... 30.2 32.0 27.2 46.1 (69.3)
Pro forma Adjusted EBITDA(d)................ -- -- -- -- 58.3
Depreciation and amortization............... 6.9 7.4 8.0 9.2 11.5
Net cash interest expense(e)................ 6.6 5.0 6.9 7.5 8.7
Capital expenditures........................ 3.5 8.1 12.5 13.0 11.7
Dividends declared per share................ -- 14.75 10.20 11.25 10.50
Ratio of earnings to fixed charges(f)....... 3.0x 3.7x 2.2x 3.9x --
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
PRO FORMA OPERATING DATA:
Net sales................................................. $416.3
Interest expense.......................................... 31.9
Net cash interest expense(e).............................. 29.2
Ratio of earnings to fixed charges(f)..................... --
</TABLE>
See Notes to Selected Consolidated Historical Financial Data.
35
<PAGE> 36
NOTES TO SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN MILLIONS)
(a) Represents losses incurred by the Company in connection with exiting its
architectural building products business.
(b) Reflects expenses incurred in regard to the early extinguishment of debt,
net of income tax benefits of $0.4.
(c) 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.
(d) EBITDA represents earning before interest, income taxes, depreciation and
amortization.
The following table presents a reconciliation of EBITDA to Pro forma
Adjusted EBITDA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
EBITDA..................................... $30.2 $32.0 $27.2 $46.1 $(69.3)
Reduction in management compensation(i)...................................... 4.3
Non-recurring expenses(ii)................................................... 0.9
MIICA investment income(iii)................................................. 4.6
Exclusion of historic MIICA (income) loss.................................... 14.6
Non-recurring private company expenses(iv)................................... 2.0
Non-cash compensation charge(v).............................................. 78.5
Recapitalization expense(vi)................................................. 22.7
------
Pro forma Adjusted EBITDA.................................................... $ 58.3
======
</TABLE>
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. Pro
forma Adjusted EBITDA is presented because it gives the Holders of the Notes
the ability to determine the Company's compliance with certain of the
covenants of the Indenture and the Senior Credit Facility (because of cross
default provisions, defaults under the Senior Credit Facility are also
defaults under the Indenture). These covenants are based on defined terms
that incorporate adjustments based on the reconciling items listed below.
While these adjustments required by the Indenture and Senior Credit Facility
are only applicable to periods prior to the Recapitalization Closing Date,
they remain relevant to Holders of the Notes as a meaningful historical and
comparative measure. In addition, certain covenants in the Senior Credit
Facility require a determination of Consolidated EBITDA for the trailing
four quarters (which until the first quarter of 1999 will include
pre-Recapitalization periods). Thus, management of the Company believes that
the Pro forma Adjusted EBITDA measure provides relevant and useful
information to investors. However, EBITDA and Pro forma Adjusted 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. In addition, EBITDA and Pro forma Adjusted
EBITDA, as described above, may
36
<PAGE> 37
not be comparable to such measurements as used by other companies. An
explanation of the reconciling items from EBITDA to Pro forma Adjusted
EBITDA follows:
<TABLE>
<S> <C>
(i) The reduction in management compensation relates to agreed
upon reductions to certain benefits paid to family members
employed by the Company. Such benefits have not continued
subsequent to the Recapitalization.
(ii) Non-recurring expenses consist of $0.7 relating to costs of
temporary warehousing space that was not utilized (and is no
longer being maintained) and costs of start-up and
incremental inventory carrying costs associated with the
modernization of the Company's Greenville remelt operation
(which are no longer being incurred) and $0.2 relating to
the closing of certain wood ladder production facilities and
temporary warehouse facilities.
(iii) For purposes of computing Pro forma Adjusted EBITDA, the
Company has assumed a 7.7% return on the investment
portfolio of MIICA. Such 7.7% return represents the
five-year average return on investment assets for commercial
casualty lines as reported by "Best's Aggregates &
Averages", 1997 Edition. The balance of the investment
portfolio used in computing the 7.7% return is the December
31, 1997 investment balance of $58.6.
(iv) Private company expenses consist of items that have not
continued following the Recapitalization. These expenses
include family-related charitable contributions and research
and development grants to educational institutions.
(v) The non-recurring non-cash compensation charge (and a
corresponding credit to shareholders' equity) of $78.5 is
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.
(vi) Recapitalization expense of $22.7 represents 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.
</TABLE>
(e) Net cash interest expense is defined as interest expense less amortization
of deferred financing costs and original issue discount.
(f) For purposes of the computation, the ratio of earnings to fixed charges has
been calculated by dividing (i) income before income taxes and extraordinary
charge plus fixed charges by (ii) fixed charges. Fixed charges are equal to
interest expense plus the portion of the rent expense estimated to represent
interest. The ratio of earnings to fixed charges is not meaningful for
periods that result in a deficit. For the historical and pro forma year
ended December 31, 1997, the deficiency of earnings to fixed charges was
$89.9 and $108.1, respectively.
37
<PAGE> 38
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," "Unaudited Pro Forma Condensed
Consolidated Financial Statements" and the Consolidated Financial Statements of
the Company and the notes thereto included elsewhere in this Prospectus. This
Prospectus 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.
GENERAL
Werner is the nation's largest manufacturer and marketer of ladders and
other climbing products. The Company also manufactures and sells aluminum
extruded products and more complex fabricated components. The Company's net
sales have increased at a five-year CAGR of 11.9% during the period from fiscal
1992 to fiscal 1997. For the year ended December 31, 1997, the Company had net
sales of $416.3 million and Pro forma Adjusted EBITDA of $58.3 million.
Ladders and Other Climbing Products. Net sales of climbing products have
accounted for approximately 75% of the Company's consolidated net sales over the
past five years. Net sales of the Company's climbing products have increased at
a CAGR of 14.4% during the period from fiscal 1992 to fiscal 1997. The Company
has grown its climbing products sales primarily by (i) increasing sales to
leading home improvement retailers, hardware cooperatives and professional
distributors, (ii) increasing its sales of fiberglass climbing products, and
(iii) selling more higher grade and higher value products.
Aluminum Extruded Products. Net sales for the Company's aluminum extruded
products business have increased at a CAGR of 5.9% during the period from fiscal
1992 to fiscal 1997. In 1995, the Company began to shift its extruded products
focus away from lower margin lineal extruded products to higher margin precision
extrusions and highly engineered fabricated components. This strategic
repositioning of the extruded business included reducing sales to less
profitable customers and directing selling efforts toward a design intensive
business in which the Company has experienced lead time for new business of six
months to several years. Accordingly, sales of extruded products were adversely
affected in 1995 and 1996, and management does not expect to realize the full
benefit of the Company's strategic shift until 1998.
MIICA. Prior to March 31, 1998, MIICA provided product liability, workers'
compensation and environmental insurance to the Company and its subsidiaries. In
the first quarter of 1998, after an extensive evaluation of the cost and
efficiency of providing such insurance, the Company decided to obtain such
insurance from an external commercial insurance company and made a decision to
discontinue MIICA's operations.
As a result of its decision, the Company effectively completed the transfer
of MIICA's outstanding product and workers' compensation liabilities to a
commercial insurance company in exchange for the payment of premiums of $41.5
million, thereby extinguishing the Company's exposure with respect thereto. To
pay the $41.5 million of insurance premiums, MIICA liquidated a substantial
portion of its investment portfolio.
Prior to March 31, 1998 MIICA maintained an investment portfolio which
consisted of investments in debt and equity securities, real estate and other
investments. Historically, MIICA did not hold any material assets other than its
insurance fund. In recent years, the insurance fund was comprised of "small cap"
stocks and other non-investment grade securities of higher risk which resulted
in volatile
38
<PAGE> 39
investment income (loss). MIICA had the following investment income (loss),
which is included in other income (expense) in the Company's Consolidated
Financial Statements included elsewhere herein:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
- --------------------------------
1995 1996 1997
- -------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
$1.3 $9.5 $(14.6)
</TABLE>
Since late 1996, MIICA was in the process of realigning its portfolio to a
more traditional mix of investments. Large fluctuations in investment income
(loss) occurred as a result of changes in the market value of these higher risk
investments and as certain of these higher risk investments were sold. Because a
substantial portion of MIICA's portfolio has been liquidated, the Company does
not expect future investment income to be significant or as volatile as in years
past. No assurances can be made that MIICA's portfolio will not experience
fluctuations in market value. However, the Company does not expect such
fluctuations to be significant to its financial condition and future operating
results. See "Risk Factors -- MIICA Investment Portfolio."
MIICA, which is not a Guarantor of the Notes, had shareholder's equity of
$17.5 million at December 31, 1997. The Company's ability to receive dividends
or loans from MIICA is strictly limited by applicable insurance company laws and
regulations. Accordingly, although the Company believes MIICA has been useful in
meeting its insurance needs, MIICA's assets are available as credit support for
the Notes only to the extent that dividends are permitted to be paid by
applicable laws and regulations. For further information regarding MIICA, see
"Summary -- Recent Development," "Risk Factors -- MIICA Investment Portfolio"
and Notes M and P to the Consolidated Financial Statements of the Company.
Certain expenses. Included in the results of operations of the Company for
the years ended December 31, 1995, 1996 and 1997 are aggregate expenses of $4.5
million, $6.2 million, and $104.1 million, respectively, consisting of the
following:
(i) $1.8 million, $3.8 million and $0.7 million in 1995, 1996 and
1997, respectively, relating to costs of temporary warehousing space that
was not utilized (and is no longer being maintained) and costs of start-up
and incremental inventory carrying costs associated with the modernization
of the Company's Greenville remelt operation (which are no longer being
incurred); and $0.9 million, $0.8 million and $0.2 million in 1995, 1996
and 1997, respectively, relating to the closing of certain wood ladder
production facilities and temporary warehousing facilities.
(ii) $1.8 million, $1.6 million and $2.0 million in 1995, 1996 and
1997, respectively, of private company expenses such as family-related
charitable contributions and research and development grants to educational
institutions which have not continued following the Recapitalization. See
Note (c) to Notes to Selected Consolidated Historical Financial Data.
(iii) Non-recurring non-cash compensation charge (and a corresponding
credit to shareholders' equity) of $78.5 million for the historical and pro
forma year ended December 31, 1997 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, and (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.
(iv) Recapitalization expense of $22.7 million in 1997.
The Transactions. As part of the Recapitalization, the Investors made an
equity investment of approximately $122.7 million and existing shareholders
retained capital stock valued at $59.3 million based on the price paid by the
Investors. In addition, pursuant to the Recapitalization Financing, the Company
completed the Old Notes Offering and entered into the Senior Credit Facility.
The Recapitalization has been accounted for as such and, accordingly, has had
and will have no impact on the
39
<PAGE> 40
historical basis of assets and liabilities. As a result of the Transactions, the
Company incurred approximately $51.8 million in fees and expenses and other
costs.
RESULTS OF OPERATIONS
The table below sets forth the Company's results of operations for the
periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997
-------------- -------------- --------------
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Climbing products.................... $248.0 73.8% $277.3 75.6% $314.2 75.5%
Extruded products.................... 88.0 26.2 89.6 24.4 102.1 24.5
------ ----- ------ ----- ------ -----
Total net sales........................ 336.0 100.0 366.9 100.0 416.3 100.0
Gross profit........................... 87.1 25.9 101.9 27.8 116.2 27.9
General and administrative expense..... 25.0 7.4 27.0 7.4 31.2 7.5
Selling and distribution expense....... 47.1 14.0 47.9 13.1 48.9 11.7
Recapitalization expense............... -- -- -- -- 22.7 5.5
Non-cash compensation charge........... -- -- -- -- 78.5 18.9
Other income (expense), net............ 4.2 1.2 9.9 2.7 (15.7) (3.8)
Interest expense....................... 7.2 2.1 7.5 2.0 9.0 2.2
Income taxes........................... 5.1 1.5 10.0 2.7 0.7 --
Extraordinary charge................... 0.6 0.2 -- -- -- --
------ ----- ------ ----- ------ -----
Net income (loss)...................... $ 6.3 1.9% $ 19.4 5.3% $(90.5) (21.7)%
====== ===== ====== ===== ====== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales increased $49.4 million, or 13.5%, to $416.3 million
for the year ended December 31, 1997 from $366.9 million for the year ended
December 31, 1996.
Net sales of climbing products increased $36.9 million, or 13.3%, to $314.2
million for the year ended December 31, 1997 from $277.3 million for the year
ended December 31, 1996. The increase in net sales of climbing products was
primarily due to significant growth in the volume of fiberglass and aluminum
step and extension ladders sold, particularly to power retailers.
Net sales of extruded products increased $12.5 million, or 14.0%, to $102.1
million for the year ended December 31, 1997 from $89.6 million for the year
ended December 31, 1996. This increase was primarily due to an increase in sales
volume. Sales volume in the year ended December 31, 1996 was adversely impacted
by the Company's strategic repositioning plan initiated in 1995.
Gross Profit. Gross profit increased $14.3 million, or 14.0%, to $116.2
million for the year ended December 31, 1997 from $101.9 million for the year
ended December 31, 1996. This increase was primarily due to increased sales
volume, as described above, partially offset by the higher cost of wood raw
materials. Gross profit margin for the year ended December 31, 1997 and 1996 was
27.9% and 27.8%, respectively.
General and Administrative Expense. General and administrative expense
increased $4.2 million, or 15.6%, to $31.2 million for the year ended December
31, 1997 from $27.0 million for the year ended December 31, 1996. This increase
was primarily due to $2.2 million in special non-recurring retirement bonuses.
Selling and Distribution Expense. Selling and distribution expense
increased $1.0 million, or 2.1%, to $48.9 million for the year ended December
31, 1997 from $47.9 million for the year ended
40
<PAGE> 41
December 31, 1996. This increase was primarily the result of increased sales
volume. For the year ended December 31, 1997, selling and distribution expense
as a percentage of net sales decreased to 11.7% from 13.1% for the year ended
December 31, 1996. This decrease was primarily due to reduced costs resulting
from the closing of the Youngstown, OH warehouse as well as lower commissions
paid to the Company's manufacturers' representatives resulting from a change in
the Company's commission plan in the third quarter of 1997.
Non-Cash Compensation Charge. The non-recurring non-cash compensation
charge (and a corresponding credit to shareholders' equity) of $78.5 million
represents (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 resulting from a
change in terms of such stock upon his separation from the Company; and (c)
changes in the terms of the plan under which such stock was granted.
Recapitalization Expense. Recapitalization expense relates to fees and
expenses incurred in connection with the Recapitalization.
Other Income (Expense), Net. Other income (expense), net decreased $25.6
million, or 258.6%, to ($15.7) million for the year ended December 31, 1997 from
$9.9 million for the year ended December 31, 1996. This decrease was primarily
due to $14.6 million of investment losses incurred by MIICA during the year
ended December 31, 1997 as compared to MIICA investment income of $9.5 million
for the year ended December 31, 1996. The losses for the year ended December 31,
1997 were primarily due to losses of approximately $8.8 million on special
expiration price options (trading securities) resulting from either selling or
exercising such options or by allowing them to expire and approximately $9.9
million of losses relating to the write-down for the other than temporary
decline in market value of certain investments classified as available for sale.
The Company continuously reviews its investment portfolio for impairment. During
1997, it was determined that a write-down for certain investments was necessary
since the market value of the securities was less than their cost for an
extended period of time, the financial condition of the issuer of the securities
was weak due to sustained operating losses and capital deficiencies, and future
operating projections did not support the ability to recover such losses. As of
December 31, 1997 the Company no longer has investments in special expiration
price options.
Interest Expense. Interest expense increased $1.5 million, or 20.0%, to
$9.0 million for the year ended December 31, 1997 from $7.5 million for the year
ended December 31, 1996. The increase was primarily due to the debt incurred as
a result of the Transactions.
Income Taxes. Income taxes decreased $9.3 million, or 93.0%, to $0.7
million for the year ended December 31, 1997 from $10.0 million for the year
ended December 31, 1996. This decrease was primarily due to lower taxable income
for the year ended December 31, 1997 as compared to the year ended December 31,
1996 due to charges associated with the Transactions and increased interest
expense. Additionally, during the year ended December 31, 1997 the Company
recorded a non-cash compensation charge of $78.5 million which was not
deductible for income tax purposes.
Net Income (Loss). The net loss for 1997 was $90.5, a $109.9 decrease from
net income of $19.4 million for 1996. The net loss for 1997 includes (on a
pretax basis) a non-cash compensation charge of $78.5 million, Recapitalization
expense of $22.7 million and $14.6 million of investment losses attributable to
MIICA, all of which are discussed above. For 1996, net income includes pretax
investment income attributable to MIICA of $9.5 million. Excluding the after tax
effect of these items, net income increased $2.9 million or 22.0% to $16.1
million for 1997 from $13.2 million for 1996. This increase was primarily due to
the increase in sales and gross profit described above.
41
<PAGE> 42
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased $30.9 million, or 9.2%, to $366.9 million
for 1996 from $336.0 million for 1995.
Net sales of climbing products increased $29.3 million, or 11.8%, to $277.3
million in 1996 from $248.0 million in 1995. This increase was primarily due to
increased sales volume in both fiberglass and aluminum climbing products, which
was achieved through the ongoing successful growth of the Company's customer
base, new product development and increased marketing efforts. During 1996, the
Company became the sole supplier to a major hardware cooperative. In addition,
the Company benefited from the full year effect of price increases of aluminum,
fiberglass and wood climbing products implemented in the second quarter of 1995
in response to increases in underlying raw material costs. Overall, average unit
sales prices for climbing products increased 4.3% over 1995.
Net sales of extruded products increased $1.6 million, or 1.8%, to $89.6
million for 1996 from $88.0 million for 1995.
Gross Profit. Gross profit increased $14.8 million, or 17.0%, to $101.9
million for 1996 from $87.1 million for 1995. This increase was primarily due to
the factors described above as well as a more favorable sales mix toward higher
margin products. Gross profit margin was 27.8% for 1996 and 25.9% for 1995.
General and Administrative Expense. General and administrative expense
increased $2.0 million, or 8.0%, to $27.0 million for 1996 from $25.0 million
for 1995. This increase was primarily due to the additional overhead required
for the growth in net sales described above.
Selling and Distribution Expense. Selling and distribution expense
increased $0.8 million, or 1.7%, to $47.9 million for 1996 from $47.1 million
for 1995. This increase was primarily the result of the factors described above.
In 1996, selling and distribution expense as a percentage of net sales decreased
to 13.1% from 14.0% for 1995. This decrease was due to a decrease in the
warehouse and distribution expenses in the Greenville, PA and Chicago, IL
distribution centers.
Other Income (Expense), Net. Other income (expense), net increased $5.7
million, or 135.7%, to $9.9 million for 1996 from $4.2 million for 1995. This
increase was primarily due to MIICA investment income of $9.5 million for 1996,
resulting in part from gains on securities sold, compared to $1.3 million of
MIICA investment income for 1995, partially offset by an increase in
miscellaneous income in 1995.
Interest Expense. Interest expense increased $0.3 million, or 4.2%, to
$7.5 million for 1996 from $7.2 million for 1995.
Income Taxes. Income taxes increased $4.9 million, or 96.1%, to $10.0
million for 1996 from $5.1 million for 1995. This increase was primarily due to
a $17.4 million increase in pre-tax income from 1995 to 1996, slightly offset by
a decrease in the effective tax rate from 42.8% for 1995 to 34.0% for 1996, due
primarily to lower state income taxes.
Net Income. Net income increased $13.3 million, or 207%, to $19.4 million
for 1996 from $6.3 million for 1995. Part of the increase was due to the pretax
investment income attributable to MIICA of $9.5 million for 1996 compared to
$1.3 million for 1995. Excluding the after tax effect of the investment income
attributable to MIICA, net income increased $7.2 million, or 120%, to $13.2
million for 1996 from $6.0 million for 1995. This increase was primarily due to
the increase in sales and gross profit described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a significant amount of indebtedness in connection
with the Transactions. At December 31, 1997, the Company had approximately
$322.5 million of consolidated indebtedness, including $131.0 million of
indebtedness, net of the original issue discount, pursuant to the Notes, and
42
<PAGE> 43
$186.5 million of borrowings under the Senior Credit Facility. The Senior Credit
Facility provides for $145.0 million of Term Loan Facilities, a $100.0 million
Revolving Facility and a $75.0 million Receivables Facility.
Prior to the Recapitalization, the Company historically met its working
capital needs and capital expenditure requirements primarily through a
combination of operating cash flow and borrowing under its then-existing credit
facility and the issuance of notes. Following the Transactions, the Company
satisfies its debt service requirements and meets its operating, working capital
and capital expenditure needs through a combination of operating cash flow and
funds available under the Receivables Facility. See "The Transactions" and "The
Senior Credit Facility."
In connection with the Transactions, the Company refinanced all of its
existing debt except for the Variable Rate Demand Industrial Building Revenue
Bonds due 2015 (the "IRBs") with the proceeds from the Notes, the Term Loan
Facility and the Receivables Facility. As of December 31, 1997, the IRBs had an
outstanding principal balance of $5.0 million.
Net cash flows from operating activities decreased $2.3 million to $17.2
million for the year ended December 31, 1997 from $19.5 million for the year
ended December 31, 1996. This is primarily attributable to the increase in
operating profit (exclusive of the non-cash compensation charge and
Recapitalization expenses in 1997) from 1996 to 1997, which was more than offset
by the increase in operating working capital (receivables, inventory, accounts
payable and accrued expenses) of $14.8 million and the 1997 payment of
supplemental retirement bonuses of $2.2 million. Operating working capital
generally increased as a result of the growth in sales. Net cash from operating
activities increased by $20.9 million from cash used of $1.4 million in 1995 to
cash provided of $19.5 million in 1996. This is primarily the result of
increased operating profits combined with reduced operating working capital of
$7.9 million. Inventory was reduced in 1996 due to a reduction of the previous
year's buildup of extrusion log inventory during the Greenville remelt
modernization project, and accounts receivable and accounts payable increased by
comparable amounts due to the growth in sales. Cash flow used in investing
activities decreased $12.2 million to $3.6 million in 1997 from $15.8 million in
1996. This decrease was due primarily to an increase in sales of debt and equity
securities at MIICA in connection with its process of realigning its investment
portfolio, as well as the Company's sale of real estate and a reduction in
capital expenditures.
The Company's ability to make scheduled payments of principal ($1.5 million
for each of the years 1998 through 2000), or to pay interest (ranging from $26.3
million to $28.3 million annually for years 1998 to 2000, assuming current
interest rates), if any, on, or to refinance its indebtedness (including the
Notes), or to fund planned capital expenditures or finance 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, 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 12 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 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.
In addition, there can be no assurance that the Company will be able to
effect any refinancing on commercially reasonable terms, or at all.
CAPITAL EXPENDITURES
The Company's capital expenditures were $12.5 million, $13.0 million and
$11.7 million, in 1995, 1996 and 1997, respectively. Approximately $3 million to
$5 million of the amount expended in each of
43
<PAGE> 44
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 $18 million
to $20 million in 1998 for various capital projects, including quality
enhancement, cost improvement, efficiency improvement, increased capacity and
normal maintenance 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 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 rate of inflation over recent years has been relatively low and has not
had a significant effect on the Company's results of operations. The Company
purchases aluminum, glass 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 contracts with
respect to its purchases of aluminum to minimize or hedge commodity price
fluctuations. See "Business -- Raw Materials and Suppliers". Additionally, the
Company has been successful in passing the majority of these increases on to its
customers after a period of 60 to 90 days.
IMPACT OF THE YEAR 2000
Based on recent assessments, the Company has determined that it will be
required to modify certain portions of its software so that its computer systems
will function properly with respect to dates in the Year 2000 and thereafter.
The Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if such modifications
are not made, or are not timely completed, the Year 2000 issue could have a
material adverse impact on the operations of the Company.
The Company has also initiated communications with its significant
suppliers and customers regarding the Year 2000 issue. However, there can be no
guarantee that the systems of these other companies will be timely converted and
the failure of the Company's significant suppliers and customers to make
necessary Year 2000 modifications could have a material adverse impact on the
Company's results and operations.
The Company will primarily utilize internal resources to reprogram, or
replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project by December 31, 1998, which is
prior to any impact of the Year 2000 on its operating systems. The Company
estimates the cost of the project to be approximately $1 million.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates
which were derived utilizing numerous assumptions of future events. However,
there can be no guarantee that these estimates and the timetable will be
achieved and actual results could differ materially from those anticipated.
44
<PAGE> 45
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is designed to provide holders of Old Notes with an
opportunity to acquire New Notes which, unlike the Old Notes, will be freely
tradable at all times, subject to any restrictions on transfer imposed by state
"blue sky" laws and provided that (i) the holder is not an affiliate of the
Company within the meaning of the Securities Act, and (ii) the holder represents
that the New Notes are being acquired in the ordinary course of such holder's
business and the holder is not engaged in, and does not intend to engage in, a
distribution of the New Notes. The outstanding Old Notes in the aggregate
principal amount of $135.0 million were originally issued and sold on November
24, 1997 (the "Original Issue Date") in order to provide financing in connection
with the Recapitalization. The original sale of Old Notes to Chase Securities
Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs &
Co. (the "Initial Purchasers") was not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the Securities Act and
the concurrent resale of the Old Notes to investors was not registered under the
Securities Act in reliance upon the exemptions provided by Rule 144A and
Regulation S promulgated under the Securities Act. The Old Notes may not be
reoffered, resold or transferred other than pursuant to a registration statement
filed pursuant to the Securities Act or unless an exemption from the
registration requirements of the Securities Act is available. Pursuant to Rule
144, Old Notes may generally be resold (a) commencing one year after the
Original Issue Date, in an amount up to, for any three-month period, the greater
of 1% of the Old Notes then outstanding or the average weekly trading volume of
the Old Notes during the four calendar weeks immediately preceding the filing of
the required notice of sale with the Commission and (b) commencing two years
after the Original Issue Date, in any amount and otherwise without restriction
by a holder who is not, and has not been for the preceding 90 days, an affiliate
of the Company. The Old Notes are eligible for trading in the PORTAL Market, and
may be resold to certain Qualified Institutional Buyers pursuant to Rule 144A
and to certain non-U.S. persons pursuant to Regulation S. Certain other
exemptions may also be available under other provisions of the federal
securities laws for the resale of the Old Notes.
In connection with the original issue and sale of the Old Notes, the Issuer
and the Guarantors entered into a Registration Rights Agreement, pursuant to
which they agreed to file with the Commission a registration statement covering
the exchange by the Issuer of the New Notes for the Old Notes (the "Exchange
Offer Registration Statement"). The Registration Rights Agreement provides that
(i) the Issuer and the Guarantors will file the Exchange Offer Registration
Statement with the Commission on or prior to 90 days after the Original Issue
Date, (ii) the Issuer and the Guarantors will use their respective best efforts
to have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 180 days after the Original Issue Date, (iii) unless
the Exchange Offer would not be permitted by applicable law or Commission
policy, the Issuer and the Guarantors will commence the Exchange Offer and use
their respective best efforts to issue on or prior to 30 business days after the
date on which the Exchange Offer Registration Statement is declared effective by
the Commission, New Notes in exchange for all Old Notes tendered prior thereto
in the Exchange Offer, and (iv) if obligated to file a shelf registration
statement covering the Old Notes (a "Shelf Registration Statement"), the Issuer
will file the Shelf Registration Statement with the Commission on or prior to 90
days after such filing obligation arises and use its best efforts to cause the
Shelf Registration Statement to be declared effective by the Commission on or
prior to 135 days after such obligation arises and cause such Shelf Registration
Statement to remain effective and usable for a period of two years following the
initial effectiveness thereof. If (a) the Issuer and the Guarantors fail to file
any of the registration statements required by the Registration Rights Agreement
on or before the date specified for such filing, (b) any of such registration
statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness, (c) the Issuer fails to consummate the offer
within 30 business days after the date on which the Exchange Offer Registration
Statement is declared effective, or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities
45
<PAGE> 46
(as defined below) during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), the Issuer and the Guarantors will pay liquidated
damages ("Liquidated Damages") to each holder of Transfer Restricted Securities
(as defined), with respect to the first 90-day period immediately following the
occurrence of such Registration Default in an amount equal to $.05 per week per
$1,000 principal amount of Transfer Restrictive Securities held by such person.
The amount of the Liquidated Damages will increase by an additional $.05 per
week per $1,000 principal amount of Transfer Restricted Securities with respect
to each subsequent 90-day period until all Registration Defaults have been cured
up to a maximum amount of Liquidated Damages of $.20 per week per $1,000
principal amount of Transfer Restricted Securities (regardless of whether one or
more than one Registration Default is outstanding). Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease. For
purposes of the foregoing, "Transfer Restricted Securities" means each Old Note
until (i) the date on which such Old Note has been exchanged by a person other
than a broker-dealer for a New Note in the Exchange Offer, (ii) the date on
which such Old Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement, (iii) the date
on which such Old Note is distributed to the public pursuant to Rule 144 under
the Securities Act, or (iv) following the exchange by a broker-dealer in the
Exchange Offer of an Old Note for a New Note, the date on which such New Note is
sold to a purchaser who receives from such broker-dealer on or prior to the date
of such sale a copy of a prospectus meeting the requirements of the Securities
Act in connection with resales of securities received by the broker-dealer in
any such exchange.
The staff of the Commission has issued certain interpretive letters that
concluded, in circumstances similar to those contemplated by the Exchange Offer,
that new debt securities issued in a registered exchange for outstanding debt
securities, which new securities are intended to be substantially identical to
the securities for which they are exchanged, may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such securities from the issuer to resell pursuant to Rule 144A or
any other available exemption under the Securities Act or (ii) a person who is
an affiliate of the issuer within the meaning of Rule 405 under the Securities
Act or (iii) a person participating in the distribution of the securities
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that the new securities are acquired in the
ordinary course of such holder's business and such holder has no arrangement or
understanding with any person to participate in the distribution of the new
securities. However, a broker-dealer who holds outstanding debt securities that
were acquired for its own account as a result of market-making or other trading
activities may be deemed to be an "underwriter" within the meaning of the
Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of the new
securities received by the broker-dealer in any such exchange. See " --
Consequences of Failure to Exchange; Resales of New Notes." The Company has not
requested or obtained an interpretive letter from the Commission staff with
respect to this Exchange Offer, and the Company and the holders are not entitled
to rely on interpretive advice provided by the staff to other persons, which
advice was based on the facts and conditions represented in such letters.
However, the Exchange Offer is being conducted in a manner intended to be
consistent with the facts and conditions represented in such letters. If any
holder has any arrangement or understanding with respect to the distribution of
the New Notes to be acquired pursuant to the Exchange Offer, such holder (i)
could not rely on the applicable interpretations of the staff of the Commission
and (ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. In addition,
each broker-dealer that receives New Notes for its own account in exchange for
the Old Notes, where such Old Notes were acquired by such broker-dealers as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution." By delivering the Letter of Transmittal, a
holder tendering Old Notes for exchange will represent and warrant to the
Company that the holder is acquiring the New Notes in the ordinary course of its
business and that the holder is not engaged in, and does not intend to engage
in, a distribution of the New Notes. Any holder using the Exchange Offer to
participate in a distribution of the New Notes to be acquired in the Exchange
Offer
46
<PAGE> 47
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. Holders who do
not exchange their Old Notes pursuant to this Exchange Offer will continue to
hold Old Notes that are subject to restrictions on transfer.
It is expected that the New Notes will be freely transferable by the
holders thereof, subject to the limitations described in the immediately
preceding paragraph and in " -- Consequences of Failure to Exchange; Resales of
New Notes." Sales of New Notes acquired in the Exchange Offer by holders who are
"affiliates" of the Company within the meaning of the Securities Act will be
subject to certain limitation on resale under Rule 144 of the Securities Act.
Such persons will only be entitled to sell New Notes in compliance with the
volume limitations set forth in Rule 144, and sales of New Notes by affiliates
will be subject to certain Rule 144 requirements as to the manner of sale,
notice and the availability of current public information regarding the Company.
The foregoing is a summary only of Rule 144 as it may apply to affiliates of the
Company. Any such persons must consult their own legal counsel for advice as to
any restrictions that might apply to the resale of their New Notes.
The New Notes otherwise will be substantially identical in all material
respects (including interest rate, maturity, security and restrictive covenants)
to the Old Notes for which they may be exchanged pursuant to this Exchange
Offer. See "Description of the New Notes."
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Issuer will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on June 16, 1998; provided, however, that if the Issuer has
extended the period of time for which the Exchange Offer is open, the term
"Expiration Date" means the latest time and date to which the Exchange Offer is
extended which date shall in any event be no later than 30 business days after
the Commission has declared the Exchange Offer Registration Statement to be
effective.
As of the date of this Prospectus, $135.0 million aggregate principal
amount of the Old Notes are outstanding. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about May 14, 1998, to all
holders of Old Notes known to the Issuer. The Issuer's obligation to accept Old
Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under " -- Certain Conditions to the Exchange Offer"
below.
The Issuer expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving notice of such
extension to the holders thereof. During any such extension, all Old Notes
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Issuer. Any Old Notes not accepted for exchange for
any reason will be returned without expense to the tendering holder thereof as
promptly as practicable after the expiration or termination of the Exchange
Offer.
