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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 September 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 September 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 /X/ No / /
The number of shares of Common Stock issued and outstanding as of November 07,
2003 was 5,485,856.
1
PART 1
ITEM 1. FINANCIAL STATEMENTS
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
(in thousands - except per-share)
Net sales $ 83,269 $ 105,153 $ 247,788 $ 307,135
Cost of goods sold 66,440 90,878 200,520 252,099
--------- --------- --------- ---------
Gross profit 16,829 14,275 47,268 55,036
Selling, general and administrative expenses 12,420 20,473 55,178 54,904
Pension - curtailment and special termination benefits 48,102 -- 48,102 --
Goodwill impairment charge 89,000 -- 89,000 --
Restructuring charges -- 5,038 -- 15,738
--------- --------- --------- ---------
Loss from operations (132,693) (11,236) (145,012) (15,606)
--------- --------- --------- ---------
Other:
Interest expense 4,537 6,135 14,457 21,475
Gain on disposition of WPC 534 -- 534 --
Gain on early retirement of debt -- 253 2,999 40,488
Other income (expense) 842 (6,381) 1,030 (6,705)
--------- --------- --------- ---------
Loss from continuing operations before taxes (135,854) (23,499) (154,906) (3,298)
Tax provision (benefit) 6,711 (8,130) 565 (12,074)
--------- --------- --------- ---------
Income (loss) from continuing operations (142,565) (15,369) (155,471) 8,776
--------- --------- --------- ---------
Discontinued operations:
Income from discontinued operation - net of tax -- 2,258 -- 10,601
Gain on sale - net of tax of $6,725 -- 11,747 -- 11,747
--------- --------- --------- ---------
Income (loss) before cumulative effect of an
accounting change (142,565) (1,364) (155,471) 31,124
Cumulative effect of an accounting change (Note 4) -- -- -- (44,000)
--------- --------- --------- ---------
Net loss $(142,565) $ (1,364) $(155,471) $ (12,876)
========= ========= ========= =========
Dividend requirement for preferred stock $ 4,856 $ 4,856 $ 14,568 $ 14,368
========= ========= ========= =========
Net loss applicable to common stock $(147,421) $ (6,220) $(170,039) $ (27,244)
========= ========= ========= =========
BASIC AND DILUTED PER SHARE OF COMMON STOCK
Loss from continuing operations - net of preferred dividends $ (27.38) $ (3.79) $ (31.75) $ (1.05)
Income from discontinued operation -- 2.62 -- 4.20
Cumulative effect of an accounting change -- -- -- (8.27)
--------- --------- --------- ---------
Net loss per share $ (27.38) $ (1.17) $ (31.75) $ (5.12)
========= ========= ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
2003 2002
- ----------------------------------------------------------------------------------------
(Dollars and shares in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 50,930 $ 18,396
Short term investments -- 205,275
Trade receivables - net 48,102 43,540
Inventories 43,656 68,921
Assets held for sale 10,000 --
Other current assets 29,743 15,412
--------- ---------
Total current assets 182,431 351,544
Advances to WPC -- 7,458
Note receivable - WPC -- 31,959
Property, plant and equipment at cost, less
accumulated depreciation and amortization 105,347 107,590
Goodwill and other intangibles 126,242 215,426
Intangibles - pension asset 794 40,270
Assets held for sale -- 11,751
Prepaid pension asset -- 26,385
Deferred taxes - non-current -- 24,315
Other non-current assets 15,376 17,690
--------- ---------
$ 430,190 $ 834,388
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 36,313 $ 60,172
Accrued liabilities 26,879 26,214
Short-term debt 42,332 107,857
Restructuring -- 5,424
Deferred income taxes - current -- 6,432
--------- ---------
Total current liabilities 105,524 206,099
Long-term debt 190,092 249,706
Other employee benefit liabilities 8,395 8,784
Loss in excess of investment in WPC -- 60,667
Accrued pension liability 28,303 --
Additional minimum pension liability 15,830 93,728
Other liabilities 1,685 1,543
--------- ---------
349,829 620,527
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 (13,871) (35,775)
Additional paid-in capital 556,207 556,009
Unearned compensation - restricted stock awards (132) --
Accumulated deficit (462,450) (306,979)
--------- ---------
Total stockholders' equity 80,361 213,861
--------- ---------
$ 430,190 $ 834,388
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2003 2002
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(155,471) $ (12,876)
Less: Income from discontinued operations -- 10,601
--------- ---------
Net loss from continuing operations and
cumulative effect of accounting change (155,471) (23,477)
Items not affecting cash from operating activities:
Cumulative effect of accounting change -- 44,000
Goodwill impairment charge 89,000 --
Restructuring charge -- 9,199
Depreciation and amortization 11,110 13,022
Amortization of debt related costs 1,362 1,912
Gain on early retirement of debt (2,999) (40,488)
Gain on sale of discontinued operations -- (11,747)
Deferred income taxes (832) 208
(Gain)/loss on asset dispositions (452) 1,124
Pension - curtailment and special benefits 48,102 --
Pension expense 6,586 5,700
Gain on disposition of WPC (534) --
Other 232 197
Decrease (increase) in working capital elements,
net of effect of acquisitions:
Trade receivables (4,562) (11,907)
Inventories 25,265 4,859
Short term investments - trading 205,275 242,123
Investment account borrowings (107,857) (110,946)
Other current assets 296 1,609
Trade payables (23,859) 30,153
Other current liabilities (4,759) 20,190
Other items - net 2,420 (8,587)
--------- ---------
Net cash provided by operating activities 88,323 167,144
