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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
-------------------------------------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- --------------------------
For Quarter Ended June 30, 2003 Commission File Number 1-2394
WHX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3768097
(State of Incorporation) (IRS Employer
Identification No.)
110 East 59th Street
New York, New York 10022
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 212-355-5200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes / / No /X/
The number of shares of Common Stock issued and outstanding as of August 1, 2003
was 5,485,856.
1
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands - except per-share)
Net sales $ 83,519 $ 109,159 $ 164,519 $ 201,982
Cost of goods sold 67,131 86,030 134,080 161,221
--------- --------- --------- ---------
Gross profit 16,388 23,129 30,439 40,761
Selling, general and administrative expenses 20,772 17,413 42,758 34,431
Restructuring charges -- 10,700 -- 10,700
--------- --------- --------- ---------
Loss from operations (4,384) (4,984) (12,319) (4,370)
--------- --------- --------- ---------
Other:
Interest expense 4,903 6,537 9,920 15,340
Gain on early retirement of debt 1,966 11,218 2,999 40,235
Other income (expense) 1,696 (1,562) 188 (324)
--------- --------- --------- ---------
Income (loss) from continuing operations before taxes (5,625) (1,865) (19,052) 20,201
Tax provision (benefit) (1,567) (3,159) (6,146) (3,944)
--------- --------- --------- ---------
Income (loss) from continuing operations (4,058) 1,294 (12,906) 24,145
Income from discontinued operation - net of tax -- 6,492 -- 8,343
--------- --------- --------- ---------
Income (loss) before cumulative effect of an
accounting change (4,058) 7,786 (12,906) 32,488
Cumulative effect of an accounting change (Note 4) -- -- -- (44,000)
--------- --------- --------- ---------
Net income (loss) $ (4,058) $ 7,786 $ (12,906) $ (11,512)
========= ========= ========= =========
Dividend requirement for preferred stock $ 4,856 $ 4,737 $ 9,712 $ 9,512
========= ========= ========= =========
Net income (loss) applicable to common stock $ (8,914) $ 3,049 $ (22,618) $ (21,024)
========= ========= ========= =========
Basic per share of common stock
Income (loss) from continuing operations - net of preferred dividends $ (1.67) $ (0.66) $ (4.24) $ 2.75
Income from discontinued operation -- 1.23 -- 1.57
Cumulative effect of an accounting change -- -- -- (8.26)
--------- --------- --------- ---------
Net income (loss) per share $ (1.67) $ 0.57 $ (4.24) $ (3.94)
========= ========= ========= =========
Diluted per share of common stock
Income (loss) from continuing operations $ (1.67) $ (0.66) $ (4.24) $ 2.29
Income from discontinued operation -- 1.23 -- 0.79
Cumulative effect of an accounting change -- -- -- (4.18)
--------- --------- --------- ---------
Net income (loss) per share $ (1.67) $ 0.57 $ (4.24) $ (1.10)
========= ========= ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
2003 2002
- ----------------------------------------------------------------------------------------
(Dollars and shares in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 85,719 $ 18,396
Short term investments 6,270 205,275
Trade receivables - net 48,739 43,540
Inventories 69,238 68,921
Other current assets 28,081 15,412
--------- ---------
Total current assets 238,047 351,544
Advances to WPC 7,113 7,458
Note receivable - WPC 32,444 31,959
Property, plant and equipment at cost, less
accumulated depreciation and amortization 104,630 107,590
Goodwill and other intangibles 215,276 215,426
Intangibles - pension asset 40,270 40,270
Assets held for sale 12,007 11,751
Prepaid pension asset 18,325 26,385
Deferred taxes - non-current 31,523 24,315
Other non-current assets 17,106 17,690
--------- ---------
$ 716,741 $ 834,388
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 61,584 $ 60,172
Accrued liabilities 17,474 20,924
Short-term debt -- 107,857
Restructuring -- 5,424
Deferred income taxes - current 6,432 6,432
Interest payable 2,058 2,514
Payroll and employee benefits 6,207 2,776
--------- ---------
Total current liabilities 93,755 206,099
Long-term debt 254,447 249,706
Other employee benefit liabilities 8,738 8,784
Loss in excess of investment in WPC 61,307 60,667
Additional minimum pension liability 93,728 93,728
Other liabilities 1,572 1,543
--------- ---------
513,547 620,527
Stockholders' Equity:
Preferred stock - $.10 par value; authorized 10,000
shares; issued and outstanding: 5,523 shares 552 552
Common stock - $.01 par value; authorized 60,000
shares; issued and outstanding: 5,486 and 5,406 shares 55 54
Accumulated other comprehensive loss (33,603) (35,775)
Additional paid-in capital 556,207 556,009
Unearned compensation - restricted stock awards (132) --
Accumulated earnings (deficit) (319,885) (306,979)
--------- ---------
Total stockholders' equity 203,194 213,861
--------- ---------
$ 716,741 $ 834,388
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2003 2002
- ----------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (12,906) $ (11,512)
Less: Income from discontinued operations -- 8,343
--------- ---------
Net loss from continuing operations and
cumulative effect of accounting change (12,906) (19,855)
Items not affecting cash from operating activities:
Cumulative effect of accounting change -- 44,000
Restructuring charge -- 9,514
Depreciation and amortization 7,485 8,610
Amortization of debt related costs 829 1,391
Other postretirement benefits 125 190
Gain on early retirement of debt (2,999) (40,235)
Deferred income taxes (7,208) (76)
Gain on asset dispositions (490) (34)
Earned compensation - restricted stock awards 66 --
Pension expense 8,060 3,800
Equity loss (income) in affiliated companies 31 (175)
Decrease (increase) in working capital elements,
net of effect of acquisitions:
Trade receivables (5,199) (19,969)
Inventories (317) (2,007)
Short term investments - trading 199,005 237,659
Investment account borrowings (107,857) (110,946)
Other current assets 3,298 (7,062)
Other current liabilities (4,487) 27,666
Other items - net (534) (430)
--------- ---------
Net cash provided by operating activities 76,902 132,041
--------- ---------
Cash flows from investing activities:
Receipts from WPC 500 --
Purchase of aircraft (19,171) --
Capital expenditures (5,939) (3,363)
Proceeds from sales of assets 3,704 51
--------- ---------
Net cash used in investing activities (20,906) (3,312)
--------- ---------
Cash flows from financing activities:
Long-term debt retirements - net -- (77,664)
Long-term debt proceeds 22,425 --
Cash paid on early extinguishment of debt (14,302) (23,559)
Due from Unimast 3,204 2,220
--------- ---------
Net cash provided by/(used in) financing activities 11,327 (99,003)
--------- ---------
Net cash provided by continuing operations 67,323 29,726
Net cash used by discontinued operations -- (1,259)
Cash and cash equivalents at beginning of period 18,396 7,789
--------- ---------
Cash and cash equivalents at end of period $ 85,719 $ 36,256
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
General
- -------
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company. In the opinion of management, the
interim financial statements reflect all normal and recurring adjustments
necessary to present fairly the consolidated financial position and the results
of operations and changes in cash flows for the interim periods.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. This quarterly report on Form 10-Q
should be read in conjunction with the Company's audited consolidated financial
statements contained in Form 10-K for the year ended December 31, 2002. The
results of operations for the three months and six months ended June 30, 2003
are not necessarily indicative of the operating results for the full year.
The condensed consolidated financial statements include the accounts
of all subsidiary companies except for Wheeling-Pittsburgh Corporation and its
subsidiaries. On November 16, 2000, Wheeling-Pittsburgh Corporation ("WPC"), a
wholly-owned subsidiary of WHX Corporation ("WHX"), and six of its subsidiaries
including Wheeling-Pittsburgh Steel Corporation ("WPSC" and together with WPC
and its other subsidiaries, the "WPC Group") filed a petition seeking
reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code
(see Note 1). As a result of the Bankruptcy Filing, the Company has, as of
November 16, 2000, deconsolidated the balance sheet of its wholly-owned
subsidiary WPC. Accordingly, the accompanying consolidated balance sheets at
June 30, 2003 and December 31, 2002 do not include any of the assets or
liabilities of WPC, and the accompanying condensed consolidated statement of
operations and the condensed consolidated statement of cash flows for the three
months and six months ended June 30, 2003 and 2002 exclude the operating results
of WPC. As discussed in Note 1 a Chapter 11 Plan of Reorganization (the "POR")
for the WPC Group was consummated on August 1, 2003. Among other things, as a
result of the consummation of the POR, each member of the WPC Group is no longer
a subsidiary of WHX Corporation.
Nature of Operations
- --------------------
WHX Corporation is a holding company that has been structured to
invest in and/or acquire a diverse group of businesses on a decentralized basis.
WHX's primary business is Handy & Harman ("H&H"), a diversified manufacturing
company whose strategic business units encompass three segments: precious metal,
wire & tubing, and engineered materials. WHX also owns Canfield Metal Coatings
Corporation, formerly Pittsburgh-Canfield Corporation ("CMCC"), a manufacturer
of electrogalvanized products used in the construction and appliance industries.
In July 2002, the Company sold its wholly owned subsidiary Unimast Incorporated
("Unimast"), a leading manufacturer of steel framing and other products for
commercial and residential construction. As a result, Unimast has been
classified as a discontinued operation for the 2002 period. The transaction
closed on July 31, 2002. WHX's other business consists of WPC and six of its
subsidiaries including WPSC, a vertically integrated manufacturer of value-added
and flat rolled steel products (see Note 1). WPSC, together with WPC and its
other subsidiaries shall be referred to herein as the "WPC Group." WHX, together
with all of its subsidiaries shall be referred to herein as the "Company," and
the Company and its subsidiaries other than the WPC Group shall be referred to
herein as the "WHX Group."
Note 1 - WPC Group Bankruptcy
- -----------------------------
On November 16, 2000, the WPC Group filed petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Ohio. As a result, subsequent to the commencement of the
Bankruptcy Filing, the WPC Group sought and obtained several orders from the
Bankruptcy Court that were intended to enable the WPC Group to continue business
operations as debtors-in-possession. Since the Petition Date, the WPC Group's
management has been in the process of stabilizing their businesses and
5
evaluating their operations, while continuing to provide uninterrupted services
to their customers. A Chapter 11 POR was confirmed by the Bankruptcy Court on
June 18, 2003 and was consummated on August 1, 2003. Pursuant to the terms of
the POR, among other things, the WPC Group ceased to be a subsidiary of WHX
effective August 1, 2003, and from that date forward has been an independent
company. See below for additional information regarding the Bankruptcy Filing.
The following is a chronological summary of the Bankruptcy Filing through the
consummation of the POR, and related matters.
On November 17, 2000, the Bankruptcy Court granted the WPC Group's
motion to approve a $290 million Debtor in Possession Credit Agreement ("DIP
Credit Agreement") provided by Citibank, N.A., as initial issuing bank, Citicorp
U.S.A., Inc., as administrative agent, and the DIP Lenders. Pursuant to the DIP
Credit Agreement, Citibank, N.A. made term loan advances to the WPC Group up to
a maximum aggregate principal amount of $35 million. In addition, the DIP
Lenders agreed, subject to certain conditions, to provide the WPC Group with
revolving loans, swing loans and letter of credit accommodations in an aggregate
amount of up to $255 million. On January 2, 2002, the WPC Group requested and
received a reduction in the revolving loans, swing loans and letter of credit to
a maximum aggregate amount of up to $175 million. On November 15, 2002, the
Bankruptcy Court approved a motion to amend the DIP Credit Agreement to reduce
the revolving loans, swing loans and letter of credit to a maximum aggregate of
$160 million and to make certain other related changes to the agreement. In
connection with the Bankruptcy Filing, WHX had guaranteed $30 million of the
term loan portion of the DIP Credit Agreement ("Term Loan") and deposited in a
pledged asset account $33 million of funds in support of such guaranty.
Effective as of June 1, 2001, WHX purchased a participation interest comprising
an undivided interest in the Term Loan in the amount of $30 million, plus
interest accrued but not paid on such amount of the Term Loan through June 1,
2001. Concurrently with such transaction, WHX's guaranty of $30 million of the
Term Loan described above was terminated and the $33 million of funds previously
deposited in a pledged asset account in support of such guaranty were released
to WHX. WHX paid to Citibank $30.5 million of such deposited funds to purchase
WHX's participation interest in the Term Loan. The DIP Credit Agreement was
terminated and repaid upon the consummation of the POR (see below). As discussed
below, the WHX participation interest was forgiven by WHX in connection with the
consummation of the POR.
WPC borrowings outstanding under the DIP Credit Facility for
revolving loans totaled $130.9 million and $135.0 million at June 30, 2003 and
December 31, 2002, respectively. Term Loans under the DIP Credit Facility
totaled $35.8 million and $35.2 million at June 30, 2003 and December 31, 2002,
respectively. Letters of credit outstanding under the facility totaled $2.8
million at June 30, 2003. At June 30, 2003, net availability under the DIP
Credit Facility was $147.5 million. As a result of the consummation of the POR
the DIP credit facility was repaid (except for the WHX participation described
below).