The Issuer expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under " -- Certain Conditions to the Exchange Offer." The Issuer
will give notice of any extension, amendment, non-acceptance or termination to
the holders of the Old Notes as promptly as practicable, such notice in the case
of any extension to be issued no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Issuer of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Issuer will constitute a binding
agreement between the tendering holder and the Issuer
47
<PAGE> 48
upon the terms and subject to the conditions set forth in this Prospectus and in
the accompanying Letter of Transmittal. Except as set forth below, a holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal, including
all other documents required by such Letter of Transmittal, to IBJ Schroder Bank
& Trust Company (the "Exchange Agent") at one of the addresses set forth below
under "Exchange Agent" on or prior to the Expiration Date. In addition, either
(i) certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE ISSUER. THE ISSUER IS NOT ASKING
NOTEHOLDERS FOR A PROXY AND NOTEHOLDERS ARE REQUESTED NOT TO SEND THE ISSUER A
PROXY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instruction" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Notes are registered in the name of a person other than a
signer of the Letter of Transmittal, the Old Notes surrendered for exchange must
be endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by the Issuer in its
sole discretion, duly executed by the registered holder with the signature
thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Issuer in its sole discretion, which determination shall be final and
binding. The Issuer reserves the absolute right to reject any and all tenders of
any particular Old Notes not properly tendered or to not accept any particular
Old Notes which acceptance might, in the judgment of the Issuer or its counsel,
be unlawful. The Issuer also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to any particular Old
Notes either before or after the Expiration Date (including the right to waive
the ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer as
to any particular Old Notes either before or after the Expiration Date
(including the Letter of Transmittal and the instructions thereto) by the Issuer
shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such reasonable period of time as the Issuer shall determine.
Neither the Issuer, the Exchange Agent nor any other person shall be under any
duty to give notification of any defect or irregularity with respect to any
tender of Old Notes for exchange, nor shall any of them incur any liability for
failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be endorsed
or accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered holder or holders that appear on the Old
Notes.
48
<PAGE> 49
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Issuer, proper evidence satisfactory to the Issuer of their authority to so
act must be submitted.
By tendering, each broker-dealer holder will represent to the Issuer that,
among other things, the New Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the holder and any
beneficial holder, that neither the holder nor any such beneficial holder has an
arrangement or understanding with any person to participate in the distribution
of such New Notes and that neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Issuer. If
the holder is not a broker-dealer, the holder must represent that it is not
engaged in nor does it intend to engage in a distribution of the New Notes.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Issuer will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See " -- Certain Conditions to the Exchange Offer" below. For
purposes of the Exchange Offer, the Issuer shall be deemed to have accepted
properly tendered Old Notes for exchange when, as and if the Issuer has given
oral and written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, such non-exchanged Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration of the Exchange Offer.
BOOK-ENTRY TRANSFER
Any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible
49
<PAGE> 50
Institution, (ii) prior to the Expiration Date, the Exchange Agent received from
such Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Issuer (by telegram, telex, facsimile
transmission, mail or hand delivery), setting forth the name and address of the
holder of Old Notes and the amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within five New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be, and
any other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date. For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Issuer, whose determination shall be final and binding
on all parties. Any Old Notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes
that have been tendered for exchange but that are not exchanged for any reason
will be returned to the holder thereof without cost to such holder (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Issuer shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, the Issuer determines that the Exchange Offer violates
applicable law, any applicable interpretation of the staff of the Commission or
any order of any governmental agency or court of competent jurisdiction.
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by the Issuer regardless of the circumstances giving rise to any such
condition or may be waived by the Issuer in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Issuer at
50
<PAGE> 51
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Issuer will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA"). In any such event, the Issuer is required to use every reasonable effort
to obtain the withdrawal of any stop order at the earliest possible time.
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests for Notices of Guaranteed Delivery should
be directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY HAND DELIVERY OR OVERNIGHT COURIER:
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
P.O. Box 84 One State Street
Bowling Green Station New York, New York 10004
New York, New York 10274-0084 Attention: Securities Processing Window
Attention: Reorganization Operations Subcellar One (SC1)
Department
</TABLE>
Facsimile Transmission:
(212) 858-2611
Confirm by Telephone:
(212) 858-2103
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES
NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The Company will pay the reasonable and customary expenses to be incurred
in connection with the Exchange Offer, which includes fees and expenses of the
Trustee, accounting, legal, printing and related fees and expenses.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is the principal amount less the unamortized original issue discount as
reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer will be capitalized for accounting purposes.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Issuer to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person
51
<PAGE> 52
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. Old Notes not exchanged pursuant to
the Exchange Offer will continue to accrue interest at 10% per annum and will
otherwise remain outstanding in accordance with their terms. In general, the Old
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuer does not
currently anticipate that it will register the Old Notes under the Securities
Act. However, (i) if any Initial Purchaser so requests with respect to Old Notes
not eligible to be exchanged for New Notes in the Exchange Offer and held by it
following consummation of the Exchange Offer or (ii) if any holder of Old Notes
is not eligible to participate in the Exchange Offer or, in the case of any
holder of Old Notes that participates in the Exchange Offer, does not receive
freely tradable New Notes in exchange for Old Notes, the Issuer is obligated
under the Registration Rights Agreement to exchange such holder's Old Notes for
private notes with terms identical to the New Notes (other than transfer
restrictions) or to file a registration statement on the appropriate form under
the Securities Act relating to the Old Notes held by such persons.
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, New Notes issued pursuant to the
Exchange Offer may be offered for resale, resold or otherwise transferred by
holders thereof (other than (i) any such holder which is an "affiliate" of the
Issuer within the meaning of Rule 405 under the Securities Act or (ii) any
broker-dealer that purchases Notes from the Issuer to resell pursuant to Rule
144A or any other available exemption) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement or understanding with any person to participate in
the distribution of such New Notes. If any holder has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. A broker-dealer who holds Old
Notes that were acquired for its own account as a result of market-making or
other trading activities may be deemed to be an "underwriter" within the meaning
of the Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of New Notes.
Each such broker-dealer who receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
in the Letter of Transmittal that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." While the Issuer
has an obligation under the Registration Rights Agreement to update this
Prospectus by amendment or supplement for a period of 90 days following
consummation of the Exchange Offer, the Issuer has no obligation thereafter to
update the Prospectus and, therefore, holders required to deliver a prospectus
may not thereafter be able to resell because they may be unable to comply with
the prospectus delivery requirements described above.
In addition, to comply with the securities laws of certain jurisdictions,
if applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Issuer has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the New Notes for offer or
sale under the securities or blue sky laws of such jurisdictions as any holder
of the Notes reasonably requests in writing.
52
<PAGE> 53
BUSINESS
OVERVIEW
Based on the Company's own research and studies commissioned by
professional research firms, management believes that Werner is the nation's
largest manufacturer and marketer of ladders and other climbing products.
Management estimates that in 1996 the Company's sales of climbing products
represented approximately 36% of the estimated $820 million total U.S. sales of
climbing products. See "-- Industry." Werner's climbing products include
aluminum, fiberglass and wood ladders, scaffolding, stages and planks. The
Company markets its broad line of innovative products across all major price
points under the Werner name, which management believes to be the most
widely-recognized climbing products brand name by both professional and consumer
end-users of climbing products. The Company sells its products through a variety
of distribution channels, such as home improvement retailers, hardware dealers,
professional supply houses and specialty wholesale distributors. Werner is
committed to providing the highest level of customer service and is a primary
supplier of ladders to most of the largest United States home improvement
retailers, including power retailers (e.g., The Home Depot and Lowe's), and to
most of the major hardware co-operatives, including ACE Hardware, HWI and
TruServ. In addition to climbing products, the Company 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. The Company's net sales have increased at a five-year
CAGR of 11.9%, from $237.1 million in fiscal 1992 to $416.3 million in fiscal
1997.
COMPETITIVE STRENGTHS
Recognized Industry Leader. Management estimates that in 1996, Werner
generated approximately three times the revenue of its largest competitor in the
domestic climbing products market and increased its percentage of the total U.S.
sales of climbing products from approximately 32% in 1993 to approximately 36%
in 1996. Management believes that the Company's combination of (i) market
leadership, (ii) breadth of product line, (iii) nationwide production and
distribution, (iv) reputation for high quality and (v) superior customer service
have enabled the Company to attract and retain many of the largest distributors
across the United States as its customers. Management believes that these
factors also enable the Company to serve its customer base on a broad geographic
basis and benefit from economies of scale in manufacturing, purchasing and
distribution. Werner serves all segments of the climbing products market.
Strong Brand Name. The Werner brand name has a nearly 50-year history, and
management believes Werner is the most recognized name by both professional and
consumer end-users of climbing products. The Company has established its leading
brand name primarily by providing high-quality products and strong customer
service. Werner has successfully used the strength of its brand name to expand
its product offerings, particularly in the fiberglass ladder category, and to
expand its market coverage by partnering with the leading home improvement
retailers, hardware dealers and professional supply houses to distribute Werner
products.
High-Quality, Innovative Product Line. Management believes that the
Company's products are regarded as the most innovative and highest quality in
the industry. The Company has consistently introduced improvements to the
climbing products market, from the early development of the ALFLO(R)
Twist-Proof(R) rung-to-side rail technology, which significantly increased the
structural integrity of lightweight aluminum ladders, to the more recent
introduction of premium quality and visually-appealing fiberglass ladders.
Management believes that Werner has successfully generated incremental new sales
and encouraged end-users to purchase ladders at higher price points by
continually introducing innovative, new products. Management estimates that new
or substantially improved products introduced since 1990 accounted for
approximately 48% of the Company's climbing products sales in 1997.
Superior Customer Service. The Company's strategically located
manufacturing and distribution facilities, coupled with a broad offering of
high-quality products, allow the Company to provide its
53
<PAGE> 54
customers throughout the United States with one-stop shopping on a
cost-effective and timely basis. Werner's strong relationships with its
customers are supported by innovative sales and marketing programs tailored to
serve specific channels of distribution. The Company has found that by educating
and working closely with its customers it has been able to increase their
effectiveness in selling the Company's products. To this end, the Company has
developed innovative marketing and category management services for its climbing
products, customers which include (i) product mix optimization, (ii) effective
point-of-purchase merchandising and signage, (iii) training programs, (iv)
aggressive application of electronic commerce and (v) customer inventory
management programs. Management believes that these services allow the Company
to assist its customers in maximizing sales. The Company's superior customer
service has been consistently recognized in awards granted to Werner by its
customers and industry organizations.
Loyal and Diverse Customer Relationships. The Company has a broad and well
established customer base of more than 17,000 customers across all major
climbing products distribution channels. Its customer network encompasses
relationships with the major home improvement retailers, hardware dealers,
professional supply houses and wholesale distributors. Werner is a primary
supplier of ladders to most of the largest United States home improvement
retailers, including power retailers (e.g., The Home Depot and Lowe's), and to
most of the largest hardware co-operatives, including ACE Hardware, HWI and
TruServ. Werner is also a primary supplier to most of the major paint retailers,
such as Sherwin Williams and ICI. Werner attributes its ability to establish
such relationships with its customers primarily to the Company's broad offering
of high-quality products and high level of customer service. These factors have
resulted in a loyal customer base, characterized by low turnover. The Company
has had relationships with many of its major customers for over 20 years.
Vertically Integrated, Cost-Efficient Manufacturing. Werner operates
vertically integrated manufacturing facilities, which allow the Company to
cost-efficiently manufacture consistent, premium quality products as well as to
respond quickly to customer requirements. The Company believes it is the most
vertically integrated company in the climbing products industry. In the last
five years, Werner has invested more than $45 million in its facilities to
increase quality and capacity and to reduce total product and distribution
costs.
Experienced and Committed Management Team. Werner has assembled a strong
and experienced management team at both the corporate and operating levels. The
top fifteen members of Werner's senior management team have an average of over
20 years of experience with the Company. The Management Shareholders own
approximately 13% of the outstanding shares of Holding with an opportunity to
own up to approximately 22% of the shares of Holding through participation in
employee incentive plans.
BUSINESS STRATEGY
The Company intends to enhance its market leadership position and maximize
profitability and cash flow by implementing the following business strategies:
Increase Penetration of the Domestic Climbing Products Market. The Company
believes it is well positioned to continue to increase its share of the domestic
climbing products market and intends to use its strong brand name, broad product
line and established distribution network to increase sales through existing
customers and to develop new customer relationships. The Company also believes
that its strong strategic relationships with leading climbing products
distributors in each channel will facilitate continued market share gains as
such customers further consolidate and expand their channels. Furthermore,
management believes that as distributors continue to consolidate their vendor
bases, the Company's broad product line and ability to supply distributors
throughout the United States provide significant opportunities for domestic
growth. The Company plans to further extend its domestic market coverage by
entering new product categories within the climbing products industry in which
it does not significantly participate at this time, such as domestic platform
ladders and step stools.
54
<PAGE> 55
Achieve Cost Reductions. Management has identified a number of cost
reduction opportunities from which the Company expects to realize up to
approximately $20 million in annual savings over the next five years, at an
estimated cost of up to approximately $49 million. These include: (i) adding
aluminum remelting capability to certain of the Company's manufacturing sites,
(ii) modernizing a number of extrusion presses, (iii) consolidating warehouses,
and (iv) constructing a new extension ladder production line. Management
believes that these capital investments will significantly enhance the Company's
vertically integrated manufacturing capabilities, thus allowing Werner to reduce
costs, improve productivity and achieve greater economies of scale.
Continue New Product Development. Werner has invested significant
resources in product development. The Company has expended approximately 0.6% of
net sales in 1995 and 1996, and 0.5% of net sales in 1997 on product
development. The Company continues to introduce new products while focusing on
higher margin products. For example, in the third quarter of 1997, the Company
introduced the Penguin(TM), an attractive, lightweight, consumer-oriented
platform ladder for household chores. Werner's commitment to product development
includes the application of further advancements in fiberglass pultrusion
technology to climbing products as well as the introduction of new products for
the stage and scaffold markets. Management believes that Werner's cost-efficient
production capability, well recognized brand name and loyal, diverse customer
relationships will enable the Company to continue to successfully introduce new
products and to increase per capita ladder ownership.
Pursue Complementary Acquisitions and International Expansion. Werner
intends to pursue acquisitions which complement its existing manufacturing and
distribution capabilities, provide opportunities to add capacity, expand product
offerings and achieve further economies of scale. Management believes that the
international climbing products market offers significant growth opportunities
for the Company. Compared to the United States market, the international
climbing products market is highly fragmented and regionally-focused, with
smaller companies offering narrower product lines and limited marketing and
customer service support. Furthermore, management believes that as the major
United States hardware and home improvement chains expand internationally, there
will be a growing need for high-quality, dependable suppliers such as Werner to
establish a direct presence overseas. The Company has licenses in the following
countries: United Kingdom, the Netherlands, South Africa, New Zealand, Brazil,
Australia, Japan, Chile, Canada and Italy. The Company sells its products to
customers in over 60 countries around the world.
COMPANY HISTORY
R.D. Werner founded the predecessor to the Company in 1922 as a floor
covering accessories converter and wholesaler. During the post-war period, the
Company began to pursue higher value-added applications of extrusion technology
by manufacturing semi-fabricated components and finished products rather than
low margin commodity products. Werner entered the climbing products market in
1950, and invented the ALFLO(R) Twist-Proof(R) rung-to-side rail connection,
which solved many of the safety and structural problems of aluminum extension
ladders. The Werner brand name has nearly a 50 year history and management
believes Werner is the most recognized name by users of climbing products.
INDUSTRY
Ladders and Other Climbing Products
The United States climbing equipment market encompasses aluminum,
fiberglass and wood step and extension ladders, domestic platform ladders and
rolling steel warehouse ladders, aluminum scaffolding, aluminum boards and
planks, aluminum stages and certain related accessories. Management estimates
that revenues in the United States climbing products industry have grown at a
CAGR of 8.3% to approximately $820 million in 1996 from approximately $645
million in 1993.
55
<PAGE> 56
The climbing products market is comprised of two partially-overlapping
end-user segments: consumers and professionals. The consumer segment primarily
consists of sales through home improvement, hardware, and paint stores to
do-it-yourself users, homeowners, renters and light commercial users. The
professional segment includes sales to independent contractors, builders,
painters, plumbers and electricians, as well as to institutional customers such
as utilities, municipalities and large corporations.
The United States climbing products industry consists of approximately 15
manufacturers, ranging from small, local producers to large manufacturers with
nationwide distribution capability, such as the Company. Management estimates
that in 1996, sales of the four largest climbing products manufacturers (Werner,
Louisville Ladder, Keller Ladders, Inc., and Cuprum, S.A. de C.V.) accounted for
approximately 63% of the estimated $820 million United States climbing products
market. Werner estimates that its share of the total climbing products market
has grown to approximately 36% in 1996 from approximately 32% in 1993.
Relative to smaller, local or regional competitors, national manufacturers
such as Werner benefit from several strategic advantages, including purchasing
power, the ability to service national customer accounts on a cost-effective and
timely basis and the ability to balance production among manufacturing
facilities. In addition, national manufacturers such as the Company are less
sensitive to regional cyclical economic downturns.
Climbing products sales growth has been influenced by a number of trends,
all of which the Company expects to continue into the foreseeable future. These
trends include the consolidation of distribution channels, the continued growth
of the home improvement and new housing markets, and the development of
international markets.
Consolidating Distribution Channels. Beginning in the mid-1980s, climbing
products distribution channels consolidated as large home improvement retailers,
hardware co-operatives and wholesalers, professional supply houses and specialty
wholesale distributors increased market share at the expense of smaller
competitors. Industry analysts expect this consolidation to continue. Sales to
both consumer and professional end-users through the power retailers have grown
faster than through other distribution channels because power retailers have
been increasing market share and enlarging the overall market for climbing
products by offering more products to the general public.
Continued Strong Home Improvement and New Housing Markets
Growth. Management expects home improvement, professional repair and
remodeling, and new housing starts to grow significantly over the next several
years. As climbing products are used in virtually all forms of construction, the
Company expects sales of its products to increase in proportion to these trends.
International Markets Growth. The Company believes that many international
markets for climbing products are approximately 20 years behind the United
States market in terms of the development of distribution channels and product
offerings. Management believes that as the major United States hardware and home
improvement chains expand internationally, there will be a growing need for
high-quality, dependable suppliers such as Werner to establish a direct presence
overseas.
Aluminum Extruded Products
Aluminum extrusion is an approximately $5 billion market in the United
States. Extrusion is a demanding manufacturing process in which hot metal is
pressed through a die to form a long length of a specific shape, known as a
lineal. A lineal can be further fabricated and finished into highly-engineered
products based on customers' design specifications. Extruded products are used
by many industries, such as transportation (e.g., truck trailer bodies and
automotive components), building products (e.g., windows, doors, hurricane
shutters, stadium seats and curtain walls), consumer durables (e.g., hardware
levels and appliances) and electrical components (e.g., buss bars, connectors
and heat sinks).
56
<PAGE> 57
The aluminum extruded products industry is broadly segmented into two
markets: lineal extruded products and fabricated components. See
"-- Manufacturing." The lineal segment is highly competitive and
volume-oriented, with the exception of several applications which require unique
capabilities which command higher margins. Except for these more profitable
niches, the large integrated aluminum producers tend to produce the bulk of the
lineal products because they offer the most competitive prices. In contrast, the
fabricated products segment is design and engineering-intensive and requires
sophisticated metallurgy, process control, and fabrication expertise. Customers
select component fabricators based on service, manufacturing flexibility and
timely production.
PRODUCTS
Ladders and Other Climbing Products
Werner manufactures approximately 1,500 stock keeping units of fiberglass,
aluminum, and wood climbing products and accessories. 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. The Company has been a leader in the climbing
products industry through the development of both proprietary aluminum extrusion
and fiberglass pultrusion technology. In the 1950s, Werner introduced aluminum
extension ladders featuring its ALFLO(R) Twist-Proof(R) rung-to-side rail
connection. In recent years, the Company has been a leader in developing
fiberglass ladder products. The Company has addressed the specific needs of the
telephone utility and industrial markets by providing electrically-and
thermally-nonconductive, weather-resistant climbing products. In addition, the
Company has broadened its product applications by introducing colorful,
attractive fiberglass climbing products to the consumer markets. The Company
began producing wood climbing products largely to address its customers'
requests for it to become a full-line provider of climbing products. The
Company's strategy with respect to its wood ladders is to migrate the end-user
from wood to fiberglass or aluminum climbing products while simultaneously
improving its gross margin for wood products by increasing cost-efficiency.
Through the introduction of a color-coded duty rating system correlated to
load capacity, the Company has simplified the end-user's purchasing decision and
differentiated Werner ladders from those of other suppliers. The Company's Type
III duty-rated ladders are economical, lightweight and dependable products for
most household applications. Werner's Type II duty-rated ladders are general
purpose, commercial grade climbing products for the handyman, painter or
mechanic. Werner's Type I duty-rated ladders are strong, stable industrial grade
climbing products designed for heavy do-it-yourself users and for uses in light
construction, maintenance or industrial applications. Finally, Type IA duty-
rated products are designed for extra heavy use by professional industrial,
construction, and maintenance purposes.
The Company also manufactures and sells a line of climbing products under
the All American brand name.
Aluminum Extruded Products
The Company is a manufacturer of lineal extruded products and
highly-engineered fabricated parts. The Company targets 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, which are internationally-recognized as the highest levels of
quality certification in the industrial and automotive industries and are
required by the "Big Three" United States automakers.
End-uses of the Company's lineal extrusions include electronic equipment,
architectural products, hardware, industrial equipment and lighting products.
The Company's customers use lineal extrusions
57
<PAGE> 58
in a broad range of products including garage door openers, bicycle frames,
pneumatic cylinders, material handling systems, electrical connectors, curtain
walls and office partitions. Werner has technical and process capabilities
required to serve the precision lineal market and believes that it has
competitive advantages over many, if not all, other U.S. extrusion companies.
Werner's metallurgical technology, die design expertise and exacting control of
all aspects of the extrusion process have contributed to the Company's success
in meeting the exacting specifications demanded in this segment. Management
believes the Company's presses and proprietary die technology offer product
features and higher production speed that are equal to, or more competitive
than, other U.S. extrusion companies. Since 1995, the Company has attempted to
shift its focus away from lower margin lineal products toward higher margin
precision extrusions and fabricated components. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The automotive market is currently the Company's primary market for
fabricated parts. The Company is a supplier to General Motors Corporation, Ford
Motor Corporation, and Chrysler Corporation. The Company has been a vendor to
various divisions of General Motors for approximately 35 years, has served Ford
for about 10 years, and has supplied Chrysler for approximately seven years.
Werner Financial
Werner Financial Inc. consists of, among other things, a claims management
entity, Phoenix Management Services, Inc. ("Phoenix"), and MIICA. Phoenix
utilizes its expertise in ladder and climbing products related liability claims
as a cost-efficient alternative to purchasing external claims management.
Prior to March 31, 1998, the Company operated MIICA as a Colorado captive
insurance company, to provide product liability, workers compensation and
environmental insurance to Holding and its subsidiaries. MIICA maintained an
insurance fund consisting of investments in debt and equity securities, real
estate and other investments to pay claims associated with these insurance
policies. In the first quarter of 1998, the Company undertook an extensive
evaluation of the cost and efficiency of providing such insurance through MIICA.
As a result of this evaluation, the Company decided to obtain such insurance
coverage from an external commercial insurance company and to discontinue the
operations of MIICA.
As a result of its decision, on March 31, 1998, the Company effectively
completed the Insurance Transfer. MIICA liquidated a substantial portion of its
investment portfolio to pay premiums associated with the Insurance Transfer.
Immediately prior to the Insurance Transfer, the Company had a reserve for such
liabilities of approximately $48.5 million as of March 31, 1998. This reserve
was established in conjunction with external independent actuaries. As a result
of the Insurance Transfer, MIICA ceded and the commercial insurance company
assumed MIICA's product and workers' compensation liabilities for losses
incurred prior to March 31, 1998. Under the terms of the agreements governing
the Insurance Transfer, the aggregate limit of all such liabilities assumed by
the commercial insurance company for losses incurred on or prior to March 31,
1998 is $75 million. The Company has agreed to indemnify the commercial
insurance company for any losses in excess of this limit.
Because MIICA is a captive insurance company licensed in Colorado, the
cessation of MIICA's operations and dissolution requires pre-approval of the
CDI. The Company believes it will obtain such approval in the second quarter of
1998. Upon receipt of this approval, it is expected that the remaining assets of
MIICA will be distributed to the Issuer and will be sold or liquidated as soon
as practicable. As required by the Senior Credit Facility, the net cash proceeds
from the disposition of these remaining assets of MIICA will be used to pay
indebtedness under the Senior Credit Facility.
In conjunction with the Insurance Transfer, the Company has obtained
product liability and workers' compensation insurance coverage for such losses
which occur on or after April 1, 1998. This insurance coverage is at guaranteed
rates over a rolling five year period and is subject to certain deductible
provisions. The Company believes that this insurance coverage is adequate for
its current and future anticipated business needs.
58
<PAGE> 59
MARKETING AND DISTRIBUTION
Ladders and Other Climbing Products
The Company categorizes its end-users into two major segments:
professionals and consumers. The consumer segment primarily consists of sales
through home improvement, hardware and paint stores to do-it-yourself users,
homeowners and light commercial users. The professional segment includes
independent contractors, builders, painters, plumbers and electricians, as well
as institutional customers such as utilities, municipalities and large
corporations. Professional users tend to purchase products through professional
supply houses and specialty wholesale distributors.
The Company's climbing products are sold primarily through approximately 50
independent, commissioned manufacturers' representative organizations, which
sell to three major distribution channels: (i) retail, (ii) hardware and (iii)
professional. These independent representative organizations have an average
tenure of approximately 16 years with Werner, cover a broad range of trade
fields, and possess extensive product knowledge and customer relationships. The
Company estimates that commissions from selling Werner products are the primary
source of revenue for approximately two-thirds of its representative groups.
Given its long-term relationships with, and economic importance to, its
independent representative network, Werner has historically experienced low
turnover and significant loyalty from these organizations.
The 50 independent manufacturers' representative organizations are directed
by an experienced in-house sales team of national and regional sales managers.
This sales team is composed of three national sales managers, one for each major
distribution channel, and five regionally-focused sales managers. In addition,
the Company's sales and marketing network is further supported by field
merchandisers who visit select customers on a regular basis to assist them with
product merchandising, point-of-purchase signage and sales techniques.
Aluminum Extruded Products
The Company's extruded products sales organization currently numbers
approximately 40 people, including Company salespeople and staffing provided by
15 independent manufacturers' representative organizations. The majority of the
Company's extruded products sales are in the eastern and mid-western United
States. As part of its strategic repositioning towards complex fabricated
components, the Company is adding new representation to build additional
business in the western United States. In addition, in 1996 Werner hired a new,
highly experienced marketing manager and additional dedicated market research
resources to support new market development. The Company operates on a "make-to-
order" basis with each customer. Werner is typically the key supplier for a
particular part or product and has enjoyed long-term relationships with its
customers.
MANUFACTURING
Climbing and extruded products are manufactured using common equipment and
facilities and similar production processes, which enable the Company to
leverage core technical competencies and balance product capacity and seasonal
demand. The Company is a manufacturer of aluminum, fiberglass and wood climbing
products, with vertically-integrated manufacturing facilities located in four
states. The Company believes that its ability to satisfy many of its own
manufacturing needs, including aluminum extrusions and fiberglass pultrusions,
provides it with an enhanced ability to serve its customers, significant
manufacturing flexibility and a reliable supply of low-cost components. The
Company also operates an aluminum remelt facility at its Greenville facility,
providing the Company with significant cost savings.
The first step in the production of aluminum and fiberglass ladders is the
extrusion or pultrusion of side rails and steps. The Company produces aluminum
extrusion products to meet virtually all its manufacturing needs. Werner's
aluminum raw material conversion process begins with the creation of proprietary
aluminum alloys by melting together in a reverbatory furnace commercially pure
aluminum
59
<PAGE> 60
ingot, select internal aluminum process scrap and other raw materials to create
alloys. In the extrusion process, aluminum billets are hydraulically pressed
through tooling dies to form the shapes necessary to build ladders and other
products.
The Company manufactures fiberglass reinforced plastic ladder siderails
using a proprietary pultrusion process. Pultrusion is a process of carefully
positioning arrays of fiberglass rovings, structural mat and surface veil,
injecting them with a liquid resin and then pulling this combination through a
temperature-controlled die. Fiberglass pultrusions can be made in numerous
colors, are electrically- and thermally-nonconductive and have excellent
structural and weathering properties. Werner's pultrusion equipment is now
designed in-house specifically for ladder rail production, which management
believes offers improved quality, higher throughput and lower costs than
competing processes or equipment.
Extrusion is a demanding manufacturing process in which hot metal is
pressed through a die to form a long length of a specific shape, known as a
lineal. A lineal can be further fabricated and finished into highly-engineered
products based on customers' design specifications. Extruded products are used
by many industries, such as transportation (truck trailer bodies and automotive
components), building products (windows, doors, stadium seats and curtain wall),
consumer durables (hardware levels and appliances) and electrical components
(connectors and heat sinks).
COMPETITION
The climbing products industry has experienced significant consolidation
over the last 10 to 15 years. The number of competitors has decreased from
roughly 65 in 1965 to approximately 15 today, with fewer than five providing a
broad product line throughout the United States. Management believes that the
Company's climbing products revenues were more than three times those of its
largest competitor in 1996. The Company competes on the basis of the variety and
quality of its products in addition to its high level of customer service.
In its extruded products business, the Company competes with integrated
primary aluminum producers, large independent producers and small independent
producers. The primary producers participate primarily in the high volume
commodity portion of the lineal segment and offer only modest levels of customer
service. The large independent extruders compete regionally or nationally, and
typically serve several niche markets. There are many small independent
extruders located throughout the United States. Most compete regionally and are
known for one or two specialty niche products.
PATENTS, TRADEMARKS AND LICENSES
The Company has over 50 patents worldwide. The Company believes that its
patents are important to its business operations but does not believe that the
expiration or loss of any of its patents would have a material adverse effect on
the Company.
The Company owns a number of trademarks, including Ladder Power(R),
Certified Werner Ladder Sales Expert(R) and Pro-Master Fiberglass Ladders(R).
The Company believes that its trademarks and its licenses are important to its
business operations, but does not believe that the expiration or loss of any
trademark or license would have a material adverse effect on the Company.
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 six principal suppliers. These contracts include stipulated prices with
provisions for price adjustments based on market prices. Five of these contracts
will be renegotiable in 1998 and one will be renegotiable in 1999.
To hedge the risk associated with price fluctuations for a certain
percentage of its forecasted aluminum raw material requirements, the Company
utilizes futures contracts. The Company's practice is not to hold derivative
commodity instruments, including aluminum futures contracts, for trading pur-
60
<PAGE> 61
poses. These futures contracts are placed with established metal brokers and are
typically of three to 27 months 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 has contracts to purchase the basic materials required for
fiberglass pultrusion with its principal suppliers, which 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.
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.
EMPLOYEES
The Company had approximately 2,700 employees as of December 31, 1997.
Approximately 1,400 hourly employees are covered by six collective bargaining
agreements, five which expire in 2000 and one of which expires in 2002. The
Company will renegotiate and renew union contracts as they expire. Management
does not anticipate any material labor disruptions as a result of the renewal of
any union contracts. The Company believes that its labor relations are good at
all of its facilities.
ENVIRONMENTAL MATTERS
The Company's operations are subject to 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. The primary environmental, health and safety laws affecting the
Company are the Federal Clean Air Act, the Water Pollution Control Act, the
Resource Conservation and Recovery Act and the Occupational, Safety and Health
Act, and their respective state counterparts. The Company believes that its
business, 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, many of which provide for substantial fines and
criminal sanctions for violations. See "Risk Factors -- Environmental
Regulation."
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
61
<PAGE> 62
its facilities are being utilized consistent with the Company's plans and do not
have substantial excess capacity. The Company's principal facilities consist of
the following:
<TABLE>
<CAPTION>
OWNED/ APPROX.
LOCATION PRINCIPAL USE LEASE EXPIRATION SQUARE FOOTAGE
-------- ------------- ---------------- --------------
<S> <C> <C> <C>
Greenville, PA.............. Office, Manufacturing, Distribution Owned 640,000
Franklin Park, IL........... Manufacturing, Distribution Owned 672,000
Anniston, AL................ Manufacturing, Distribution Owned 410,000
Carrolton, KY............... Wood Manufacturing, Distribution Owned(1) 200,000
Union City, CA.............. Warehouse 10/31/00 38,600
Bell, CA.................... Warehouse 4/30/01 39,100
Phoenix, AZ................. Warehouse 9/30/00 18,500
Dallas, TX.................. Warehouse 6/30/99 16,480
Houston, TX................. Warehouse 2/28/01 40,000
Jefferson, LA............... Warehouse 4/30/00 7,800
Greensboro, NC.............. Warehouse 4/30/98(2) 20,800
Maryland Hgts., MO.......... Warehouse 9/30/00 8,700
Bensenville, IL............. Warehouse 10/31/98(3) 95,000
Minneapolis, MN............. Warehouse 8/31/00 11,900
</TABLE>
- ---------------
(1) Subject to Variable Rate Industrial Building Revenue Bonds due 2015 issued
by the County of Carroll, Kentucky.
(2) A renewal option of two three-year terms exists for the Greensboro lease.
(3) Extension of the Bensenville lease is currently being negotiated.
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 financial condition or results of
operations. See "Risk Factors -- Legal Proceedings."