At January 1, 2000, $136.8 million of the Company's net equity
represented its investment in the WPC Group. In addition to this investment, WHX
owned a $32.0 million participation interest in the Term Loan discussed above
and held other claims against WPC and WPSC totaling approximately $7.1 million
all of which were forgiven in connection with the consummation of the POR. The
recognition of the WPC Group's net loss of $176.6 million, in the year 2000,
eliminated the investment's carrying value of $136.8 million. In November 2000,
WHX recorded a liability of $39.8 million representing the excess of the WPC
Group's loss over the carrying amount of the investment.
During the period November 17, 2000 through June 30, 2003, the WPC
Group incurred cumulative net losses of $338.5 million. Pursuant to the terms to
the amended POR, WHX agreed to contribute $20.0 million to the WPC Group (see
discussion below pertaining to WHX Contributions). As a result of the Company's
obligation to fund $20.0 million to WPC Group, the Company recorded a $20.0
million charge as Equity in loss of WPC as of December 31, 2002. All conditions
to the WHX Contributions were satisfied effective upon consummation of the POR,
and the WHX Contributions have been made.
A Settlement and Release Agreement ("Settlement Agreement") by and
among WPSC, WPC, WHX, and certain affiliates of WPSC, WPC and WHX, received
approval of the United States Bankruptcy Court for the Northern District of Ohio
on May 24, 2001, was entered into on May 25, 2001, and became effective on May
29, 2001.
The Settlement Agreement provided, in part, for (1) the payment by
WHX to WPC of $32 million; (2) the exchange of releases between the WPC Group
and the WHX Group; (3) the acquisition by WHX or its designee of certain assets
of Pittsburgh-Canfield Corporation ("PCC"), plus the assumption of certain trade
payables, subject to certain terms and conditions (WHX recorded $5.4 million as
the fair value of the net assets of PCC.); (4) the termination of the Tax
6
Sharing Agreements between WHX and WPC; (5) WHX to deliver an agreement to the
WPC Group whereby it agreed not to charge or allocate any pension obligations,
expenses or charges to the WPC Group with respect to the WHX Pension Plan,
subject to certain limitations as provided therein, through and including the
earlier of the effective date of a Plan or Plans of Reorganization and December
31, 2002; and (6) the final settlement of all inter-company receivables and
liabilities between the WHX Group and the WPC Group (except for commercial trade
transactions), including the liability for redeemable stock. Such transactions,
other than the acquisition of certain assets of PCC, all occurred effective May
29, 2001. The acquisition of certain assets of PCC closed on June 29, 2001. The
PCC agreement included a one-year repurchase option for the seller. The
repurchase option expired unexercised on June 29, 2002.
On October 22, 2001, the Bankruptcy Court entered an order ("October
Order"), approving several transactions intended, among other things, to provide
the WPC Group with additional liquidity. As part of the October Order, the
Bankruptcy Court approved a Memorandum of Understanding by and among the
Company, Wheeling-Pittsburgh Corporation ("WPC"), Wheeling-Pittsburgh Steel
Corporation ("WPSC") and the United Steelworkers of America, AFL-CIO-CLC
("USWA"), pursuant to which the Company agreed to provide to WPSC (1) up to $5
million of secured loans and $5 million of liquidity support (part of which
consisted of financing terms) during the period from the Order through January
31, 2002, (2) if certain conditions are met, an additional $2 million of secured
loans (for an aggregate of $7 million) and the maintenance of the $5.0 million
of liquidity support referred to above, during the period from February 1, 2002
through March 31, 2002, (the conditions were not met and accordingly the
additional $2.0 million in secured loans were not made), and (3) a $25 million
contribution to a new WPSC defined benefit pension plan contingent upon, among
other things, a confirmed WPSC Plan of Reorganization (item 3 has since been
superceded by the WHX Contributions described below). Through June 30, 2003, WHX
had advanced $5.0 million of the loans and up to $5.5 million of financing. At
June 30, 2003, the outstanding balance of these secured advances was $5.0
million plus interest of $0.5 million, and $1.6 million, respectively. These
secured advances, totaling $7.1 million were forgiven in connection with the
consummation of the POR.
The October Order also approved a Supplemental Agreement among the
members of the WPC Group and WHX, under which all of the extensions of credit
referred to in the preceding paragraph were granted super-priority claim status
in WPSC's Chapter 11 case and are secured by a lien on substantially all of the
assets of WPSC, junior to the liens, security interests and super-priority
claims of the lenders to WPSC under the DIP Credit Agreement. The Supplemental
Agreement also provided, among other things, that the Company may sell, transfer
or dispose of the stock of WPC free from the automatic stay imposed under the
Bankruptcy Code, and under specified circumstances required WPC to support
certain changes to the WHX Pension Plan.
Additionally, the October Order approved the terms of the Modified
Labor Agreement ("MLA") by and among WPC, WPSC and the USWA. WHX is not a party
to the MLA. The MLA modified the then current WPSC collective bargaining
agreement to provide for, among other things, immediate reductions in wages and
the cost of providing medical benefits to active and retired employees in
exchange for improvement in wages and pension benefits for hourly employees upon
a confirmed WPSC Plan of Reorganization. The MLA was part of a comprehensive
support arrangement that also involved concessions from WPSC salaried employees,
WPSC's vendors and other constituencies in the Chapter 11 proceedings.
In January 2002, WPSC finalized a financial support plan which
included a $5.0 million loan from the State of West Virginia, a $7.0 million
loan and a $0.2 million grant from the State of Ohio, a $10.0 million advance by
the WHX Group for future steel purchases (all of which were delivered before
June 30, 2002) and additional wage and salary deferrals from WPSC union and
salaried employees. At December 31, 2002, the balance outstanding with the State
of West Virginia was $5.0 million, and $7.0 million with the State of Ohio.
On September 23, 2002, WPC announced that the Royal Bank of Canada
("RBC") had filed on its behalf an application with the Emergency Steel Loan
Guarantee Board ("ESLGB") for a $250 million federal loan guarantee. An
affiliate of RBC has agreed to underwrite the loan if the guaranty is granted.
On February 28, 2003, the ESLGB initially rejected the application. WPC and RBC,
however, amended and supplemented the application and it was conditionally
approved on March 26, 2003. The approval of the guaranty was subject to the
satisfaction of various conditions on or before June 30, 2003, subsequently
extended to August 15, 2003, including, without limitation, resolution of the
treatment of the WHX Pension Plan that is acceptable to and approved by the
PBGC, confirmation of a Plan of Reorganization for the WPC Group, and the
execution of definitive agreements satisfactory in form and substance to the
ESLGB. All such conditions were satisfied on or before August 1, 2003.
7
The amended RBC application contained a business plan that assumed a
confirmed Chapter 11 plan of reorganization ("POR") for the WPC Group. As part
of the POR, the Company has conditionally to make certain contributions (the
"WHX Contributions") to the reorganized company. Under the WHX Contributions,
the Company forgave the repayment of its claims against the WPC Group of
approximately $39 million and, additionally, contributed to the reorganized
company $20 million of cash, for which the Company received a note in the amount
of $10 million. As a result of the WHX Contributions, the Company recorded a
$20.0 million charge as Equity in loss of WPC as of December 31, 2002.
On June 18, 2003 the POR was confirmed by the Bankruptcy Court and
on August 1, 2003 it was consummated. In connection with the consummation of the
POR the loan with the RBC closed on August 1, 2003 and all conditions to the
guaranty by the ESLGB were satisfied and the guaranty was granted. The proceeds
of the RBC Loan, among other things, were used to repay the DIP creditors
(except for WHX). In addition all conditions to the WHX Contributions were
satisfied and the WHX Contributions were made. Accordingly, effective on August
1, 2003 the WPC Group ceased to be a subsidiary of WHX and from that date
forward has been an independent company.
On March 6, 2003, the Pension Benefit Guaranty Corporation ("PBGC")
published its Notice of Determination ("Notice") and on March 7, 2003 filed a
Summons and Complaint ("Complaint") in United States District Court for the
Southern District of New York seeking the involuntary termination of the WHX
Pension Plan ("WHX Plan"). WHX filed an answer to this complaint on March 27,
2003, contesting the PBGC's action. On July 24, 2003, the Company entered into
an agreement among the Pension Benefit Guaranty Corporation ("PBGC"),
Wheeling-Pittsburgh Corporation ("WPC"), Wheeling-Pittsburgh Steel Corporation
("WPSC"), and the United Steelworkers of America, AFL-CIO-CL ("USWA") in
settlement of matters relating to the PBGC v. WHX Corporation, Civil Action No.
03-CV-1553, in the United States District Court for the Southern District of New
York ("Termination Litigation"), in which the PBGC was seeking to terminate the
WHX Pension Plan ("Plan"). Under the settlement, among other things, WHX has
agreed (a) that the Plan, as it is currently constituted, is a single employer
pension plan, (b) to contribute funds to the Plan equal to moneys spent (if any)
by WHX or its affiliates to purchase WHX 10.5% Senior Notes ("Senior Notes") in
future open market transactions, and (c) to grant to the PBGC a pari passu
security interest of up to $50 million in the event WHX obtains any future
financing on a secured basis or provides any security or collateral for the
Senior Notes.
Also under the settlement, all parties have agreed that as of the
effective date of the WPC Plan of Reorganization, (a) no shutdowns have occurred
at any WPC Group facility, (b) no member of the WPC Group is a participating
employer under the Plan, (c) continuous service for WPC Group employees is
broken, (d) no WPC Group employees will become entitled to "Rule of 65" or
"70/80" Retirement Benefits (collectively, "Shutdown Benefits") by reason of
events occurring after the effective date of the POR, and (e) the Plan shall
provide for a limited early retirement option to allow up to 650 WPSC
USWA-represented employees the right to receive retirement benefits based on the
employee's years of service as of July 1, 2003 with a benefit equal to $40
multiplied by the employee's years of service as of July 31, 2003.
Finally, under the settlement, the PBGC has agreed (a) that, after
the effective date of the POR, if it terminates the Plan at least one day prior
to a WPC Group facility shutdown, WHX shall be released from any additional
liability to PBGC resulting from the shutdown, (b) to withdraw its claims in the
WPC Bankruptcy Proceedings; and (c) to dismiss the Termination Litigation.
For accounting purposes, the cost of the early retirement incentive
will be recognized in the third quarter of 2003 as a special termination benefit
in accordance with Statement of Financial Accounting Standards No. 88,
"Employers' Accounting for Settlement and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" ("SFAS 88"). In addition, a
Curtailment arises as a result of the break in service for WPC Group employees
that also requires a charge pursuant to SFAS 88. The amount of these charges
will depend on many factors including the number and characteristics of the
employees who choose to retire and the Plan's funded status as of the
measurement date. Based on preliminary estimates, the combined impact of both
charges may be in the range of $40.0 to $55.0 million.
For Plan funding purposes, the impact of the changes will not be
recognized until the next actuarial valuation which occurs as of January 1,
2004. The funding requirements will depend on many factors including those
identified above as well as future investment returns on Plan assets. Based on
preliminary estimates, using the current statutory discount rate, it is possible
that average annual contributions to the Plan of approximately $10.0 million may
be required for the years 2004, 2005 and 2006.
8
The agreement with the PBGC also contains the provision that WHX
will not contest a future action by the PBGC to terminate the Plan in connection
with a future WPC Group facility shutdown. In the event that such a plan
termination occurs, the PBGC has agreed to release WHX from any claims relating
to the shutdown. However, there may be PBGC claims related to unfunded
liabilities that may exist as a result of a termination of the Plan.
In connection with past collective bargaining agreements by and
between the WPC Group and the United Steelworkers of America, AFL-CIO-CLC
("USWA"), the WPC Group is obligated to provide certain medical insurance, life
insurance, disability and surviving spouse retirement benefits to retired
employees and their dependents ("OPEB Obligations"). WHX is not a signatory to
any of these agreements. However, WHX previously had separately agreed to be
contingently liable for a portion of the OPEB Obligations. WHX's contingent
obligation would be triggered in the event that the WPC Group was to fail to
satisfy its OPEB Obligations. WHX's contingent obligation is limited to 25% of
the Accumulated Post-Retirement Benefit Obligation with respect to the WPC
Group's employees and retirees represented by the USWA. WPSC's total OPEB
Obligation at January 1, 2003 is estimated to be $314.1 million. WHX has
estimated that approximately 85% of employees and retirees entitled to such OPEB
Obligations are represented by the USWA. As a result of the consummation of the
POR, WHX's contingent liability for the OPEB Obligation was eliminated.
As a result of the consummation of the POR any balance remaining in
the loss in excess of investment will be reversed into income in the third
quarter of 2003.
Note 2 - Discontinued Operations
- --------------------------------
On July 31, 2002, the Company sold the stock of Unimast, its
wholly-owned subsidiary, to Worthington Industries, Inc. for $95.0 million in
cash. Under the terms of the agreement, the buyer assumed certain debt of
Unimast. Net cash proceeds from the sale, after escrow of $2.5 million, closing
costs, transaction fees, employee related payments, and other costs and expenses
were approximately $85.0 million. The Company applied these proceeds in
accordance with the terms of the Indenture for the Company's 10 1/2% Senior
Notes.