In addition, on March 31, 1998, an action was filed in the United States
District Court for the Western District of Pennsylvania entitled Elizabeth
Werner, et al v. Richard L. Werner, et al (Case No. GD 98-4020). The plaintiffs
of the action are Elizabeth Werner; Jeffrey R. Ackerman, individually and as
trustee under a trust for the benefit of Elizabeth Werner; Matthew W. Weiss (by
his parent Elizabeth Werner); Timothy F. Burke, Jr., as executor of the estate
of Anne L. Werner and as trustee of certain trusts under Anne L. Werner's last
will and testament; Edward A. Pollack; and all of such plaintiffs derivatively
on behalf of Holding. There are over 60 named defendants, including the
Management Shareholders, former Company officers Richard L. Werner, Robert I.
Werner and Marc L. Werner, certain other Non-Management Shareholders, Holding,
the Issuer, Werner Co., Werner Ladder Co., Werner Financial Inc., Phoenix
Management Services, Inc. and MIICA. The action purports in part to be brought
derivatively on behalf of the Company. The aspect of the case purportedly
brought on behalf of the Company 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. The
Company's board of directors has referred the matter to a special committee of
disinterested directors to investigate the merits of the claims and to take
appropriate actions on behalf of the Company with respect to them. The action
also purports to be brought on behalf of the plaintiffs
62
<PAGE> 63
individually against the Company, certain affiliated entities, and certain
current and former officers and directors of the Company. The claims that are
asserted against the Company appear to arise out of the 1992 and 1993 restricted
stock issuances as well as alleged misrepresentations by representatives of the
Company. The plaintiffs seek money damages in an unspecified amount. Management
believes that the ultimate resolution of this lawsuit will not have a material
adverse effect on the Company's financial condition.
OPERATION THROUGH SUBSIDIARIES
The Company conducts substantially all its operations through the Issuer's
direct and indirect subsidiaries. The Company is currently undertaking a review
of the desirability of operating through all of the Issuer's subsidiaries,
including the Subsidiary Guarantors. In the event certain of the Issuer's
subsidiaries are deemed no longer necessary, it is expected that such
subsidiaries will be consolidated into the Issuer or one of its remaining
subsidiaries. Such consolidation will have no impact however upon the holders of
the Notes or the consolidated results of operations of the Company.
63
<PAGE> 64
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and principal position of each
of the directors of Holding and the executive officers of the Company.
Each director of Holding will hold office until the next annual meeting of
shareholders of Holding or until his successor has been elected and qualified.
Officers of the Company are appointed by the Board of Directors of Holding and
serve at the discretion of the Board of Directors, subject to any applicable
employment agreements.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Donald M. Werner.......................... 64 Chairman, President, Chief Executive
Officer, and Director
Howard L. Solot........................... 60 Vice Chairman, Chief Operating Officer,
Executive Vice President and Director
Donald W. Resnick......................... 56 Chief Financial Officer and Treasurer
Michael E. Werner......................... 38 President, Werner Ladder Co.
Michael D. Isacco......................... 60 Vice President, Manufacturing
Eric J. Werner............................ 35 Chief Administrative Officer, Secretary
and General Counsel
Savio W. Tung............................. 46 Director
Charles J. Philippin...................... 47 Director
Christopher J. Stadler.................... 33 Director
</TABLE>
Donald M. Werner has served as President and Chief Executive Officer of
Holding since May 1997. 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
director and officerships at subsidiaries of Holding. Prior to commencing his 39
year career with the Company, Mr. Werner was an aircraft structural design
engineer for Grumman Aircraft Co. Mr. Werner is 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.
Howard L. Solot has served as Executive Vice President and Chief Operating
Officer of Holding since 1995. 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 and officerships at subsidiaries of Holding. Mr.
Solot is a member of the board of directors of the Aluminum Extruders Council.
Mr. Solot is the cousin of Donald M. Werner.
Donald W. Resnick joined the Company as Chief Financial Officer of Holding
in 1996. He has also served as President of Werner Financial Inc. and of MIICA
since December 1996. Mr. Resnick also holds various officerships at subsidiaries
of Holding. Prior to joining the Company, Mr. Resnick served as President and
Chief Operating Officer of Ameriquest Technologies, Inc. Prior to that, he was
with Digital Equipment Corporation for twelve years, where he served as
International Chief Financial Officer for eight years.
Michael E. Werner has served as President of the Company's Werner Ladder
Co. business unit since 1997. Mr. Werner joined the Company in 1988 and has held
several positions including Vice President -- National Accounts and Vice
President -- Sales & Marketing. Mr. Werner also holds various officerships at
subsidiaries of Holding. 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
64
<PAGE> 65
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.
Michael D. Isacco has served as Vice President, Manufacturing of the
Company since April 1995. Mr. Isacco joined the Company in 1981 as Engineering
Administrator and has held a variety of positions with the Company, including
Manager of Engineering Administration and Greenville Division Plant Manager.
Prior to joining the Company, Mr. Isacco spent twenty years in various positions
with the United States Army, retiring in 1979 with the rank of Lieutenant
Colonel.
Eric J. Werner joined the Company in 1988 as Secretary and Corporate
Counsel. He has served as Chief Administrative Officer of the Company since 1995
and General Counsel of the Company since 1993. Prior to joining the Company, Mr.
Werner was an associate at the law firm of O'Connor, Broude, Snyder and Aronson.
Mr. Werner also holds various officerships at subsidiaries of Holding. 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.
Savio W. Tung has served as a director of Holding since November 1997. He
has been an executive of Investcorp, its predecessor or one or more of its
wholly-owned subsidiaries since September 1984. Mr. Tung is a director of CSK
Auto Corporation, Saks Holdings, Inc. and Star Markets Holdings, Inc.
Charles J. Philippin has served as a director of Holding since November
1997. He has been an executive of Investcorp or one or more of its wholly-owned
subsidiaries since July 1994. Prior to joining Investcorp, Mr. Philippin was a
partner of Coopers & Lybrand L.L.P. Mr. Philippin is a director of Saks
Holdings, Inc., CSK Auto Corporation, The William Carter Company and Falcon
Building Products, Inc.
Christopher J. Stadler has served as a director of Holding 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, The William Carter Company and Falcon Building Products, Inc.
DIRECTOR COMPENSATION
Holding does not pay any additional remuneration to its employees or to
executives of Investcorp for serving as directors. The Company does reimburse
directors for any expenses incurred in attending meetings. See " -- Executive
Compensation."
SHAREHOLDER RIGHTS AGREEMENT
Pursuant to the Shareholder Rights Agreement entered into on the
Recapitalization Closing Date, Class D Investors have a right to designate at
least a majority of Holding's Board, the Chief Executive Officer of Holding
shall be a director, and, depending on the size of the board, 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 Transactions -- Agreements with Certain Shareholders --
Shareholder Rights Agreement."
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all cash compensation earned in fiscal 1997
by the Company's Chief Executive Officer, each of the other four most highly
compensated executive officers whose remuneration exceeded $100,000 and two
other individuals who served as executive officers during 1997 (collectively,
the "Named Executive Officers"). The current compensation arrangements for each
of these officers are described in " -- Employment Arrangements" below.
65
<PAGE> 66
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ($)
------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION COMPENSATION(A)
---------------------------- ---- ------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Donald M. Werner(1).................. 1997 414,923 297,920 97,533 2,000,000
President, Chief Executive Officer
Howard L. Solot(2)................... 1997 413,058 297,920 59,755 2,000,000
Chief Operating Officer,
Executive Vice President
Donald W. Resnick(3)................. 1997 243,654 95,264 65,680 857,500
Chief Financial Officer, Treasurer
Michael E. Werner(4)................. 1997 222,942 134,952 176,349 --
President of Werner Ladder Co.
Eric J. Werner(5).................... 1997 214,961 84,448 23,938 --
Chief Administrative Officer,
Secretary,
General Counsel
Richard L. Werner(6)................. 1997 159,231 171,139 366,174 2,000,000
Chairman, President and Chief
Executive Officer
Robert I. Werner(7).................. 1997 170,769 80,660 434,375 2,000,000
Vice Chairman, Senior Vice
President,
Technology and Quality
</TABLE>
- ---------------
(a) See the following section "Compensation Relating to the Recapitalization"
for a detailed explanation of amounts in this column.
(1) Prior to April 1997, Donald M. Werner was the President of Werner Ladder Co.
The amount shown for Mr. Werner under Other Annual Compensation reflects
payments of $67,972 in respect of life insurance premiums paid by the
Company, $4,750 in respect of matching contributions made under the 401(k)
Plan, $9,302 in respect of accruals under the Retiree Health Plan, $2,625 of
imputed income arising from the personal use of a Company provided
automobile, $6,798 for financial planning services, and $6,086 of imputed
interest. The amount shown for Mr. Werner under All Other Compensation
reflects payments of $2,000,000 relating to the acceleration of additional
supplemental pension and consulting payments as a result of the
Recapitalization.
(2) The amount shown for Mr. Solot under Other Annual Compensation reflects
payments of $32,795 in respect of life insurance premiums paid by the
Company, $4,750 in respect of matching contributions made under the 401(k)
Plan, $5,850 in respect of accruals under the Retiree Health Plan, $7,030 of
imputed income arising from the personal use of a Company provided
automobile, and $9,330 for financial planning services. The amount shown for
Mr. Solot under All Other Compensation reflects payments of $2,000,000
relating to the acceleration of additional supplemental pension and
consulting payments as a result of the Recapitalization.
(3) The amount shown for Mr. Resnick under Other Annual Compensation reflects
payments of $45,505 in respect of life insurance premiums paid by the
Company, $4,750 in respect of matching contributions made under the 401(k)
Plan, $4,050 in respect of accruals under the Retiree Health Plan, $1,115 of
imputed income arising from the personal use of a Company provided
automobile, and $10,260 of moving expense. The amount shown for Mr. Resnick
under All Other Compensation reflects incentive payments relating to the
Recapitalization.
(4) The amount shown for Michael E. Werner under Other Annual Compensation
reflects payments of $8,044 in respect of life insurance premiums paid by
the Company, $3,062 in respect of matching contributions made under the
401(k) Plan, $594 in respect of accruals under the Retiree Health Plan,
$3,889 of imputed income arising from the personal use of a Company provided
automobile, $50,391 of moving expense, $107,119 of special pay and $3,250 of
financial planning services.
66
<PAGE> 67
(5) The amount shown for Eric J. Werner under Other Annual Compensation reflects
payments of $6,935 in respect of life insurance premiums paid by the
Company, $4,750 in respect of matching contributions made under the 401(k)
Plan, $594 in respect of accruals under the Retiree Health Plan, $4,766 of
imputed income arising from the personal use of a Company provided
automobile, and $6,893 of financial planning services.
(6) Richard L. Werner retired as the Company's Chairman and Chief Executive
Officer in May 1997. The amount shown for Mr. Werner under Other Annual
Compensation reflects payments of $49,065 in respect of life insurance
premiums paid by the Company, $4,750 in respect of matching contributions
made under the Company's Employee Savings Plan (the "401(k) Plan"), $6,615
in respect of accruals by the Company under its Officers'/Directors' Health
and Dental Insurance Continuation Plan (the "Retiree Health Plan"), and
$3,834 of interest income, $23,759 of financial planning services and
$278,151 of pension payment. The amount shown for Mr. Werner under All Other
Compensation reflects payments of $2,000,000 relating to additional
supplemental pension and consulting payments including amounts which were
accelerated as a result of the Recapitalization.
(7) Robert I. Werner retired as the Company's Senior Vice President, Technology
and Quality in May 1997. The amount shown for Mr. Werner under Other Annual
Compensation reflects payments of $46,655 in respect of life insurance
premiums paid by the Company, $4,750 in respect of matching contributions
made under the 401(k) Plan, $5,355 in respect of accruals under the Retiree
Health Plan, and $13,723 of imputed interest, $6,838 of financial planning
services and $357,054 of pension payment. The amount shown for Mr. Werner
under All Other Compensation reflects payments of $2,000,000 relating to
additional supplemental pension and consulting payments including amounts
which were accelerated as a result of the Recapitalization.
COMPENSATION RELATED TO THE RECAPITALIZATION
Consulting Agreements
As part of the Company's succession plan, the Company Board determined in
December 1996 to provide each of Richard L. Werner, Robert I. Werner, Donald M.
Werner and Howard L. Solot a Consulting Agreement and an additional supplemental
pension to be entered into or paid (as the case may be) at the time that each of
the foregoing retires from the Company subject to certain acceleration
provisions. Accordingly, in April 1997, each of Richard L. Werner and Robert I.
Werner entered into a four-year Consulting Agreement providing for consulting
fees of $250,000 per annum and received an additional supplemental pension of $1
million. Pursuant to the December 1996 awards, a change of control of Holding
results in the acceleration of such payments. The Recapitalization constituted a
change of control for purposes of the Consulting Agreements, and, as a result,
all remaining amounts under the Consulting Agreements were accelerated and paid
to each of Richard L. Werner and Robert I. Werner on the Recapitalization
Closing Date. In addition, pursuant to the December 1996 awards, each of Donald
M. Werner and Howard L. Solot became entitled to receive, at the time of the
Transactions, all amounts that they would have received had they retired as of
such time, pursuant to the terms of additional supplemental pensions and the
acceleration of their Consulting Agreements. Such amounts totaling $2 million
each were paid by Holding on the Recapitalization Closing Date. See "-- Pension
Plans." After all such payments were made pursuant to the acceleration, the
Consulting Agreements terminated pursuant to their terms.
Employee Protection Agreements
In connection with the Transactions, Holding entered into Employee
Protection Agreements with approximately 50 employees, including the Named
Executive Officers and the Company's other senior management. The Employee
Protection Agreements provide for payments ranging from 50% to 150% of a year's
salary to be paid to each covered employee (i) who remains employed on the first
anniversary of a change in control of Holding or (ii) prior to such anniversary
(A) whose employment is terminated by Holding other than for cause or (B) who
suffers a "material employment change" (as defined in the Employee Protection
Agreements). It is estimated that payments to be made under the
67
<PAGE> 68
Employment Protection Agreements will total approximately $6.6 million. In
addition, certain employees who are not Werner family members, including Mr.
Resnick, have been provided incentive bonuses in their Employee Protection
Agreements relating to a change of control of Holding. The Recapitalization
constituted a change of control for purposes of the Employee Protection
Agreements. The Company paid such incentive payments on the Recapitalization
Closing Date in the amount of $1,133,500.
Restricted Stock Plan
In 1992 and 1993, pursuant to the terms of the Company's Restricted Stock
Plan, the Company awarded the following shares of restricted
pre-Recapitalization Class B Stock (the "Restricted Shares") to the following
persons and in the following amounts: Richard L. Werner (5,600 shares), Robert
I. Werner (5,600 shares), Donald M. Werner (5,600 shares), Howard L. Solot
(5,600 shares), Marc L. Werner (1,750 shares), Craig R. Werner (1,750 shares),
Michael E. Werner (1,750 shares), Eric J. Werner (1,750 shares), Bruce D. Werner
(1,750 shares), and Michael J. Solot (1,750 shares). The Restricted Shares were
awarded in consideration of each executive's continued employment by the Company
and therefore would have vested on a delayed basis following the date of grant.
In the absence of a change of control, the Restricted Shares held by Michael J.
Solot would have vested on December 17, 2000, and the Restricted Shares held by
the other executives (other than Robert Werner and Richard L. Werner, whose
shares automatically vested upon their retirement in May 1997) would have vested
on March 14, 1999 or, if earlier, upon the occurrence of a change of control of
Holding. The Recapitalization constituted a change of control for purposes of
the Restricted Stock Plan and, accordingly, all outstanding Restricted Shares
became fully vested upon the Recapitalization Closing Date. Consequently, a
non-cash compensation charge of $78.5 million was taken by the Company in 1997.
Employment Arrangements
Pursuant to the Recapitalization Agreement, Holding entered into employment
agreements with each of Donald M. Werner, Howard L. Solot, Michael E. Werner,
Eric J. Werner and three other senior managers of the Company (the "Employment
Agreements"). Each of the Employment Agreements is for a term of three years,
commencing on the Recapitalization Closing Date. The Employment Agreements for
Named Executive Officers provide for a base annual salary, effective as of
January 1, 1998, in the following amounts: $406,000 for Donald M. Werner,
$385,000 for Howard L. Solot, $183,000 for Eric J. Werner and $234,000 for
Michael E. Werner. In addition to such executive's salary, the Employment
Agreements also provide for an annual bonus payment up to a maximum of 90% of
annual salary for Donald M. Werner and Howard L. Solot, 60% of annual salary for
Eric J. Werner and 70% of annual salary for Michael E. Werner. This bonus is
reduced, within a range of board discretion, to the extent that the Company
falls short of EBITDA targets specified in the Employment Agreements. The
Employment Agreements further provide for an additional cash bonus payable at
the discretion of the Company Board. Under the Employment Agreements, Holding
may only terminate such executives' employment, without obligation for
severance, for cause. 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.
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
Recapitalization, adverse changes in duties and forced relocation.
Management Stock Incentive Plan
Pursuant to the Recapitalization Agreement, Holding 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. While no options have yet
been issued pursuant to such plan, the Company anticipates that
68
<PAGE> 69
options representing approximately 7% of the outstanding post-Recapitalization
common stock will be issued in the near future. Certain members of senior
management, including the Named Executive Officers, are expected to be granted a
significant portion of these options. The exercise price for options that are to
be granted will be equal to the Cash Redemption Price. An award granted under
the plan to an employee may 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, at the
discretion of the Compensation Committee, any change of control of Holding. Each
option will be 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 will have
certain rights to repurchase, and the optionee shall have certain rights to
require an affiliate of Investcorp to repurchase (subject to the right, granted
to Holding, 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).
Stock Loan Plan
Pursuant to the Recapitalization Agreement, Holding adopted, as of the
consummation of the Transactions, 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") in
amounts that do not exceed the sum of (i) 50% of the purchase price of the
shares of Class C Common Stock purchased by the Loan Participant and (ii) the
amount of the retention bonus to be paid by Holding to the Loan Participant
pursuant to the respective Employee Protection Agreement. Loans made pursuant to
the Stock Loan Plan will mature in seven years, and will bear interest at the
same rate as the Revolving Facility of the Senior Credit Facility. Holding will
negotiate with each Loan Participant the amount of principal to be paid from
such Loan Participant's annual bonus. The Stock Loan Plan will require each Loan
Participant to enter into a pledge agreement and to execute a secured promissory
note. Shares with an aggregate fair market value of at least $2 million will be
made available for purchase pursuant to the Stock Loan Plan and management stock
purchase agreements.
Pension Plans
The Company's salaried employees receive an annual lifetime pension (up to
$160,000, as adjusted) benefit based on years of service and salary under the
Werner Holding Co. (DE), Inc. Salaried Employees' Pension Plan, a funded,
tax-qualified defined benefit plan covering all salaried employees (the
"Retirement Plan"). Certain Named Executive Officers also receive pension
benefits under the Werner Holding Co. (DE), Inc. Supplemental Pension Plan A
and/or the Werner Holding Co. (DE), Inc. Supplemental Pension Plan B. The
following tables show the estimated aggregate annual benefits payable at age 65
to Named Executive Officers retiring at age 65 with the indicated average
compensation and years of credited service from both the Retirement Plan and the
applicable Supplemental Pension Plans. These benefits are in addition to the $1
million supplemental pensions paid in May 1997 to Richard L. Werner and Robert
I. Werner, and paid on the Recapitalization Closing Date to Donald M. Werner and
Howard L. Solot. See "-- Compensation Related to the
Recapitalization -- Consulting Agreements."
69
<PAGE> 70
A. PENSION PLAN TABLE: ANNUAL BENEFITS PAYABLE AT AGE 65
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30 35 40 45
- ------------ ------- ------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$100,000 $ 6,416 $12,832 $ 19,248 $ 25,664 $ 32,080 $ 38,496 $ 45,645 $ 52,792 $ 59,941
200,000 13,564 27,129 40,693 54,258 67,822 81,387 95,684 109,980 124,278
300,000 20,713 41,426 62,139 82,852 103,565 124,278 145,724 167,169 188,615
400,000 27,862 55,723 83,585 111,446 139,308 167,169 195,764 224,357 252,951
500,000 35,010 70,020 105,030 140,040 175,050 210,060 245,803 281,545 317,288
</TABLE>
B. PENSION PLAN TABLE: ANNUAL BENEFITS PAYABLE AT AGE 65
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30 35 40 45
- ------------ ------- ------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$300,000 $ 0 $14,297 $ 21,446 $ 28,594 $ 35,743 $ 42,891 $ 50,040 $ 57,188 $ 64,337
400,000 0 19,063 28,594 38,126 47,657 57,188 66,720 76,251 85,782
500,000 0 23,828 35,743 47,657 59,571 71,485 83,399 95,314 107,228
600,000 0 28,594 42,891 57,188 71,485 85,782 100,079 114,376 128,673
700,000 0 33,360 50,040 66,720 83,400 100,079 116,759 133,439 150,119
800,000 0 38,125 57,188 76,251 95,314 114,376 133,439 152,502 171,565
900,000 0 42,891 64,337 85,782 107,228 128,673 150,119 171,565 193,010
</TABLE>
The benefits listed in the tables are not subject to any deduction for
Social Security. The benefits listed in Table A are computed on the basis of the
average salary of the employee (excluding bonuses) for the three consecutive
full calendar years out of the last 10 years prior to retirement that provide
the highest average. The benefits listed in Table B are computed on the basis of
the average salary of the employee (including bonuses) for the three consecutive
full calendar years out of the last 10 years prior to retirement that provide
the highest average.
Supplemental Pension Plans A and B 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 Employee Retirement Income Saving Act (ERISA), plus
additional other benefits. Supplemental Pension Plan A covers all members of the
Company's Management Committee and Supplemental Pension Plan B covers all the
elected corporate officers. Supplemental Pension Plan benefits are a function of
service and final average compensation. Executives must have spent at least ten
years as either an elected salaried corporate officer or a member of the
Management Committee of the Company which includes all of the named executive
officers to be eligible. Eligibility for supplemental plans is conditioned upon
participants' compliance with a non-competition agreement.
The compensation used for pension formula purposes is annual base pay alone
for the qualified Retirement Plan (subject to IRS limits, currently at $160,000
per year) and both base pay and annual bonus (without regard to any limits) for
the nonqualified Supplemental Plans. The base salaries and bonuses of each of
the named executive officers for 1997 are set forth in the Summary Compensation
Table.
An amendment to Supplemental Pension Plan B provides to Richard L. Werner,
Robert I. Werner, Donald M. Werner and Howard L. Solot a minimum of supplemental
pension equal to the amount necessary to bring the total Retirement Plan pension
and the pension otherwise payable under the Supplemental Pension Plans, up to a
combined minimum pension of 1.25% of average annual compensation for all years
of service, up to a lump sum equivalent maximum for this additional benefit
(based on a 7.5% discount rate) of $1 million. Richard L. Werner and Robert I.
Werner were paid this $1 million lump sum additional benefit upon their
retirement in May 1997. The obligations of the Company to
70
<PAGE> 71
Donald M. Werner and Howard L. Solot under this amendment were accelerated at
the Recapitalization Closing Date, and Donald M. Werner and Howard L. Solot each
received $1 million from the Company. See "-- Compensation Related to the
Recapitalization -- Consulting Agreements."
The respective years of credited service for the Named Executive Officers
as of December 31, 1997 are: Richard L. Werner, 44; Robert I. Werner, 44; Donald
M. Werner, 39; Howard L. Solot, 38; Michael E. Werner, 9; Eric J. Werner, 9; and
Donald W. Resnick, 2.
COMMITTEES OF THE BOARD OF DIRECTORS;
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the consummation of the Transactions, the Salary Administration
Committee of Werner Co., a subsidiary of the Issuer, determined the annual
salary budget for each department, which was then allocated by the department
head. The full board of directors of Werner Co. determined the compensation for
senior non-Werner family management. During 1997, this board consisted of
Richard L. Werner, Robert I. Werner, Donald M. Werner, Howard L. Solot, Craig R.
Werner, Michael E. Werner, Eric J. Werner, Bruce D. Werner and Michael J. Solot.
The full board of directors of Werner Management Co. determined the compensation
for Werner family executive officers. During 1997, the board consisted of
Richard L. Werner, Robert I. Werner, Donald M. Werner and Howard L. Solot.
None of the executive officers of the Company served on the board of
directors or on the compensation committee of any other entity, any of whose
officers served either on any of the boards of directors or the Salary
Administration Committee of the Company.
71
<PAGE> 72
PRINCIPAL SHAREHOLDERS
The Class A Stock, Class B Stock and Class D Common Stock are the only
classes of Holding'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.
The following table sets forth certain information regarding the beneficial
ownership of the capital stock of Holding. The table sets forth for such periods
(i) each person known by the Company to be the beneficial owner of more than 5%
of each class of voting stock of Holding, (ii) each person who is a director of
Holding or Named Executive Officer of the Company who is expected to
beneficially own shares of voting stock of Holding and (iii) all directors of
Holding 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.
Investcorp and its affiliates beneficially own approximately 67% of the
outstanding voting stock of Holding and the pre-Recapitalization existing
shareholders, including certain members of management, now own approximately 33%
of the outstanding voting stock of Holding. In addition, the Investors own 4,682
shares of Class C Common Stock and 45,000 shares of Class E Common Stock. See
"Certain Transactions -- Agreements with Certain Shareholders" and "The
Transactions."
<TABLE>
<CAPTION>
NUMBER %
OF SHARES(1) OF CLASS
------------ --------
<S> <C> <C>
CLASS A VOTING STOCK
Noel Berk-Rauch............................................. 142 6.9
Shirley W. Rauch Trust(2)................................... 130 6.4
Stanley S. Rauch Trust(3)................................... 130 6.4
Howard L. Solot(4).......................................... 361 17.5
Donald M. Werner............................................ 388 18.8
Richard L. Werner Revocable Trust(5)........................ 331 16.1
Ronald E. Werner(6)......................................... 240 11.7
All directors and executive officers as a group, including
certain of the above named persons........................ 884 42.9
CLASS B VOTING STOCK
Howard L. Solot(7).......................................... 1,415 6.3
Bruce D. Werner Trust(8).................................... 1,399 6.2
Craig R. Werner Trust(9).................................... 1,508 6.7
Michael E. Werner Revocable Trust(10)....................... 1,496 6.7
Donald M. Werner(11)........................................ 769 3.5
Eric J. Werner(12).......................................... 1,384 6.2
Ronald E. Werner(13)........................................ 1,746 7.8
All directors and executive officers as a group, including
certain of the above named persons........................ 5,064 22.6
CLASS D VOTING STOCK
INVESTCORP S.A.(14)(15)..................................... 1,000 100.0
SIPCO Limited(16)........................................... 1,000 100.0
CIP Limited(17)(18)......................................... 920 92.0
Ballet Limited(17)(18)...................................... 92 9.2
Denary Limited(17)(18)...................................... 92 9.2
Gleam Limited(17)(18)....................................... 92 9.2
Highlands Limited(17)(18)................................... 92 9.2
Noble Limited(17)(18)....................................... 92 9.2
Outrigger Limited(17)(18)................................... 92 9.2
Quill Limited(17)(18)....................................... 92 9.2
Radial Limited(17)(18)...................................... 92 9.2
Shoreline Limited(17)(18)................................... 92 9.2
Zinnia Limited(17)(18)...................................... 92 9.2
INVESTCORP Investment Equity Limited(15).................... 80 8.0
</TABLE>
72
<PAGE> 73
- ---------------
(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) Includes 64.87 shares of Class A Stock held in the name of Stanley S. Rauch
Trust.
(3) Includes 64.87 shares of Class A Stock held in the name of Shirley W. Rauch
Trust.
(4) Includes 36.47 shares of Class A Stock held in the name of Mr. Solot's
spouse, Janet F. Solot.
(5) Includes 27.93 shares of Class A Stock held in the name of the Lois S.
Werner Revocable Trust. Lois S. Werner is the spouse of Mr. Werner.
(6) 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.
(7) Includes 212.17 shares of Class B Stock held in the name of Mr. Solot's
spouse, Janet F. Solot.
(8) 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.
(9) Includes 532.16 shares of Class B Stock owned by the Craig R. Werner Family
Limited Partnership.
(10) 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.
(11) 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.
(12) 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.
(13) Includes 1,035.74 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.
(14) Investcorp does not directly own any stock in Holding. The number of shares
shown as owned by Investcorp includes all of the shares owned by INVESTCORP
Investment Equity Limited (see (15) 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
(18) 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 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.
(15) 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.
(16) 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.
(17) CIP Limited ("CIP") owns no stock in Holding. 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 (18) below). CIP may be
deemed to share beneficial ownership of the shares of voting stock of
Holding held by
73
<PAGE> 74
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's voting stock.
(18) 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, 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 of such holder's intent to sell such shares. Following the receipt of
such notice, Holding 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 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, to the extent it is legally permitted to do so.
CERTAIN TRANSACTIONS
AGREEMENTS WITH CERTAIN SHAREHOLDERS
Consulting and Financial Services Agreements
Financing for the Recapitalization was provided in part by a $122.7 million
equity investment by the Investors.
In connection with the Transactions, the Company paid Investcorp
International, Inc. ("III"), an affiliate of Investcorp, advisory fees
aggregating $6.0 million, and Invifin S.A., an affiliate of Investcorp, fees
aggregating $6.0 million for providing a standby commitment to fund the amount
of the Notes and the Senior Credit Facility. In connection with the closing of
the Transactions, the Company entered into an agreement for management advisory
and consulting services for a five-year term with III, pursuant to which the
Company prepaid III $5.0 million upon closing.
Separation Agreement
In connection with Marc L. Werner's separation from the Company in
September 1997, Mr. Werner entered into a Separation Agreement which contained,
among other things, certain confidentiality, non-competition, release and
full-cooperation provisions. The agreement also provided that Mr. Werner would
vote all of his shares of Holding's capital stock in accordance with the vote of
the majority of Class A Stock. Pursuant to the agreement, Mr. Werner was, among
other things, permitted to retain his Restricted Shares and granted a lump-sum
severance payment of approximately $274,000.
Shareholder Rights Agreement
On the Recapitalization Closing Date, Holding 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's capital stock, in favor of the Class D Investors to
require the Management Shareholders to sell their remaining equity interests in
Holding 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 the Recapitalization, (ii)
the right in favor of all
74
<PAGE> 75
holders of Holding's capital stock, during the period beginning immediately
after the Closing Date and continuing 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's Board of Directors or in
connection with business acquisitions by Holding) if the securities to be issued
by the Company are not being issued at fair market value as determined in good
faith by Holding'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, (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's Board will
consist of persons designated by the Class D Investors, (b) the Chief Executive
Officer of Holding shall be a director and (c) depending on the size of the
board, 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.
LOANS TO CERTAIN OFFICERS
Prior to the Recapitalization, the Company periodically extended loans to
certain officers and directors, pursuant to the Werner Relocation Policy, in
connection with moving expenses incurred as a result of relocation or new hires.
All such loans were repaid on or prior to the Recapitalization Closing Date.
THE SENIOR CREDIT FACILITY
General. As part of the Transactions, the Issuer entered into the Senior
Credit Facility with BT, as administrative agent and co-arranger, Merrill Lynch
Capital Corporation, as syndication agent and co-arranger, The Chase Manhattan
Bank, as documentation agent, Goldman Sachs Credit Partners L.P., as co-agent,
and the several lenders parties thereto. The Senior Credit Facility consists of
Term Loan Facilities in an aggregate principal amount of $145.0 million, the
Revolving Facility in an aggregate principal amount of up to $100.0 million and
the Receivables Facility in an aggregate principal amount of up to $75.0 million
(together with the Term Loan Facilities and the Revolving Facility, the
"Loans"). The following is a summary description of the principal terms of the
Senior Credit Facility and is subject to, and qualified in its entirety by
reference to the definitive agreement.
All obligations of the Issuer are unconditionally and irrevocably
guaranteed jointly and severally by Holding and each of the Issuer's present
subsidiaries other than MIICA and its subsidiaries and certain other nonmaterial
subsidiaries ("Loan Guarantors"). Indebtedness under the Senior Credit Facility
is secured by a first priority security interest in (i) all of the capital stock
of the Issuer and certain of its subsidiaries, (ii) substantially all of the
inventory and equipment, and certain real property of the Issuer and the Loan
Guarantors and (iii) substantially all other tangible and intangible assets of
the Issuer and the Loan Guarantors.
Term Loan Facilities. The Term Loan Facilities consist of two tranches of
term loans in an aggregate principal amount of $145.0 million. The Tranche B
term loans are in an aggregate principal amount of $90.0 million, and the
Tranche C term loans are in an aggregate principal amount of $55.0 million. The
loans under the Term Loan Facilities were made in a single drawing on the
Recapitalization Closing Date. The Tranche B term loans will mature on the
seventh anniversary of the Recapitalization Closing Date, and the Tranche C term
loans will mature on the eighth anniversary of the Recapitalization Closing
Date. Installments of the Tranche B term loans will be due in aggregate
principal amounts of $0.9 million per annum for the first five years after the
Recapitalization Closing Date, $30.0 million for the sixth year after the
Recapitalization Closing Date, and $55.5 million for the seventh year after the
Recapitalization Closing Date. Installments of the Tranche C term loans will be
due in aggregate principal amounts of $0.55 million for the first seven years
after the Recapitalization Closing Date and $51.15 million for the eighth year
after the Recapitalization Closing Date.
75
<PAGE> 76
Revolving Credit Facility. The Revolving Facility consists of a revolving
credit facility in an aggregate principal amount of $100.0 million. The Issuer
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 ("Swing Line Loans")
available on same-day notice. The Revolving Facility will mature on the sixth
anniversary of the Recapitalization Closing Date.