As a result of the sale, the Condensed Consolidated Financial
Statements and related Notes for the periods presented herein reflect Unimast as
a discontinued operation.
Operating results of discontinued operations were as follows:
Three Six
Months Months
Ended Ended
June 30, June 30,
2002 2002
----------- ---------
(in thousands)
Net sales $ 71,890 $127,052
Operating income 10,849 14,215
Interest/other expense 601 892
Income taxes 3,756 4,980
Net income 6,492 8,343
Note 3 - Business Restructuring Charges
- ---------------------------------------
During April 2002, the Company's wholly owned subsidiary, Handy &
Harman, decided to exit certain of its precious metal activities. The affected
product lines were manufactured at H&H's Fairfield, CT and East Providence, RI
facilities. The decision to exit these operating activities resulted in a
restructuring charge of $12.0 million in the year ended December 31, 2002. This
charge included $6.6 million in employee separation expenses (approximately 251
employees, substantially all of whom were terminated by June 30, 2003); $0.6
9
million of contractual obligations, and $4.8 million in costs to close the
facilities, including refining charges for inventory remaining after operations
ceased.
The Company received $1.8 million in 2003 and $8.5 million in 2002
for the sale of certain property and equipment associated with this segment.
Included in the Company's Balance Sheet as Assets Held For Sale at June 30,
2003, is $12.0 million related to the Fairfield, CT property. The sale of this
property is expected to occur in 2003.
The following table represents the activity of the restructuring
reserve:
Reserve Reserve
Balance Balance
December 31, Cost June 30,
2002 Incurred Adjustment 2003
------------ -------- ---------- -----------
(in thousands)
Employee separation and related costs $ 1,358 $ (882) $ (476) $-
Facility closing and refining costs 1,117 (1,622) 505 --
Contractual obligations 137 (63) (74) --
------- ------- ------- ---
$ 2,612 $(2,567) $ (45) $-
======= ======= ======= ===
In September 2002, the Company decided to exit certain of its
stainless steel wire activities. The affected operations were at H&H's
facilities in Liversedge, England and Willingboro, NJ. The decision to exit
these operating activities resulted in restructuring charges of $8.0 million in
the second half of 2002. The components of the restructuring charges were: $2.8
million in employee separation expenses (approximately 121 employees, all of
whom were terminated by June 30, 2003), $4.8 million for the write-down of
production supplies and consumables and facility closing costs, and $0.4 million
in contractual obligations. As of June 30, 2003, the Company has received $1.4
million for the sale of the Liversedge, England property. The Company
anticipates additional cash proceeds in the range of $1.5 million to $2.5
million on the sale of the Willingboro, NJ property. The estimated settlement of
certain pension obligations is expected to be in the range of $1.0 million to
$1.5 million.
The following table represents the activity of this restructuring
reserve:
10
Reserve Reserve
Balance Balance
December 31, Cost June 30,
2002 Incurred Adjustment 2003
----------- ---------- ----------- ----------
(in thousands)
Employee separation and related costs $ 1,197 $(1,121) $ (76) $-
Facility closing costs 1,241 (1,592) 351 --
Contractual obligations 374 (144) (230) --
------- ------- ------- ---
$ 2,812 $(2,857) $ 45 $-
======= ======= ======= ===
All of the accrued restructuring costs for the precious metals and
stainless wire activities were paid by June 30, 2003. The adjustments made to
the restructuring reserves during the six months ended June 30, 2003 represented
revisions to the original cost estimates based on actual costs incurred.
Note 4 - Accounting Changes and Recently Issued Accounting Pronouncements
- -------------------------------------------------------------------------
The Company adopted the provisions of Statement of Financial
Standards 142, "Goodwill and Other Intangible Assets" ("SFAS 142") effective
January 1, 2002. As a result of the adoption of SFAS 142, the Company recorded a
$44.0 million non-cash goodwill impairment charge related to the H&H Wire Group
in the first quarter of 2002. This charge was reported as a cumulative effect of
an accounting change. The Company recorded this charge because the fair value of
this reporting unit, as determined by estimated cash flow projections, was less
than the reporting unit's carrying value.
The changes in the carrying amount of goodwill for the six months ended June 30,
2003 were as follows:
(in thousands)
Precious Wire & Engineered
Metals Tubing Materials Total
---------- ----------- ----------- -----------
Balance as of January 1, 2003 $ 106,971 $ 60,464 $ 47,150 $ 214,585
Pre acquisition foreign NOL utilized -- (100) -- (100)
--------- --------- --------- ---------
Balance at June 30, 2003 $ 106,971 $ 60,364 $ 47,150 $ 214,485
========= ========= ========= =========
As of June 30, 2003, the Company had $0.9 million of other
intangible assets, which will continue to be amortized over their remaining
useful lives ranging from 3 to 17 years.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 143, "Accounting for Asset Retirement Obligation" ("SFAS
143"). SFAS 143 requires that obligations associated with the retirement of a
tangible long-lived asset be recorded as a liability when those obligations are
incurred, with the amount of the liability initially measured at fair value.
Upon initially recognizing a liability for an asset-retirement obligation
("ARO"), an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. WHX adopted the provisions of SFAS 143 on
January 1, 2003 and its adoption did not have a significant effect on the
Company's financial statements.
11
In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The Statement also extends the reporting requirements to
report separately, as discontinued operations, components of an entity that have
either been disposed of or classified as held for sale. WHX adopted the
provisions of SFAS 144 as of January 1, 2002.
On July 31, 2002, WHX sold the stock of Unimast, its wholly-owned
subsidiary for $95.0 million. As a result of this transaction, Unimast was
accounted for as a discontinued operation in accordance with SFAS 144 (see Note
2).
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 sets forth
various modifications to existing accounting guidance which prescribes the
conditions which must be met in order for costs associated with contract
terminations, facility consolidations, employee relocations and terminations to
be accrued and recorded as liabilities in financial statements. WHX adopted the
provisions of SFAS 146, as related to exit or disposal activities as of January
1, 2003, and its adoption did not have a significant effect on the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to
provide alternative methods of transition to SFAS 123's fair value method of
accounting for stock-based employee compensation. While the Statement does not
amend SFAS 123 to require companies to account for employee stock options using
the fair value method, the disclosure provisions of SFAS 148 are applicable to
all companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS 123 or the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure provisions of SFAS 148. Had
compensation expense for the Company's stock option plans been determined based
on the fair value at the grant date for awards under these plans, consistent
with the methodology prescribed under SFAS 148, the Company's net income (loss)
and earnings (loss) per share would have approximated the pro forma amounts
indicated below:
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
(in thousands - except per share)
Reported:
Income (loss) from continuing operations $ (4,058) $ 1,294 $ (12,906) $ 24,145
Basic earnings (loss) per share $ (1.67) $ (0.66) $ (4.24) $ 2.75
Diluted earnings (loss) per share $ (1.67) $ (0.66) $ (4.24) $ 2.29
Adjustment to compensation expense for
stock-based awards - net of tax $ (193) $ (157) $ (320) $ (265)
Pro forma:
Income (loss) from continuing operations $ (4,251) $ 1,137 $ (13,226) $ 23,880
Basic earnings (loss) per share $ (1.71) $ (0.68) $ (4.30) $ 2.70
Diluted earnings (loss) per share $ (1.71) $ (0.68) $ (4.30) $ 2.27
The weighted-average fair value of each stock option included in the
preceding pro forma amounts was estimated using the Black-Scholes option-pricing
model and is amortized over the vesting period of the underlying options.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," which addresses consolidation by
a business of variable interest entities in which it is the primary beneficiary.
The Interpretation is effective immediately for certain disclosure requirements
and variable interest entities created after January 31, 2003, and in fiscal
2004 for all other variable interest entities. This Interpretation will not have
a material impact on the Company's financial statements.
In April 2003, the FASB issued SFAS no. 149, "Amendment of Statement
of 133 on Derivative Instruments and Hedging Activities." ("SFAS 149"). SFAS 149
amends and clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," SFAS 149 is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
12
June 30, 2003. The adoption of SFAS 149 is not expected to have a material
effect on the Company's financial position, results of operations, or cash
flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS 150 is effective for
all financial instruments entered into or modified after May 31, 2003 and must
be applied to our existing financial instruments effective July 6, 2003, the
beginning of the first fiscal period after June 15, 2003. The Company adopted
SFAS 150 on June 1, 2003. The adoption of SFAS 150 did not have any effect on
the Company's financial position, results of operations, or cash flows.
Note 5 - Earnings Per Share
- ---------------------------
The computation of basic earnings per common share is based upon the
average number of shares of Common Stock outstanding. In the computation of
diluted earnings per common share in the three-month and six-month periods ended
June 30, 2003 and the three-month and six-month period ended June 30, 2002, the
conversion of preferred stock, redeemable common stock and the exercise of
options would have had an anti-dilutive effect. In the computation of diluted
earnings per common share in the six-month period ended June 30, 2002, the
exercise of options would have had an anti-dilutive effect. A reconciliation of
the income and shares used in the computation follows:
RECONCILIATION OF INCOME AND SHARES IN EPS CALCULATION
(in thousands except per share amounts)
For the Three Months Ended June 30, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net loss from continuing operations $(4,058)
Less: Preferred stock dividends 4,856
-----
Basic and Diluted EPS
Loss from continuing operations
applicable to common stockholders $(8,914) 5,340 $ (1.67)
======= ======= ========
For the Six Months Ended June 30, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net loss from continuing operations $(12,906)
Less: Preferred stock dividends 9,712
--------
Basic and Diluted EPS
Loss from continuing operations
applicable to common stockholders $(22,618) 5,339 $ (4.24)
======== ======== =========
13
For the Three Months Ended June 30, 2002
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
Net income from continuing operations $ 1,294
Less: Preferred stock dividends 4,737
-----
Basic and Diluted EPS
Loss from continuing operations
applicable to common stockholders $(3,443) 5,335 $ (0.66)
======= ======= =========
For the Six Months Ended June 30, 2002
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
Net income from continuing operations $24,145
Less: Preferred stock dividends 9,512
-----
Basic EPS
Income from continuing operations
applicable to common stockholders $14,633 5,325 $ 2.75
Effect of Dilutive Securities
Convertible Preferred Stock 9,512 5,136
Redeemable Common Stock 73
------- -------
Diluted EPS
Income from continuing operations
applicable to common stockholders
plus assumed conversion $24,145 10,534 $ 2.29
======= ======= ========
Outstanding stock options for common stock granted to officers,
directors, key employees and others totaled 2.1 million at June 30, 2003.
PREFERRED STOCK DIVIDENDS
At June 30, 2003, dividends in arrears to Series A and Series B
Convertible Preferred Shareholders were $23.0 million and $30.4 million,
respectively. Presently management believes that it is not likely that the
Company will be able to pay these dividends in the foreseeable future.
REDEEMABLE COMMON STOCK
At December 31, 2000, certain present and former employees of the
WPC Group held, through an Employee Stock Ownership Plan ("ESOP"), 81,502 shares
of common stock of WHX. These employees received such shares as part of the 1991
Plan of Reorganization in exchange for Series C preferred shares of
Wheeling-Pittsburgh Steel Corporation (WPC's predecessor company prior to the
1990 bankruptcy). Beneficial owners of such shares who were active employees on
August 15, 1990 and who have either retired, died or become disabled, or who
reach 30 years of service, may sell their shares to the Company at a price of
$45 per share or, upon qualified retirement, $60 per share. These contingent
obligations are expected to extend over many years, as participants in the ESOP
satisfy the criteria for selling shares to the Company. In addition, each
beneficiary can direct the ESOP to sell any or all of its common stock into the
public markets at any time; provided, however, that the ESOP will not on any day
sell in the public markets more than 20% of the number of shares of Common Stock
traded during the previous day. Management had estimated the liability for
future redemptions to be approximately $2.6 million at December 31, 2001. As a
result of the Settlement Agreement discussed in Note 1, the liability for
redeemable common shares was assumed by WPC, accordingly participants will sell
their shares to WPC. Approximately 65,000 shares of Common Stock of WHX were
held by the ESOP at June 30, 2003.
14
2003 INCENTIVE STOCK PLAN
The 2003 Incentive Stock Plan authorizes the granting of stock
options and restricted stock awards. In the second quarter of 2003 the Company
granted 80,000 restricted stock awards under this plan to members of the Board
of Directors. The market value of shares issued under this plan is recorded as
unearned compensation and shown as a separate component of shareholders' equity.
This compensation is amortized to expense over the vesting period. The vesting
period is one-third at date of grant and an additional one-third on the first
and second anniversaries of grant date, respectively.