Receivables Facility. The Receivables Facility consists of a revolving
credit facility in an aggregate principal amount of $75.0 million, which is
subject to a borrowing base limit not to exceed 80% of eligible accounts
receivable. The Issuer will be entitled to draw amounts under the Receivables
Facility for general corporate purposes and to meet working capital
requirements. The Receivables Facility will mature on the sixth anniversary of
the Recapitalization Closing Date. The Company is currently evaluating a
refinancing of the Receivables Facility with an accounts receivable
securitization facility. Although the Company does not yet have a commitment for
such accounts receivables securitization facility, the Company believes that the
refinancing of the Receivables Facility will be consummated during 1998,
although there can be no assurance that such a refinancing will occur on terms
favorable to the Company or at all.
Availability. The availability of the Senior Credit Facility is subject to
various conditions precedent typical of bank facilities of this type including,
among other things, the absence of any material adverse condition or material
adverse change in or affecting the business, property, assets, nature of assets,
liabilities or condition of the Company. The full amount of the Term Loan
Facilities was drawn in a single drawing on the Recapitalization Closing Date.
The Revolving Credit Facility and the Receivables Facility may be borrowed,
repaid and reborrowed on and after the Recapitalization Closing Date.
Utilization under the Receivables Facility will be limited to a borrowing base
equal to 80% of eligible accounts receivables.
Interest Rates. Interest will accrue quarterly on the Loans with reference
to the base rate (the "Base Rate") plus the applicable interest margin. The
Issuer may elect that all or a portion of the Loans other than the Swing Line
Loans bear interest at the eurodollar rate (the "Eurodollar Rate") plus the
applicable interest margin. The Base Rate is defined as the higher of (i) the
certificate of deposit rate as published by the Federal Reserve Bank of New
York, plus 1/2% and (ii) the prime commercial lending rate of BT. The
Eurodollar Rate is defined as the rate at which eurodollar deposits for one,
two, three or six months or (if and when available to all of the relevant
lenders) nine or 12 months are offered to BT in the interbank eurodollar market.
The applicable interest margin for Tranche B term loans is 1.50% for Base Rate
loans and 2.50% for Eurodollar Rate loans. The applicable interest margin for
Tranche C term loans is 1.75% for Base Rate loans and 2.75% for Eurodollar Rate
loans. The applicable interest margin for the Revolving Facility is 1.25% for
Base Rate loans and 2.25% for Eurodollar Rate loans. The applicable interest
margin for Receivables Facility loans is 0.50% for Base Rate loans and 1.50% for
Eurodollar Rate loans. If the Receivables Facility has not been replaced within
six months of the consummation of the Transactions, the applicable margin under
the Receivables Facility will be increased to 1.25% for Base Rate Loans and to
2.25% for Eurodollar Rate Loans. The Company believes that the Receivables
Facility will be refinanced with an accounts receivables securitization facility
shortly after the consummation of the Transactions. The interest margins for the
Loans are subject to reduction based on the Company's ability to meet certain
financial tests.
Mandatory and Optional Prepayment. The Term Loan Facilities shall be
prepaid, subject to certain conditions and exceptions, with (i) 100% of the net
proceeds of any incurrence of indebtedness, subject to certain exceptions, by
Holding or its subsidiaries, (ii) after the repayment of the Notes in connection
with the exercise by the Issuer of certain redemption options available to it in
connection with a public offering described under "Description of the New
Notes," 50% of the net proceeds of issuances of equity after the
Recapitalization Closing Date by Holding or any of its subsidiaries, (iii) 100%
of the net proceeds of certain asset dispositions, (iv) 50% of the excess cash
flow (as such term will be defined in the Senior Credit Facility) of Holding and
its subsidiaries on a consolidated basis and (v) 100% of net proceeds from any
insurance recovery events, subject to certain re-investment rights.
76
<PAGE> 77
The foregoing mandatory prepayments will first be applied pro rata to reduce
outstanding Tranche B and Tranche C term loans. Prepayments in excess of the
amount of outstanding term loans will be applied to reduce commitments under the
Revolving Facility, and subsequently to reduce any commitments under the
Receivables Facility. The Senior Credit Facility provides that the Issuer may
prepay loans in whole or in part without penalty, subject to minimum prepayments
and reimbursement of the lenders' breakage and redeployment costs in the case of
prepayment of Eurodollar Rate Loans.
Fees. The Issuer is required to pay the lenders, on a quarterly basis, a
commitment fee of 0.50% per annum on the unutilized commitments on the Term Loan
Facilities, the Revolving Facility and the Receivables Facility. The Issuer is
also required to pay (a) a per annum letter of credit fee, on a quarterly basis,
equal to the applicable interest margin for the Revolving Facility maintained as
Eurodollar Rate loans; (b) a fronting bank fee, on a quarterly basis, equal to
0.25% per annum of the aggregate face amount of outstanding letters of credit
under the Revolving Facility; and (c) agent, arrangement and other similar fees.
These fees are subject to reduction based on the Company's ability to meet
certain financial tests.
Covenants. The Senior Credit Facility contains certain covenants and other
requirements of the Issuer and its subsidiaries. The affirmative covenants
provide for, among other things, mandatory reporting by the Company of financial
and other information to the agent and notice by the Issuer to the agent upon
the occurrence of certain events. The affirmative covenants also include
standard covenants requiring the Company to operate its business in an orderly
manner and consistent with past practice.
The Senior Credit Facility also contains certain negative covenants and
restrictions on actions by the Company including, without limitation,
restrictions on indebtedness, liens, guarantee obligations, mergers, asset
dispositions not in the ordinary course of business, investments, loans,
advances and acquisitions, dividends and other restricted junior payments
transactions with affiliates, change in business conducted and prepayment and
amendments of subordinated indebtedness. Generally, the Company may not incur
additional debt except as specifically permitted, including the following
permitted debt: debt among the Issuer and the Loan Guarantors, up to $25 million
of debt to certain foreign subsidiaries, debt under certain receivables
facilities, letters of credit of up to $25 million, up to $25 million of debt
incurred in connection with permitted acquisitions and up to $25 million of
additional debt. The Company is also restricted from paying dividends, except
that the Issuer's subsidiaries may pay dividends to the Issuer or the Issuer's
wholly owned domestic subsidiaries, and the Issuer may pay dividends to Holding
to enable Holding to pay its taxes, to pay certain operating expenses and to
repurchase up to $3 million per year or $10 million aggregate of Holding capital
stock from employees. The Senior Credit Facility requires the Company to meet
certain financial covenants including interest coverage ratios and maximum
leverage ratios, including a four-quarter debt to EBITDA ratio (currently
required to be 6.75 to 1.00) and an interest coverage ratio (currently required
to be at least 1.60 to 1.00).
Events of Default. The Senior Credit Facility specifies certain customary
events of default including, without limitation, non-payment of principal,
interest or fees, violation of covenants, inaccuracy of representations and
warranties in any material respect, cross default to certain other indebtedness
and agreements, bankruptcy and insolvency events, material judgments and
liabilities, ERISA violations and change of control transactions.
DESCRIPTION OF THE NEW NOTES
GENERAL
The New Notes will be issued pursuant to an indenture (the "Indenture") by
and among the Issuer, the Guarantors and IBJ Schroder Bank & Trust Company, as
trustee (the "Trustee"). The terms of the New Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The New Notes are
subject to all such terms, and Holders of New Notes are referred to the
Indenture and the Trust Indenture Act for a
77
<PAGE> 78
statement thereof. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. Copies of the Indenture and Registration Rights Agreement are
available as set forth below under "-- Additional Information." The definitions
of certain terms used in the following summary are set forth below under
"-- Certain Definitions."
The Indenture provides for the issuance of up to $135.0 million aggregate
principal amount of additional Notes having identical terms and conditions to
the New Notes offered hereby (the "Additional Notes"), subject to compliance
with the covenants contained in the Indenture. Any Additional Notes will be part
of the same issue as the New Notes offered hereby and will vote on all matters
with the New Notes offered hereby. For purposes of this "Description of the New
Notes," reference to the New Notes does not include Additional Notes.
All of the Issuer's Subsidiaries are Restricted Subsidiaries. However,
under the terms of the Indenture, a current or future Restricted Subsidiary
(including a Note Guarantor) may be designated as an Unrestricted Subsidiary if
the Investments of the Company in such Subsidiary (calculated as the fair market
value of the net assets of such Subsidiary at the time of such designation), to
the extent that they do not constitute Permitted Investments, comply with the
restrictions described in "-- Certain Covenants -- Restricted Payments."
Unrestricted Subsidiaries and Holding are not subject to many of the restrictive
covenants set forth in the Indenture, including the covenants described under
"Asset Sales" and "Certain Covenants."
PRINCIPAL AND MATURITY OF AND INTEREST ON THE NEW NOTES
The New Notes will be general unsecured senior subordinated obligations of
the Issuer, in an aggregate principal amount of $135.0 million and will mature
on November 15, 2007. Interest on the New Notes will accrue at the rate of 10%
per annum and will be payable, in cash, semi-annually in arrears on May 15 and
November 15, commencing on May 15, 1998, to Holders of record on the immediately
preceding May 1 and November 1. Interest on the New Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the date of original issuance. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months. Principal, premium, if any,
interest and Liquidated Damages (as defined under "-- Registration Rights;
Liquidated Damages"), if any, on the New Notes will be payable at the office or
agency of the Issuer maintained for such purpose within the City and State of
New York or, at the option of the Issuer, payment of interest and Liquidated
Damages, if any, may be made by check mailed to the Holders of the New Notes at
their respective addresses set forth in the register of Holders of New Notes;
provided that all payments of principal, premium, if any, interest and
Liquidated Damages, if any, with respect to any New Notes the Holders of which
have given wire transfer instructions to the Issuer will be required to be made
by wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Issuer, the Issuer's office
or agency in New York is the office of the Trustee maintained for such purpose.
The New Notes will be issued in denominations of $1,000 and integral multiples
thereof.
SUBORDINATION
The indebtedness evidenced by the New Notes will be unsecured, will be
subordinated in right of payment, as set forth in the Indenture, to all existing
and future Senior Debt of the Issuer, will rank pari passu in right of payment
with all existing and future Pari Passu Indebtedness of the Issuer and will be
senior in right of payment to all existing and future Subordinated Debt of the
Issuer. The New Notes will also be effectively subordinated to any Secured Debt
of the Issuer and its subsidiaries to the extent of the value of the assets
securing such Indebtedness. However, payment from the money or the proceeds of
Government Notes held in any defeasance trust described under "-- Legal
Defeasance and Covenant Defeasance" below is not subordinated to any Senior Debt
or subject to the restrictions described herein, so long as the payments into
the defeasance trust were not prohibited pursuant to the subordination
provisions hereinafter described at the time when so paid.
78
<PAGE> 79
The indebtedness evidenced by a Note Guarantee will be unsecured debt of
the Guarantor issuing such Note Guarantee. The payment of a Note Guarantee will
be subordinate in right of payment, as set forth in the Indenture, to all
existing and future Senior Debt of such Guarantor, will rank pari passu in right
of payment with the existing and future Pari Passu Indebtedness of such
Guarantor and will be senior in right of payment to all existing and future
Subordinated Debt of such Guarantor. Each Note Guarantee will also be
effectively subordinated to any Secured Debt of the applicable Guarantor to the
extent of the value of the assets securing such indebtedness.
The New Notes will be general unsecured obligations of the Issuer that will
be subordinated to all Senior Debt of the Issuer. The Note Guarantees will be
general unsecured obligations of the Guarantors that will be subordinated to all
Senior Debt of the Guarantors. At December 31, 1997, (i) the outstanding Senior
Debt of the Issuer was $186.5 million, all of which was Secured Debt, (ii) the
Issuer had no Pari Passu Indebtedness outstanding and no indebtedness that would
be subordinate or junior in right of payment to the New Notes, (iii) the
outstanding Senior Debt of the Subsidiary Guarantors was $191.5 million, all of
which was Secured Debt, and (iv) the Subsidiary Guarantors had no Pari Passu
Indebtedness and no indebtedness that would be subordinate or junior in right of
payment to the Subsidiary Guarantees. Although the Indenture contains
limitations on the amount of additional indebtedness which the Issuer and the
Subsidiary Guarantors may incur, under certain circumstances the amount of such
Indebtedness could be substantial and such Indebtedness may be Senior Debt. The
Indenture provides that the Issuer and the Restricted Subsidiaries may not incur
or otherwise become liable for any indebtedness that is subordinate or junior in
right of payment to any Senior Debt and senior in any respect in right of
payment to the New Notes.
Only Indebtedness of the Issuer or a Guarantor that is Senior Debt will
rank senior to the New Notes or the relevant Note Guarantee in accordance with
the provisions of the Indenture. The New Notes and each New Note Guarantee in
all respects rank pari passu with all other Pari Passu Indebtedness of the
Issuer or the relevant Guarantor, respectively. The Issuer and each Guarantor
have agreed in the Indenture that they will not incur, directly or indirectly,
any Indebtedness which is subordinate or junior in ranking in any respect to
Senior Debt unless such Indebtedness is pari passu with or is expressly
subordinated in right of payment to the Notes or the Note Guarantees. Unsecured
Indebtedness is not deemed to be subordinate or junior to secured indebtedness
merely because it is unsecured.
Upon any payment or distribution to creditors of the Issuer in a
liquidation or dissolution of the Issuer or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Issuer or its
property, an assignment for the benefit of creditors or any marshaling of the
Issuer's assets and liabilities, the holders of Senior Debt will be entitled to
receive payment in full, in cash or Cash Equivalents, of all Obligations due in
respect of such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt, whether or
not allowed or allowable in such proceeding) before the Holders of New Notes
will be entitled to receive any payment with respect to the New Notes, and until
all Obligations with respect to Senior Debt are paid in full, in cash or Cash
Equivalents, any payment or distribution to which the Holders of New Notes would
be entitled shall be made to the holders of Senior Debt (except that Holders of
New Notes may receive and retain (i) Permitted Junior Securities and (ii)
payments made from the trust described under "-- Legal Defeasance and Covenant
Defeasance" so long as, on the date or dates the respective amounts were paid
into the trust, such payments were made with respect to the New Notes without
violating the subordination provisions described herein). The term "payment"
means, with respect to the New Notes, any payment, whether in cash or other
assets or property, of interest, principal (including redemption price and
purchase price), premium, Liquidated Damages or any other amount on, of or in
respect of the New Notes, any other acquisition of New Notes and any deposit
into the trust described under "-- Legal Defeasance and Covenant Defeasance"
below. The verb "pay" has a correlative meaning.
The Issuer also may not make any payment or distribution upon or in respect
of the New Notes (except from the trust described under "-- Legal Defeasance and
Covenant Defeasance") if (i) a default
79
<PAGE> 80
in the payment of any Obligations with respect to Designated Senior Debt occurs
and is continuing (a "payment default") or any other default on Designated
Senior Debt occurs and the maturity of such Designated Senior Debt is
accelerated in accordance with its terms or (ii) a default, other than a payment
default, occurs and is continuing with respect to Designated Senior Debt that
permits holders of the Designated Senior Debt as to which such default relates
to accelerate its maturity (a "non-payment default") and, in the case of this
clause (ii) only, the Trustee receives a notice of such default (a "Payment
Blockage Notice") from a Representative for, or the holders of a majority of the
outstanding principal amount of, any issue of Designated Senior Debt. Payments
on the New Notes may and shall be resumed (a) in the case of a payment default,
upon the date on which such default is cured or waived and, in the case of
Designated Senior Debt that has been accelerated, such acceleration has been
rescinded, and (b) in case of a non-payment default, the earlier of the date on
which such non-payment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the maturity of
any Designated Senior Debt has been accelerated. No new period of payment
blockage may be commenced on account of any non-payment default unless and until
360 days have elapsed since the initial effectiveness of the immediately prior
Payment Blockage Notice. No non-payment default that existed or was continuing
on the date of delivery of any Payment Blockage Notice to the Trustee (it being
acknowledged that (x) any action of the Issuer or any of its Subsidiaries
occurring subsequent to delivery of a Payment Blockage Notice that would give
rise to any event of default pursuant to any provision under which an event of
default previously existed (or was continuing at the time of delivery of such
Payment Blockage Notice) shall constitute a new event of default for this
purpose and (y) any breach of a financial covenant giving rise to a non-payment
default for a period ending subsequent to the date of delivery of respective
Payment Blockage Notice shall constitute a new event of default for this
purpose) shall be, or be made, the basis for a subsequent Payment Blockage
Notice unless such default shall have been cured or waived for a period of not
less than 90 days.
The Indenture further requires the Issuer to promptly notify holders of
Designated Senior Debt if payment of the New Notes, once issued, is accelerated
because of an Event of Default. The Issuer may not pay any such accelerated New
Notes until five Business Days after such holders receive notice of such
acceleration and, thereafter, may make such payment only if otherwise
permissible under the subordination provisions of the Indenture.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of New Notes may recover less ratably
than other creditors of the Issuer including holders of Senior Debt and trade
creditors. The Indenture limits, subject to certain financial tests and
exceptions, the amount of additional Indebtedness, including Senior Debt, that
the Issuer and its Subsidiaries can incur. See "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock."
NOTE GUARANTEES
The Issuer's payment obligations under each of the Notes will be jointly
and severally, fully and unconditionally guaranteed by the Guarantors. The Note
Guarantees of each Guarantor will be subordinated to the prior payment in full
of all Senior Debt of such Guarantor on substantially the same terms as the
Notes are subordinated to Senior Debt of the Issuer. The obligations of each
Guarantor under its Note Guarantees will be limited so as not to constitute a
fraudulent conveyance under applicable law.
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person) another Person
(other than the Issuer or another Guarantor) unless (i) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, under the Notes and the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default exists; and (iii) the Issuer will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, either (x) be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
80
<PAGE> 81
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described below under the caption " -- Incurrence of Indebtedness and
Issuance of Preferred Stock" or (y) have a Fixed Charge Coverage Ratio at least
equal to the actual Fixed Charge Coverage Ratio for such four-quarter reference
period. Notwithstanding the foregoing clauses (ii) and (iii), (a) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to any Subsidiary Guarantor and (b) any Guarantor may
merge with an Affiliate incorporated solely for the purpose of reincorporating
such Guarantor in another jurisdiction.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor, by way of merger, consolidation
or otherwise, or a sale or other disposition of all of the capital stock of any
Subsidiary Guarantor then held by the Issuer and its Restricted Subsidiaries,
then such Subsidiary Guarantor will be released and relieved of any obligations
under its Note Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture. See " -- Repurchase at Option of Holders -- Asset Sales." In
addition, the Indenture provides that any Subsidiary Guarantor that is
designated as an Unrestricted Subsidiary in accordance with the provisions of
the Indenture will be released from its Note Guarantee upon effectiveness of
such designation.
OPTIONAL REDEMPTION
Except as described in the following paragraphs, the New Notes will not be
redeemable at the Issuer's option prior to November 15, 2002. Thereafter, the
New Notes will be subject to redemption at any time at the option of the Issuer,
in whole or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the
applicable redemption date, (subject to the right of Holders on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the twelve-month period beginning on November 15 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 105.000%
2003........................................................ 103.333%
2004........................................................ 101.667%
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time, prior to November 15, 2000,
the Issuer may redeem up to 35% of the sum of (i) the original aggregate
principal amount of New Notes and (ii) the original aggregate principal amount
of any Additional Notes at a redemption price of 110% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages thereon, if
any, to the redemption date (subject to the right of Holders on the relevant
record date to receive interest due on the relevant interest payment date), with
the net cash proceeds of a public offering of common stock of the Issuer or
Holding; provided that at least 65% of the sum of (i) the original aggregate
principal amount of New Notes and (ii) the original aggregate principal amount
of any Additional Notes remains outstanding immediately after the occurrence of
such redemption; and provided, further, that such redemption shall occur within
60 days of the date of the closing of such public offering.
At any time on or prior to November 15, 2002, the New Notes may be redeemed
as a whole but not in part at the option of the Issuer upon the occurrence of a
Change of Control, upon not less than 30 nor more than 60 days' prior notice
(but in no event may any such redemption occur more than 90 days after the
occurrence of such Change of Control) mailed by first-class mail to each
Holder's registered address, at a redemption price equal to 100% of the
principal amount thereof plus the Applicable Premium as of, and accrued but
unpaid interest and Liquidated Damages, if any, to, the redemption date, subject
to the right of Holders on the relevant record date to receive interest due on
the relevant interest payment date.
81
<PAGE> 82
"Applicable Premium" means, with respect to a New Note at any redemption
date, the greater of (i) 1.0% of the principal amount of such New Note or (ii)
the excess of (A) the present value at such time of (1) the redemption price of
such New Note at November 15, 2002 (such redemption price being set forth in the
tables above) plus (2) all required interest payments due on such New Note
through November 15, 2002 (excluding accrued but unpaid interest), computed
using a discount rate equal to the Treasury Rate plus 75 basis points, over (B)
the principal amount of such New Note, if greater.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H. 15(519)
which has become publicly available at least two Business Days prior to the
redemption date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the redemption date to November 15, 2002, provided, however, that if
the period from the redemption date to November 15, 2002 is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the redemption date to November 15, 2002
is less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
SELECTION AND NOTICE
If less than all of the New Notes are to be redeemed at any time, selection
of New Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
New Notes are listed, or, if the New Notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no New Notes of $1,000 or less shall be redeemed in part. Notices
of redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of New Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any New
Note is to be redeemed in part only, the notice of redemption that relates to
such New Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original New Note. New Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
New Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders"
the Issuer is not required to make mandatory redemption or sinking fund payments
with respect to the New Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, unless all New Notes have been
called for redemption pursuant to the provisions described above under the
caption "-- Optional Redemption," each Holder of New Notes will have the right
to require the Issuer to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's New Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash (the
"Change of Control Payment") equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any,
to the date of purchase. Within 30 days following any Change of Control, unless
notice of redemption of all New Notes has then been given pursuant to the
provisions described under the caption "-- Optional Redemption" above, the
Issuer will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
New Notes on the date specified in such notice, which date shall be no earlier
than 30 days and no later than
82
<PAGE> 83
60 days from the date such notice is mailed (the "Change of Control Payment
Date"), pursuant to the procedures required by the Indenture and described in
such notice. The Issuer will comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations to the extent
such laws and regulations are applicable in connection with the repurchase of
the New Notes as a result of a Change of Control. To the extent that the
provisions of any applicable securities laws or regulations conflict with
provisions of this covenant, the Issuer will comply with such securities laws
and regulations and will not be deemed to have breached its obligations under
this paragraph by virtue thereof.
On the Change of Control Payment Date, the Issuer will, to the extent
lawful, (1) accept for payment all New Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all New
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the New Notes so accepted together with an Officers' Certificate
stating the aggregate principal amount of New Notes or portions thereof being
purchased by the Issuer. The Paying Agent will promptly mail to each Holder of
New Notes so tendered the Change of Control Payment for such New Notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each Holder a new Note equal in principal amount to any unpurchased
portion of the New Note surrendered, if any; provided that each such new Note
will be in a principal amount of $1,000 or an integral multiple thereof. The
Indenture provides that, prior to complying with the provisions of this
covenant, but in any event within 90 days following a Change of Control, the
Issuer will either repay all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt to
permit the repurchase of New Notes required by this covenant, unless notice of
redemption of all Notes has then been given pursuant to the provisions described
under the caption "-- Optional Redemption" above and such redemption is
permitted by the terms of outstanding Senior Debt. The Issuer will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the New Notes to require that the Issuer
repurchase or redeem the New Notes in the event of a takeover, recapitalization
or similar transaction. The Change of Control purchase feature is a result of
negotiations between the Issuer and the Initial Purchasers. Management has no
present intention to engage in a transaction involving a Change of Control,
although it is possible that the Issuer would decide to do so in the future.
Subject to the limitations discussed below, the Issuer could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Issuer's capital structure or credit ratings.
The Senior Credit Facility currently prohibits the Issuer from purchasing
any New Notes, and also provides that certain change of control events with
respect to the Issuer would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Issuer
becomes a party may contain similar restrictions and provisions. In the event a
Change of Control occurs at a time when the Issuer is prohibited from purchasing
New Notes, the Issuer could seek the consent of its lenders to the purchase of
New Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Issuer does not obtain such a consent or repay such
borrowings, the Issuer will remain prohibited from purchasing New Notes. In such
case, the Issuer's failure to purchase tendered New Notes would constitute an
Event of Default under the Indenture which would, in turn, constitute a default
under the Senior Credit Facility. In such circumstances, the subordination
provisions in the Indenture would restrict payments to the Holders of New Notes.
The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the
83
<PAGE> 84
Issuer and purchases all New Notes validly tendered and not withdrawn under such
Change of Control Offer.
"Change of Control" means such time as:
(i) prior to the earlier to occur of (A) the first public offering of
Voting Stock of the Issuer or (B) the first public offering of Voting Stock
of Holding, the Initial Control Group ceases to be the "beneficial owner"
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of more than 50% of the total voting power of the Voting Stock
of the Issuer or Holding, whether as a result of the issuance of securities
of the Issuer or Holding, as the case may be, any merger, consolidation,
liquidation or dissolution of the Issuer or Holding, as the case may be,
any direct or indirect transfer of securities by the Initial Control Group
or otherwise (for purposes of this clause (i) and clause (ii) below, the
Initial Control Group shall be deemed to beneficially own any Voting Stock
of an entity (the "specified entity") held by any other entity (the "parent
entity") so long as the Initial Control Group beneficially owns (as so
defined), directly or indirectly, in the aggregate a majority of the voting
power of the Voting Stock of the parent entity);
(ii) following the first public offering of Voting Stock of the
Issuer or Holdings, as the case may be, (A) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act), other than one or
more members of the Initial Control Group, is or becomes the beneficial
owner (as defined in clause (i) above, except that such person shall be
deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than 40%
of the total voting power of the Voting Stock of the Issuer or Holding, as
the case may be, and (B) the Initial Control Group "beneficially owns" (as
defined in clause (i) above), directly or indirectly, in the aggregate a
lesser percentage of the total voting power of the Voting Stock of the
Issuer or Holding, as the case may be, than such other person and does not
have the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the board of directors of the
Issuer or Holding, as the case may be (for purposes of this clause (ii),
such other person shall be deemed to beneficially own any Voting Stock of a
specified entity held by a parent entity, if such other person
"beneficially owns" (as defined in clause (i) above), directly or
indirectly, in the aggregate more than 40% of the voting power of the
Voting Stock of such parent entity and the Initial Control Group
"beneficially owns" (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent entity and does not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the board of directors of such parent entity); or
(iii) any person other than the Initial Control Group, (A) (I)
nominates one or more individuals for election to the Board of Directors of
the Issuer or Holding, as the case may be and (II) solicits proxies,
authorization or consents in connection therewith and (B) such number of
nominees elected to serve on the Board of Directors in such election and
all previous elections after the Closing Date represents a majority of the
Board of Directors of the Issuer or Holding, as the case may be, following
such election.
"Initial Control Group" means Investcorp, its Affiliates, members of the
Management Group, the investors who are the initial holders of the Capital Stock
of Holding, any Person acting in the capacity of an underwriter or initial
purchaser in connection with a public or private offering of the Issuer's or
Holding's Capital Stock, any employee benefit plan of Holding, the Issuer or any
of its Subsidiaries or any participant therein, a trustee or other fiduciary
holding securities under any such employee benefit plan or any Permitted
Transferee of any of the foregoing Persons.
"Permitted Transferee" means, with respect to any Person, (i) any other
Person, directly or indirectly, controlling or controlled by or under direct or
indirect common control with such specified Person, (ii) the spouse, former
spouse, lineal descendants, heirs, executors, administrators, testamentary
trustees, legatees or beneficiaries of any such Person, (iii) a trust, the
beneficiaries of which, or a corporation or partnership or limited liability
company, the stockholders, general or limited partners or members
84
<PAGE> 85
of which, include only such Person or his or her spouse, lineal descendants or
heirs, in each case to whom such Person has transferred the beneficial ownership
of any securities of the Issuer or Holding and (iv) any investment fund or
investment entity that is a subsidiary of such Person or a Permitted Transferee
of such Person.
ASSET SALES
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Issuer
(or the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets or
Equity Interests issued or sold or otherwise disposed of and (ii) at least 75%
of the consideration therefor received by the Issuer or such Restricted
Subsidiary is in the form of cash or Cash Equivalents; provided that the amount
of (x) any liabilities (as shown on the Issuer's or such Restricted Subsidiary's
most recent balance sheet), of the Issuer or any Restricted Subsidiary (other
than liabilities that are by their terms subordinated to the Notes or, in the
case of liabilities of a Restricted Subsidiary, the Note Guarantee of such
Subsidiary) that are assumed by the transferee of any such assets and (y) any
securities, notes or other obligations received by the Issuer or any such
Restricted Subsidiary from such transferee that are converted by the Issuer or
such Restricted Subsidiary into cash (to the extent of the cash received) within
180 days after receipt, shall be deemed to be cash for purposes of this
provision; provided, further, however, that this clause (ii) shall not apply to
any sale of Equity Interests of or other Investments in Unrestricted
Subsidiaries.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Issuer may apply such Net Proceeds, at its option, (a) to repay Senior Debt
or Pari Passu Indebtedness (other than Indebtedness owed to Holding, the Issuer
or a Subsidiary of the Issuer, and provided that if the Issuer shall so reduce
Pari Passu Indebtedness, it will equally and ratably make an Asset Sale Offer
(in accordance with the procedures set forth below for an Asset Sale Offer) to
all Holders), (b) to invest in properties and assets that will be used or useful
in the business of the Issuer or any of its Subsidiaries or (c) to the
acquisition of a controlling interest in another business, the making of a
capital expenditure or the acquisition of other assets, in each case, in the
same or a similar line of business as the Issuer was engaged in on the Closing
Date. Pending the final application of any such Net Proceeds, the Issuer may
temporarily reduce borrowings under a Credit Facility or otherwise invest such
Net Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Indenture
provides that the Issuer will (i) make an offer to all Holders of Notes, and
(ii) prepay, purchase or redeem (or make an offer to do so) any other Pari Passu
Indebtedness of the Issuer in accordance with provisions requiring the Issuer to
prepay, purchase or redeem such Indebtedness with the proceeds from any Asset
Sales (or offer to do so), pro rata in proportion to the respective principal
amounts of the Notes and such other Indebtedness required to be prepaid,
purchased or redeemed or tendered for, in the case of the Notes pursuant to such
offer (an "Asset Sale Offer") to purchase the maximum principal amount of Notes
that may be purchased out of such pro rata portion of the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest and Liquidated Damages thereon, if any to the
date of purchase, in accordance with the procedures set forth in the Indenture.
To the extent that the aggregate principal amount of Notes tendered pursuant to
an Asset Sale Offer is less than the Excess Proceeds, the Issuer may use any
remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of Notes surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Notes pursuant to an Asset Sale Offer. To the extent that the
85
<PAGE> 86
provisions of any applicable securities laws or regulations conflict with the
provisions of the Indenture, the Issuer will comply with such securities laws
and regulations and shall not be deemed to have breached its obligations
described in the Indenture by virtue thereof.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution (including any payment in
connection with any merger or consolidation) on account of the Issuer's or any
of its Restricted Subsidiaries' Equity Interests (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock)); (ii)
purchase, redeem or otherwise acquire or retire for value (including in
connection with any merger or consolidation) any Equity Interests of the Issuer
or Holding (or any Restricted Subsidiary held by Persons other than the Issuer
or another Restricted Subsidiary); (iii) make any payment on or with respect to,
or purchase, redeem, defease or otherwise acquire or retire for value any
Subordinated Debt, except (A) a payment of interest or principal at Stated
Maturity and (B) the purchase, repurchase or other acquisition or retirement of
Indebtedness in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
purchase, repurchase or other acquisition or retirement; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Issuer would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with (without duplication) the
aggregate amount of all other Restricted Payments made by the Issuer and
its Restricted Subsidiaries after the Recapitalization Closing Date
(excluding Restricted Payments permitted by clauses (ii), (iii), (iv), (v)
(other than clauses (i) and (v)(A) of the definition of "Specified
Affiliate Payments") and (vi) of the next succeeding paragraph, but
including all other Restricted Payments permitted by the next succeeding
paragraph), is less than the sum (without duplication) of (i) 50% of the
Consolidated Net Income of the Issuer for the period (taken as one
accounting period) from the beginning of the fiscal quarter during which
the Recapitalization Closing Date occurs to the end of the Issuer's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Issuer from
the issue or sale (other than to a Subsidiary) of, or from capital
contributions with respect to, Equity Interests of the Issuer (other than
Disqualified Stock), in either case after the Recapitalization Closing
Date, plus (iii) the aggregate principal amount (or accreted value, if
less) of Indebtedness of the Issuer or any Restricted Subsidiary issued
since the Recapitalization Closing Date (other than to a Restricted
Subsidiary) that has been converted into Equity Interests (other than
Disqualified Stock) of the Issuer, plus (iv) 100% of the aggregate net cash
received by the Issuer or a Restricted Subsidiary of the Issuer since the
Recapitalization Closing Date from (A) Restricted Investments, whether
through interest payments, principal payments, dividends or other
distributions and payments, or the sale or other disposition (other than to
the Issuer or a Restricted Subsidiary) thereof made by the Issuer and its
Restricted Subsidiaries or (B) a cash dividend from, or the sale (other
than to the Issuer or a Restricted Subsidiary) of the stock of, an
Unrestricted Subsidiary, plus
86
<PAGE> 87
(v) upon the redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary, the fair market value of the Investments of the Issuer and its
Restricted Subsidiaries (other than such Subsidiary) in such Subsidiary.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Equity Interests or Subordinated Debt of the Issuer
in exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Restricted Subsidiary of the Issuer)
of, other Equity Interests of, or a capital contribution to, the Issuer
(other than any Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be
excluded from clause (c) (ii) of the preceding paragraph;
(iii) the defeasance, redemption, repurchase, retirement or other
acquisition of Subordinated Debt made by an exchange for, or with the
net cash proceeds from an incurrence of, Permitted Refinancing
Indebtedness;
(iv) the payment of any dividend by a Restricted Subsidiary of the
Issuer to the holders of its common Equity Interests on a pro rata
basis;
(v) to the extent constituting Restricted Payments, the Specified
Affiliate Payments;
(vi) the payment of dividends, other distributions or other
amounts by the Issuer to Holding in amounts equal to amounts required
for Holding to pay Federal, state and local income taxes to the extent
such income taxes are attributable to the income of the Issuer and its
Subsidiaries; and
(vii) Restricted Payments in an aggregate amount not to exceed
$10.0 million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the Issuer
and its Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated, to the extent they do not constitute Permitted
Investments at the time such Subsidiary became an Unrestricted Subsidiary, will
be deemed to be Restricted Payments made at the time of such designation and
will reduce the amount available for Restricted Payments under the first
paragraph of this covenant. The amount of such outstanding Investments will be
equal to the portion of the fair market value of the net assets of any
Subsidiary of the Issuer at the time that such Subsidiary is designated an
Unrestricted Subsidiary that is represented by the interest of the Issuer and
its Restricted Subsidiaries in such Subsidiary, in each case as determined in
good faith by the Board of Directors of the Issuer. Such designation will only
be permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Issuer or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined in good
faith by the Board of Directors of the Issuer.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Issuer will not issue any
Disqualified Stock and will not permit any
87
<PAGE> 88
of its Restricted Subsidiaries to issue any shares of preferred stock; provided,
however, that the Issuer and its Restricted Subsidiaries may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock and the Issuer's
Restricted Subsidiaries may issue preferred stock, if the Fixed Charge Coverage
Ratio for the Issuer's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock or
preferred stock is issued would have been at least 1.75 to 1, if such
Indebtedness is incurred or such Disqualified Stock or preferred stock is issued
on or prior to November 30, 1999, and 2.00 to 1, if such Indebtedness is
incurred or such Disqualified Stock or preferred stock is issued thereafter, in
each case, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock or preferred stock had been issued, as the
case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Issuer or any of its Restricted
Subsidiaries of term and revolving Indebtedness and letters of credit (with
letters of credit being deemed to have a principal amount equal to the
undrawn face amount thereof) under Credit Facilities; provided that the
aggregate principal amount of all Indebtedness outstanding pursuant to this
clause (i) after giving effect to such incurrence does not exceed an amount
equal to $250.0 million;
(ii) the incurrence by the Issuer and its Restricted Subsidiaries of
Existing Indebtedness;
(iii) the incurrence by the Issuer of Indebtedness represented by the
New Notes and by the Subsidiary Guarantors of Indebtedness represented by
the Note Guarantees;
(iv) the incurrence by the Issuer or any of its Restricted
Subsidiaries of (A) Acquired Debt or (B) Indebtedness (including Capital
Lease Obligations) for the purpose of financing or refinancing all or any
part of the lease, purchase price or cost of construction or improvement of
any property (real or personal) or other assets that are used or useful in
the business of the Issuer or such Restricted Subsidiary (whether through
the direct purchase of assets or the Capital Stock of any Person owning
such assets and whether such Indebtedness is owed to the seller or Person
carrying out such construction or improvement or to any third party), in an
aggregate principal amount for all Indebtedness incurred pursuant to this
clause (iv), at the date of such incurrence (including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (iv)) not to exceed an amount
equal to 10.0% of Total Assets; provided that, in the case of Indebtedness
exceeding $2.0 million incurred pursuant to this clause (iv), such
Indebtedness exists at the date of such purchase or transaction or is
created within 180 days thereafter;
(v) the incurrence by the Issuer or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Indebtedness
(other than intercompany Indebtedness) that was permitted by the Indenture
to be incurred;
(vi) the incurrence by the Issuer or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Issuer and
any of its Restricted Subsidiaries, including any Indebtedness arising in
connection with a Receivables Facility; provided, however, that (A) any
subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than the Issuer or a
Restricted Subsidiary and (B) any sale or other transfer of any such
Indebtedness to a Person that is not either the Issuer or a Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Issuer or such Restricted Subsidiary, as the case
may be, that was not permitted by this clause (vi);
(vii) the incurrence by the Issuer or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred (A) for the purpose
of fixing or hedging interest rate risk with respect to any
88
<PAGE> 89
floating rate Indebtedness that is permitted by the terms of the Indenture
to be outstanding or (B) for the purpose of fixing or hedging currency
exchange rate risk or commodity price risk incurred in the ordinary course
of business;
(viii) the guarantee by the Issuer or any of the Subsidiary Guarantors
of Indebtedness of the Issuer or a Restricted Subsidiary of the Issuer that
was permitted to be incurred by another provision of this covenant;
(ix) the incurrence of Indebtedness secured by or financing
Receivables (including any such Indebtedness under the Credit Facilities),
provided that the aggregate principal amount of such Indebtedness incurred
pursuant to this clause (ix) does not, at any time, exceed an amount equal
to $75.0 million less the aggregate Receivable Financing Amount of all
Receivables Facilities of the Issuer and its Restricted Subsidiaries;
(x) the incurrence by the Issuer or any of its Restricted
Subsidiaries of Indebtedness under (or constituting reimbursement
obligations with respect to) letters of credit, surety bonds or similar
instruments issued in connection with the ordinary course of a Permitted
Business, including letters of credit in respect of workers' compensation
claims, self-insurance, and insurance written by MIICA in connection with a
Permitted Business; provided, however, that upon the drawing of such
letters of credit or other instrument, such obligations are reimbursed
within 30 days following such drawing;
(xi) the incurrence by Foreign Subsidiaries of Indebtedness for
working capital purposes, and by the Issuer or any of its Restricted
Subsidiaries of Guaranties of Indebtedness of Foreign Subsidiaries or
foreign joint ventures, provided that the aggregate principal amount of
such Indebtedness and of the Indebtedness so Guaranteed at any time
outstanding does not exceed 5% of Total Assets; and
(xii) the incurrence by the Issuer or any of its Restricted
Subsidiaries of additional Indebtedness (which may comprise Indebtedness
under the Senior Credit Facility) in an aggregate principal amount (or
accreted value, as applicable) at any time outstanding pursuant to this
clause (xii) not to exceed an amount equal to $35.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Issuer shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof; provided that all outstanding Indebtedness under
the Senior Credit Facility immediately following the Recapitalization shall be
deemed to have been incurred pursuant to clauses (i) and/or (ix) of the
definition of Permitted Debt. Accrual of interest and the accretion of accreted
value will not be deemed to be an incurrence of Indebtedness for purposes of
this covenant.
Liens
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, create, incur, assume or otherwise cause or
suffer to exist or become effective any Lien of any kind securing Indebtedness
or trade payables (other than Permitted Liens) upon any of their property or
assets, now owned or hereafter acquired, unless all payments due under the
Indenture and the Notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer secured
by a Lien.
89
<PAGE> 90
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Issuer or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Issuer or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Issuer or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Issuer or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) Existing Indebtedness, (b) the Indenture, the New Notes and the
Note Guarantees, (c) any agreement or other instrument of a Person acquired by
the Issuer or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (but not created in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, (d) purchase money obligations
(including Capital Lease Obligations) for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, (e) restrictions created in connection
with any Receivables Facility that, in the good faith determination of the Board
of Directors or senior management of the Issuer, are necessary or advisable to
effect such Receivables Facility, (f) in the case of clause (iii), any
encumbrance or restriction (1) that restricts in a customary manner the
subletting, assignment, or transfer of any property or asset that is subject to
a lease, license or similar contract, (2) by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any property
or assets of the Issuer or any Restricted Subsidiary not otherwise prohibited by
the Indenture or (3) contained in security agreements or mortgages securing
Indebtedness to the extent such encumbrance or restrictions restrict the
transfer of the property subject to such security agreements or mortgages, (g)
contracts for the sale of assets, including any restriction with respect to a
Restricted Subsidiary imposed pursuant to an agreement entered into for the sale
or disposition of all or substantially all of the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or disposition, (h)
contractual encumbrances or restrictions in effect on the Recapitalization
Closing Date, including pursuant to the Senior Credit Facility and its related
documentation, (i) restrictions on cash or other deposits or net worth imposed
by leases, credit agreements or other agreements entered into in the ordinary
course of business, (j) customary provisions in joint venture agreements and
other similar agreements, (k) any encumbrances or restrictions created with
respect to Senior Debt of the Issuer or its Restricted Subsidiaries or
Indebtedness of Foreign Subsidiaries or Insurance Subsidiaries permitted to be
incurred subsequent to the Recapitalization Closing Date pursuant to the
provision of the covenant described under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock" and (l) any encumbrances or
restrictions of the type referred to in clauses (i), (ii) and (iii) imposed by
any amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of the contracts, instruments or
obligations referred to in clauses (a) through (l), provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are, in the good faith judgment of the
Issuer, no more restrictive with respect to such dividend and other payment
restrictions than those contained in the dividend or other payment restrictions
prior to such amendment, modification, restatement, renewal, increase,
supplement, refunding, replacement or refinancing.
MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS
The Indenture provides that the Issuer may not consolidate or merge with or
into (whether or not the Issuer is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another Person
unless (i) the Issuer is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Issuer) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Person formed by or
90
<PAGE> 91
surviving any such consolidation or merger (if other than the Issuer) or the
Person to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Issuer under
the Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately after such transaction
no Default or Event of Default exists; and (iv) except in the case of a merger
of the Issuer with or into a Wholly Owned Restricted Subsidiary of the Issuer,
the Issuer or the Person formed by or surviving any such consolidation or merger
(if other than the Issuer), or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, either (x) be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption " -- Incurrence of Indebtedness and
Issuance of Preferred Stock" or (y) have a Fixed Charge Coverage Ratio at least
equal to the Fixed Charge Coverage Ratio of the Issuer for such four-quarter
reference period. Notwithstanding the foregoing clauses (iii) and (iv), (a) any
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to the Issuer, and (b) the Issuer may merge with an
Affiliate incorporated solely for the purpose of reincorporating the Issuer in
another jurisdiction.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Issuer will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Issuer or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Issuer or such Restricted Subsidiary
with an unrelated Person and (ii) the Issuer delivers to the Trustee (a) with
respect to any Affiliate Transaction entered into after the Recapitalization
Closing Date involving aggregate consideration in excess of $3.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the members
of the Board of Directors and (b) with respect to any Affiliate Transaction
involving aggregate consideration in excess of $10.0 million, an opinion as to
the fairness to the Holders of such Affiliate Transaction from a financial point
of view issued by an investment banking, appraisal or accounting firm of
national standing. In addition, the following will not be deemed to be Affiliate
Transactions: (1) the provision of administrative or management services by the
Issuer or any of its officers to any of its Restricted Subsidiaries in the
ordinary course of business, (2) any employment agreement, collective bargaining
agreement, employee benefit plan, related trust agreement or any similar
arrangement heretofore or hereafter entered into in the ordinary course of
business, (3) transactions between or among the Issuer and/or its Restricted
Subsidiaries, (4) Restricted Payments that are permitted by the provisions of
the Indenture described above under the caption "--Restricted Payments", (5)
payment of compensation to employees, officers, directors or consultants in the
ordinary course of business, (6) maintenance in the ordinary course of business
(and payments required thereby) of benefit programs, or arrangements for
employees, officers or directors, including vacation plans, health and life
insurance plans, deferred compensation plans, directors' and officers'
indemnification agreements and retirement or savings plans and similar plans,
(7) loans or advances to employees (or guarantees of third party loans to
employees) in the ordinary course of business, (8) sales of Receivables to a
Receivables Subsidiary, (9) the payment of annual management, consulting and
advisory fees and related expenses to Investcorp and its Affiliates (whether or
not such Persons are Affiliates of the Issuer), (10) payments by the Issuer or
any of its Restricted Subsidiaries to Investcorp and its Affiliates (whether or
not such Persons are Affiliates of the Issuer) made for any financial advisory,
financing, underwriting or placement services or in respect of other investment
banking activities, including in connection with acquisitions or divestitures,
which payments are approved by the Board of Directors of the Issuer in good
faith,
91
<PAGE> 92
(11) any tax sharing agreement as in effect on the Recapitalization Closing Date
and any other agreement as in effect on the Recapitalization Closing Date
(including the Recapitalization Agreement) or any amendment thereto (so long as
any such amendment is not disadvantageous to the Holders in any material
respect) or any transaction contemplated thereby (including distributions by the
Issuer to Holding to effect the Recapitalization), (12) the payment of all fees
and expenses related to the Recapitalization, (13) transactions with customers,
clients, suppliers, or purchasers or sellers of goods or services, in each case
in the ordinary course of business and otherwise in compliance with the terms of
the Indenture which are fair to the Issuer or its Restricted Subsidiaries, or
are on terms at least as favorable as might reasonably have been obtained at
such time from an unaffiliated party, in each case in the reasonable
determination of the Board of Directors of the Issuer or the senior management
thereof, and (14) Indebtedness permitted by paragraph (vi) or to the extent such
Indebtedness is on terms that are no less favorable to the Issuer or the
relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction with an unrelated Person, paragraph (xii) of the covenant
described under the caption " -- Incurrence of Indebtedness and Issuance of
Preferred Stock."
ADDITIONAL NOTE GUARANTEES
The Indenture provides that all current and future Subsidiaries of the
Issuer other than Foreign Subsidiaries, Insurance Subsidiaries and Subsidiaries
that have been properly designated as Unrestricted Subsidiaries in accordance
with the Indenture for so long as they continue to constitute Unrestricted
Subsidiaries, will be Guarantors in accordance with the terms of the Indenture.
Notwithstanding the foregoing, if any Foreign Subsidiary or Insurance Subsidiary
that is a Restricted Subsidiary shall Guarantee any Indebtedness of the Issuer,
Holding or any Domestic Subsidiary while the New Notes are outstanding, then
such Foreign Subsidiary or Insurance Subsidiary, as the case may be, shall
become a Guarantor under the Indenture and will execute a Note Guarantee in
accordance with the provisions of the Indenture.
Each Note Guarantee is limited to an amount not to exceed the maximum
amount that can be Guaranteed by that Subsidiary (after giving effect to all its
guarantees of Indebtedness under the Senior Credit Facility) without rendering
the Note Guarantee, as it relates to such Subsidiary, voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally.
Each such Note Guarantee is subordinated to Senior Debt of the respective
Guarantor on the same basis and to the same extent as the New Notes are
subordinated to Senior Debt of the Issuer. See " -- Subordination." Each
Guarantor may consolidate with or merge into or sell its assets, and may be
released from its obligations under its Guarantee, upon the terms and conditions
set forth in the Indenture.
NO SENIOR SUBORDINATED DEBT
The Indenture provides that (i) the Issuer will not incur any Indebtedness
that is expressly subordinate in right of payment to any Senior Debt and senior
in any respect in right of payment to the New Notes, once issued and (ii) no
Guarantor will incur any Indebtedness that is expressly subordinate in right of
payment to any Senior Debt and senior in any respect in right of payment to the
Note Guarantees.
BUSINESS ACTIVITIES
The Issuer will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
is not material to the Issuer and its Restricted Subsidiaries taken as a whole.
Holding will not engage in any business other than managing its investment in
the Issuer and any business incidental or reasonably related thereto.
92
<PAGE> 93
REPORTS
Notwithstanding that the Issuer may not be required to remain subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, to the
extent permitted by the Exchange Act, the Issuer will file with the Securities
and Exchange Commission (the "Commission"), and provide, within 15 days after
the Issuer is required to file the same with the Commission, the Trustee and the
Holders with the annual reports and the information, documents and other reports
that are specified in Sections 13 and 15(d) of the Exchange Act. In the event
the Issuer is not permitted to file such reports, documents and information with
the Commission, the Issuer will provide substantially similar information to the
Trustee and the Holders, as if the Issuer were subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default with respect to the New Notes, once issued: (i) default for 30 days in
the payment when due of interest on, or Liquidated Damages with respect to, the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due of the principal of or premium, if
any, on the Notes (whether or not prohibited by the subordination provisions of
the Indenture); (iii) failure by the Issuer (A) to comply with the provisions
described under the caption " -- Certain Covenants -- Merger, Consolidation, or
Sale of all or Substantially all Assets" or (B) for a period of 30 days after
receipt of written notice specifying such a failure, stating that such notice is
a "Notice of Default" under the Indenture and demanding that the Issuer remedy
the same, shall have been given by registered or certified mail, return receipt
requested, to the Issuer by the Trustee, or to the Issuer and the Trustee by the
Holders of at least 25% in aggregate principal amount of the Notes at the time
outstanding, to comply with the provisions described under the captions
" -- Repurchase at the Option of Holders Change of Control," " -- Repurchase at
the Option of Holders -- Asset Sales," " -- Certain Covenants -- Restricted
Payments," " -- Certain Covenants -- Liens," " -- Certain Covenants -- Dividend
and Other Payment Restrictions Affecting Restricted Subsidiaries," " -- Certain
Covenants -- Transactions with Affiliates," " -- Certain Covenants -- Additional
Note Guarantees," " -- Certain Covenants -- No Senior Subordinated Debt,"
" -- Certain Covenants -- Business Activities" or " -- Certain Covenants
Incurrence of Indebtedness and Issuance of Preferred Stock," (iv) failure by the
Issuer for 60 days after receipt of a Notice of Default to comply with any of
its other agreements in the Indenture or the Notes; (v) the failure by the
Issuer or any Restricted Subsidiary that is a Significant Subsidiary to pay any
Indebtedness within any applicable grace period after final maturity or
acceleration by the holders thereof because of a default if the total amount of
such Indebtedness unpaid or accelerated exceeds $20.0 million; (vi) any judgment
or decree for the payment of money in excess of $20.0 million is entered against
the Issuer or any Significant Subsidiary that is a Restricted Subsidiary and is
not discharged, waived or stayed and either (A) an enforcement proceeding has
been commenced by any creditor upon such judgment or decree or (B) there is a
period of 60 days following the entry of such judgment or decree during which
such judgment or decree is not discharged, waived or the execution thereof
stayed; (vii) except as permitted by the Indenture, any Note Guarantee by
Holding or a Guarantor that is a Significant Subsidiary shall be held in any
judicial proceeding to be unenforceable or invalid or shall cease for any reason
to be in full force and effect or any Guarantor, or any Person acting on behalf
of any Guarantor, shall deny or disaffirm its obligations under its Note
Guarantee; and (viii) certain events of bankruptcy or insolvency with respect to
the Issuer or any of its Restricted Subsidiaries that is a Significant
Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable. Upon such a declaration, such
amounts shall be due and payable immediately; provided, however, that if upon
such declaration there are any amounts outstanding under the Senior Credit
Facility and the amounts thereunder have not been accelerated, such amounts
shall be due and payable upon the earlier of the time such amounts are
accelerated or five Business Days after receipt by the Issuer and the
Representative of the lenders under the Senior Credit Facility of such
declaration. Notwithstanding the foregoing,
93
<PAGE> 94
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to the Issuer or any of its Restricted Subsidiaries that
is a Significant Subsidiary, all outstanding New Notes will become due and
payable without further action or notice. Holders of the New Notes may not
enforce the Indenture or the New Notes except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in principal amount of the
then outstanding Notes may direct the Trustee in its exercise of any trust or
power.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any), interest or Liquidated Damages when due, no Holder
may pursue any remedy with respect to the Indenture or the Notes unless (i) such
Holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such Holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity, and (v)
the Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee.
The Trustee, however, may refuse to follow any direction that conflicts
with law or the Indenture or that the Trustee determines is unduly prejudicial
to the rights of any other Holder or that would involve the Trustee in personal
liability. Prior to taking any action under the Indenture, the Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
trust officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any), interest or
Liquidated Damages on any Note, the Trustee may withhold notice if and so long
as a committee of its trust officers in good faith determines that withholding
notice is in the interests of Noteholders. In addition, the Issuer is required
to deliver to the Trustee, within 120 days after the end of each fiscal year, a
certificate indicating whether the signers thereof know of any Default that
occurred during the previous year. The Issuer also is required to deliver to the
Trustee, forthwith upon any officer of the Issuer becoming aware of any such
Default, written notice of any event which would constitute certain Defaults,
their status and what action the Issuer is taking or proposes to take in respect
thereof.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder or Affiliate of
the Issuer, as such, shall have any liability for any obligations of the Issuer
under the New Notes, the Indenture or for any claim based on, in respect of, or
by reason of, such obligations or their creation. No director, officer,
employee, incorporator or stockholder or Affiliate of any of the Guarantors, as
such, shall have any liability for any obligations of the Guarantors under the
Note Guarantees, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of New Notes and Note
Guarantees by accepting a New Note and a Note Guarantee waives and releases all
such
94
<PAGE> 95
liabilities. The waiver and release are part of the consideration for issuance
of the New Notes and the Note Guarantees. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all of its and
any Guarantor's obligations discharged with respect to the outstanding Notes and
any Note Guarantees, as the case may be ("Legal Defeasance") and cure all then
existing Events of Default, except for (i) the rights of Holders of outstanding
Notes to receive payments in respect of the principal of, premium, if any, and
interest and Liquidated Damages on such Notes when such payments are due from
the trust referred to below, (ii) the Issuer's obligations with respect to the
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for Note payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Issuer's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Issuer may, at its option and at any time, elect to have the
obligations of the Issuer and the Guarantors released with respect to certain
covenants that are described in the Indenture and the Note Guarantees ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes and the
Note Guarantees. In the event Covenant Defeasance occurs, certain events (not
including non-payment, and, solely with respect to the Issuer, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the Notes
and the Note Guarantees.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Issuer or the Guarantors must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders of the Notes cash in U.S. dollars,
non-callable Government Notes, or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Issuer and the
Guarantors must specify whether the Notes are being defeased to maturity or to a
particular redemption date; (ii) in the case of Legal Defeasance, the Issuer or
the Guarantors shall have delivered to the appropriate Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that, subject to customary assumptions and exclusions, (A) the Issuer and the
Guarantors have received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the Closing Date, there has been a change
in the applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, subject to customary
assumptions and exclusions, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Issuer or the Guarantors shall have delivered to the appropriate
Trustee an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that, subject to customary assumptions and exclusions, the
Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit and the
grant of any Lien securing such borrowing) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a default
under any material agreement or instrument (other than the Indenture, except for
the subordination provisions thereof) to which the Issuer or any of its
Subsidiaries is a party or by which the Issuer or any of its Subsidiaries is
95
<PAGE> 96
bound; (vi) the Issuer or the Guarantors must have delivered to the appropriate
Trustee an opinion of counsel, subject to customary assumptions and exclusions,
to the effect that after the 91st day following the deposit, the trust funds
will not be part of any "estate" formed by the bankruptcy or reorganization of
the Issuer or subject to the "automatic stay" under the Bankruptcy Code or in
the case of covenant defeasance, will be subject to a first priority lien in
favor of the Trustee for the benefit of the holders of the Notes; (vii) the
Issuer or the Guarantors must deliver to the appropriate Trustee an Officers'
Certificate stating that the deposit was not made by the Issuer with the intent
of preferring the Holders of Notes over the other creditors of the Issuer or the
Guarantors, as applicable, with the intent of defeating, hindering, delaying or
defrauding creditors of the Issuer or the Guarantors, as applicable, or others;
and (viii) the Issuer must deliver to the appropriate Trustee an Officers'
Certificate and an opinion of counsel (which opinion of counsel may be subject
to customary assumptions and exclusions), each stating that all conditions
precedent relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
SATISFACTION AND DISCHARGE OF INDENTURE
Upon the request of the Issuer, the Indenture will cease to be of further
effect (except as to surviving rights of registration of transfer or exchange of
the Securities, as expressly provided for herein or pursuant hereto), the Issuer
and the Guarantors will be discharged from their obligations under the New Notes
and the Note Guarantees, and the Trustee, at the expense of the Issuer, will
execute proper instruments acknowledging satisfaction and discharge of the
Indenture when:
(a) either (i) all the Notes theretofore authenticated and delivered
(other than mutilated or destroyed, lost or stolen Notes that have been
replaced or paid and Securities that have been subject to defeasance under
the Indenture) have been delivered to the Trustee for cancellation or (ii)
all Notes not theretofore delivered to the Trustee for cancellation (A)
have become due and payable, (B) will become due and payable at maturity
within one year or (C) are to be called for redemption within one year
under arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Issuer,
and the Issuer has irrevocably deposited or caused to be deposited with the
Trustee funds in trust for such purpose in an amount sufficient to pay and
discharge, without the need to reinvest any proceeds thereof, the entire
Indebtedness on such Notes not theretofore delivered to the Trustee for
cancellation, for principal (and premium, if any, on) and interest on the
Securities to the date of such deposit (in the case of Securities that have
become due and payable) or to the Stated Maturity or redemption date, as
the case may be;
(b) the Issuer has paid or caused to be paid all sums payable under
the Indenture by the Issuer; and
(c) the Issuer has delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent
provided in the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
Notwithstanding the satisfaction and discharge of the Indenture, certain
obligations of the Issuer shall survive.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange New Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Issuer may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Issuer is not required to transfer or exchange
any New Note selected for redemption or repurchase. Also, the Issuer is not
required to transfer or exchange any New Note for a period of 15 days before a
selection of Notes to be redeemed or before any repurchase offer.
96
<PAGE> 97
The New Notes will be issued in registered form and the registered Holder
of a New Note will be treated as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the New Notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a purchase of, or tender offer or exchange
offer for, Notes), and any existing default or compliance with any provision of
the Indenture or the New Notes may be waived with the consent of the Holders of
a majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of, change the fixed maturity of any Note,
reduce any premium payable upon optional redemption of the Notes or otherwise
alter the provisions with respect to the redemption or repurchase of the Notes
(other than provisions relating to the covenants described above under the
caption " -- Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders of
at least a majority in aggregate principal amount of the Notes and a waiver of
the payment default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the Notes, (vi) impair the rights of
Holders of Notes to receive payments of principal of or premium, if any, or
interest or Liquidated Damages on the Notes, (vii) make any change in the
foregoing amendment and waiver provisions, (viii) except for releases of
Guarantors as permitted by the Indenture, make any change to the Note Guarantees
in any manner that adversely affects the rights of the Holders or (ix) make any
change to the subordination provisions of the Indenture that adversely affects
the rights of the Holders.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Issuer and the Trustee may amend or supplement the Indenture or the Notes to
cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes
in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to provide for the assumption of
the Issuer's or any Guarantor's obligations to Holders of Notes in the case of a
merger, consolidation or sale of assets, to release any Note Guarantee in
accordance with the provisions of the Indenture to provide for additional
Guarantors, to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, to comply with requirements of
the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act, or, subject to certain exceptions, to make any
change to certain provisions of the Indenture and the exhibits thereto that
applies only to Additional Notes.
Notwithstanding anything to the contrary contained above, no amendment,
waiver or supplement to the Indenture shall be made so as to adversely affect
the rights of any holder of Senior Debt without the consent of such holder.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Issuer, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as Note or otherwise. The Trustee will be permitted to engage in
other transactions; however, if the Trustee acquires any conflicting interest
the Trustee must eliminate such conflict within 90 days, apply to the Commission
for permission to continue or resign.
97
<PAGE> 98
The Indenture provides that in case an Event of Default shall occur (which
shall not be cured), the Trustee will be required, in the exercise of its power,
to use the degree of care of a prudent man in the conduct of his own affairs.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to the Issuer at the
following address: Werner Holding Co. (DE), Inc., 1105 North Market Street,
Suite 1300, Wilmington, Delaware 19899.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including Indebtedness incurred in connection with, or in contemplation of, such
other Person's merging with or into or becoming a Restricted Subsidiary of such
specified Person (provided such Person is not formed for the purpose of
incurring such Indebtedness and is engaged in a bona fide business prior to
incurring such Indebtedness or has material assets other than cash), and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such specified
Person.
"Affiliate" of any specified Person means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person, (ii) any other Person that owns, directly or
indirectly, 5% or more of such specified Person's Voting Stock or (iii) any
Person who is a director or officer (a) of such Person, (b) of any Subsidiary of
such Person or (c) of any Person described in clause (i) or (ii) above. For
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlling," "controlled by" and "under common control with"), as
used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including by way of a sale and leaseback) (provided that
the sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Issuer and its Restricted Subsidiaries taken as a whole will
be governed by the provisions of the Indenture described above under the caption
" -- Certain Covenants - Merger, Consolidation or Sale of all or Substantially
all Assets" and not by the provisions of the Asset Sale covenant), and (ii) the
issue or sale by the Issuer or any of its Restricted Subsidiaries of Equity
Interests of any of the Issuer's Subsidiaries (other than director's qualifying
shares), in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, (1) the following will not be Asset
Sales: (i) a transfer of assets by the Issuer to a Restricted Subsidiary or by a
Restricted Subsidiary to the Issuer or to another Restricted Subsidiary, (ii) an
issuance of Equity Interests by a Restricted Subsidiary to the Issuer or to
another Restricted Subsidiary, (iii) a contribution, transfer or other
disposition of Receivables in connection with a Receivables Facility provided
consideration in an amount at least equal to the fair market value of such
Receivables is received, directly or indirectly, by the Issuer or any of its
Restricted Subsidiaries, provided further that all the net cash proceeds of any
Receivables Facility are remitted to the Issuer or any Restricted Subsidiary,
(iv) a Restricted Payment or Permitted Investment that is permitted by the
covenant described above under the caption " -- Certain Covenants -- Restricted
Payments" (including any formation of or contribution of assets to a joint
venture), (v) leases or subleases, in the ordinary course of business, to third
parties of real property owned in fee or leased by the Issuer or its
98
<PAGE> 99
Subsidiaries, (vi) a disposition, in the ordinary course of business, of a lease
of real property, (vii) any disposition of property of the Issuer or any of its
Subsidiaries that, in the reasonable judgment of the Issuer, has become
uneconomic, obsolete or worn out, (viii) any disposition of property or assets
(including any disposition of inventory and any licensing agreements) in the
ordinary course of business, other than in connection with a Receivables
Facility, (ix) the sale of Cash Equivalents, Permitted Insurance Company
Investments and Investment Grade Securities, (x) any exchange of like property
pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended, and
(xi) any sale of life insurance policies to certain management personnel
pursuant to the Recapitalization Agreement in an approximate amount not to
exceed $2.0 million and (2) subject to clause (1)(iii), the term "Asset Sale"
shall include a contribution or other transfer of Receivables to, or a
disposition of Receivables by, an Unrestricted Subsidiary in connection with a
Receivables Facility of the Issuer and its Restricted Subsidiaries.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person, or any authorized committee of the Board of Directors
of such Person.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any similar participation in profits and losses or equity of a Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any commercial bank or trust company having capital
and surplus in excess of $300 million, (iv) repurchase obligations with a term
of not more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution meeting
the qualifications specified in clause (iii) above, (v) commercial paper having
the highest rating obtainable from Moody's Investors Service, Inc. ("Moody's")
or Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies,
Inc. ("S&P") and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (ii)-(v) above, (vii) readily marketable
direct obligations issued by any state of the United States of America or any
political subdivision thereof having one of the two highest rating categories
obtainable from either Moody's or S&P and (viii) Indebtedness with a rating of
"A" or higher from S&P or "A2" or higher from Moody's.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Hedging Agreements" means any futures contract or other similar
agreement or arrangement designed to protect the Issuer or any Subsidiary
against fluctuations in commodities prices.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period (A) plus, to the
extent deducted in computing such Consolidated Net Income, (i) Fixed Charges and
the amortization of debt issuance costs, commissions, fees and expenses of such
Person and its Restricted Subsidiaries for such period, (ii) provision for taxes
based on income or profits (including franchise taxes) of such Person and its
Restricted Subsidiaries for such
99
<PAGE> 100
period, (iii) depreciation and amortization expense, including amortization of
inventory write-up under APB 16, amortization of intangibles (including goodwill
and the non-cash costs of Interest Rate Agreements, Commodity Hedging Agreements
or Currency Agreements, license agreements and non-competition agreements),
non-cash amortization of Capital Lease Obligations, and organization costs, (iv)
non-cash expenses related to the amortization of management fees paid on or
prior to the Closing Date, (v) expenses and charges related to any equity
offering or incurrence of Indebtedness permitted to be incurred by the Indenture
(including any such expenses or charges relating to the Recapitalization), (vi)
the amount of any restructuring charge or reserve, (vii) unrealized gains and
losses from hedging, foreign currency or commodities translations and
transactions, (viii) expenses consisting of internal software development costs
that are expensed during the period but could have been capitalized in
accordance with GAAP, (ix) any write-downs, write-offs, and other non-cash
charges and expenses (excluding insurance reserves), (x) the amount of any
minority interest expense of Restricted Subsidiaries, and (xi) costs of surety
bonds in connection with financing activities, and (B) minus (x) non-cash items
increasing such Consolidated Net Income for such period and (y) any cash payment
or expense (excluding cash payments on account of insurance claims) for which a
reserve or charge of the kind described in the clause (vi), (ix) or (x) above
was taken previously during such period.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Restricted Subsidiary of such Person, (ii) the
Net Income of any Restricted Subsidiary (other than an Insurance Subsidiary)
shall be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, prohibited by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders unless such restriction with respect to the
payment of dividends has been permanently waived, (iii) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, (iv) the cumulative effect of a
change in accounting principles shall be excluded (effected either through
cumulative effect adjustment or a retroactive application, in each case, in
accordance with GAAP), (v) to the extent deducted in determining Net Income, the
fees, expenses and other costs incurred in connection with the Recapitalization,
including payments to management contemplated by the Recapitalization Agreement,
in each case, to the extent that such fee, expense or cost was disclosed in the
Prospectus, shall be excluded, (vi) any unrealized gains or losses with respect
to Investments held in the insurance business of any Restricted Subsidiary shall
be excluded and (vii) with respect to periods prior to the Recapitalization
Closing Date, Consolidated Net Income shall include (without duplication) (A)
all adjustments relating to MIICA investment income (loss) reflected in the
calculation of EBITDA set forth in note (d) in the Notes to Unaudited Pro Forma
Condensed Consolidated Statements of Operations set forth in "Unaudited Pro
Forma Condensed Consolidated Financial Statements" and (B) all adjustments
relating to reductions in management compensation, non-recurring expenses, MIICA
investment income, non-recurring employee separation charges and non-recurring
private company expenses, in each case reflected in the calculation of Adjusted
EBITDA set forth in footnote (a) to the "Summary Historical and Pro Forma
Financial Information."