Note 6 - Comprehensive Income (Loss)
- ------------------------------------
Comprehensive income (loss) for the three-month and six-month
periods ended June 30, 2003 and 2002 is as follows:
(in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- -------- ----------- --------
Net income (loss) $ (4,058) $ 7,786 $(12,906) $(11,512)
Other comprehensive income (loss):
Write off of deferred foreign currency translation losses 1,142 -- 1,142 --
Foreign currency translation adjustments 269 1,105 1,030 796
-------- -------- -------- --------
Comprehensive income (loss) $ (2,647) $ 8,891 $(10,734) $(10,716)
======== ======== ======== ========
The write off of deferred foreign currency losses of $1.1 million is
included in other income and expense.
Accumulated other comprehensive income (loss) balances as of June
30, 2003 and December 31, 2002 were comprised as follows:
(in thousands)
June 30, 2003
- -----------------------------------------------
Balance on January 1, 2003 $(35,775)
Foreign currency translation adjustment 2,172
--------
Balance on June 30, 2003 $(33,603)
========
December 31, 2002
- -----------------------------------------------
Balance on January 1, 2002 $ (2,268)
Foreign currency translation adjustment 1,241
Minimum pension liability adjustment - net of tax (34,748)
--------
Balance on December 31, 2002 $(35,775)
========
Note 7 - Short Term Investments and Other Current Assets
- --------------------------------------------------------
Net realized and unrealized gains and losses on trading securities
included in other income (expense) for the six-months ended June 30, 2003 and
2002 were income of $1.6 million and losses of $0.1 million, respectively. Net
15
realized and unrealized gains on trading securities included in other income for
the three-months ended June 30, 2003 and 2002, was income of $2.6 million and
$0.2 million, respectively.
In the first quarter of 2003 the Company purchased an aircraft for
$19.1 million which it intends to re-sell. The aircraft is included in other
current assets on the Company's Consolidated Balance Sheet at June 30, 2003.
Note 8 - Inventories
- --------------------
Inventories at June 30, 2003 and December 31, 2002 are comprised as
follows:
(in thousands) June 30, December 31,
2003 2002
--------- -----------
Finished products $ 15,666 $ 13,067
In-process 10,026 11,291
Raw materials 20,204 19,925
Fine and fabricated precious metal in various stages of completion 23,949 25,322
-------- --------
69,845 69,605
LIFO reserve (607) (684)
-------- --------
$ 69,238 $ 68,921
======== ========
The operating loss for the six-months ended June 30, 2003, includes
a first quarter non-cash charge included in cost of sales resulting from the
lower of cost or market adjustment on precious metal inventories in the amount
of $1.3 million.
Note 9 - Long-Term Debt
- -----------------------
The Company's long-term debt consists of the following debt
instruments:
(in thousands) June 30, December 31,
2003 2002
---------- -----------
Senior Notes due 2005, 10 1/2% $ 92,820 $110,504
Handy & Harman Senior Secured Credit Facility 154,127 130,465
Other 7,500 8,737
-------- --------
254,447 249,706
Less portion due within one year -- --
-------- --------
Total long-term debt $254,447 $249,706
======== ========
In the six-months ended June 30, 2003, the Company purchased and
retired $17.7 million aggregate principal amount of 10 1/2% Senior Notes in the
open market for $14.3 million. After the write off of $0.4 million of deferred
debt related costs, the Company recognized a pre-tax gain of $3.0 million. In
the quarter ended June 30, 2003, the Company purchased and retired $12.8 million
aggregate principal amount of the 10 1/2% Senior Notes in the open market for
$9.8 million. After the write-off of deferred debt related costs, the Company
recognized a pre-tax gain of $2.0 million.
16
In the six-months ended June 30, 2002, the Company purchased and
retired $122.0 million aggregate principal amount of 10 1/2% Senior Notes in the
open market for $77.7 million. After the write off of $4.1 million of deferred
debt related costs, the Company recognized a pre-tax gain of $40.2 million. In
the quarter ended June 30, 2002, the Company purchased and retired $39.5 million
aggregate principal amount of the 10 1/2% Senior Notes in the open market for
$27.0 million. After the write-off of deferred debt related costs, the Company
recognized a pre-tax gain of $11.2 million.
As discussed in Note 1, on March 6, 2003, the PBGC issued its Notice
and on March 7, 2003 published its Notice and filed a Summons and Complaint in
the United States District Court for the Southern District of New York seeking
to terminate the WHX Pension Plan ("WHX Pension Plan"). On March 11, 2003 H&H
informed its lenders that the PBGC action may be an occurrence that would
preclude H&H from making certain representations to the lenders (as required by
the Facilities) in connection with future borrowings. H&H elected not to borrow
any additional funds against the Facilities until such time as the PBGC action
was resolved. Effective upon the consummation of the POR and the signing of an
agreement with the PBGC the dispute with the PBGC has been resolved and H&H has
resumed borrowings under the H&H Facilities.
Note 10- Contingencies
- ----------------------
SEC ENFORCEMENT ACTION
On June 25, 1998, the Securities and Exchange Commission ("SEC")
instituted an administrative proceeding against the Company alleging that it had
violated certain SEC rules in connection with the tender offer for Dynamics
Corporation of America ("DCA") commenced on March 31, 1997 through the Company's
wholly-owned subsidiary, SB Acquisition Corp. ("Offer"). Specifically, the Order
Instituting Proceedings ("Order") alleges that, in its initial form, the Offer
violated the "All Holders Rule," Rule 14d-10(a)(1) under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), based on the Company's inclusion of a
"record holder condition" in the Offer. No shareholder had tendered any shares
at the time the condition was removed. The Order further alleges that the
Company violated Rules 14d-4(c) and 14d-6(d) under the Exchange Act upon
expiration of the Offer, by allegedly waiving material conditions to the Offer
without prior notice to shareholders and purchasing the approximately 10.6% of
DCA's outstanding shares tendered pursuant to the offer. The SEC does not claim
that the Offer was intended to or in fact defrauded any investor.
The Order institutes proceedings to determine whether the SEC should
enter an order requiring the Company (a) to cease and desist from committing or
causing any future violation of the rules alleged to have been violated and (b)
to pay approximately $1.3 million in disgorgement of profits. The Company filed
an answer denying any violations and seeking dismissal of the proceeding. On
October 6, 2000, the initial decision of the Administrative Law Judge who heard
the case dismissed all charges against the Company, with the finding that the
Company had not violated the law.
The Division of Enforcement has filed a petition for the SEC to
review the decision and a brief, but only as to the All Holders Rule Claim. On
June 4, 2003, the SEC issued an opinion that, in overturning the initial
decision of the Administrative law Judge, found that the Company had violated
the "All Holders Rule." The SEC ordered that the Company cease and desist from
committing or causing any violations or future violations of the "All Holders
Rule." No other sanction was imposed. The Company has filed a petition for
review of the SEC's decision with the United States Court of Appeals for the
District of Columbia. Briefing and oral argument of the appeal have not been set
at this time.
PBGC ACTION
On March 6, 2003, the Pension Benefit Guaranty Corporation ("PBGC")
published its Notice of Determination ("Notice") and on March 7, 2003 filed a
Summons and Complaint ("Complaint") in United States District Court for the
Southern District of New York seeking the involuntary termination of the WHX
Pension Plan ("WHX Plan"). WHX filed an answer to this complaint on March 27,
2003, contesting the PBGC's action. On July 24, 2003, the Company entered into
an agreement among the Pension Benefit Guaranty Corporation ("PBGC"),
Wheeling-Pittsburgh Corporation ("WPC"), Wheeling-Pittsburgh Steel Corporation
("WPSC"), and the United Steelworkers of America, AFL-CIO-CL ("USWA") in
settlement of matters relating to the PBGC v. WHX Corporation, Civil Action No.
03-CV-1553, in the United States District Court for the Southern District of New
17
York ("Termination Litigation"), in which the PBGC was seeking to terminate the
WHX Pension Plan ("Plan"). Under the settlement, among other things, WHX has
agreed (a) that the Plan, as it is currently constituted, is a single employer
pension plan, (b) to contribute funds to the Plan equal to moneys spent (if any)
by WHX or its affiliates to purchase WHX 10.5% Senior Notes ("Senior Notes") in
future open market transactions, and (c) to grant to the PBGC a pari passu
security interest of up to $50 million in the event WHX obtains any future
financing on a secured basis or provides any security or collateral for the
Senior Notes.
Also under the settlement, all parties have agreed that as of the
effective date of the WPC Plan of Reorganization ("POR"), (a) no shutdowns have
occurred at any WPC or WPSC (collectively, "Steel") facility, (b) Steel is not a
participating employer under the Plan, (c) continuous service for Steel
employees is broken, (d) no Steel employees will become entitled to "Rule of 65"
or "70/80" Retirement Benefits (collectively, "Shutdown Benefits") by reason of
events occurring after the effective date of the POR, and (e) the Plan shall
provide for a limited early retirement option to allow up to 650 WPSC
USWA-represented employees the right to receive retirement benefits based on the
employee's years of service as of July 1, 2003 with a benefit equal to $40
multiplied by the employee's years of service.
Finally, under the settlement, the PBGC has agreed (a) that, after
the effective date of the POR, if it terminates the Plan at least one day prior
to a Steel facility shutdown, WHX shall be released from any additional
liability to PBGC resulting from the shutdown, (b) to withdraw its claims in the
WPC Bankruptcy Proceedings; and (c) to dismiss the Termination Litigation.
For additional information concerning these developments, see Item 2
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 1 and 9 to the Consolidated Financial Statements.
THE WHX GROUP GENERAL LITIGATION
The WHX Group is a party to various litigation matters including
general liability claims covered by insurance. In the opinion of management,
such claims are not expected to have a material adverse effect on the financial
condition or results of operations of the Company. However, it is possible that
the ultimate resolution of such litigation matters and claims could have a
material adverse effect on quarterly or annual operating results when they are
resolved in future periods.
THE WPC GROUP GENERAL LITIGATION
The WPC Group is a party to various litigation matters including
general liability claims covered by insurance. Claims that are "pre-petition"
claims for Chapter 11 purposes will ultimately be handled in accordance with the
terms of a confirmed Plan of Reorganization in Chapter 11 cases. In the opinion
of management, litigation claims are not expected to have a material adverse
effect on the WPC Group's results of operations or its ability to reorganize.
ENVIRONMENTAL MATTERS
The WPC Group has been identified as a potentially responsible party
under the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund") or similar state statutes at several waste sites. The WPC Group is
subject to joint and several liability imposed by Superfund on potentially
responsible parties. The WPC Group entered into a Settlement Agreement with the
US EPA that resolves all of the US EPA's pre-petition unsecured claims under the
Superfund law and releases the WPC Group from any future liability for such
claims. The Bankruptcy Court approved the Settlement Agreement by order entered
June 13, 2003.
The WPC Group, as are other industrial manufacturers, is subject to
increasingly stringent standards relating to the protection of the environment.
In order to facilitate compliance with these environmental standards, the WPC
Group has incurred capital expenditures for environmental control projects
aggregating $0.8 million, $1.7 million and $0.7 million for 2001, 2002, and the
six-months ended June 30, 2003, respectively. The WPC Group anticipates spending
approximately $19.2 million in the aggregate on major environmental compliance
projects through the year 2005, estimated to be spent as follows: $2.5 million
in 2003, $13.2 million in 2004 and $3.5 million in 2005. However, due to the
possibility of unanticipated factual or regulatory developments and in light of
limitations imposed by the pending Chapter 11 cases, the amount and timing of
future expenditures may vary substantially from such estimates.
18
The WPC Group entered into a Settlement Agreement with the US EPA
that resolves all of the US EPA's pre-petition unsecured claims and releases the
WPC Group from any future liability for such claims with respect to fines and
penalties under various environmental laws. The Bankruptcy Court approved the
Settlement Agreement by order entered June 13, 2003.
After adjusting for the resolution of pre-petition claims described
above, the WPC Group's accrued environmental liabilities totaled $11.1 million
at June 30, 2003. WPC Group management believes, based on its best estimate that
WPC has adequately provided for remediation costs that might be incurred or
penalties that might be imposed under present environmental laws and
regulations. However, final agreement with applicable regulatory agencies has
yet to be reached in a number of instances. In addition, unasserted claims may
exist of which WPC Group management is presently unaware and therefore unable to
evaluate. As a result, there is at least a remote possibility that material
additional losses may have been incurred, the amount of which cannot be
estimated.
Based on information currently available, including the WPC Group's
prior capital expenditures, anticipated capital expenditures, consent agreements
negotiated with Federal and State agencies and information available to the WPC
Group on pending judicial and administrative proceedings, the WPC Group does not
expect its environmental compliance, including the incurrence of additional
fines and penalties, if any, relating to the operation of its facilities, to
have a material adverse effect on the results of operations of the WPC Group.
However, it is possible that litigation and environmental contingencies could
have a material effect on quarterly or annual operating results when they are
resolved in future periods. As further information comes into the WPC Group's
possession, it will continue to reassess such evaluations.
In the event the WPC Group is unable to fund these liabilities,
claims may be made against WHX for payment of such liabilities.