"Credit Facilities" means, with respect to the Issuer, one or more debt
facilities (including the Senior Credit Facility) or commercial paper facilities
with banks, insurance companies or other institutional lenders providing for
revolving credit loans, term loans, notes, receivables financing (including
through the sale of receivables to such lenders or to special purpose entities
formed to borrow from or issue securities to such lenders against such
receivables) or letters of credit or other credit facilities, in each
100
<PAGE> 101
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement to which the Issuer or any
Subsidiary is a party or of which it is a beneficiary.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Senior Credit Facility and (ii) any other Senior Debt permitted under the
Indenture the principal amount of which is $10.0 million or more and that has
been designated by the Issuer or any Guarantor as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than as a result of a
Change of Control), matures or is mandatorily redeemable, pursuant to a sinking
fund obligation or otherwise, or redeemable at the option of the holder thereof,
in whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that if such Capital Stock is issued
to any plan for the benefit of employees of the Issuer or its Subsidiaries or by
any such plan to such employees, such Capital Stock shall not constitute
Disqualified Stock solely because it may be required to be repurchased by the
Issuer in order to satisfy applicable statutory or regulatory obligations.
"Domestic Subsidiary" means any Restricted Subsidiary of the Issuer other
than a Foreign Subsidiary.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Issuer and its Restricted
Subsidiaries (other than Indebtedness under the Senior Credit Facility) in
existence on the Recapitalization Closing Date, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings or any Receivables Facility, and net payments (if
any) pursuant to Hedging Obligations relating to Interest Rate Agreements or
Currency Agreements with respect to Indebtedness, excluding, however, (A)
amortization of debt issuance costs, commissions, fees and expenses, (B)
customary commitment, administrative and transaction fees and charges) and (C)
expenses attributable to letters of credit or similar arrangements supporting
insurance certificates issued to customers in the ordinary course of business,
(ii) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period, (iii) any interest expense
on Indebtedness of another Person that is Guaranteed by such Person or one of
its Restricted Subsidiaries or secured by a Lien on assets of such Person or one
of its Restricted Subsidiaries (whether or not or, in the case of Indebtedness
of a Foreign Subsidiary, at any time after such, Guarantee or Lien is called
upon), (iv) all dividend payments, whether or not in cash, on any series of
preferred stock of any Restricted Subsidiary of such Person, (v) all dividend
payments, whether or not in cash, on any series of preferred stock of such
person other than dividend payments or accruals payable solely in Equity
Interests (other than Disqualified Stock) of such Person, in each case, on a
consolidated basis and in accordance with GAAP and (vi) commissions, discounts
and other fees and charges incurred in connection with a Receivables Facility of
the Issuer or any Restricted Subsidiary.
101
<PAGE> 102
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Issuer or any
of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. For purposes of
making the computation referred to above, Investments in Restricted
Subsidiaries, acquisitions, dispositions, mergers and consolidations that have
been made by the Issuer or any of its Restricted Subsidiaries during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date, and discontinued operations determined in
accordance with GAAP on or prior to the Calculation Date, shall be given effect
on a pro forma basis assuming that all such Investments in Restricted
Subsidiaries, acquisitions, dispositions, mergers and consolidations or
discontinued operations (and the reduction or increase of any associated fixed
charge obligations and the change in Consolidated Cash Flow resulting therefrom)
had occurred on the first day of the four-quarter reference period. If since the
beginning of such period any Person (that subsequently became a Restricted
Subsidiary or was merged with or into the Issuer or any Restricted Subsidiary
since the beginning of such period) shall have made any Investment in a
Restricted Subsidiary, acquisition, disposition, merger or consolidation or
determined a discontinued operation, that would have required adjustment
pursuant to this definition, then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect thereto for such period as if such
Investment, acquisition, disposition, merger or consolidation or discontinued
operations had occurred at the beginning of the applicable four-quarter period.
For purposes of this definition, whenever pro forma effect is to be given to a
transaction, the pro forma calculations shall be made in good faith by a
responsible financial or accounting officer of the Issuer. If any Indebtedness
to which pro forma effect is given bears interest at a floating rate, the
interest expense on such Indebtedness shall be calculated as if the rate in
effect on the Calculation Date had been the applicable interest rate for the
entire period (taking into account any Interest Rate Agreement in effect on the
Calculation Date). Interest on a Capital Lease Obligation shall be deemed to
accrue at an interest rate reasonably determined by a responsible financial or
accounting officer of the Issuer to be the rate of interest implicit in such
Capital Lease Obligation in accordance with GAAP. Interest on Indebtedness that
may optionally be determined at an interest rate based upon a factor of a prime
or similar rate, a eurocurrency interbank offered rate, or other rate, shall be
deemed to have been based upon the rate actually chosen, or, if none, then based
upon such optional rate chosen as the Issuer may designate.
"Foreign Subsidiary" means any Subsidiary of the Issuer formed under the
laws of any jurisdiction other than the United States or any political
subdivision thereof substantially all of the assets of which are located outside
of the United States or that conducts substantially all of its business outside
of the United States.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession. All ratios and computations based on GAAP contained in the Indenture
shall be computed in conformity with GAAP as in effect as of the
Recapitalization Closing Date.
"Government Notes" means direct obligations of, or obligations guaranteed
by, the United States of America for the payment of which guarantee or
obligations the full faith and credit of the United States is pledged.
102
<PAGE> 103
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including letters of credit and reimbursement
agreements in respect thereof), of all or any part of any Indebtedness.
"Guarantors" means each of (i) Holding, (ii) the Issuer's Restricted
Subsidiaries on the Recapitalization Closing Date other than any (A) Foreign
Subsidiary or (B) Insurance Subsidiary and (iii) any other Restricted Subsidiary
of the Issuer that executes a Note Guarantee in accordance with the provisions
of the Indenture, and their respective successors and assigns, in each case
until released from its Note Guarantee in accordance with the terms of the
Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under Interest Rate Agreements, Currency Agreements or Commodity
Hedging Agreements.
"Holding" means Werner Holding Co. (PA), Inc.
"Indebtedness" means, with respect to any Person (without duplication), (i)
any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or representing Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any property, which purchase price
is due more than six months after the date of placing such property in service
or taking delivery thereof, or representing any Hedging Obligations, except any
such balance that constitutes an accrued expense or trade payable, if and to the
extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, (ii) all indebtedness under clause (i)
of other Persons secured by a Lien on any asset of such Person (whether or not
such indebtedness is assumed by such Person) and (iii) to the extent not
otherwise included, the Guarantee by such Person of any indebtedness under
clause (i) of any other Person; provided, however, that Indebtedness shall not
include (a) any servicing or guarantee of servicing obligations with respect to
Receivables; (b) obligations of the Issuer or any of its Restricted Subsidiaries
arising from agreements of the Issuer or a Restricted Subsidiary providing for
indemnification, adjustment of purchase price or similar obligations, in each
case, incurred or assumed in connection with the disposition of any business,
assets or a Subsidiary, other than guarantees of Indebtedness incurred by any
Person acquiring all or any portion of such business, assets or a Subsidiary for
the purpose of financing such acquisition; provided, however, that (x) such
obligations are not reflected on the balance sheet of the Issuer or any
Restricted Subsidiary (contingent obligations referred to in a footnote to
financial statements and not otherwise reflected on the balance sheet will not
be deemed to be reflected on such balance sheet for purposes of this clause (x))
and (y) the maximum assumable liability in respect of all such obligations shall
at no time exceed the gross proceeds including noncash proceeds (the fair market
value of such noncash proceeds being measured at the time received and without
giving effect to any subsequent changes in value) actually received by the
Issuer and its Restricted Subsidiaries in connection with such disposition; or
(c) obligations in respect of performance and surety bonds and completion
guarantees provided by the Issuer or any Restricted Subsidiary in the ordinary
course of business. The amount of any Indebtedness outstanding as of any date
shall be (i) the accreted value thereof, in the case of any Indebtedness that
does not require current payments of interest, and (ii) the principal amount
thereof in the case of any other Indebtedness.
"Insurance Subsidiary" means MIICA and its Subsidiaries that are engaged in
the insurance business or any business incidental thereto.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, repurchase agreement, futures contract or other financial
agreement or arrangement designed to protect the Issuer or any Subsidiary
against fluctuations in interest rates.
103
<PAGE> 104
"Investment Grade Securities" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents), (ii) debt securities or
debt instruments with a rating of BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such rating by such rating organization, or, if no
rating of S&P or Moody's then exists, the equivalent of such rating by any other
nationally recognized securities rating agency, but excluding any debt
securities or instruments constituting loans or advances among the Issuer and
its Subsidiaries, and (iii) investments in any fund that invests exclusively in
investments of the type described in clauses (i) and (ii) which fund may also
hold immaterial amounts of cash pending investment and/or distribution.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations, but
excluding advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person), advances
or capital contributions (excluding commission, travel, payroll, entertainment,
relocation and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items that
are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Issuer or any Subsidiary of the Issuer sells or
otherwise disposes of any Equity Interests of any direct or indirect Subsidiary
of the Issuer such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of the Issuer, the Issuer shall be deemed
to have made an Investment on the date of any such sale or disposition equal to
the fair market value of the Equity Interests of such Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption " -- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement or any lease
in the nature thereof); provided that in no event shall an operating lease be
deemed to constitute a Lien.
"Management Group" means the senior management of the Issuer or the
Restricted Subsidiaries of the Issuer.
"MIICA" means Manufacturers Indemnity and Insurance Company of America or
any successor thereto.
"Net Income" means, with respect to any Person and any period, the net
income (or loss) of such Person for such period, determined in accordance with
GAAP and before any reduction in respect of preferred stock dividends,
excluding, however, (i) any extraordinary or non-recurring gains or losses or
charges and gains or losses or charges from the sale of assets outside the
ordinary course of business, together with any related provision for taxes on
such gain or loss or charges and (ii) deferred financing costs written off in
connection with the early extinguishment of Indebtedness; provided, however,
that Net Income shall be deemed to include any increases during such period to
shareholder's equity of such Person attributable to tax benefits from net
operating losses and the exercise of stock options that are not otherwise
included in Net Income for such period.
"Net Proceeds" means the aggregate cash proceeds received by the Issuer or
any of its Restricted Subsidiaries in respect of any Asset Sale (including any
cash received upon the sale or other disposition of any non-cash consideration
received in any Asset Sale), net of the direct costs relating to such Asset Sale
(including legal, accounting and investment banking fees, and brokerage and
sales commissions) and any relocation expenses incurred as a result thereof,
taxes paid or payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), amounts
applied to the repayment of principal, premium (if any) and interest on
Indebtedness that is not subordinated to the Notes required (other than required
by clause (a) of the second para-
104
<PAGE> 105
graph of " -- Repurchase at the Option of Holders -- Asset Sales") to be paid as
a result of such transaction, all distributions and other payments required to
be made to minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Sale, and any deduction of appropriate amounts to be
provided by the Issuer as a reserve in accordance with GAAP against any
liabilities associated with the asset disposed of in such transaction and
retained by the Issuer after such sale or other disposition thereof, including
pension and other post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
such transaction.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Issuer
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness) or (b) is directly or indirectly liable (as a guarantor or
otherwise); and (ii) no default with respect to which (including any rights that
the holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder of any
other Indebtedness (other than the Notes being offered hereby) of the Issuer or
any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Issuer or any of its Restricted Subsidiaries; provided that, notwithstanding the
foregoing, the Issuer and any of its other Subsidiaries that sell Receivables to
the Person incurring such Indebtedness shall be allowed to provide such
representations, warranties, covenants and indemnities as are customarily
required in such transactions so long as no such representations, warranties,
covenants or indemnities constitute a Guarantee of payment or recourse against
credit losses.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages, guarantees and other liabilities
payable under the documentation governing any Indebtedness, in each case whether
now or hereafter existing, renewed or restructured, whether or not from time to
time decreased or extinguished and later increased, created or incurred, whether
or not arising on or after the commencement of a proceeding under Title 11, U.S.
Code or any similar federal or state law for the relief of debtors (including
post-petition interest) and whether or not allowed or allowable as a claim in
any such proceeding.
"Pari Passu Indebtedness" means any Indebtedness of the Issuer or any
Guarantor that ranks pari passu with the New Notes or the Note Guarantee of such
Guarantor, as applicable.
"Permitted Business" means the climbing equipment, extruded products and
fabricated products businesses and any other business reasonably related,
complementary or incidental to any of those businesses (including any related
insurance business).
"Permitted Insurance Company Investments" means Investments in (a) Cash
Equivalents; (b) Investment Grade Securities; and (c) other types of debt and
equity securities, real estate or other Investments; provided, however, that (i)
the aggregate amount of all Permitted Insurance Company Investments referred to
in clause (c) shall not, at the time any such Investment is made, exceed 40% of
all outstanding Permitted Insurance Company Investments, and (ii) MIICA shall at
all times have an investment policy approved from time to time by the Board of
Directors of the Issuer or MIICA pursuant to which all Permitted Insurance
Company Investments shall be required to be made.
"Permitted Investments" means (a) any Investment in the Issuer or in a
Restricted Subsidiary (including in any Equity Interests of a Restricted
Subsidiary); (b) any Investment in Cash Equivalents or Investment Grade
Securities; (c) any Investment by the Issuer or any Restricted Subsidiary of the
Issuer in a Person, if as a result of such Investment (i) such Person becomes a
Restricted Subsidiary or (ii) such Person, in one transaction or a series of
substantially concurrent related transactions, is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Issuer or a Restricted Subsidiary; (d) any
securities received or other Investments made as a result of the receipt of
non-cash consideration from an Asset Sale that was
105
<PAGE> 106
made pursuant to and in compliance with the covenant described above under the
caption " -- Repurchase at the Option of Holders - Asset Sales" or in connection
with any other disposition of assets not constituting an Asset Sale; (e) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of the Issuer or Holding; (f) any Investments
relating to a Receivables Subsidiary; (g) loans or advances to employees (or
guarantees of third party loans to employees) in the ordinary course of
business; (h) stock, obligations or securities received in satisfaction of
judgments or settlement of debts; (i) receivables owing to the Issuer or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms (including
such concessionary terms as the Issuer or such Restricted Subsidiary deems
reasonable); (j) any Investment existing on the Recapitalization Closing Date;
(k) Investments in Interest Rate Agreements, Currency Agreements and Commodity
Hedging Agreements otherwise permitted under the Indenture; (l) any transaction
to the extent it constitutes an Investment that is permitted and made in
accordance with the provisions of clause (13) of the last sentence of the
covenant described under the caption " -- Certain Covenants -- Transactions with
Affiliates"; (m) any Investment in a Permitted Business having an aggregate fair
market value, taken together with all other Investments made pursuant to this
clause (m) that are at that time outstanding, not to exceed 15.0% of Total
Assets at the time of such Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value); (n) Permitted Insurance Company Investments; and
(o) additional Investments having an aggregate fair market value, taken together
with all other Investments made pursuant to this clause (o) that are at that
time outstanding, not to exceed 10.0% of Total Assets at the time of such
Investment (with the fair market value of each Investment being measured at the
time made and without giving effect to subsequent changes in value).
"Permitted Junior Securities" shall mean debt or equity securities of the
Issuer, any Guarantor or any successor corporation to the Issuer or such
Guarantor issued pursuant to a plan of reorganization or readjustment of the
Issuer or such Guarantor that are subordinated to the payment of all then
outstanding Senior Debt of the Issuer or such Guarantor, as applicable at least
to the same extent that (i) in the case of the Issuer, the New Notes are
subordinated to the payment of all Senior Debt of the Issuer on the
Recapitalization Closing Date, and (ii) in the case of such Guarantor, that the
Note Guarantee of such Guarantor is subordinated to the payment of Senior Debt
of such Guarantor on the Recapitalization Closing Date, so long as (i) the
effect of the use of this defined term in the subordination provisions described
under the caption "Subordination" is not to cause the New Notes or the Note
Guarantees, as applicable to be treated as part of (a) the same class of claims
as the Senior Debt of the Issuer or such Guarantor, as applicable or (b) any
class of claims pari passu with, or senior to, the Senior Debt for any payment
or distribution in any case or proceeding or similar event relating to the
liquidation, insolvency, bankruptcy, dissolution, winding up or reorganization
of the Issuer and (ii) to the extent that any Senior Debt of the Issuer or such
Guarantor, as applicable outstanding on the date of consummation of any such
plan of reorganization or readjustment are not paid in full in cash on such
date, either (a) the holders of any such Senior Debt not so paid in full in cash
have consented to the terms of such plan of reorganization or readjustment or
(b) such holders receive securities which constitute Senior Debt of the Issuer
or such Guarantor, as applicable and which have been determined by the relevant
court to constitute satisfaction in full in money or money's worth of any Senior
Debt not paid in full in cash.
"Permitted Liens" means (i) Liens securing Senior Debt of the Issuer or a
Restricted Subsidiary that was permitted by the terms of the Indenture to be
incurred; (ii) Liens in favor of the Issuer or any Restricted Subsidiary; (iii)
Liens on property of a Person existing at the time such Person is merged into or
consolidated with the Issuer or any Restricted Subsidiary of the Issuer;
provided that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Issuer or a Restricted Subsidiary,
as the case may be; (iv) Liens on property existing at the time of acquisition
thereof by the Issuer or any Restricted Subsidiary of the Issuer, provided that
such Liens were in existence prior to the contempla-
106
<PAGE> 107
tion of such acquisition and do not extend to any assets other than those
acquired; (v) Liens to secure the performance of bids, tenders, trade or
government contracts (other than for borrowed money), leases, licenses,
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vi)
without limitation of clause (i), Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (iv) of the second paragraph of
the covenant entitled " -- Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness; (vii) Liens
existing on the Recapitalization Closing Date; (viii) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings, provided that
any reserve or other appropriate provision as shall be required in conformity
with GAAP shall have been made therefor; (ix) Liens on Receivables to reflect
sales of Receivables to and by a Receivables Subsidiary pursuant to a
Receivables Facility or securing Indebtedness permitted by paragraph (ix) of the
covenant described under the caption " -- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock"; (x) Liens incurred in the
ordinary course of business of the Issuer or any Restricted Subsidiary of the
Issuer with respect to obligations that do not exceed $5.0 million at any one
time outstanding and that (a) are not incurred in connection with the borrowing
of money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Issuer or such Restricted Subsidiary; (xi)
carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or
other like Liens arising in the ordinary course of business in respect of
obligations that are not yet due or that are bonded or that are being contested
in good faith and by appropriate proceedings if adequate reserves with respect
thereto are maintained on the books of the Issuer or such Restricted Subsidiary,
as the case may be, in accordance with GAAP; (xii) pledges or deposits in
connection with workmen's compensation, unemployment insurance and other social
security legislation; (xiii) easements (including reciprocal easement
agreements), rights-of-way, building, zoning and similar restrictions, utility
agreements, covenants, reservations, restrictions, encroachments, changes, and
other similar encumbrances or title defects incurred, or leases or subleases
granted to others, in the ordinary course of business, that do not in the
aggregate materially detract from the aggregate value of the properties of the
Issuer and its Subsidiaries, taken as a whole, or in the aggregate materially
interfere with or adversely affect in any material respect the ordinary conduct
of the business of the Issuer and its Subsidiaries on the properties subject
thereto, taken as a whole; (xiv) Liens on goods (and the proceeds thereof) and
documents of title and the property covered thereby securing Indebtedness in
respect of commercial letters of credit; (xv) (A) mortgages, liens, security
interests, restrictions, encumbrances or any other matters of record that have
been placed by any developer, landlord or other third party on property over
which the Issuer or any Restricted Subsidiary of the Issuer has easement rights
or on any real property leased by the Issuer on the Recapitalization Closing
Date and subordination or similar agreements relating thereto and (B) any
condemnation or eminent domain proceedings affecting any real property; (xvi)
leases or subleases to third parties; (xvii) Liens in connection with workmen's
compensation obligations and general liability exposure of the Issuer and its
Restricted Subsidiaries; (xviii) Liens arising by reason of a judgment, decree
or court order, to the extent not otherwise resulting in an Event of Default;
(xix) Liens securing Hedging Obligations entered into in the ordinary course of
business; (xx) without limitation of clause (i), Liens securing Refinancing
Indebtedness permitted to be incurred under the Indenture or amendments or
renewals of Liens that were permitted to be incurred, provided, in each case,
that such Liens do not extend to an additional property or asset; and (xxi)
Liens that secure Indebtedness of a Person existing at the time such Person
becomes a Restricted Subsidiary of the Issuer, provided that such Liens do not
extend to any assets other than those of the Person that became a Restricted
Subsidiary of the Issuer.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Issuer
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Issuer or any of its Restricted Subsidiaries
incurred in compliance with the Indenture; provided that: (i) the principal
amount (or accreted value, if applicable) of such Permitted Refinancing
Indebtedness does not exceed the principal amount of (or
107
<PAGE> 108
accreted value, if applicable), plus accrued interest on, the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable premium and fees and expenses incurred in connection therewith);
(ii) in the case of term Indebtedness, principal payments required under such
Permitted Refinancing Indebtedness have a Stated Maturity no earlier than the
Stated Maturity of those under the Indebtedness being refinanced and such
Permitted Refinancing Indebtedness has a Weighted Average Life to Maturity equal
to or greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the New Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and is subordinated in right of payment to, the New Notes on terms at
least as favorable to the Holders of New Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Issuer or by its Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Receivables" means, collectively, (a) the Indebtedness and other
obligations owed to the Issuer or any of its Subsidiaries (before giving effect
to any sale or transfer thereof pursuant to a Receivables Facility), whether
constituting an account, chattel paper, an instrument, a document or general
intangible, arising in connection with the sale of goods, insurance and/or
services by the Issuer or such Subsidiary, including the obligation to pay any
late fees, interest or other finance charges with respect thereto (each of the
foregoing, collectively, an "Account Receivable" ), (b) all of the Issuer's or
such Subsidiary's interest in the goods (including returned goods), if any, the
sale of which gave rise to any Account Receivable, and all insurance contracts
with respect thereto, (c) all other security interests or Liens and property
subject thereto from time to time, if any, purporting to secure payment of any
Account Receivable, together with all financing statements and security
agreements describing any collateral securing such Account Receivable, (d) all
Guarantees, insurance and other agreements or arrangements of whatever character
from time to time supporting or securing payment of any Account Receivable, (e)
all contracts, invoices, books and records of any kind related to any Account
Receivable, (f) all cash collections in respect of, and cash proceeds of, any of
the foregoing and any and all lockboxes, lockbox accounts, collection accounts,
concentration accounts and similar accounts in or into which such collections
and cash proceeds are now or hereafter deposited, collected or concentrated, and
(g) all proceeds of any of the foregoing.
"Receivables Facility" means, with respect to any Person, any Receivables
securitization or factoring program pursuant to which such Person receives
proceeds pursuant to a sale, pledge or other encumbrance of its Receivables. A
Receivables Facility involving the sale, pledge or other encumbrance of
Receivables of, and the direct or indirect receipt of the proceeds thereof by,
the Issuer or any Restricted Subsidiary thereof shall constitute a Receivables
Facility of the "Issuer" and/or its "Restricted Subsidiaries" whether or not as
part of such securitization or factoring program such Receivables are initially
contributed or otherwise transferred to an Unrestricted Subsidiary of the Issuer
(and then resold or encumbered by such Unrestricted Subsidiary).
"Receivables Financing Amount" means at any date, with respect to any
Receivables Facility of any Person that does not represent an incurrence of
Indebtedness, the sum on such date of (a) the aggregate uncollected balances of
Accounts Receivable (as defined in the definition of "Receivables") transferred
("Transferred Receivables") in such Receivables Facility plus (b) the aggregate
amount of all collections of Transferred Receivables theretofore received by
such Person but not yet remitted to the purchaser, net of all reserves and
holdbacks retained by or for the benefit of the purchaser and net of any
interest retained by such Person and reasonable costs and expenses (including
fees and commissions and taxes other than income taxes) incurred by such Person
in connection therewith and not payable to any Affiliate of such Person.
108
<PAGE> 109
"Receivables Subsidiary" means any Subsidiary created primarily to purchase
or finance the receivables of the Issuer and/or its Subsidiaries pursuant to a
Receivables Facility, so long as it: (a) has no Indebtedness other than
Non-Recourse Debt and (b) is a Person with respect to which neither the Issuer
nor any of its other Subsidiaries has any direct obligation to maintain or
preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results other than to act as servicer of
Receivables. If, at any time, such Receivables Subsidiary would fail to meet the
foregoing requirements as a Receivables Subsidiary, it shall thereafter cease to
be a Receivables Subsidiary for purposes of the Indenture and any Indebtedness
of such Receivables Subsidiary shall be deemed to be incurred by a Subsidiary of
the Issuer as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
" -- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock," the Issuer shall be in default of such covenant).
"Representative" means any agent or representative in respect of any
Designated Senior Debt; provided that if, and for so long as, any Designated
Senior Debt lacks such a representative, then the Representative for such
Designated Senior Debt shall at all times constitute the holders of a majority
in outstanding principal amount of such Designated Senior Debt.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Secured Debt" means any Indebtedness of the Issuer or any Guarantor
secured by a Lien.
"Senior Credit Facility" means the Credit Agreement expected to be dated as
of November 24,1997 among the Issuer and the financial institutions named
therein, and any related notes, collateral documents, letters of credit and
guarantees, including any appendices, exhibits or schedules to any of the
foregoing (as the same may be in effect from time to time), in each case, as
such agreements may be amended, modified, supplemented or restated from time to
time, or refunded, refinanced, restructured, replaced, renewed, repaid or
extended from time to time (whether with the original agents and lenders or
other agents or lenders or otherwise, and whether provided under the original
credit agreement or other credit agreements or otherwise).
"Senior Debt" means (i) all Indebtedness of the Issuer or any Guarantor
outstanding under the Senior Credit Facility and all Hedging Obligations with
respect thereto, (ii) any other Indebtedness (including Acquired Debt) permitted
to be incurred by the Issuer or any Guarantor under the terms of the Indenture,
unless the instrument under which such Indebtedness is incurred expressly
provides that it is on a parity with or subordinated in right of payment to the
Notes or the relevant Note Guarantee and (iii) all Obligations with respect to
the foregoing. Notwithstanding anything to the contrary in the foregoing, Senior
Debt will not include (v) any liability for federal, state, local or other taxes
owed or owing by the Issuer, (w) any Indebtedness of the Issuer or any Guarantor
to any of its Subsidiaries or other Affiliates (other than Indebtedness under
any Credit Facility to any such Affiliate), (x) any trade payables, (y) that
portion of Indebtedness incurred in violation of the covenant described above
under "Incurrence of Indebtedness and Preferred Stock" (but as to any such
Indebtedness under any Credit Facility, no such violation shall be deemed to
exist for purposes of this clause (y) if the lenders have obtained a
representation from a responsible financial officer of the Issuer to the effect
that the issuance of such Indebtedness does not violate such covenant) or (z)
any Indebtedness or obligation of the Issuer or any Guarantor which is expressly
subordinated in right of payment to any other Indebtedness or obligation of the
Issuer or such Guarantor, as applicable, including any Subordinated Debt.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such regulation is in effect on the Closing
Date.
109
<PAGE> 110
"Specified Affiliate Payments" means: (i) the repurchase, redemption or
other acquisition or retirement for value of any Equity Interests of the Issuer
or any Restricted Subsidiary of the Issuer, or amounts paid to Holding on
account of any such acquisition or retirement for value of any Equity Interests
of Holding, held by any future, present or former employee, director, officer or
consultant of Holding or the Issuer (or any of its Restricted Subsidiaries)
pursuant to any management equity subscription agreement, stock option
agreement, put agreement, stockholder agreement or similar agreement that may be
in effect from time to time; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$3.0 million in any calendar year (with unused amounts in any calendar year
being carried over to succeeding calendar years subject to a maximum amount of
repurchases, redemptions or other acquisitions pursuant to this clause (i)
(without giving effect to the immediately following proviso) of $10.0 million in
any calendar year) and no payment default on Senior Debt or the Notes shall have
occurred and be continuing; provided further that such amount in any calendar
year may be increased by an amount not to exceed (A) the cash proceeds received
by the Issuer (including by way of capital contribution) since the
Recapitalization Closing Date from the sale of Equity Interests of Holding or
the Issuer to employees, directors, officers or consultants of Holding, the
Issuer or their respective Subsidiaries that occurs in such calendar year (it
being understood that such cash proceeds shall be included in clause (c)(ii) of
the first paragraph under the covenant described under the caption " -- Certain
Covenants -- Restricted Payments") plus (B) the cash proceeds from key man life
insurance policies received by the Issuer and its Restricted Subsidiaries in
such calendar year (including proceeds from the sale of such policies to the
person insured thereby); and provided further that cancellation of Indebtedness
owing to the Issuer from employees, directors, officers or consultants of the
Issuer or any of its Subsidiaries in connection with a repurchase of Equity
Interests of the Issuer will not be deemed to constitute a Restricted Payment
for purposes of the Indenture; (ii) repurchases of Equity Interests deemed to
occur upon exercise of stock options or warrants as a result of the payment of
all or a portion of the exercise price of such options or warrants with Equity
Interests; (iii) payments by the Issuer or Holding to members of management of
the Issuer and its Subsidiaries in connection with the Recapitalization to the
extent disclosed in this Prospectus; (iv) payments or other transactions
permitted under clauses (8) and (11) of the second sentence of the covenant
described under " -- Certain Covenants -- Transaction with Affiliates"; and (v)
dividends, other distributions or other amounts paid by the Issuer to Holding
(A) in amounts equal to amounts required for Holding to pay franchise taxes and
other expenses required to maintain its corporate existence and provide for
other operating costs of up to $750,000 per fiscal year or (B) to pay, or
reimburse Holding for, the costs, fees and expenses incident to a registration
of any of the Capital Stock of Holding for a primary offering under the
Securities Act, so long as the net proceeds (after payment of additional
contingent amounts then due and payable on account of Market Participation
Rights) of such offering (if it is completed) are contributed to, or otherwise
used for the benefit of, the Issuer.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the documentation governing
such Indebtedness, and shall not include any contingent obligations to repay,
redeem or repurchase any such interest or principal prior to the date scheduled
for the payment thereof.
"Subordinated Debt" means any Indebtedness of the Issuer or any Guarantor
(whether outstanding on the Recapitalization Closing Date or thereafter
incurred) that is subordinate or junior in right of payment to the New Notes or
the applicable Note Guarantee pursuant to written agreement.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
110
<PAGE> 111
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Total Assets" means, at any time, the total consolidated assets of the
Issuer and its Restricted Subsidiaries at such time. For the purposes of
paragraph (iv) of the covenant described under the caption " -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock," Total
Assets shall be determined giving pro forma effect to the lease, acquisition,
construction or improvement of the assets being leased, acquired, constructed or
improved with the proceeds of the relevant Indebtedness.
"Unrestricted Subsidiary" means (i) any Receivables Subsidiary in existence
on the Recapitalization Closing Date, (ii) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, and (iii) any Subsidiary of an Unrestricted Subsidiary; but in the
case of any Subsidiary referred to in clause (ii) (or any Subsidiary of any such
Subsidiary) only to the extent that such Subsidiary: (a) except in the case of a
Foreign Subsidiary, has no Indebtedness other than Non-Recourse Debt; (b) is not
party to any agreement, contract, arrangement or understanding with the Issuer
or any Restricted Subsidiary of the Issuer unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to the
Issuer or such Restricted Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of the Issuer; (c) except in the case
of a Foreign Subsidiary, is a Person with respect to which neither the Issuer
nor any of its Restricted Subsidiaries has any direct or indirect obligation (x)
to subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Issuer or any of
its Restricted Subsidiaries. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
" -- Certain Covenants -- Restricted Payments." If, at any time, any
Unrestricted Subsidiary referred to in clause (ii) of the first sentence of this
definition (or any Subsidiary thereof) would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Issuer as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
" -- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock," the Issuer shall be in default of such covenant). The Board of Directors
of the Issuer may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of the Issuer of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the covenant
described under the caption " -- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period,
and (ii) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
111
<PAGE> 112
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
112
<PAGE> 113
FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material United States federal income
tax consequences of the Exchange Offer. It is based on the Internal Revenue Code
of 1986, as amended to the date hereof (the "Code"), existing and proposed
Treasury regulations, and judicial and administrative determinations, all of
which are subject to change at any time, possibly on a retroactive basis. The
following relates only to Old Notes, and New Notes received therefor, that are
held as "capital assets" within the meaning of Section 1221 of the Code by
persons who are citizens or residents of the United States. It does not discuss
state, local, or foreign tax consequences, nor does it discuss tax consequences
to categories of holders that are subject to special rules, such as foreign
persons, tax-exempt organizations, insurance companies, banks, and dealers in
stocks and securities. Tax consequences may vary depending on the particular
status of an investor. No rulings will be sought from the Internal Revenue
Service ("IRS") with respect to the federal income tax consequences of the
Exchange Offer.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO PURCHASE THE NOTES.
EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING THE APPLICATION
OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS PARTICULAR SITUATION
BEFORE DETERMINING WHETHER TO PURCHASE THE NOTES.
THE EXCHANGE OFFER
In the opinion of Gibson, Dunn & Crutcher LLP, counsel for the Company, the
exchange of Old Notes for New Notes pursuant to the Exchange Offer will not
constitute a material modification of the terms of the Notes and, accordingly,
such exchange will not constitute an exchange for federal income tax purposes.
Accordingly, such exchange will have no federal income tax consequences to
holders of Notes, either those who exchange or those who do not, and each holder
of Notes will continue to be required to include interest on the Notes in its
gross income in accordance with its method of accounting for federal income tax
purposes and the Company intends, to the extent required, to take such position.
BACKUP WITHHOLDING
Under the Code, a holder of a Note may be subject, under certain
circumstances, to "backup withholding" at a 31% rate with respect to payments in
respect of interest thereon or the gross proceeds from the disposition thereof.
This withholding generally applies only if the holder (i) fails to furnish his
or her social security or other taxpayer identification number ("TIN") within a
reasonable time after request therefor, (ii) furnishes an incorrect TIN, (iii)
is notified by the IRS that he or she has failed to report properly payments of
interest and dividends and the IRS has notified the Company that he or she is
subject to backup withholding, or (iv) fails, under certain circumstances, to
provide a certified statement, signed under penalty of perjury, that the TIN
provided is his or her correct number and that he or she is not subject to
backup withholding. Any amount withheld from a payment to a holder under the
backup withholding rules is allowable as a credit against such holder's federal
income tax liability, provided that the required information is furnished to the
IRS. Corporations and certain other entities described in the Code and Treasury
regulations are exempt from such withholding if their exempt status is properly
established.
113
<PAGE> 114
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Issuer has agreed that for a period of 90 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until August 12, 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Issuer will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Issuer has agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the holders of the Old
Notes), other than commissions or concessions of any brokers or dealers, and
will indemnify the holders of the Old Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
BOOK-ENTRY, DELIVERY AND FORM
GLOBAL NOTE
Except as set forth below, the New Notes will initially be issued in the
form of one or more permanent global Notes in definitive, fully registered form
without interest coupons (each, a "Global Note"). Upon issuance, each Global
Note will be deposited with the Trustee as custodian for, and registered in the
name of, a nominee of The Depository Trust Company ("DTC").
If a holder tendering Old Notes so requests, such holder's New Notes will
be issued as described below under "-- Certificated Securities" in registered
form without coupons (the "Certificated Securities").
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
114
<PAGE> 115
So long as DTC, or its nominee, is the registered owner or Holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or Holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture.
Payments of the principal of, premium, if any, and interest, on a Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. Neither the Company, the Trustee nor any Paying Agent will have
any responsibility or liability for any aspects of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest in respect of a Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Note
held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by
a Holder of a Note only at the direction of one or more participants to whose
account the DTC interests in a Global Note is credited and only in respect of
such portion of the aggregate principal amount of a Note as to which such
participant or participants has or have given direction.
DTC has advised the Company that it is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and to facilitate the clearance and settlement of securities transactions
between participants through electronic book-entry changes in accounts of its
participants. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among participants of DTC, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
CERTIFICATED SECURITIES
If (i) the Issuer notifies the Trustee in writing that DTC is no longer
willing or able to act as a depository and the Issuer is unable to locate a
qualified successor within 90 days or (ii) the Issuer, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by DTC of its Global
Note, Certificated Securities will be issued to each person that DTC identifies
as the beneficial owner of the New Notes represented by the Global Note. In
addition, any person having a beneficial interest in a Global Note or any holder
of Old Notes whose Old Notes have been accepted for exchange may, upon request
to the Trustee or the Exchange Agent, as the case may be, exchange such
beneficial interest or Old Notes for Certificated Securities.
115
<PAGE> 116
Upon any such issuance, the Trustee is required to register such Certificated
Securities in the name of such person or persons (or the nominee of any
thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any participant or indirect participant in identifying the beneficial owners of
the related New Notes and each such person may conclusively rely on, and shall
be protected in relying on, instructions from DTC for all purposes (including
with respect to the registration and delivery, and the respective principal
amounts, of the New Notes to be issued).
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Issuer
by Gibson, Dunn & Crutcher LLP, New York, New York. Gibson, Dunn & Crutcher LLP
has provided a tax opinion in connection with the Exchange Offer.
EXPERTS
The consolidated financial statements of Werner Holding Co. (PA), Inc. as
of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997 appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
116
<PAGE> 117
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Changes in Shareholders' Equity
(Deficit)................................................. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 118
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Werner Holding Co. (PA), Inc.
Greenville, Pennsylvania
We have audited the accompanying consolidated balance sheets of Werner
Holding Co. (PA), Inc. and subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, changes in shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Werner Holding
Co. (PA), Inc. and subsidiaries at December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
February 10, 1998
F-2
<PAGE> 119
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 986 $ 3,107
Accounts receivable, less allowance for doubtful accounts
(1996 -- $1,930; 1997 -- $1,250)....................... 46,277 62,913
Refundable income taxes................................... 2,016 820
Inventories............................................... 44,407 44,670
Deferred income taxes..................................... 2,577 4,451
Other..................................................... 1,837 6,936
-------- --------
Total current assets........................................ 98,100 122,897
Investments and other assets:
Insurance fund investments................................ 80,949 58,579
Deferred income taxes..................................... 4,149 11,586
Deferred financing fees, net.............................. 174 15,098
Other..................................................... 15,249 14,196
-------- --------
100,521 99,459
Property, plant and equipment:
Land and improvements..................................... 5,740 7,369
Buildings................................................. 29,372 34,666
Machinery and equipment................................... 91,101 97,909
-------- --------
126,213 139,944
Less accumulated depreciation and amortization............ 69,085 77,284
-------- --------
57,128 62,660
Capital projects in progress.............................. 5,436 3,169
-------- --------
62,564 65,829
-------- --------
TOTAL ASSETS................................................ $261,185 $288,185
======== ========
</TABLE>
F-3
<PAGE> 120
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1997
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term bank debt...................................... $ $ 41,500
Accounts payable.......................................... 21,691 24,904
Accrued liabilities....................................... 19,614 24,896
Current maturities of long-term debt...................... 7,571 1,450
-------- --------
Total current liabilities................................... 48,876 92,750
Long-term obligations:
Long-term debt -- less current maturities (net of
unamortized original issue discount of $4,009 in
1997).................................................. 75,871 279,541
Reserve for losses and loss adjustment expenses........... 45,320 49,644
Other..................................................... 16,039 19,922
-------- --------
137,230 349,107
Shareholders' equity (deficit):
Common stock:
Pre-Recapitalization common stock:
Class A -- $1.00 par value; voting; 42,000 shares
authorized; 13,227 and 0 shares issued and
outstanding in 1996 and 1997, respectively.......... 13
Class B -- $1.00 par value; non-voting; 378,000
shares authorized; 148,473 and 0 shares issued and
outstanding in 1996 and 1997, respectively.......... 148
Post-Recapitalization common stock:
Class A -- $.01 par value; voting; 5,000 shares
authorized; 2,059 shares issued and outstanding in
1997................................................ --
Class B -- $.01 par value; voting; 25,000 shares
authorized; 22,438 shares issued and outstanding in
1997................................................ --
Class C -- $.01 par value; non-voting; 45,000 shares
authorized; 4,682 shares issued and outstanding in
1997................................................ --
Class D -- $.01 par value; voting; 1,000 shares
authorized; 1,000 shares issued and outstanding in
1997................................................ --
Class E -- $.01 par value; non-voting; 50,000 shares
authorized; 45,000 shares issued and outstanding in
1997................................................ 1
Additional paid-in capital................................ 1,316 198,847
Retained earnings (deficit)............................... 70,402 (351,753)
Other..................................................... 3,200 (767)
-------- --------
Total shareholders' equity (deficit)........................ 75,079 (153,672)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)........ $261,185 $288,185
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 121
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales............................................... $336,029 $366,864 $416,321
Cost of sales........................................... 248,937 264,977 300,095
-------- -------- --------
Gross profit............................................ 87,092 101,887 116,226
General and administrative expense...................... 25,007 27,027 31,186
Selling and distribution expense........................ 47,073 47,846 48,944
Recapitalization expense................................ 22,714
Non-cash compensation charge............................ 78,527
-------- -------- --------
Operating profit (loss)................................. 15,012 27,014 (65,145)
Other income (expense), net............................. 4,214 9,851 (15,669)
-------- -------- --------
Income (loss) before interest and taxes................. 19,226 36,865 (80,814)
Interest expense........................................ 7,206 7,517 8,979
-------- -------- --------
Income (loss) before provision for income taxes......... 12,020 29,348 (89,793)
Income taxes............................................ 5,141 9,988 714
-------- -------- --------
Income (loss) before extraordinary charge............... 6,879 19,360 (90,507)
Extraordinary charge-early extinguishment of debt....... 579
-------- -------- --------
NET INCOME (LOSS)....................................... $ 6,300 $ 19,360 $(90,507)
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 122
WERNER HOLDING CO. (PA), INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRE-RECAPITALIZATION COMMON STOCK POST-RECAPITALIZATION COMMON STOCK
------------------------------------------- -------------------------------------
CLASS A CLASS B CLASS A CLASS B
------------------- --------------------- ----------------- -----------------
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS
------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995...... 13,282 $ 14 149,887 $ 149
Net income......................
Dividends declared ($10.20 per
share).........................
Amortization of deferred
compensation...................
Unrealized gains on investments
(net of tax)...................
--------- ------- ----------- ------- ------- ------- ------- -------
Balance at December 31, 1995.... 13,282 14 149,887 149
Net income......................
Dividends declared ($11.25 per
share).........................
Amortization of deferred
compensation...................
Repurchase of common stock...... (55) (1) (1,414) (1)
Adjustment to minimum pension
liability......................
Unrealized losses on investments
(net of tax)...................
--------- ------- ----------- ------- ------- ------- ------- -------
Balance December 31, 1996....... 13,227 13 148,473 148
Net (loss)......................
Dividends declared ($10.50 per
share).........................
Amortization of deferred
compensation...................
Repurchase of common stock...... (55) -- (574) --
Adjustment to minimum pension
liability......................
Unrealized losses on investments
(net of tax)...................
Redemption and reclassification
of common stock in connection
with the Recapitalization...... (13,172) (13) (147,899) (148) 2,059 -- 22,438 --
Issuance of common stock in
connection with the
Recapitalization, net of
issuance costs of $2,196.......
Non-cash compensation charge....
--------- ------- ----------- ------- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 1997.... $ -- $ -- 2,059 $ -- 22,438 $ --
========= ======= =========== ======= ======= ======= ======= =======
<CAPTION>
POST-RECAPITALIZATION COMMON STOCK
----------------------------------------------------------
CLASS C CLASS D CLASS E ADDITIONAL
----------------- ----------------- ------------------ PAID-IN RETAINED
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS CAPITAL EARNINGS OTHER
------ ------- ------ ------- ------ ------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995...... $ 1,316 $ 49,652 $ (1,287)
Net income...................... 6,300
Dividends declared ($10.20 per
share)......................... (1,664)
Amortization of deferred
compensation................... 242
Unrealized gains on investments
(net of tax)................... 7,381
------- ------- ------- ------- -------- ------- --------- ---------- --------
Balance at December 31, 1995.... 1,316 54,288 6,336
Net income...................... 19,360
Dividends declared ($11.25 per
share)......................... (1,836)
Amortization of deferred
compensation................... 185
Repurchase of common stock...... (1,410)
Adjustment to minimum pension
liability...................... (275)
Unrealized losses on investments
(net of tax)................... (3,046)
------- ------- ------- ------- -------- ------- --------- ---------- --------
Balance December 31, 1996....... 1,316 70,402 3,200
Net (loss)...................... (90,507)
Dividends declared ($10.50 per
share)......................... (1,691)
Amortization of deferred
compensation................... 133
Repurchase of common stock...... (731)
Adjustment to minimum pension
liability...................... (1,946)
Unrealized losses on investments
(net of tax)................... (2,353)
Redemption and reclassification
of common stock in connection
with the Recapitalization...... (1,515) (329,226) 199
Issuance of common stock in
connection with the
Recapitalization, net of
issuance costs of $2,196....... 4,682 -- 1,000 -- 45,000 1 120,519
Non-cash compensation charge.... 78,527
------- ------- ------- ------- -------- ------- --------- ---------- --------
BALANCE AT DECEMBER 31, 1997.... 4,682 $ -- 1,000 $ -- 45,000 $ 1 $ 198,847 $ (351,753) $ (767)
======= ======= ======= ======= ======== ======= ========= ========== ========
<CAPTION>
TOTAL
-----
<S> <C>
Balance at January 1, 1995...... $ 49,844
Net income...................... 6,300
Dividends declared ($10.20 per
share)......................... (1,664)
Amortization of deferred
compensation................... 242
Unrealized gains on investments
(net of tax)................... 7,381
----------
Balance at December 31, 1995.... 62,103
Net income...................... 19,360
Dividends declared ($11.25 per
share)......................... (1,836)
Amortization of deferred
compensation................... 185
Repurchase of common stock...... (1,412)
Adjustment to minimum pension
liability...................... (275)
Unrealized losses on investments
(net of tax)................... (3,046)
----------
Balance December 31, 1996....... 75,079
Net (loss)...................... (90,507)
Dividends declared ($10.50 per
share)......................... (1,691)
Amortization of deferred
compensation................... 133
Repurchase of common stock...... (731)
Adjustment to minimum pension
liability...................... (1,946)
Unrealized losses on investments
(net of tax)................... (2,353)
Redemption and reclassification
of common stock in connection
with the Recapitalization...... (330,703)
Issuance of common stock in
connection with the
Recapitalization, net of
issuance costs of $2,196....... 120,520
Non-cash compensation charge.... 78,527
----------
BALANCE AT DECEMBER 31, 1997.... $ (153,672)
==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 123
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 6,300 $ 19,360 $(90,507)
Reconciliation of net income (loss) to net cash (used in)
provided by
operating activities:
Recapitalization expense................................ 22,714
Non-cash compensation charge............................ 78,527
Loss from early extinguishment of debt.................. 579
Depreciation and amortization........................... 8,018 9,201 11,500
Provision for losses on accounts receivable............. 405 700 (115)
Provision for insurance claims.......................... 14,719 17,181 15,841
Payment of insurance claims............................. (9,882) (13,347) (11,517)
Deferred income taxes................................... (1,745) (3,625) (8,044)
Realized net (gains) losses on disposition and
impairment of insurance fund investments.............. (1,671) (9,431) 16,407
Net purchases of trading securities..................... (2,660) (5,381) (1,975)
Changes in operating assets and liabilities:
Accounts receivable................................... 154 (4,326) (16,521)
Refundable income taxes............................... 393 (313) 1,196
Inventories........................................... (7,331) 3,644 (263)
Accounts payable...................................... (12,088) 5,130 3,213
Accrued liabilities................................... 601 3,414 (1,267)
Other (net)........................................... 2,840 (2,689) (1,957)
-------- -------- --------
Net cash (used in) provided by operating activities......... (1,368) 19,518 17,232
INVESTING ACTIVITIES
Capital expenditures........................................ (12,517) (13,048) (11,710)
Insurance fund securities available-for-sale:
Purchases of debt and equity securities................... (74,362) (176,034) (79,484)
Sale of debt and equity securities........................ 72,358 178,623 59,497
Net (purchases) sales of other insurance fund investments... (4,147) 2,345 24,073
Other....................................................... (212) (7,718) 4,062
-------- -------- --------
Net cash (used in) investing activities..................... (18,880) (15,832) (3,562)
FINANCING ACTIVITIES
Redemption of common stock.................................. (332,899)
Issuance of common stock.................................... 122,716
Payment of recapitalization fees and expenses............... (37,952)
Refinancing of existing debt................................ (65,571)
Issuance of Senior Subordinated Notes, net.................. 130,950
Borrowings under Senior Credit Facility..................... 186,500
Net borrowings (repayments) under revolving credit
agreements................................................ 24,800 7,600 (6,300)
Borrowings of long-term debt................................ 6,000
Repayments of long-term debt................................ (7,676) (7,642) (6,571)
Repurchase of common stock.................................. (1,412) (731)
Dividends paid.............................................. (1,991) (1,836) (1,691)
Other....................................................... (345) (39)
-------- -------- --------
Net cash provided by (used in) financing activities......... 20,788 (3,329) (11,549)
-------- -------- --------
Net increase in cash and equivalents........................ 540 357 2,121
Cash and equivalents at beginning of year................... 89 629 986
-------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR......................... $ 629 $ 986 $ 3,107
======== ======== ========
CASH PAID DURING THE YEAR FOR
Interest.................................................... $ 6,980 $ 6,756 $ 7,752
======== ======== ========
Income taxes................................................ $ 6,493 $ 13,925 $ 9,955
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 124
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A. DESCRIPTION OF BUSINESS
The Company operates predominantly in a single industry within the United
States: the manufacture of climbing equipment which includes aluminum,
fiberglass and wood ladders, scaffolding, stages and planks. In addition, the
Company manufactures and sells aluminum extruded products. The Company's
products are manufactured at common production facilities and use common
manufacturing processes.
The Company's export sales are less than 10% of total revenues. Sales to
one customer accounted for 10.5% and 18.0% of consolidated net sales for the
year ended December 31, 1996 and 1997, respectively. There were no other sales
to customers that exceeded 10% of consolidated net sales for each of the years
presented.
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 condition and results of operations of Werner Holding
Co. (PA), Inc. are substantially the same as those of Werner Holding Co. (DE),
Inc. Intercompany accounts and transactions have been eliminated.
Revenue Recognition -- Sales are recorded when products are shipped and
title passes to the customer.
Accounts Receivable -- The Company provides credit, in the normal course of
business, to its customers. 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 $341, $557 and $565 in 1995, 1996
and 1997, respectively.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Inventories -- Inventories are stated at the lower of cost or market (net
realizable value). Cost is determined principally by the last-in, first-out
(LIFO) method. The Company utilizes futures contracts to hedge the price risk
associated with a certain percentage of its anticipated aluminum raw material
requirements. All gains and losses on qualifying hedging transactions are
deferred and reported as a component of the underlying transaction. The
Company's practice is not to hold derivative commodity instruments for trading
purposes.
At December 31, 1996 and 1997, the Company had futures contracts to
purchase aluminum of $44,486 and $47,194, respectively, which approximated their
fair value. In 1995 the Company revised its projections of aluminum raw material
requirements, reduced related purchase commitments and sold corresponding
futures contracts resulting in the recognition of a pre-tax gain of $1,688.
F-8
<PAGE> 125
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
B. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Property, Plant and Equipment -- Property, plant and equipment is stated at
cost. Depreciation expense is calculated principally by using accelerated
methods 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.
Long-lived assets are 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 undisounted 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.
Insurance Fund Investments -- The Company's captive insurance subsidiary,
Manufacturers Indemnity and Insurance Company of America ("MIICA"), maintains an
investment fund which consists of debt securities, equity securities, real
estate, cash and equivalents, and other investments. MIICA's investments in debt
and equity securities are available for sale; therefore, these securities are
reported at market value. Investments in real estate are recorded at depreciated
value and short-term and other investments are stated primarily at cost which
approximates market. Investments in special expiration price options are
classified as trading securities and are reported at market value.
Realized gains and losses on the sale of investments are recognized in
operations. The cost of securities sold is based on the specific identification
method. Changes in market values of debt and equity securities are reflected as
unrealized gains or losses directly in shareholders' equity and accordingly,
have no effect on operations until sold unless such losses are other than
temporary, at which time such losses are recognized in operations. Changes in
market values of special expiration price options are reported directly in
operations.
Reserve for Losses and Loss Adjustment Expenses -- MIICA maintains reserves
for the product liability, workers' compensation and environmental liability
claims of the Company. The reserve for losses and loss adjustment expenses
includes an amount determined from loss reports and 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. Payments of claims are made from MIICA's
investment funds.
Advertising -- The Company expenses all advertising as incurred. These
expenses for the years ended December 31, 1995, 1996 and 1997 totaled $6,546,
$7,586, and $8,001, 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 equivalents include cash on hand,
demand deposits and short-term highly liquid debt instruments purchased with a
maturity of three months or less, exclusive of MIICA's investments.
Recently Issued Accounting Standards -- In June 1997, the Financial
Accounting Standards Board (FASB) issued Statements of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, which requires that an
enterprise classify items of other comprehensive income (such as unrealized
gains and losses on investments in debt and equity securities) in a financial
statement and
F-9
<PAGE> 126
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
B. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of the
balance sheet. The Company will comply with the provisions of this Statement
upon its required adoption in 1998.
In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which establishes new standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
is currently studying the effects of adoption of this statement which will be
applicable for the Company effective December 31, 1998.
Fair Values of Financial Instruments -- The Company's disclosures for
financial instruments are as follows:
Cash and equivalents -- The carrying amounts reported in the balance
sheet for cash and equivalents bear interest at prevailing market rates and
therefore approximates fair value.
Insurance fund investments -- Debt and equity securities and other
invested assets are stated at fair value.
Long-term debt -- The carrying amounts of the Company's borrowings
under the Senior Subordinated Notes, 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,
1996 and 1997. The fair value of the Company's fixed rate senior notes was
estimated using discounted cash flow analyses based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements. The fair value of the senior notes was $11,000 at December
31, 1996.
Reclassification -- Certain prior year amounts have been reclassified to
conform to the current year presentation in the consolidated financial
statements.
C. RECAPITALIZATION
On October 8, 1997, the Company 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 (collectively the
"Investors").
The Recapitalization
Pursuant to the Recapitalization Agreement, on November 24, 1997, the
Company took the following actions (all of which together constituted the
"Recapitalization"):
(A) the Company filed with the Secretary of the State of the Commonwealth
of Pennsylvania the Restated Articles of Incorporation pursuant to which the
Company's capital stock was reclassified as follows:
(i) Each share of Pre-Recapitalization Class A Stock held by
shareholders who were not active in the management of the Company
("Non-Management Shareholders") was reclassified into the right to retain
0.1376 of a fully paid and non-assessable share of Class A Stock and the
right to receive 0.8624 of a fully paid and non-assessable share of Class
A-1 Stock and each share of Pre-Recapitalization Class B Stock held by
Non-Management Shareholders was reclassified into
F-10
<PAGE> 127
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
C. RECAPITALIZATION -- CONTINUED
the right to retain 0.1376 of a fully paid and non-assessable share of
Class B Stock and the right to receive 0.8624 of a fully paid and
non-assessable share of Class B-1 Stock;
(ii) Each share of Class A Stock and Class B Stock held by
shareholders who were active in the management of the Company ("Management
Shareholders") was reclassified into the fractions of fully paid and
non-assessable shares of Class A Stock and Class A-1 Stock, and Class B
Stock and Class B-1 Stock, respectively, as set forth in the
Recapitalization Agreement; and
(iii) Class C Common Stock, Class D Common Stock, Class E Common Stock
and Common Stock were newly authorized for issuance.
(B) the Class A-1 Stock and the Class B-1 Stock was then redeemed by the
Company at a cash redemption price of approximately $2,421 per share (totaling
approximately $330,700), plus the right to receive, upon certain conditions, an
additional, one-time, lump sum payment (the "Market Participation Right"); and
(C) the Pre-Recapitalization shareholders retained the outstanding shares
of Class A Stock and Class B Stock, and the Investors purchased for
approximately $122,700 shares of the Company's Class C Common Stock, Class D
Common Stock and Class E Common Stock.
Following the Recapitalization, the Pre-Recapitalization shareholders
(including the Management Shareholders) continue to own approximately 33% of the
outstanding voting equity of the Company and the Management Shareholders, who
continue to manage and operate the business, continue to own approximately 13%
of the Company's voting capital stock. Immediately following the
Recapitalization, the Investors owned approximately 67% of the outstanding
voting equity of the Company. Common stock with a par value of $.01 per share
has been authorized (131,000 shares), but no shares are issued or outstanding at
December 31, 1997.
Market Participation Right -- If, prior to the tenth anniversary of
November 24, 1997 (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 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.
Such 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, 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. When issued,
this new class of Common Stock of the Company will have one vote per share.
F-11
<PAGE> 128
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
C. RECAPITALIZATION -- CONTINUED
Recapitalization Financing -- The Recapitalization was funded by (i)
$186,500 of borrowings under the Senior Credit Facility as discussed in Note F,
(ii) $135,000 from the offering of the Senior Subordinated Notes as discussed in
Note F, and (iii) an equity contribution by the Investors of approximately
$122,700. The proceeds from these financings funded: the payment of
approximately $330,700 to holders of Class A-1 and Class B-1 Stock who redeemed
their shares; the repayment of approximately $66,000 of outstanding indebtedness
under the then existing credit facility and notes; and the payment of
approximately $45,200 of fees and expenses (including $5,000 in prepaid
management fees) associated with the Recapitalization.
Recapitalization Accounting -- The transaction was accounted for as a
recapitalization and as such, the historical basis of the Company's assets and
liabilities was not affected. Approximately $15,300 of Recapitalization related
costs primarily representing financing fees were capitalized and are being
amortized over the term of the related debt. Approximately $22,700 of
Recapitalization related costs were expensed and are reflected as a component of
operating income in the Company's Consolidated Statements of Operations. The
expensed costs represent investment banker fees, transaction fees, legal and
accounting fees, cash transaction bonuses totaling $1,134 paid to certain
Company employees upon the successful completion of the Recapitalization, and
other miscellaneous costs incurred in connection with the Recapitalization.
Additionally, approximately $2,200 of Recapitalization costs incurred related to
the issuance of common stock to the Investors has been netted against the
proceeds of approximately $122,700.
Other Arrangements -- The Company has also entered into employee protection
agreements whereby certain management employees will receive cash payments
aggregating approximately $6,600 upon completion of one year of service from the
Recapitalization Closing Date. This amount is included in other current assets
and liabilities at December 31, 1997, and is being amortized over the terms of
the agreements, not to exceed one year from the Recapitalization Closing Date.
Additionally, as a result of the Recapitalization, payments totaling $3,708
related to consulting agreements entered into in December 1996 with four senior
executive officers/shareholders were accelerated and paid on the
Recapitalization Closing Date. Such amounts were expensed and are included as
part of the Recapitalization costs above. Previous payments made under the
consulting agreements ($292) have been expensed as incurred and are included in
general and administrative expenses.
Included in the Recapitalization related costs above is approximately
$17,000 of amounts paid to Investcorp, including $5,000 which was paid during
1997 under a five year management fee arrangement.
D. NON-CASH COMPENSATION CHARGE
In 1997, the Company recorded a non-cash compensation charge of $78,500,
with an offsetting credit to additional paid in capital. Such charge resulted
from changes made to the terms of the plan under which restricted
Pre-Recapitalization class B common stock was issued to certain key employees of
the Company. Approximately $74,300 of this charge relates to the accelerated
vesting, as a result of the Recapitalization, of restricted Pre-Recapitalization
class B common stock previously granted to certain key employees of the Company
and $4,200 of the charge relates to the accelerated vesting, as a result of the
Recapitalization, of restricted Pre-Recapitalization class B common stock
previously granted to a former key management employee upon his separation from
the Company. Such charges represent the fair value of the shares at the date of
the Recapitalization ($2421.29 per share) less the amount of the previously
recognized compensation under the plan.
F-12
<PAGE> 129
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
E. INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1996 1997
------- -------
<S> <C> <C>
Finished goods.............................................. $27,153 $26,512
Work in process............................................. 12,538 11,953
Raw materials and supplies.................................. 15,231 18,075
------- -------
Total inventories, which approximates replacement cost...... 54,922 56,540
Less excess of cost over LIFO stated values................. 10,515 11,870
------- -------
NET INVENTORIES............................................. $44,407 $44,670
======= =======
</TABLE>
F. DEBT AND CREDIT ARRANGEMENTS
Debt and credit arrangements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1997
------- --------
<S> <C> <C>
Variable Rate Demand Industrial Building Revenue Bonds, due
2015...................................................... $ 5,000 $ 5,000
Secured Credit Facility:
Term loan facility........................................ 145,000
Unsecured Credit Agreement:
Revolving credit.......................................... 57,300
Term loan................................................. 14,000
Senior notes, payable through 1998.......................... 7,142
Senior Subordinated Notes, due 2007, net of unamortized
discount.................................................. 130,991
------- --------
Total debt and credit arrangements.......................... 83,442 280,991
Less current maturities..................................... 7,571 1,450
------- --------
DEBT CLASSIFIED AS LONG-TERM................................ $75,871 $279,541
======= ========
</TABLE>
As part of the Recapitalization, the Company entered into a new senior
credit facility with a group of banks (the "Senior Credit Facility"), and
pursuant to the indenture dated November 24, 1997, issued $135,000 of 10% Senior
Subordinated Notes (the "Notes"). Each of the Company's subsidiaries (except
MIICA) have guaranteed the Senior Credit Facility and the Notes. Such guarantee
of the Notes is subordinate to the guarantee of the Senior Credit Facility.
The Notes:
The $135,000 of Notes mature on November 15, 2007. Interest on the Notes is
payable semi-annually in arrears on May 15 and November 15 commencing on May 15,
1998. 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 will rank pari passu in right of payment with all
other indebtedness of the Company that is subordinated to 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 12
months beginning November 15, 2002, 103.333% during the 12 months beginning
November 15, 2003, 101.667% during the 12 months beginning November 15, 2004 and
at 100% thereafter (expressed as a percentage of principal amount).
F-13
<PAGE> 130
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
F. DEBT AND CREDIT ARRANGEMENTS -- CONTINUED
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.
Senior Credit Facility:
The Senior Credit Facility entered into on November 24, 1997, consists of
$145,000 in term loan facilities; a $100,000 revolving credit facility; and a
$75,000 receivables credit facility.
Term Loan Facilities. The Term Loan Facilities consists of two tranches of
term loans in an aggregate principal amount of $145,000. The Tranche B term
loans are in an aggregate principal amount of $90,000, and the Tranche C term
loans are in an aggregate principal amount of $55,000. These loans were made in
a single drawing as part of the Recapitalization. The Tranche B and C term loans
will mature on November 30, 2004 and 2005, respectively. Installments of the
Tranche B term loans will be due in aggregate principal amounts of $900 per
annum for the first five years, $30,000 for the sixth year, and $55,500 for the
seventh year. Installments of the Tranche C term loans will be due in aggregate
principal amounts of $550 for the first seven years and $51,150 for the eighth
year.
Revolving Credit Facility. The Revolving Credit Facility consists of a
revolving credit facility in an aggregate principal amount of $100,000 under
which no amounts were borrowed at December 31, 1997 except for amounts of $5,108
issued under the letter of credit subfacility. 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 ("Swing Line Loans") available on same-day notice.
The Revolving Facility matures on November 30, 2003.
Receivables Facility. The Receivables Facility consists of a revolving
credit facility in an aggregate principal amount of $75,000, which is subject to
a borrowing base limit not to exceed 80% of eligible accounts receivable. At
December 31, 1997 $41,500 was outstanding under the Receivables Facility and is
classified as short-term bank debt. The Company is entitled to draw amounts
under the Receivables Facility for general corporate purposes and to meet
working capital requirements. The Receivables Facility matures on November 30,
2003. At December 31, 1997, $2,200 was available for borrowing under this
facility.
Borrowings under the Senior Credit Facility bear interest at alternative
floating rate structures at management's option 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 other than MIICA. The Senior Credit Facility requires an annual
commitment fee of 0.5% on the average daily unused amount of the Term Loan
Facility, the Revolving Credit Facility and the Receivables Facility.
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. 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 assets having an original
cost of $3,889 are pledged as collateral for the bonds.
F-14
<PAGE> 131
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
F. DEBT AND CREDIT ARRANGEMENTS -- CONTINUED
The Senior Credit Facility and the Notes contain various restrictive
covenants including restrictions on additional indebtedness, mergers, asset
dispositions, restricted payments, prepayment and amendments of subordinated
indebtedness. These covenants also prohibit, among other things, the payment of
dividends. The financial covenants of the Senior Credit Facility require the
Company to meet specific interest coverage, maximum leverage, minimum EBITDA,
and capital expenditure requirements.
The aggregate amount of principal payments is $1,450 in each of the years
1998 through 2002.
G. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Advertising, promotions and allowances......... $ 5,455 $ 5,668
Payroll........................................ 6,236 6,521
Deferred management transaction bonuses........ 6,634
Other.......................................... 7,923 6,073
------- -------
$19,614 $24,896
======= =======
</TABLE>
H. STOCK INCENTIVE PLANS
Management Stock Incentive Plan
In November 1997, the Company adopted the Stock Incentive Plan (the "Plan")
which is administered by the Compensation Committee of the Board of Directors.