Note 11 - Reported Segments
- ---------------------------
The Company has three reportable segments: (1) Precious Metal. This
segment manufactures and sells precious metal products and electroplated
material, containing silver, gold, and palladium in combination with base metals
for use in a wide variety of industrial applications; (2) Wire & Tubing. This
segment manufactures and sells metal wire, cable and tubing products and
fabrications primarily from stainless steel, carbon steel and specialty alloys,
for use in a wide variety of industrial applications; (3) Engineered Materials.
This segment manufactures specialty roofing and construction fasteners, products
for gas, electricity and water distribution using steel and plastic which are
sold to the construction, and natural gas and water distribution industries, and
electrogalvinized products used in the construction and appliance industries.
Management reviews operating income to evaluate segment performance.
Operating income for the reportable segments excludes unallocated general
corporate expenses. Other income and expense, interest expense, and income taxes
are not presented by segment since they are excluded from the measure of segment
profitability reviewed by the Company's management.
19
The following table presents information about reported segments for
the three and six-month period ending June 30, 2003 and 2002:
(in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----------- ---------- --------- ---------
Revenue
Precious Metal $ 21,365 $ 42,792 $ 43,719 $ 77,664
Wire & Tubing 30,759 35,528 62,907 70,141
Engineered Materials 31,395 30,839 57,893 54,177
--------- --------- --------- ---------
Consolidated revenue $ 83,519 $ 109,159 $ 164,519 $ 201,982
========= ========= ========= =========
Segment operating income
Precious Metal $ (177) $ (7,757) $ (1,376) $ (6,170)
Wire & Tubing 159 2,297 (566) 4,140
Engineered Materials 2,906 4,506 3,521 6,394
--------- --------- --------- ---------
2,888 (954) 1,579 4,364
--------- --------- --------- ---------
Unallocated corporate expenses 7,272 4,030 13,898 8,734
--------- --------- --------- ---------
Operating loss (4,384) (4,984) (12,319) (4,370)
Interest expense 4,903 6,537 9,920 15,340
Gain on early retirement of debt 1,966 11,218 2,999 40,235
Other income (expense) 1,696 (1,562) 188 (324)
--------- --------- --------- ---------
Income (loss) before taxes, discontinued operations
and cumulative effect of an accounting change (5,625) (1,865) (19,052) 20,201
Income tax expense (benefit) (1,567) (3,159) (6,146) (3,944)
Income from discontinued operations - net of tax -- 6,492 -- 8,343
--------- --------- --------- ---------
Income (loss) before cumulative effect of an
accounting change (4,058) 7,786 (12,906) 32,488
Cumulative effect of an accounting change - net of tax -- -- -- (44,000)
--------- --------- --------- ---------
Net income (loss) $ (4,058) $ 7,786 $ (12,906) $ (11,512)
========= ========= ========= =========
20
Note 12 - Supplemental WPC Group Income Statement Data
- ------------------------------------------------------
During the six-months ended June 30, 2003 and 2002, the WPC Group
incurred a net loss of $67.1 million and $51.5 million, respectively. These
results are not reflected in WHX's June 30, 2003 and 2002 consolidated results
of operations. (See Note 1) The WPC Group's summarized income statement data for
the three and six- months ended June 30, 2003 and 2002 is as follows (in
thousands):
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
----------- ---------- --------- ----------
Net sales $ 250,469 $ 241,642 $ 489,141 $ 447,723
Cost of goods sold, excluding depreciation 239,702 216,457 486,955 428,115
Depreciation 16,349 19,436 33,794 37,253
Selling, general and administrative expenses 11,394 11,614 25,258 23,454
Reorganzation expenses 2,845 2,343 6,145 5,300
--------- --------- --------- ---------
Operating profit/(loss) (19,821) (8,208) (63,011) (46,399)
Interest expense 4,072 4,056 7,723 7,861
Reorganization income (expense) 169 1,297 160 1,297
Other income (expense) 1,612 487 2,846 1,464
--------- --------- --------- ---------
Pre-tax profit/(loss) (22,112) (10,480) (67,728) (51,499)
Tax provision (638) 6 (629) 12
--------- --------- --------- ---------
Net income/(loss) $ (21,474) $ (10,486) $ (67,099) $ (51,511)
========= ========= ========= =========
21
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
RISK FACTORS AND CAUTIONARY STATEMENTS
This Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
including, in particular, forward-looking statements under the headings "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data." These
statements appear in a number of places in this Report and include statements
regarding WHX's intent, belief or current expectations with respect to (i) its
financing plans, (ii) trends affecting its financial condition or results of
operations, (iii) the impact of competition and (iv) the impact and effect of
the Bankruptcy Filing by the WPC Group. The words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate," and similar expressions are
intended to identify such forward-looking statements; however, this Report also
contains other forward-looking statements in addition to historical information.
Any forward-looking statements made by WHX are not guarantees of
future performance and there are various important factors that could cause
actual results to differ materially from those indicated in the forward-looking
statements. This means that indicated results may not be realized.
Factors that could cause the actual results of the WHX Group in
future periods to differ materially include, but are not limited to, the
following:
o The WHX Group's businesses operate in highly
competitive markets and are subject to significant competition from
other businesses;
o A decline in the general economic and business
conditions and industry trends and the other factors detailed from
time to time in the Company's filings with the Securities and
Exchange Commission could continue to adversely affect the Company's
results of operations;
o The WPC Group has a large net operating tax loss carry
forward due to prior losses and continues to incur losses. WPC is
part of the Company's consolidated tax group. In accordance with
federal tax laws and regulations, WPC's tax attributes have been
utilized by the Company's consolidated group to reduce its
consolidated federal tax obligations. The WPC Group's tax attributes
will be available to the WHX Group through December 31, 2003, and
thereafter will no longer be available;
o Various members of the WPC Group have existing and
contingent liabilities relating to environmental matters, including
environmental compliance costs, costs of remediation, and fines and
penalties relating to possible violations of national and state
environmental laws. In the event the WPC Group is unable to fund
these liabilities, claims may be made against WHX for payment of
such liabilities;
o WHX and H&H each have a significant amount of
outstanding indebtedness, and their ability to access capital
markets in the future to refinance such indebtedness may be limited;
and
o The credit agreement of H&H has certain financial
covenants that limit the amount of cash distributions that can be
paid to WHX.
Bankruptcy Filing of the WPC Group
On November 16, 2000, the WPC Group filed petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Ohio. As a result, subsequent to the commencement of the
22
Bankruptcy Filing, the WPC Group sought and obtained several orders from the
Bankruptcy Court that were intended to enable the WPC Group to continue business
operations as debtors-in-possession. Since the Petition Date, the WPC Group's
management has been in the process of stabilizing their businesses and
evaluating their operations, while continuing to provide uninterrupted services
to their customers. A Chapter 11 Plan of Reorganization ("POR") was confirmed by
the Bankruptcy Court on June 18, 2003 and was consummated on August 1, 2003.
Pursuant to the terms of the POR, among other things, the WPC Group ceased to be
a subsidiary of WHX effective August 1, 2003, and from that date forward has
been an independent company. See below for additional information regarding the
Bankruptcy Filing. The following is a chronological summary of the Bankruptcy
Filing through the consummation of the POR, and related matters.
On November 17, 2000, the Bankruptcy Court granted the WPC Group's
motion to approve a $290 million Debtor in Possession Credit Agreement ("DIP
Credit Agreement") provided by Citibank, N.A., as initial issuing bank, Citicorp
U.S.A., Inc., as administrative agent, and the DIP Lenders. Pursuant to the DIP
Credit Agreement, Citibank, N.A. made term loan advances to the WPC Group up to
a maximum aggregate principal amount of $35 million. In addition, the DIP
Lenders agreed, subject to certain conditions, to provide the WPC Group with
revolving loans, swing loans and letter of credit accommodations in an aggregate
amount of up to $255 million. On January 2, 2002, the WPC Group requested and
received a reduction in the revolving loans, swing loans and letter of credit to
a maximum aggregate amount of up to $175 million. On November 15, 2002, the
Bankruptcy Court approved a motion to amend the DIP Credit Agreement to reduce
the revolving loans, swing loans and letter of credit to a maximum aggregate of
$160 million and to make certain other related changes to the agreement. In
connection with the Bankruptcy Filing, WHX had guaranteed $30 million of the
term loan portion of the DIP Credit Agreement ("Term Loan") and deposited in a
pledged asset account $33 million of funds in support of such guaranty.
Effective as of June 1, 2001, WHX purchased a participation interest comprising
an undivided interest in the Term Loan in the amount of $30 million, plus
interest accrued but not paid on such amount of the Term Loan through June 1,
2001. Concurrently with such transaction, WHX's guaranty of $30 million of the
Term Loan described above was terminated and the $33 million of funds previously
deposited in a pledged asset account in support of such guaranty were released
to WHX. WHX paid to Citibank $30.5 million of such deposited funds to purchase
WHX's participation interest in the Term Loan. The DIP Credit Facility was
terminated and repaid upon the consummation of the POR (see below). As discussed
below, the WHX participation interest was forgiven by WHX in connection with the
consummation of the POR.
WPC borrowings outstanding under the DIP Credit Facility for
revolving loans totaled $130.9 million and $ 135.0 million at June 30, 2003 and
December 31, 2002 respectively. Term Loans under the DIP Credit Facility totaled
$35.8 million and $35.2 million at June 30, 2003 and December 31, 2002
respectively. Letters of credit outstanding under the facility totaled $ million
at June 30, 2003. At June 30, 2003, net availability under the DIP Credit
Facility was $147.5 million. As a result of the consummation of the POR the DIP
credit facility was repaid (except for the WHX participation described below).
At January 1, 2000, $136.8 million of the Company's net equity
represented its investment in the WPC Group. In addition to this investment, WHX
owned a $32.0 million participation interest in the Term Loan discussed above
and held other claims against WPC and WPSC totaling approximately $7.1 million
all of which were forgiven in connection with the consummation of the POR. The
recognition of the WPC Group's net loss of $176.6 million, in the year 2000,
eliminated the investment's carrying value of $136.8 million. In November 2000,
WHX recorded a liability of $39.8 million representing the excess of the WPC
Group's loss over the carrying amount of the investment.
During the period November 17, 2000 through June 30, 2003, the WPC
Group incurred cumulative net losses of $338.5 million. Pursuant to the terms to
the amended POR, WHX agreed to contribute $20.0 million to the WPC Group (see
discussion below pertaining to WHX Contributions). As a result of the Company's
obligation to fund $20.0 million to WPC Group, the Company recorded a $20.0
million charge as Equity in loss of WPC as of December 31, 2002. All conditions
to the WHX contributions were satisfied effective upon consummation of the POR,
and the WHX Contributions have been made.
A Settlement and Release Agreement ("Settlement Agreement") by and
among WPSC, WPC, WHX, and certain affiliates of WPSC, WPC and WHX, received
approval of the United States Bankruptcy Court for the Northern District of Ohio
on May 24, 2001, was entered into on May 25, 2001, and became effective on May
29, 2001.
23
The Settlement Agreement provided, in part, for (1) the payment by
WHX to WPC of $32 million; (2) the exchange of releases between the WPC Group
and the WHX Group; (3) the acquisition by WHX or its designee of certain assets
of Pittsburgh-Canfield Corporation ("PCC"), plus the assumption of certain trade
payables, subject to certain terms and conditions (WHX recorded $5.4 million as
the fair value of the net assets of PCC.); (4) the termination of the Tax
Sharing Agreements between WHX and WPC; (5) WHX to deliver an agreement to the
WPC Group whereby it agreed not to charge or allocate any pension obligations,
expenses or charges to the WPC Group with respect to the WHX Pension Plan,
subject to certain limitations as provided therein, through and including the
earlier of the effective date of a Plan or Plans of Reorganization and December
31, 2002; and (6) the final settlement of all inter-company receivables and
liabilities between the WHX Group and the WPC Group (except for commercial trade
transactions), including the liability for redeemable stock. Such transactions,
other than the acquisition of certain assets of PCC, all occurred effective May
29, 2001. The acquisition of certain assets of PCC closed on June 29, 2001. The
PCC agreement included a one-year repurchase option for the seller. The
repurchase option expired unexercised on June 29, 2002.
On October 22, 2001, the Bankruptcy Court entered an order ("October
Order"), approving several transactions intended, among other things, to provide
the WPC Group with additional liquidity. As part of the October Order, the
Bankruptcy Court approved a Memorandum of Understanding by and among the
Company, Wheeling-Pittsburgh Corporation ("WPC"), Wheeling-Pittsburgh Steel
Corporation ("WPSC") and the United Steelworkers of America, AFL-CIO-CLC
("USWA"), pursuant to which the Company agreed to provide to WPSC (1) up to $5
million of secured loans and $5 million of liquidity support (part of which
consisted of financing terms) during the period from the Order through January
31, 2002, (2) if certain conditions are met, an additional $2 million of secured
loans (for an aggregate of $7 million) and the maintenance of the $5.0 million
of liquidity support referred to above, during the period from February 1, 2002
through March 31, 2002, (the conditions were not met and accordingly the
additional $2.0 million in secured loans were not made), and (3) a $25 million
contribution to a new WPSC defined benefit pension plan contingent upon, among
other things, a confirmed WPSC Plan of Reorganization (item 3 has since been
superceded by the WHX Contributions described below). Through June 30, 2003, WHX
had advanced $5.0 million of the loans and up to $5.5 million of financing. At
June 30, 2003, the outstanding balance of these secured advances was $5.0
million plus interest of $0.5 million, and $1.6 million, respectively. These
secured advances, totaling $7.1 million were forgiven in connection with the
consummation of the POR.
The October Order also approved a Supplemental Agreement among the
members of the WPC Group and WHX, under which all of the extensions of credit
referred to in the preceding paragraph were granted super-priority claim status
in WPSC's Chapter 11 case and are secured by a lien on substantially all of the
assets of WPSC, junior to the liens, security interests and super-priority
claims of the lenders to WPSC under the DIP Credit Agreement. The Supplemental
Agreement also provided, among other things, that the Company may sell, transfer
or dispose of the stock of WPC free from the automatic stay imposed under the
Bankruptcy Code, and under specified circumstances required WPC to support
certain changes to the WHX Pension Plan.
Additionally, the October Order approved the terms of the Modified
Labor Agreement ("MLA") by and among WPC, WPSC and the USWA. WHX is not a party
to the MLA. The MLA modified the then current WPSC collective bargaining
agreement to provide for, among other things, immediate reductions in wages and
the cost of providing medical benefits to active and retired employees in
exchange for improvement in wages and pension benefits for hourly employees upon
a confirmed WPSC Plan of Reorganization. The MLA was part of a comprehensive
support arrangement that also involved concessions from WPSC salaried employees,
WPSC's vendors and other constituencies in the Chapter 11 proceedings.
In January 2002, WPSC finalized a financial support plan which
included a $5.0 million loan from the State of West Virginia, a $7.0 million
loan and a $0.2 million grant from the State of Ohio, a $10.0 million advance by
the WHX Group for future steel purchases (all of which were delivered before
June 30, 2002) and additional wage and salary deferrals from WPSC union and
salaried employees. At December 31, 2002, the balance outstanding with the State
of West Virginia was $5.0 million, and $7.0 million with the State of Ohio.
On September 23, 2002, WPC announced that the Royal Bank of Canada
("RBC") had filed on its behalf an application with the Emergency Steel Loan
Guarantee Board ("ESLGB") for a $250 million federal loan guarantee. An
affiliate of RBC has agreed to underwrite the loan if the guaranty is granted.
On February 28, 2003, the ESLGB initially rejected the application. WPC and RBC,
however, amended and supplemented the application and it was conditionally
approved on March 26, 2003. The approval of the guaranty was subject to the
satisfaction of various conditions on or before June 30, 2003 including, without
24
limitation, resolution of the treatment of the WHX Pension Plan that is
acceptable to and approved by the PBGC, confirmation of a Plan of Reorganization
for the WPC Group, and the execution of definitive agreements satisfactory in
form and substance to the ESLGB. All such conditions were satisfied on or before
August 1, 2003.
The amended RBC application contained a business plan that assumed a
confirmed Chapter 11 plan of reorganization ("POR") for the WPC Group. As part
of the POR, the Company agreed conditionally to make certain contributions ("WHX
Contributions") to the reorganized company. Under the WHX Contributions, the
Company forgave the repayment of its claims against the WPC Group of
approximately $39 million and, additionally, contributed to the reorganized
company $20 million of cash, for which the Company received a note in the amount
of $10 million. As a result of the WHX Contributions, the Company recorded a
$20.0 million charge as Equity in loss of WPC as of December 31, 2002.
On June 18, 2003 the POR was confirmed by the Bankruptcy Court and
on August 1, 2003 it was consummated. In connection with the consummation of the
POR the loan with the RBC closed on August 1, 2003 and all conditions to the
Guaranty by the ESLGB were satisfied and the guaranty was granted. The proceeds
of the RBC Loan, among other things, were used to repay the DIP creditors
(except for WHX). In addition all conditions to the WHX Contributions were
satisfied and the WHX Contributions were made. Accordingly, effective on August
1, 2003 the WPC Group ceased to be a subsidiary of WHX and from that date
forward has been an independent company.
On March 6, 2003, the Pension Benefit Guaranty Corporation ("PBGC")
published its Notice of Determination ("Notice") and on March 7, 2003 filed a
Summons and Complaint ("Complaint") in United States District Court for the
Southern District of New York seeking the involuntary termination of the WHX
Pension Plan ("WHX Plan"). WHX filed an answer to this complaint on March 27,
2003, contesting the PBGC's action. On July 24, 2003, the Company entered into
an agreement among the Pension Benefit Guaranty Corporation ("PBGC"),
Wheeling-Pittsburgh Corporation ("WPC"), Wheeling-Pittsburgh Steel Corporation
("WPSC"), and the United Steelworkers of America, AFL-CIO-CL ("USWA") in
settlement of matters relating to the PBGC v. WHX Corporation, Civil Action No.
03-CV-1553, in the United States District Court for the Southern District of New
York (the "Termination Litigation"), in which the PBGC was seeking to terminate
the WHX Pension Plan (the "Plan"). Under the settlement, among other things, WHX
has agreed (a) that the Plan, as it is currently constituted, is a single
employer pension plan, (b) to contribute funds to the Plan equal to moneys spent
(if any) by WHX or its affiliates to purchase WHX 10.5% Senior Notes (the
"Senior Notes") in future open market transactions, and (c) to grant to the PBGC
a pari passu security interest of up to $50 million in the event WHX obtains any
future financing on a secured basis or provides any security or collateral for
the Senior Notes.
Also under the settlement, all parties have agreed that as of the
effective date of the WPC Plan of Reorganization (the "POR"), (a) no shutdowns
have occurred at any WPC Group facility, (b) no member of the WPC Group is a
participating employer under the Plan, (c) continuous service for WPC Group
employees is broken, (d) no WPC Group employees will become entitled to "Rule of
65" or "70/80" Retirement Benefits (collectively, "Shutdown Benefits") by reason
of events occurring after the effective date of the POR, and (e) the Plan shall
provide for a limited early retirement option to allow up to 650 WPSC
USWA-represented employees the right to receive retirement benefits based on the
employee's years of service as of July 1, 2003 with a benefit equal to $40
multiplied by the employee's years of service as of July 31, 2003.
Finally, under the settlement, the PBGC has agreed (a) that, after
the effective date of the POR, if it terminates the Plan at least one day prior
to a WPC Group facility shutdown, WHX shall be released from any additional
liability to PBGC resulting from the shutdown, (b) to withdraw its claims in the
WPC Bankruptcy Proceedings; and (c) to dismiss the Termination Litigation.
For accounting purposes, the cost of the early retirement incentive
will be recognized in the third quarter of 2003 as a special termination benefit
in accordance with Statement of Financial Accounting Standards No. 88
"Employers' Accounting for Settlement and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" ("SFAS 88"). In addition, a
Curtailment arises as a result of the break in service for WPC Group employees
that also requires a charge pursuant to the SFAS 88. The amounts of these
charges will depend on many factors including the number and characteristics of
the employees who choose to retire and the Plan's funded status as of the
measurement date. Based on preliminary estimates, the combined impact of both
charges may be in the range of $40.0 to $55.0 million.
25
For Plan funding purposes, the impact of the changes will not be
recognized until the next actuarial valuation which occurs as of January 1,
2004. The funding requirements will depend on many factors including those
identified above as well as future investment returns on Plan assets. Based on
preliminary estimates, using the current statutory discount rate, it is possible
that average annual contributions to the Plan of approximately $10.0 million may
be required for the years 2004, 2005 and 2006.
The agreement with the PBGC also contains the provision that WHX
will not contest a future action by the PBGC to terminate the Plan in connection
with a future WPC Group facility shutdown. In the event that such a plan
termination occurs, the PBGC has agreed to release WHX from any claims relating
to the shutdown. However, there may be PBGC claims related to unfunded
liabilities that may exist as a result of a termination of the Plan.
In connection with past collective bargaining agreements by and
between the WPC Group and the United Steelworkers of America, AFL-CIO-CLC
("USWA"), the WPC Group is obligated to provide certain medical insurance, life
insurance, disability and surviving spouse retirement benefits to retired
employees and their dependents ("OPEB Obligations"). WHX is not a signatory to
any of these agreements. However, WHX previously had separately agreed to be
contingently liable for a portion of the OPEB Obligations. WHX's contingent
obligation would be triggered in the event that the WPC Group was to fail to
satisfy its OPEB Obligations. WHX's contingent obligation is limited to 25% of
the Accumulated Post-Retirement Benefit Obligation with respect to the WPC
Group's employees and retirees represented by the USWA. WPSC's total OPEB
Obligation at January 1, 2003 is estimated to be $314.1 million. WHX has
estimated that approximately 85% of employees and retirees entitled to such OPEB
Obligations are represented by the USWA. In connection with the consummation of
the POR WHX's contingent liability for the OPEB Obligations was eliminated.
As a result of the consummation of the POR any balance remaining in
the loss in excess of investment will be reversed into income in the third
quarter of 2003.
OVERVIEW
WHX is a holding company that has been structured to invest in
and/or acquire a diverse group of businesses on a decentralized basis. WHX's
primary business currently is Handy & Harman, a diversified manufacturing
company whose strategic business units encompass three segments: precious metal
plating and fabrication, specialty wire and tubing, and engineered materials.
WHX also owns Canfield Metal Coating Corporation, a manufacturer of
electrogalvanized products used in the construction and appliance industries. In
July 2002, the Company sold its wholly owned subsidiary, Unimast Incorporated, a
leading manufacturer of steel framing and other products for commercial and
residential construction. As a result, Unimast has been classified as a
discontinued operation for all periods presented. Effective upon the
consummation the POR on August 1, 2003, WPC and its subsidiaries including WPSC,
a vertically integrated manufacturer of value-added and flat rolled steel
products, which sought bankruptcy protection in November 2000, ceased to be a
subsidiary of WHX and from that day forward has been an independent company.
WHX continues to pursue strategic alternatives to maximize the value
of its portfolio of businesses. Some of these alternatives have included, and
will continue to include, selective acquisitions, divestitures and sales of
certain assets. WHX has provided, and may from time to time in the future,
provide information to interested parties regarding portions of its businesses
for such purposes.
Results of Operations
- ---------------------
Comparison of the Second Quarter of 2003 with the Second Quarter of 2002
- ------------------------------------------------------------------------
Net sales for the second quarter of 2003 were $83.5 million compared
to $109.2 million in the second quarter of 2002. Sales decreased at the Precious
Metal Segment by $21.4 million and by $4.8 million at the Wire & Tubing Segment.
Sales increased by $0.6 million at the Engineered Materials Segment. Gross
profit percentage declined in the second quarter of 2003 to 19.6% from 21.2% in
the second quarter of 2002 primarily due to increased raw material costs and
lower sales volume.
26
Selling, general and administrative expenses increased $3.4 million
to $20.8 million in the second quarter of 2003 from $17.4 million in the
comparable 2002 period. This resulted from increased pension expense of $2.1
million, increased legal and professional fees related to the PBGC action, and
incremental costs, primarily employee related, associated with the closure of
certain H&H operations.
Operating loss for the second quarter of 2003 was $4.4 million
compared to an operating loss of $5.0 million for the second quarter of 2002.
Operating income at the segment level was $2.9 million compared to an operating
loss of $1.0 million in 2002. The 2002 operating results at the segment level
included a $10.7 million restructuring charge related to the Precious Metal
Segment.
Unallocated corporate expenses increased from $4.0 million to $7.3
million. This increase is primarily related to increased pension expense of $2.1
million and increased legal and professional fees related to the PBGC action.
The increased pension expense is primarily related to the lowering of the
assumed long-term rate of return on the WHX Pension Plan assets from 9.25% to
8.5% and a reduction in the discount rate.
Interest expense for the second quarter of 2003 decreased $1.6
million to $4.9 million from $6.5 million in the second quarter of 2002. This
decrease was due to lower borrowings, primarily from the retirement of a portion
of the 10 1/2% Senior Notes in 2003 and 2002, lower interest rates and reduced
amortization of deferred financing and consent fees.
Other income was $1.7 million in the second quarter of 2003 compared
to expense of $1.6 million in 2002. Included in 2003 is net investment income of
$.7 million, an unrealized gain on short-term investments of $2.6 million, loss
on interest rate swap of $0.3, and the recognition of $1.1 million of
accumulated foreign currency translation losses.
In the three-months ended June 30, 2003, the Company purchased and
retired $12.0 million aggregate principal amount of 10 1/2% Senior Notes in the
open market for $9.8 million. After the write off of $0.2 million of deferred
debt related costs, the Company recognized a pre-tax gain of $2.0 million. In
the quarter ended June 30, 2002, the Company purchased and retired $39.5 million
aggregate principal amount of the 10 1/2% Senior Notes in the open market for
$27.0 million. After the write off of deferred debt related costs, the Company
recognized a pre-tax gain of $11.2 million.