Pursuant to the Plan, certain directors, employees and officers of the Company
will be given the opportunity to acquire shares of Class C Common Stock through
the grant of non-qualified and qualified stock options, stock appreciation
rights and restricted shares. Options granted pursuant to the Plan are
exercisable at no less than the fair market value of the Class C Common Stock at
the time of grant. Qualified stock options shall expire no more than ten years
after the date of grant. Non-qualified options shall expire no more than ten
years and thirty days after the date of grant. A total of 7,600 shares of Class
C Common Stock is reserved for issuance under the Plan with a maximum of 2,500
shares to be issued to any employee in any year. As of December 31, 1997 no
options, stock appreciation rights or restricted shares were issued under the
Plan.
Stock Loan Plan
In connection with the Recapitaliztion, the Company established a stock
purchase plan for certain members of the Company's management. Such individuals
will have the opportunity to purchase shares of Class C Common Stock through a
Stock Loan Plan, which provides loans to the members of management entering into
stock purchase agreements. Shares with an aggregate fair market value of at
least $2,000 will be made available for purchase under the Stock Loan Plan and
stock purchase agreements.
Restricted Stock Plan
Until the date of the Recapitalization the Company maintained a restricted
stock plan. Amortization of unearned compensation was $242, $185 and $133 in
1995, 1996 and 1997, respectively. As discussed in Note D, in connection with
the Recapitalization the restricted stock awards which were outstanding at that
date became fully vested.
F-15
<PAGE> 132
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
I. INCOME TAXES
The components of income tax expense at December 31 are presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current taxes:
Federal.......................................... $ 6,148 $12,797 $ 8,093
State and local.................................. 738 816 665
------- ------- -------
6,886 13,613 8,758
Deferred taxes:
Federal.......................................... (1,745) (3,094) (7,859)
State and local.................................. (531) (185)
------- ------- -------
(1,745) (3,625) (8,044)
------- ------- -------
TOTAL.............................................. $ 5,141 $ 9,988 $ 714
======= ======= =======
</TABLE>
The income tax rate for financial reporting purposes varied from the
federal statutory rate as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- -----
<S> <C> <C> <C>
Federal statutory rate.................................. 35.0% 35.0% 35.0%
Non-cash compensation charge............................ (30.6)
State income taxes, net of federal benefit.............. 6.7 1.0 (0.5)
Adjustments to estimated income tax accruals............ 1.1 (1.4) (3.6)
Other -- net............................................ (0.6) (1.1)
---- ---- -----
EFFECTIVE TAX RATE...................................... 42.8% 34.0% (0.8%)
==== ==== =====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation.............................................. $ 4,568 $ 4,817
Investments in debt and equity securities................. 2,050 783
Accrued expenses.......................................... 2,275 3,596
------- -------
Total deferred tax liabilities.............................. 8,893 9,196
Deferred tax assets:
Provision for loss and loss adjustment expenses........... 5,793 5,460
Accrued vacation.......................................... 1,288 1,467
Pension obligation........................................ 2,438 2,821
Deferred compensation..................................... 2,349 3,040
Accrued expenses.......................................... 3,734 8,264
Capital losses............................................ 17 5,287
Capital loss valuation allowance.......................... (1,106)
------- -------
Total deferred tax assets................................... 15,619 25,233
------- -------
NET DEFERRED TAX ASSETS..................................... $ 6,726 $16,037
======= =======
</TABLE>
SFAS 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 uncer-
F-16
<PAGE> 133
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
I. INCOME TAXES -- CONTINUED
tain, a valuation allowance has been recorded. The Company believes that it has
taxable income in prior periods sufficient to fully recognize its remaining
deferred tax assets.
J. LEASES
The Company leases certain real estate and various equipment under
long-term operating leases. Total rent expense for all leases amounted to
$5,623, $5,606 and $4,970 for 1995, 1996 and 1997, respectively.
Future minimum rental commitments as of December 31, 1997 for all
noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1998............................................ $ 3,362
1999............................................ 2,550
2000............................................ 1,878
2001............................................ 765
2002............................................ 302
Thereafter...................................... 2,240
-----------
TOTAL........................................... $ 11,097
===========
</TABLE>
K. COMMITMENTS
The Company has contracts to provide most of its estimated aluminum
requirements with six principal suppliers. These contracts include stipulated
prices, with provisions for price adjustments based on market. The six contracts
are renegotiable, five in 1998 and one in 1999. MIICA has a letter of credit
(expiring April 30, 1998) of which $11,938 and $12,529 were outstanding at
December 31, 1996 and 1997, respectively.
L. EMPLOYEE RETIREMENT AND BENEFIT PLANS
The Company sponsors two non-contributory defined benefit pension plans to
provide retirement benefits for substantially all of its employees. The pension
plans provide benefits based on the participants' years of service and
compensation or stated amounts for each year of service. The Company's funding
policy is to contribute at least the amount that is sufficient to meet the
minimum funding requirements of applicable federal law.
A summary of the components of net periodic pension cost for these plans at
December 31 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the period... $ 1,097 $ 1,495 $ 1,483
Interest cost on projected benefit obligation....... 2,189 2,424 2,556
Actual return on plan assets........................ (3,707) (3,197) (671)
Net amortization and deferral....................... 891 166 (2,535)
------- ------- -------
TOTAL EXPENSE....................................... $ 470 $ 888 $ 833
======= ======= =======
</TABLE>
F-17
<PAGE> 134
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
L. EMPLOYEE RETIREMENT AND BENEFIT PLANS -- CONTINUED
The following table sets forth the funded status of these plans and the
related amounts included in the consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation................................. $ 25,070 $ 28,935
======== ========
Accumulated benefit obligation............................ $ 27,539 $ 31,931
======== ========
Plan assets at fair value................................... $ 32,510 $ 32,238
Projected benefit obligation................................ (34,324) (40,512)
-------- --------
Plan assets less than projected benefit obligation.......... (1,814) (8,274)
Less:
Unrecognized net gain (loss).............................. 717 (5,155)
Unrecognized prior service cost........................... 1,273 1,163
Unrecognized net assets at January 1, 1987,
net of amortization.................................... 1,409 1,171
Adjustment for minimum liability.......................... 243 1,681
-------- --------
NET PENSION LIABILITY RECORDED AT DECEMBER 31............... $ 5,456 $ 7,134
======== ========
</TABLE>
Plan assets consist primarily of listed common stocks, corporate and
government bonds and short-term investments.
The Company also sponsors an unfunded, non-qualified supplemental
retirement plan to provide to certain officers a defined pension benefit in
excess of limits imposed by federal tax law. Pension expense for this plan was
$1,370 in 1995, $1,639 in 1996, and $4,862 (including special retirement
benefits paid to certain former key management employees of $3,336) in 1997. At
December 31, 1997, the projected benefit obligation for this plan totaled
$13,739 of which $4,642 (comprised of unrecognized net losses of $2,740,
unrecognized prior service cost of $1,216 and an unrecognized net obligation at
January 1, 1987, of $686) is subject to later amortization. The remaining $9,097
is included in other long-term liabilities in the accompanying consolidated
balance sheets.
Assumptions used in accounting for the pension plans as of December 31
were:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Discount rate.......................................... 7.50% 7.75% 7.00%
Rate of increase in compensation levels................ 5.00% 5.00% 5.00%
Expected long-term rate of return on assets............ 9.00% 9.00% 9.00%
</TABLE>
The decrease in the discount rate in 1997 from 1996 increased the
accumulated benefit obligation of the two non-contributory defined benefit plans
and the non-qualified supplemental retirement plan by $2,804 and $795,
respectively, at December 31, 1997.
The Company also sponsors various defined contribution plans which cover
substantially all of its employees. For certain employees covered by contract,
contributions are based on negotiated rates and hours worked; for others,
contributions are a percentage of employees' contributions. The expense related
to these plans was $1,318, $1,386, and $1,515 in 1995, 1996 and 1997,
respectively.
The Company sponsors several unfunded postretirement life and health-care
benefits to certain of its key employees. Benefits are determined based on
varying formulas using age at retirement and years of active service.
F-18
<PAGE> 135
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
L. EMPLOYEE RETIREMENT AND BENEFIT PLANS -- CONTINUED
The following table sets forth postretirement benefits recognized in the
Company's consolidated balance sheet:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $ 599 $ 1,514
Other fully eligible participants......................... 2,710 1,987
Other active participants................................. 964 1,121
------- -------
Subtotal.................................................... 4,273 4,622
Unrecognized transition obligation.......................... (2,652) (2,505)
Unrecognized actuarial loss................................. (782) (741)
------- -------
POSTRETIREMENT BENEFIT LIABILITY RECORDED AT DECEMBER 31.... $ 839 $ 1,376
======= =======
</TABLE>
Net postretirement benefit cost for the plan at December 31 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Service cost -- benefits earned during the period.......... $ 94 $131 $189
Interest cost on projected benefit obligation.............. 234 272 326
Net amortization and deferral.............................. 147 154 163
---- ---- ----
TOTAL EXPENSE.............................................. $475 $557 $678
==== ==== ====
</TABLE>
The accumulated postretirement benefit obligation was determined using an
assumed discount rate of 7.75% and 7.00% for the years ended December 31, 1996
and 1997, respectively, and health care cost trend rates of 7.5% in 1996 and
7.0% in 1997. The assumed health care cost trend rate for 1998 is 6.5%
decreasing ratably to 6.0% by the year 1999. The effect of a one percent
increase in the health care cost trend rate assumption would increase the
accumulated postretirement benefit obligation by $190 at December 31, 1997. The
increase to the postretirement benefit cost would not be material.
M. INSURANCE FUND INVESTMENTS AND RESERVE FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES
The following is a summary of the components of insurance fund investments:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1996 1997
------- -------
<S> <C> <C>
Cash and equivalents........................................ $ 2,935 $14,821
Debt securities............................................. 2,895 17,851
Equity securities........................................... 25,721 20,422
Special expiration price options............................ 6,824
Other investments........................................... 12,104 5,485
Receivable from securities sold............................. 30,470
------- -------
TOTAL INSURANCE FUND INVESTMENTS............................ $80,949 $58,579
======= =======
</TABLE>
F-19
<PAGE> 136
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
M. INSURANCE FUND INVESTMENTS AND RESERVE FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES -- CONTINUED
AVAILABLE-FOR-SALE SECURITIES
The insurance fund investment portfolio of debt and marketable equity
securities, at December 31, 1997 and 1996, primarily consists of the following
investments classified as available-for-sale:
<TABLE>
<CAPTION>
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1996:
U.S. Treasury............................. $ 332 $ 2 $ 330
States and political subdivisions......... 1,090 $ 28 1,118
Foreign governments....................... 50 50
Corporate................................. 1,397 1,397
------- ------- ------- -------
Total debt securities..................... 2,869 28 2 2,895
Equity securities......................... 19,682 12,887 6,848 25,721
------- ------- ------- -------
$22,551 $12,915 $ 6,850 $28,616
======= ======= ======= =======
December 31, 1997:
U.S. Treasury............................. $13,272 $ 97 $ 20 $13,349
States and political subdivisions......... 1,075 41 1,116
Foreign governments....................... 401 1 400
Corporate................................. 2,981 6 1 2,986
------- ------- ------- -------
Total debt securities..................... 17,729 144 22 17,851
Equity securities......................... 18,536 4,893 3,007 20,422
------- ------- ------- -------
$36,265 $ 5,037 $ 3,029 $38,273
======= ======= ======= =======
</TABLE>
The gross realized gains and (losses) on sales of available-for-sale
securities totaled $4,251 and $(4,089) for 1995, $11,139 and $(3,893) for 1996,
and $4,118 and $(2,949) for 1997, respectively. During 1995, 1996, and 1997, the
change in net unrealized holding gain (loss) on available-for-sale securities
that has been included as a separate component of shareholders' equity totaled
$4,518 (net of deferred taxes of $2,424), $196 (net of deferred taxes of $106),
and $(2,636) (net of deferred taxes of $1,420), respectively.
In 1996 and 1997, MIICA recorded impairment losses of $656 and $9,884,
respectively, relating to available-for-sale equity securities deemed by
management to be other-than-temporarily impaired.
MIICA owns common stock shares and warrants that have restrictions and
cannot immediately be sold on the open market. These restricted securities have
a fair value of $14,983 and $7,950 at December 31, 1996 and 1997, respectively.
A substantial portion of the debt securities at December 31, 1997 mature in
the years 1999 through 2002, whereas others have contractual maturity dates of
the year 2003 or later.
TRADING SECURITIES
MIICA also owned special expiration price options which were classified as
trading securities. Those outstanding at December 31, 1996 were either sold,
exercised or allowed to expire in 1997. The fair value of these securities was
$6,824 at December 31, 1996. The average fair value of the options held during
the year ended December 31, 1996 and 1997 was $8,422 and $3,207, respectively.
F-20
<PAGE> 137
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
M. INSURANCE FUND INVESTMENTS AND RESERVE FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES -- CONTINUED
Unrealized gains on these options were reported directly in net income and
totaled $2,935, $1,190, and $0 in 1995, 1996, and 1997, respectively. The net
realized (losses) on sales of these investments totaled $(1,037) in 1995,
$(4,595) in 1996, and $(8,798) in 1997.
OTHER INVESTMENTS
MIICA has investments, which are not publicly traded and which are carried
on the equity method. During 1996, MIICA liquidated a substantial portion of
these investments realizing a net gain of $5,463. MIICA had a receivable of
$30,470 relating to the sale of these and other securities at December 31, 1996.
This receivable was collected in full during 1997. The net adjustment to
unrealized holding gains (losses) on these securities, included as a separate
component of shareholders' equity, totaled $2,863 in 1995 (net of deferred taxes
of $1,564); $(3,242) in 1996 (net of deferred tax benefits of $1,745); and $283
in 1997 (net of deferred taxes of $153). Equity income or losses from these
investments were not significant for any of the years presented. Other
investments at December 31, 1996 and 1997 also include real estate ventures of
$7,248 and $3,207, respectively.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the changes in the reserve
for losses and loss adjustment expenses:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $36,649 $41,486 $45,320
Add:
Provision for claims occurring in the current year........ 12,351 13,618 19,958
Increase (decrease) in reserve for claims occurring in
prior years............................................ 2,368 3,563 (117)
Provision for the year.................................... 14,719 17,181 15,841
------- ------- -------
Deduct:
Payments for claims occurring:
Current year........................................... 722 982 1,131
Prior years............................................ 9,160 12,365 10,386
------- ------- -------
Payments for the year....................................... 9,882 13,347 11,517
------- ------- -------
Balance at end of year...................................... $41,486 $45,320 $49,644
======= ======= =======
</TABLE>
The increase (decrease) in the reserve for claims occurring in prior years is
primarily the result of the increase (decrease) in the severity of prior year
claims.
F-21
<PAGE> 138
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
N. OTHER INCOME (EXPENSE), NET
Other income (expense), net is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1995 1996 1997
------ ------ --------
<S> <C> <C> <C>
MIICA investment (loss) income:
Realized (losses) gains and impairment losses.......... $ (875) $7,458 $(17,513)
Unrealized gains on trading securities................. 2,935 1,190
Other investment (losses) earnings..................... (753) 803 2,952
------ ------ --------
Investment income (loss), net.......................... 1,307 9,451 (14,561)
Miscellaneous income (loss), net............................ 2,907 400 (1,108)
------ ------ --------
Total other income (expense), net........................... $4,214 $9,851 $(15,669)
====== ====== ========
</TABLE>
O. SUPPLEMENTAL GUARANTOR INFORMATION
As discussed in Note F, the Company in November 1997 completed refinancing
substantially all of its outstanding debt through borrowings under the Senior
Credit Facility and the Notes. The issuer of the refinanced debt is Werner
Holding Co. (DE), Inc. (the "Issuer"). The Issuer's wholly owned subsidiaries,
except for MIICA (the "Guarantor Subsidiaries"), along with Werner Holding Co.
(PA), Inc., its parent, have provided full, unconditional, joint and several
guarantees of the Senior Credit Facility and the Notes and will provide the same
guarantee for obligations of any registered notes exchanged for the Notes.
Following is condensed consolidated financial information for Werner
Holding Co. (PA), Inc. (the "Parent Company"), the Issuer, the Guarantor
Subsidiaries and MIICA (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, the Guarantor Subsidiaries are 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 by the Company on the equity
method of accounting. Earnings at subsidiaries are, therefore, reflected in the
Company's investment account. The elimination entries eliminate investment in
subsidiaries and intercompany balances and transactions.
F-22
<PAGE> 139
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
O. SUPPLEMENTAL GUARANTOR INFORMATION -- CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------------
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents........ $ 344 $ 13 $ 629 $ $ $ 986
Accounts receivable......... 47,069 818 (1,610) 46,277
Refundable income taxes..... 1,989 27 2,016
Inventories................. 44,407 44,407
Deferred income taxes....... 2,057 520 2,577
Other....................... 4,840 127 (3,130) 1,837
------- ------- -------- ------- --------- --------
Total current assets.......... 344 13 100,991 1,465 (4,713) 98,100
Investments and other assets:
Insurance fund
investments.............. 80,949 80,949
Deferred income taxes....... 2,985 1,164 4,149
Deferred financing fees,
net...................... 174 174
Investment in
subsidiaries............. 74,735 74,722 (149,457)
Other....................... 19,572 677 (5,000) 15,249
------- ------- -------- ------- --------- --------
74,735 74,722 22,731 82,790 (154,457) 100,521
Property, plant and equipment:
Land and improvements....... 5,740 5,740
Buildings................... 29,372 29,372
Machinery and equipment..... 90,884 217 91,101
------- ------- -------- ------- --------- --------
125,996 217 126,213
Less accumulated
depreciation and
amortization............. 68,957 128 69,085
------- ------- -------- ------- --------- --------
57,039 89 57,128
Capital projects in
progress................. 5,436 5,436
------- ------- -------- ------- --------- --------
62,475 89 62,564
------- ------- -------- ------- --------- --------
Total assets.................. $75,079 $74,735 $186,197 $84,344 $(159,170) $261,185
======= ======= ======== ======= ========= ========
</TABLE>
F-23
<PAGE> 140
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
O. SUPPLEMENTAL GUARANTOR INFORMATION -- CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------------
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...... $ $ $ 20,830 $ 861 $ $ 21,691
Intercompany payable
(receivable)....... (1,508) 1,508
Accrued liabilities... 14,958 9,369 (4,713) 19,614
Current maturities of
long-term debt..... 7,571 7,571
------- ------- -------- ------- --------- --------
Total current
liabilities........... 41,851 11,738 (4,713) 48,876
Long-term obligations:
Long-term debt -- less
current
maturities......... 75,871 75,871
Intercompany payable
(receivable)....... 5,000 (5,000)
Reserve for losses and
loss adjustment
expenses........... 45,320 45,320
Other................. 16,039 16,039
------- ------- -------- ------- --------- --------
91,910 50,320 (5,000) 137,230
Total shareholders'
equity (deficit)...... 75,079 74,735 52,436 22,286 (149,457) 75,079
------- ------- -------- ------- --------- --------
Total liabilities and
shareholders' equity
(deficit)............. $75,079 $74,735 $186,197 $84,344 $(159,170) $261,185
======= ======= ======== ======= ========= ========
</TABLE>
F-24
<PAGE> 141
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
O. SUPPLEMENTAL GUARANTOR INFORMATION -- CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------------------
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and
equivalents..... $ 17 $ 6 $ 3,084 $ $ $ 3,107
Accounts
receivable...... 62,548 6,502 (6,137) 62,913
Refundable income
taxes........... 664 156 820
Inventories........ 44,670 44,670
Deferred income
taxes........... 2,623 1,828 4,451
Other.............. 6,636 300 6,936
--------- --------- -------- -------- -------- --------
Total current
assets............. 17 6 120,225 8,786 (6,137) 122,897
Investments and other
assets:
Insurance fund
investments..... 58,579 58,579
Deferred income
taxes........... 6,445 5,141 11,586
Deferred financing
fees, net....... 15,098 15,098
Investment in
subsidiaries.... (153,689) 148,698 4,991
Other.............. 13,447 749 14,196
--------- --------- -------- -------- -------- --------
(153,689) 163,796 19,892 64,469 4,991 99,459
Property, plant and
equipment:
Land and
improvements.... 7,369 7,369
Buildings.......... 34,666 34,666
Machinery and
equipment....... 97,736 173 97,909
--------- --------- -------- -------- -------- --------
139,771 173 139,944
Less accumulated
depreciation and
amortization.... 77,157 127 77,284
--------- --------- -------- -------- -------- --------
62,614 46 62,660
Capital projects in
progress........ 3,169 3,169
--------- --------- -------- -------- -------- --------
65,783 46 65,829
--------- --------- -------- -------- -------- --------
Total assets......... $(153,672) $ 163,802 $205,900 $ 73,301 $ (1,146) $288,185
========= ========= ======== ======== ======== ========
</TABLE>
F-25
<PAGE> 142
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
O. SUPPLEMENTAL GUARANTOR INFORMATION -- CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Short-term bank
debt............. $ $ 41,500 $ $ $ $ 41,500
Accounts payable.... 24,904 24,904
Intercompany payable
(receivable)..... 261 (261)
Accrued
liabilities...... 24,597 6,436 (6,137) 24,896
Current maturities
of long-term
debt............. 1,450 1,450
--------- -------- -------- ------- -------- --------
Total current
liabilities......... 42,950 49,762 6,175 (6,137) 92,750
Long-term obligations:
Long-term debt --
less current
maturities (net
of unamortized
discount of
$4,009).......... 274,541 5,000 279,541
Reserve for losses
and loss
adjustment
expenses......... 49,644 49,644
Other............... 19,922 19,922
--------- -------- -------- ------- -------- --------
274,541 24,922 49,644 349,107
Shareholders' equity
(deficit)........... (153,672) (153,689) 131,216 17,482 4,991 (153,672)
--------- -------- -------- ------- -------- --------
Total liabilities and
shareholders' equity
(deficit)........... $(153,672) $163,802 $205,900 $73,301 $ (1,146) $288,185
========= ======== ======== ======= ======== ========
</TABLE>
F-26
<PAGE> 143
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
O. SUPPLEMENTAL GUARANTOR INFORMATION -- CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------------
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... $ $ $336,029 $1,421 $ (1,421) $336,029
Cost of sales.................. 248,937 248,937
------ ------ -------- ------ -------- --------
Gross profit................... 87,092 1,421 (1,421) 87,092
General and administrative
expense...................... 23,443 2,042 (478) 25,007
Selling and distribution
expense...................... 47,073 47,073
------ ------ -------- ------ -------- --------
Operating profit (loss)........ 16,576 (621) (943) 15,012
Income from equity investees... 6,300 6,300 (12,600)
Other income, net.............. 1,525 2,125 564 4,214
------ ------ -------- ------ -------- --------
Income before interest and
taxes........................ 6,300 6,300 18,101 1,504 (12,979) 19,226
Interest expense............... 7,148 58 7,206
------ ------ -------- ------ -------- --------
Income before provisions for
income taxes................. 6,300 6,300 10,953 1,446 (12,979) 12,020
Income taxes................... 4,964 177 5,141
------ ------ -------- ------ -------- --------
Income before extraordinary
charge....................... 6,300 6,300 5,989 1,269 (12,979) 6,879
Extraordinary charge -- early
extinguishment of debt....... 579 579
------ ------ -------- ------ -------- --------
NET INCOME..................... $6,300 $6,300 $ 5,410 $1,269 $(12,979) $ 6,300
====== ====== ======== ====== ======== ========
</TABLE>
F-27
<PAGE> 144
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
O. SUPPLEMENTAL GUARANTOR INFORMATION -- CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $ $ $366,864 $ 687 $ (687) $366,864
Cost of sales................. 264,977 264,977
------- ------- -------- ------- -------- --------
Gross profit.................. 101,887 687 (687) 101,887
General and administrative
expense..................... 25,926 2,509 (1,408) 27,027
Selling and distribution
expense..................... 47,846 47,846
------- ------- -------- ------- -------- --------
Operating profit (loss)....... 28,115 (1,822) 721 27,014
Income from equity
investees................... 19,360 19,360 (38,720)
Other income, net............. 61 9,629 161 9,851
------- ------- -------- ------- -------- --------
Income before interest and
taxes....................... 19,360 19,360 28,176 7,807 (37,838) 36,865
Interest expense.............. 7,517 7,517
------- ------- -------- ------- -------- --------
Income before provision for
income taxes................ 19,360 19,360 20,659 7,807 (37,838) 29,348
Income taxes.................. 7,413 2,575 9,988
------- ------- -------- ------- -------- --------
NET INCOME.................... $19,360 $19,360 $ 13,246 $ 5,232 $(37,838) $ 19,360
======= ======= ======== ======= ======== ========
</TABLE>
F-28
<PAGE> 145
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
O. SUPPLEMENTAL GUARANTOR INFORMATION -- CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $ $ $416,321 $ 2,704 $ (2,704) $416,321
Cost of sales................ 300,095 300,095
-------- -------- -------- -------- -------- --------
Gross profit................. 116,226 2,704 (2,704) 116,226
General and administrative
expense.................... 29,717 2,501 (1,032) 31,186
Selling and distribution
expense.................... 48,944 48,944
Recapitalization expense..... 22,714 22,714
Non-cash compensation
charge..................... 78,527 78,527
-------- -------- -------- -------- -------- --------
Operating (loss) profit...... (63,676) 203 (1,672) (65,145)
(Loss) from equity
investees.................. (90,507) (90,507) 181,014
Other (expense), net......... (1,106) (14,563) (15,669)
-------- -------- -------- -------- -------- --------
(Loss) before interest and
taxes...................... (90,507) (90,507) (64,782) (14,360) 179,342 (80,814)
Interest expense............. 8,979 8,979
-------- -------- -------- -------- -------- --------
(Loss) before provision for
income taxes............... (90,507) (90,507) (73,761) (14,360) 179,342 (89,793)
Income taxes................. 4,623 (3,909) 714
-------- -------- -------- -------- -------- --------
NET (LOSS)................... $(90,507) $(90,507) $(78,384) $(10,451) $179,342 $(90,507)
======== ======== ======== ======== ======== ========
</TABLE>
F-29
<PAGE> 146
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
O. SUPPLEMENTAL GUARANTOR INFORMATION -- CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------------------
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES... $ $ $(3,711) $ 2,343 $ $(1,368)
INVESTING ACTIVITIES
Capital expenditures......... (12,517) (12,517)
Insurance fund securities
available-for-sale:
Purchases of debt and
equity securities..... (74,362) (74,362)
Sale of debt and equity
securities............ 72,358 72,358
Net purchases of other
insurance fund
investments................ (4,147) (4,147)
Other........................ (1,063) 851 (212)
Intercompany transactions.... 2,318 (66) (2,252) -- -- --
------- ------- ------- ------- ------- -------
Net cash provided by (used
in) investing activities... 2,318 (66) (15,832) (5,300) (18,880)
FINANCING ACTIVITIES
Net borrowings under
revolving credit
agreements................. 24,800 24,800
Borrowings of long-term
debt....................... 6,000 6,000
Repayment of long-term
debt....................... (7,676) (7,676)
Dividends paid............... (1,991) (1,991)
Other........................ (2,345) 2,000 (345)
------- ------- ------- ------- ------- -------
Net cash (used in) provided
by financing activities.... (1,991) -- 20,779 2,000 20,788
------- ------- ------- ------- ------- -------
Net increase (decrease) in
cash and equivalents....... 327 (66) 1,236 (957) 540
Cash and equivalents
(overdraft) at beginning of
year....................... 6 76 (950) 957 89
------- ------- ------- ------- ------- -------
CASH AND EQUIVALENTS AT END
OF YEAR.................... $ 333 $ 10 $ 286 $ $ $ 629
======= ======= ======= ======= ======= =======
</TABLE>
F-30
<PAGE> 147
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
O. SUPPLEMENTAL GUARANTOR INFORMATION -- CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------------
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............... $ $ $ 24,452 $ (4,934) $ $ 19,518
INVESTING ACTIVITIES
Capital expenditures....... (13,048) (13,048)
Insurance fund securities
available-for-sale:
Purchases of debt and
equity securities... (176,034) (176,034)
Sale of debt and
equity securities... 178,623 178,623
Net sales of other
insurance fund
investments.............. 2,345 2,345
Other...................... (7,718) (7,718)
Intercompany
transactions............. 3,259 3 (3,262)
-------- -------- -------- -------- -------- ---------
Net cash provided by (used
in) investing
activities............... 3,259 3 (24,028) 4,934 (15,832)
FINANCING ACTIVITIES
Net borrowings under
revolving credit
agreements............... 7,600 7,600
Repayments of long-term
debt..................... (7,642) (7,642)
Repurchase of common
stock.................... (1,412) (1,412)
Dividends paid............. (1,836) (1,836)
Other...................... (39) (39)
-------- -------- -------- -------- -------- ---------
Net cash (used in) provided
by financing
activities............... (3,248) (81) (3,329)
-------- -------- -------- -------- -------- ---------
Net increase in cash and
equivalents.............. 11 3 343 357
Cash and equivalents at
beginning of year........ 333 10 286 629
-------- -------- -------- -------- -------- ---------
CASH AND EQUIVALENTS AT END
OF YEAR.................. $ 344 $ 13 $ 629 $ $ $ 986
======== ======== ======== ======== ======== =========
</TABLE>
F-31
<PAGE> 148
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
O. SUPPLEMENTAL GUARANTOR INFORMATION -- CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------------
COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............... $ $ $ 24,318 $ (7,086) $ $ 17,232
INVESTING ACTIVITIES
Capital expenditures....... (11,710) (11,710)
Insurance fund securities
available-for-sale:
Purchases of debt and
equity securities... (79,484) (79,484)
Sale of debt and
equity securities... 59,497 59,497
Net sales of other
insurance fund
investments.............. 24,073 24,073
Other (net)................ 4,062 4,062
Intercompany
transactions............. 212,278 (279,505) 67,227 -- -- --
-------- --------- -------- -------- -------- --------
Net cash provided by (used
in) investing
activities............... 212,278 (279,505) 59,579 4,086 (3,562)
FINANCING ACTIVITIES
Redemption of common
stock.................... (332,899) (332,899)
Issuance of common stock... 122,716 122,716
Payment of recapitalization
fees and expenses........ (37,952) (37,952)
Refinancing of existing
debt..................... (65,571) (65,571)
Issuance of Subordinated
Notes, net............... 130,950 130,950
Borrowings under Senior
Credit Facility.......... 186,500 186,500
Net (repayments) under
revolving credit
agreements............... (6,300) (6,300)
Repayments of long-term
debt..................... (6,571) (6,571)
Repurchase of common
stock.................... (731) (731)
Dividends paid............. (1,691) (1,691)
Capital contribution....... (8,000) 8,000
Other...................... 5,000 (5,000)
-------- --------- -------- -------- -------- --------
Net cash (used in) provided
by financing
activities............... (212,605) 279,498 (81,442) 3,000 (11,549)
-------- --------- -------- -------- -------- --------
Net (decrease) increase in
cash and equivalents..... (327) (7) 2,455 2,121
Cash and equivalents at
beginning of year........ 344 13 629 986
-------- --------- -------- -------- -------- --------
CASH AND EQUIVALENTS AT END
OF YEAR.................. $ 17 $ 6 $ 3,084 $ $ $ 3,107
======== ========= ======== ======== ======== ========
</TABLE>
F-32
<PAGE> 149
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
P. SUBSEQUENT EVENT (UNAUDITED)
In the first quarter of 1998, the Company made a decision to obtain
commercial insurance coverage for its product liability and workers'
compensation claims as opposed to providing insurance for such claims through
MIICA. Accordingly, on March 31, 1998 the Company entered into an arrangement
with a commercial insurance provider under which the risk associated with the
Company's product liability and workers' compensation claims was transferred to
the commercial insurance provider and the commercial insurance provider agreed
to assume losses which occurred on or before March 31, 1998 and extinguished the
Company's liability in regard to such losses. The Company paid approximately
$41,500 for this insurance coverage from the proceeds of the liquidation of
certain of MIICA's insurance fund investments. As of March 31, 1998, the Company
had a reserve for such losses of approximately $48,500. As a result the Company
recognized a gain of approximately $7,000. The Company has also obtained third
party insurance coverage, subject to certain deductible provisions, for product
liability and workers' compensation claims which occur on or after April 1,
1998.
Further, the Company made a decision to discontinue the operations of
MIICA, a Colorado corporation with its principal place of business in Boulder,
Colorado, and has recorded a charge of $700 at March 31, 1998 relating primarily
to legal fees, employee separation and severance costs, the write-off of certain
of its fixed assets, and other related expenses.
F-33
<PAGE> 150
======================================================
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
BY REGISTERED OR CERTIFIED MAIL:
IBJ Schroder Bank & Trust Company
P.O. Box 84
Bowling Green Station
New York, New York 10274-0084
Attention: Reorganization Operations Department
BY HAND DELIVERY OR OVERNIGHT COURIER:
IBJ Schroder Bank & Trust Company
One State Street
New York, New York 10004
Attention: Securities Processing Window
Subcellar One (SC1)
FACSIMILE TRANSMISSION:
(212) 858-2611
CONFIRM BY TELEPHONE:
(212) 858-2103
(Originals of all documents submitted by facsimile
should be sent promptly by hand,
overnight courier, or registered or certified mail)
NO BROKER, DEALER OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFER
MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL AUGUST 12, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES,
WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER
A PROSPECTUS.
======================================================
======================================================
WERNER HOLDING CO. (DE), INC.
WERNER LOGO
OFFER FOR OUTSTANDING
10% SENIOR SUBORDINATED
NOTES DUE 2007
IN EXCHANGE FOR
10% SERIES A SENIOR SUBORDINATED
NOTES DUE 2007
------------------------
PROSPECTUS
------------------------
MAY 14, 1998
======================================================