The 2003 second quarter tax benefit is based on a Federal benefit of
35%, offset by permanent differences and state and foreign tax expense. The 2002
second quarter tax provision assumes no liability for federal taxes. This is
based on the assumed utilization of net operating loss carryforwards of WPC, a
non-consolidated subsidiary.
The comments that follow compare revenues and operating income from
continuing operations by segment for the second quarter 2003 and 2002:
Precious Metal
- --------------
Sales for the Precious Metal Segment decreased $21.4 million from
$42.8 million in 2002 to $21.4 million in 2003. Approximately $17.4 million of
this decrease was due to the closing of the Fairfield, CT facility at the end of
the third quarter 2002.
Operating income increased $7.6 million from a loss of $7.8 million
in 2002 to a loss of $0.2 million in 2003. The 2002 operating results include a
$10.7 million restructuring charge related to the closure of the Fairfield CT
facility. Excluding this charge operating income declined by $3.1 million. This
decline is primarily attributable to incremental costs, primarily employee
related, of $1.4 million associated with the closure of facilities, and to lower
sales at the remaining operating units reflecting weak U.S. industrial output.
Wire & Tubing
- -------------
Sales for the Wire & Tubing Segment decreased $4.7 million from
$35.5 million in 2002 to $30.8 million in 2003 due to lower sales volume and
pricing in the specialty tubing group, and the shutdown of the Liversedge,
27
England and Willingboro, N.J. specialty wire facilities at the end of 2002.
These specialty wire facilities had sales of $4.4 million in the 2002 period.
Operating income decreased by $2.1 million from $2.3 million in 2002
to $0.2 million in 2003. The decrease in operating income is due to increased
raw material costs and declining sales prices associated with this segment's
refrigeration business, lower margins in the stainless steel tubing markets, and
incremental costs, primarily employee related, of approximately $1.0 million
associated with the closure of the above mentioned specialty wire facilities.
Engineered Materials
- --------------------
Sales for the Engineered Materials Segment increased $.6 million
from $30.8 million in 2002 to $31.4 million in 2003 due to market share gains
and new products in this segment's fastener business, offset by a decline in
sales in the construction and appliance markets in this segments
electro-galvanizing business.
Operating income decreased by $1.6 million from $4.5 million in 2002
to $2.9 million in 2003. The decrease in operating income is due to a decline in
sales in the construction and appliance markets in this segment's
electro-galvanizing business.
Comparison of the First Six Months of 2003 with the First Six Months of 2002
- ----------------------------------------------------------------------------
Net sales for the first six months of 2003 were $164.5 million
compared to $202.0 million in the first six months of 2003. Sales decreased by
$33.9 million at the Precious Metal Segment and by $7.2 million at the Wire &
Tubing Segment. Sales increased by $3.7 million at the Engineered Materials
Segment. Gross profit percentage declined in the six month period of 2003 to
18.5% from 20.2% in the comparable 2002 period primarily due to increased raw
material costs and lower sales volume, and a $1.3 million lower of cost or
market adjustment for precious metal inventory in the first quarter of 2003.
Selling, general and administrative expenses increased $8.3 million
to $42.8 million in the first six months of 2003 from $34.4 million in the
comparable 2002 period. This resulted from increased pension expense of $4.2
million, increased legal and professional fees related to the PBGC action,
incremental costs (primarily employee related) of approximately $2.4 million
associated with the shut down of certain H&H operations, and a $3.5 million
charge for employee separation and related expenses in the first quarter of
2003. This $3.5 million charge relates to a reduction in executive,
administrative and information technology personnel at H&H.
Operating loss for the first six months of 2003 was $12.3 million
compared to a $4.4 million operating loss for the first six months of 2002.
Operating income at the segment level was $1.6 million compared to operating
income of $4.4 million in 2002. The 2003 operating results at the segment level
include the $3.5 million charge for employee separation and related expenses,
and incremental costs (primarily employee related) of $2.2 million associated
with the shut down of certain H&H operations discussed above. The operating
results in the 2002 period include a $10.7 million restructuring charge related
to the Company's Precious Metal Segment.
Unallocated corporate expenses increased from $8.7 million to $13.9
million. This increase is primarily related to increased pension expense of $4.2
million and increased legal and professional fees related to the PBGC action
seeking to terminate the WHX Pension Plan.
Interest expense for the first six months of 2003 decreased $5.4
million to $9.9 million from $15.3 million in the first six months of 2002. This
decrease was due to lower borrowings, primarily from the retirement of a portion
of the 10 1/2% Senior Notes in 2003 and 2002, lower interest rates and reduced
amortization of deferred financing and consent fees.
Other income was $0.2 million in the first six months of 2003
compared to expense of $0.3 million in 2002. Included in 2003 is net investment
income of $1.7 million, an unrealized gain on short-term investments of $1.6
million, a loss on an interest rate swap of $0.6 million, loss on the disposal
of assets of $.8 million, and the recognition of $1.1 million of accumulated
foreign currency translation losses. The expense for 2002 was primarily related
28
to an unrealized loss on an interest rate swap of $1.7 million, losses on
disposal of property, plant and equipment of $0.6 million partially offset by
net investment income of $2.5 million.
In the six months ended June 30, 2003, the Company purchased and
retired $17.7 million aggregate principal amount of 10 1/2% Senior Notes in the
open market for $14.3 million. After the write-off of $0.4 million of deferred
debt related costs, the Company recognized a gain of $3.0 million.
In the six months ended June 30, 2002, the Company purchased and
retired $122.0 million aggregate principal amount of 10 1/2% Senior Notes in the
open market for $77.0 million. After the write-off of $4.1 million of deferred
debt related costs, the Company recognized a gain of $40.2 million.
The Company adopted the provisions of Statement of Financial
Standards 142, "Goodwill and Other Intangible Assets" ("SFAS 142") effective
January 1, 2002. As a result of the adoption of SFAS 142, the Company recorded a
$44.0 million non-cash goodwill impairment charge related to the H&H Wire Group
in the first quarter of 2002. This charge was reported as a cumulative effect of
an accounting change. The Company recorded this charge because the fair value of
this reporting unit, as determined by estimated cash flow projections, was less
than the reporting unit's carrying value.
The 2003 period tax provision is based on a federal benefit of 35%,
offset by permanent differences and state and foreign tax expense. The 2002
six-month tax provision assumes no liability for federal taxes. This assumption
is based on the utilization of current year losses generated by WPC, a
non-consolidated subsidiary. The cumulative effect of an accounting change in
2002 had no tax consequence as it relates to non-deductible goodwill.
The comments that follow compare revenues and operating income from
continuing operations by segment for the six-month periods 2003 and 2002:
Precious Metal
- --------------
Sales for the Precious Metal Segment decreased $33.9 million from
$77.7 million in 2002 to $43.7 million in 2003. Approximately $32.3 million of
this decrease was due to the closing of the Fairfield, CT facility at the end of
the third quarter 2002.
Operating loss was $1.4 million in 2003 compared to an operating
loss of $6.2 million in 2002. Included in the 2002 period is a second quarter
restructuring charge of $10.7 million relating to the closure of the Fairfield
CT facility. Excluding this charge operating income declined by $5.9 million.
Included in 2003 is a non cash lower of cost or market charge of $1.3 million
related to precious metal inventory and an additional $1.1 million of severance
related expenses allocated to this segment from the reduction in salaried staff
at H&H. The remainder of the decline is primarily attributable to lower sales at
the remaining operating units reflecting weak U.S. industrial output, and
incremental costs, primarily employee related, associated with the closure of
facilities.
Wire & Tubing
- -------------
Sales for the Wire & Tubing Segment decreased $7.2 million from
$70.1 million in 2002 to $62.9 million in 2003. This decline was due to the
shutdown of the Liversedge, England and Willingboro, N.J. specialty wire
facilities at the end of 2002. These facilities had sales of $8.9 million in the
2002 period.
Operating income decreased by $4.7 million from $4.1 million in 2002
to an operating loss of $0.6 million in 2003. The decrease in operating income
is due to increased raw material costs and declining sales prices associated
with this segment's refrigeration business, lower margins in the stainless steel
tubing markets, and incremental costs, primarily employee related, associated
with the closure of the above mentioned specialty wire facilities. In addition,
the 2003 period includes $1.5 million of severance related expenses allocated to
this segment from the reduction in salaried staff at H&H.
29
Engineered Materials
- --------------------
Sales for the Engineered Materials Segment increased $3.7 million
from $54.2 in 2002 to $57.9 million in 2003 primarily due to market share gains
and new products in this segment's fastener business, partially offset by a
decline in sales in the construction and appliance markets in this segment's
electro-galvanizing business.
Operating income decreased $2.9 million from $6.4 million in 2002 to
$3.5 million in 2003. Included in 2003 is $0.9 million of severance related
expenses allocated to this segment from the reduction in salaried staff at H&H.
The remaining operating income decrease is due to a decline in sales in the
construction and appliance markets in this segment's electro-galvanizing
business.
Financial Position
- ------------------
Net cash flow provided by operating activities from continuing
operations for the six months ended June 30, 2003 totaled $76.8 million. Income
from continuing operations adjusted for non-cash income and expense items used
$6.5 million of cash. Working capital accounts provided $83.5 million of funds,
as follows: Short-term trading investments and related short-term borrowings are
reported as cash flow from operating activities and provided a net $91.1 million
of funds in the first six months of 2003. Accounts receivable used $5.5 million,
trade payables used $1.4 million, and net other current items used $.4 million.
Inventories, valued principally by the LIFO method for financial reporting
purposes, totaled $69.2 million at June 30, 2003, and used $.3 million.
In the six months of 2003, $5.9 million was spent on capital
improvements.
In the first quarter of 2003 the Company purchased an aircraft for
$19.1 million which it intends to re-sell. The aircraft is included in other
current assets on the Company's Consolidated Balance Sheet at June 30, 2003.
The Company's major subsidiary, H&H, maintains a separate and
distinct credit facility with various financial institutions.
Borrowings outstanding against the H&H Senior Secured Credit
Facility at June 30, 2003 totaled $154.1 million. Letters of credit outstanding
under the H&H Revolving Credit Facility were $13.4 million at June 30, 2003. At
December 31, 2002, borrowings outstanding under the H&H Senior Secured Credit
Facility were $130.5 million.
H&H has entered into an interest rate swap agreement for certain of
its variable-rate debt. The swap agreement covers a notional amount of $100.0
million and converts $100.0 million of its variable rate debt to a fixed rate of
4.79%. The effective date of the swap is January 1, 2003 with a termination date
of July 1, 2004.
In the six months ended June 30, 2003 the Company purchased and
retired $17.7 million aggregate principal amount of 10 1/2% Senior Notes in the
open market for $14.3 million. After the write off of $0.4 million of deferred
debt related costs, the Company recognized a gain of $3.0 million.
As a result of the recent PBGC action to terminate the WHX Pension
Plan, H&H elected not to borrow any additional funds against the H&H Credit
Facilities until such time as the PBGC action was resolved. This election
resulted in an increase in H&H borrowings under its Senior Secured Credit
Facility of $23.7 million, as H&H did not use cash to reduce its revolver
balance. Effective upon the consummation of the POR and the signing of an
agreement with the PBGC the current dispute with the PBGC has been resolved and
H&H has resumed borrowings under the H&H Facilities.
Liquidity
- ---------
At June 30, 2003 the WHX Group had cash and cash equivalents of
$85.7 million and short-term investments of $6.3 million.
In the twelve months ended December 31, 2002, the Company purchased
and retired $134.6 million aggregate principal amount of 10 1/2% Senior Notes in
the open market for $87.6 million. During the period January 1, 2003 through
June 30, 2003, purchased $17.7 million aggregate principal amount of Senior
Notes in the open market for $14.3 million. The cumulative result of these
purchases amounted to a reduction of principal of $152.3 million and annual
reduction in future cash interest expense of $16.0 million.
30
On July 31, 2002, the Company sold the stock of Unimast, Inc., its
wholly-owned subsidiary, to Worthington Industries, Inc. for $95.0 million in
cash. Under the terms of the agreement, the buyer assumed approximately $25.6
million of Unimast debt. Net cash proceeds from the sale, after escrow of $2.5
million, closing costs, transaction fees, employee related payments, and other
costs and expenses were approximately $85.0 million. The Company applied these
proceeds in accordance with the terms of the Indenture for the Company's 10 1/2
% Senior Notes.
In 2001, in connection with the term loan portion of the WPC Group's
debtor-in-possession financing, WHX purchased a participation interest
comprising an undivided interest in the term loan in the amount of $30.5
million. In addition, at June 30, 2003, WHX had balances due from WPSC totaling
$7.1 million in the form of advances and liquidity support. As part of the POR
the Company agreed to make certain contributions to the reorganized company. In
connection with the consummation of the POR, on August 1, 2003 the Company made
the WHX contributions, which consisted of forgoing repayment of the above claims
and contributing $20 million in cash to the reorganized company.
The WHX Group has a significant amount of outstanding indebtedness,
and their ability to access capital markets in the future may be limited.
However, management believes that cash on hand and future operating cash flow
will enable the WHX Group to meet its cash needs for the foreseeable future. The
credit agreement of H&H has certain financial covenants restricting
indebtedness, liens and limiting cash distributions that can be made to WHX.
Certain financial covenants associated with leverage, fixed charge coverage,
capital spending and interest coverage must be maintained. In second quarter of
2003, H&H received a capital contribution of $3.0 million from WHX in order to
remain in compliance with certain of these financial covenants. Such funds were
utilized to reduce H&H debt. The H&H credit agreement allows for the payment of
management fees, income taxes pursuant to a tax sharing agreement, precious
metal lease repayments and related interest, and certain other expenses. In
addition, dividends may be paid under certain conditions. At December 31, 2002,
the net assets of H&H amounted to $206.1 million, of which approximately $1.0
million was not restricted as to the payment of dividends to WHX.
On March 6, 2003, the PBGC issued its Notice and on March 7, 2003,
the PBGC published its Notice and filed a Complaint in the United States
District Court for the Southern District of New York seeking to terminate the
WHX Corporation Pension Plan ("WHX Plan"). On March 11, 2003 H&H informed its
lenders that the PBGC action may have been an occurrence that would preclude H&H
from making certain representations to the lenders (as required by the H&H
Facilities) in connection with future borrowings. H&H elected not to borrow any
additional funds against the H&H Facilities until such time as the PBGC action
was resolved. Effective upon the consummation of the POR and the signing of an
agreement with the PBGC the dispute with the PBGC has been resolved and H&H has
resumed borrowings under the H&H Facilities.
Short-term liquidity is dependent, in large part, on cash on hand,
investments, precious metal values, and general economic conditions and their
effect on market demand. Long-term liquidity is dependent upon the WHX Group's
ability to sustain profitable operations and control costs during periods of low
demand or pricing in order to sustain positive cash flow. The WHX Group
satisfies its working capital requirements through cash on hand, investments,
borrowing availability under the H&H Credit Facilities and funds generated from
operations. The WHX Group believes that, cash on hand, assuming it is able to
sustain the current outstanding borrowings under the H&H Facilities, will
provide the WHX Group for the next twelve months with the funds required to
satisfy working capital and capital expenditure requirements.
At June 30, 2003 there were 2.6 million shares of Series A
Convertible Preferred Stock and 2.9 million shares of Series B Convertible
Preferred Stock outstanding. Dividends on these shares are cumulative and are
payable quarterly in arrears, in an amount equal to $3.25 per annum per share of
Series A and $3.75 per annum per share of Series B. Pursuant to the terms of the
Supplemental Indenture to the Company's 10 1/2% Senior Notes, the Company was
prohibited from paying dividends on this Preferred Stock until after October 31,
2002, at the earliest and thereafter only in the event that the Company
satisfies certain conditions set forth in the Indenture. Such conditions were
not satisfied at June 30, 2003. Presently, management believes that it is not
likely that the Company will be able to pay these dividends in the foreseeable
future. The holders of the Preferred Stock are eligible to elect two directors
to the Company's Board of Directors upon the Company's failure to pay six
quarterly dividend payments, whether or not consecutive. Dividends on the
Preferred Stock have not been paid since the dividend payment of October 31,
2000. Accordingly, the holders of the Preferred Stock have the right to elect
two directors to the Company's Board of Directors. To date, the holders of the
Preferred Stock have not elected such directors. At June 30, 2003, preferred
dividends in arrears totaled $53.4 million.
31
New Accounting Standards
- ------------------------
The Company adopted the provisions of Statement of Financial
Standards 142, "Goodwill and Other Intangible Assets" ("SFAS 142") effective
January 1, 2002. As a result of the adoption of SFAS 142, the Company recorded a
$44.0 million non-cash goodwill impairment charge related to the H&H Wire Group
in the first quarter of 2002. This charge was reported as a cumulative effect of
an accounting change. The Company recorded this charge because the fair value of
this reporting unit, as determined by estimated cash flow projections, was less
than the reporting unit's carrying value.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 143, "Accounting for Asset Retirement Obligation" ("SFAS
143"). SFAS 143 requires that obligations associated with the retirement of a
tangible long-lived asset be recorded as a liability when those obligations are
incurred, with the amount of the liability initially measured at fair value.
Upon initially recognizing a liability for an asset-retirement obligation
("ARO"), an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. WHX adopted the provisions of SFAS 143 on
January 1, 2003 and its adoption did not have a significant effect on the
Company's financial statements.
In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The Statement also extends the reporting requirements to
report separately, as discontinued operations, components of an entity that have
either been disposed of or classified as held for sale. WHX adopted the
provisions of SFAS 144 as of January 1, 2002.
On July 31, 2002, WHX sold the stock of Unimast, its wholly-owned
subsidiary for $95.0 million. As a result of this transaction, Unimast was
accounted for as a discontinued operation in accordance with SFAS 144 (see Note
2).
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 sets forth
various modifications to existing accounting guidance which prescribes the
conditions which must be met in order for costs associated with contract
terminations, facility consolidations, employee relocations and terminations to
be accrued and recorded as liabilities in financial statements. WHX adopted the
provisions of SFAS 146, as related to exit or disposal activities as of January
1, 2003, and its adoption did not have a significant effect on the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to
provide alternative methods of transition to SFAS 123's fair value method of
accounting for stock-based employee compensation. While the Statement does not
amend SFAS 123 to require companies to account for employee stock options using
the fair value method, the disclosure provisions of SFAS 148 are applicable to
all companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS 123 or the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure provisions of SFAS 148.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," which addresses consolidation by
a business of variable interest entities in which it is the primary beneficiary.
The Interpretation is effective immediately for certain disclosure requirements
and variable interest entities created after January 31, 2003, and in fiscal
2004 for all other variable interest entities. This Interpretation will not have
a material impact on the Company's financial statements.
In April 2003, the FASB issued SFAS no. 149, "Amendment of Statement
of 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
amends and clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS 149 is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
32
June 30, 2003. The adoption of SFAS 149 is not expected to have a material
effect on the Company's financial position, results of operations, or cash
flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS 150 is effective for
all financial instruments entered into or modified after May 31, 2003 and must
be applied to our existing financial instruments effective July 6, 2003, the
beginning of the first fiscal period after June 15, 2003. The Company adopted
SFAS 150 on June 1, 2003. The adoption of SFAS 150 did not have any effect on
the Company's financial position, results of operations, or cash flows.
*******
When used in the Management's Discussion and Analysis, the words
"anticipate", "estimate" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which are intended to be covered by the
safe harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, general
economic conditions and, the ability of the Company to develop markets and sell
its products and the effects of competition and pricing. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included herein will prove
to be accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in financial market risk as originally
discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by
this Form 10-Q, the Company's Principal Executive Officer and Principal
Financial Officer have concluded the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934) are effective. There have been no significant changes in
internal controls over financial reporting that have materially affected or are
reasonably likely to materially affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 25, 1998, the Securities and Exchange Commission ("SEC")
instituted an administrative proceeding against the Company alleging that it had
violated certain SEC rules in connection with the tender offer for Dynamics
Corporation of America ("DCA") commenced on March 31, 1997 through the Company's
wholly-owned subsidiary, SB Acquisition Corp. ("Offer"). Specifically, the Order
Instituting Proceedings ("Order") alleges that, in its initial form, the Offer
violated the "All Holders Rule," Rule 14d-10(a)(1) under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), based on the Company's inclusion of a
"record holder condition" in the Offer. No shareholder had tendered any shares
at the time the condition was removed. The Order further alleges that the
Company violated Rules 14d-4(c) and 14d-6(d) under the Exchange Act upon
expiration of the Offer, by allegedly waiving material conditions to the Offer
without prior notice to shareholders and purchasing the approximately 10.6% of
DCA's outstanding shares tendered pursuant to the offer. The SEC does not claim
that the Offer was intended to or in fact defrauded any investor.
The Order institutes proceedings to determine whether the SEC should
enter an order requiring the Company (a) to cease and desist from committing or
causing any future violation of the rules alleged to have been violated and (b)
to pay approximately $1.3 million in disgorgement of profits. The Company filed
33
an answer denying any violations and seeking dismissal of the proceeding. On
October 6, 2000, the initial decision of the Administrative Law Judge who heard
the case dismissed all charges against the Company, with the finding that the
Company had not violated the law.
The Division of Enforcement has filed a petition for the SEC to
review the decision and a brief, but only as to the All Holders Rule Claim. On
June 4, 2003, the SEC issued an opinion that, in overturning the initial
decision of the Administrative law Judge, found that the Company had violated
the "All Holders Rule." The SEC ordered that the Company cease and desist from
committing or causing any violations or future violations of the "All Holders
Rule." No other sanction was imposed. The Company has filed a petition for
review of the SEC's decision with the United States Court of Appeals for the
District of Columbia. Briefing and oral argument of the appeal have not been set
at this time.
On November 16, 2000, the WPC Group filed petitions for relief under
Chapter 11 of the Bankruptcy Code. The Bankruptcy Filing was made in the United
States Bankruptcy Court for the Northern District of Ohio. As a result,
subsequent to the commencement of the Bankruptcy Filing, the WPC Group sought
and obtained several orders from the Bankruptcy Court that were intended to
enable the WPC Group to continue business operations as debtors-in-possession.
Since the Petition Date, the WPC Group's management has been in the process of
stabilizing their businesses and evaluating their operations, while continuing
to provide uninterrupted services to its customers. A Chapter 11 POR was
confirmed by the Bankruptcy Court on June 18, 2003. Pursuant to the terms of the
POR, among other things, the WPC Group ceased to be a subsidiary of WHX
effective August 1, 2003, and from that date forward has been an independent
company. Reference is made to Note 1 of the Condensed Consolidated Financial
Statements included herewith and to the Company's Annual Report Form 10-K for a
more detailed description of the matters referred to in this paragraph.
Reference is hereby made to Item 3. Legal Proceedings of the
Company's Annual Report on Form 10-K for the year ended December 31, 2002, as
well as to Note 10 to the Condensed Consolidated Financial Statements included
herein, for information regarding additional matters.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At June 30, 2003, there were 2.6 million shares of Series A
Convertible Preferred Stock and 2.9 million shares of Series B Convertible
Preferred Stock outstanding. Dividends on these shares are cumulative and are
payable quarterly in arrears, in an equal amount to $3.25 per annum per share of
Series A and $3.75 per annum per share of Series B. Pursuant to the terms of the
Supplemental Indenture to the Company's 10 1/2 % Senior Notes, the Company was
prohibited from paying dividends on this Preferred Stock until after October 31,
2002, at the earliest and thereafter only in the event that the Company
satisfies certain conditions set forth in the Indenture. Such conditions were
not satisfied as of June 30, 2003. Presently, management believes that it is not
likely that the Company will be able to pay these dividends in the foreseeable
future. At June 30, 2003 dividends in arrear amounted to $53.4 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
2003 Annual Meeting of Stockholders
- -----------------------------------
(a) The 2003 Annual Meeting of Stockholders was held on June 3, 2003.
(b) All of the Company's nominees as Class I directors, as set forth
below, were elected. There was no solicitation in opposition to the
Company's nominees. The other members of the Company's Board of
Directors as of the date of the Company's annual meeting of
stockholders were Neil D. Arnold, Robert A. Davidow, Ronald LaBow,
Marvin L. Olshan, Garen W. Smith and Raymond S. Troubh.
(c) Matters voted on at the meeting and the number of votes cast:
Voted For Withheld
--------- --------
(1) Election of Directors
34
William Goldsmith 4,472,633 466,848
Louis Klein Jr. 4,509,008 430,473
Howard Mileaf 4,508,689 430,792
Voted Broker
Voted For Against Abstentions Non-Votes
--------- ------- ----------- ---------
(2) Adoption of 2003 Incentive Stock
Plan 4,289,904 609,438 40,139 0
(3) Ratification of Pricewaterhouse
Coopers LLP as the Company's
Independent Public Accountants for
the fiscal year ending December 31,
2003 4,550,177 366,858 22,446 0
(d) In addition to the matters voted upon at the Annual Meeting as
described above, holders of the Company's Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock, voting
together as a class, had the right to elect up to two directors to
the Board of Directors of the Company. No quorum of preferred
stockholders was present at the Annual Meeting, and accordingly, no
action was conducted at such meeting by the preferred stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
* Exhibit 31.1 Certification of Principal Executive Officer
* Exhibit 31.2 Certification of Principal Executive Officer
* Exhibit 32.1 Certification of Principal Executive Officer
* Exhibit 32.2 Certificate of Principal Financial Officer
Form 8-K filed on May 13, 2003
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHX CORPORATION
/s/ Robert K. Hynes
-------------------
Robert K. Hynes
Chief Financial Officer
(Principal Accounting Officer)
August 8, 2003
36