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net payment to WPC (19,500) --
Purchase of aircraft for resale (19,171) --
Capital expenditures (10,189) (7,600)
Net proceeds on sale of discontinued operations -- 84,695
Dividends from affiliates 58 141
Acquisitions -- (3,057)
Proceeds from sales of assets 3,709 81
--------- ---------
Net cash (used)/provided by investing activities (45,093) 74,260
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt proceeds 402 --
Cash paid on early extinguishment of debt (14,302) (78,851)
Net payments of long-term debt -- (46,679)
Due from Unimast 3,204 3,223
--------- ---------
Net cash used in financing activities (10,696) (122,307)
--------- ---------
NET CASH PROVIDED BY CONTINUING OPERATIONS 32,534 119,097
NET CASH USED BY DISCONTINUED OPERATIONS -- (1,358)
Cash and cash equivalents at beginning of period 18,396 7,789
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 50,930 $ 125,528
========= =========
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 nine-months ended September 30,
2003 are not necessarily indicative of the operating results for the full year.
The unaudited condensed consolidated financial statements include
the accounts of all subsidiary companies. Wheeling-Pittsburgh Corporation
("WPC") and its subsidiaries, which had been subsidiaries of the Company, ceased
to be subsidiaries on August 1, 2003. On November 16, 2000, 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 ("Bankruptcy
Filing") (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
September 30, 2003 and December 31, 2002 do not include any of the assets or
liabilities of WPC, and the accompanying condensed consolidated statements of
operations and the condensed consolidated statements of cash flows for the
three-months and nine-months ended September 30, 2003 and 2002 exclude 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.
The accompanying unaudited condensed consolidated financial
statements have been prepared assuming the Company will continue as a going
concern, which indicates that the Company will be able to realize its assets and
satisfy its liabilities in the normal course of business. The Handy & Harman
("H&H") senior secured credit facility includes a revolving credit facility that
matures on July 31, 2004 and a term loan of $4.6 million that matures on March
31, 2004. This facility also includes a term loan of $98.5 million that matures
on July 30, 2006. In addition, H&H has Industrial Revenue Bonds of $5.0 million
and $2.5 million that mature on March 31, 2004 and September 30, 2004,
respectively. It is the Company's intention to refinance the secured bank loan
facilities and the Industrial Revenue Bonds prior to their scheduled maturities.
Although the Company believes it will successfully refinance such obligations,
there can be no assurance such refinancing will be obtained. In the event the
Company is not able to effect such refinancing, its ability to continue
operating as a going concern cannot be assured. The unaudited condensed
consolidated financial statements do not include any adjustments that might
result from the occurrence of this contingency.
NATURE OF OPERATIONS
- --------------------
WHX Corporation is a holding company that has been structured to
invest in and/or acquire a diverse group of businesses that are managed on a
decentralized basis. WHX's primary business is 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 ("CMCC"), formerly Pittsburgh-Canfield 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
("Unimast"), a leading manufacturer of steel framing and other products for
commercial and residential construction. As a result, Unimast has been
5
classified as a discontinued operation for the 2002 period. The transaction
closed on July 31, 2002. WHX's other business (up through August 1,2003)
consisted 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 enabled the WPC Group to continue business operations as
debtors-in-possession. The 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 and the POR.
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 (`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 Agreement for
revolving loans totaled $137.2 million and $135.5 million at July 31, 2003 and
December 31, 2002 respectively. Term Loans under the DIP Credit Agreement
totaled $35.7 million and $35.2 million at July 31, 2003 and December 31, 2002
respectively. Letters of credit outstanding under the facility totaled $2.8
million at July 31, 2003. At July 31, 2003, net availability under the DIP
Credit Agreement was $2.4 million. As a result of the consummation of the POR
the DIP credit Agreement 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 July 31, 2003, the WPC
Group incurred cumulative net losses of $348.6 million. Pursuant to the terms to
the 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
6
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 on
August 1, 2003, the WHX Contributions were 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
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 (the
"WHX 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 was superceded by
the WHX Contributions described below). Through July 31, 2003, WHX had advanced
$5.0 million of the loans and up to $5.5 million of financing. At July 31, 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 collateralized 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 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.
7
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 agreed to underwrite the loan if the guaranty was 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 was 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 for the WPC Group. As part of the
POR, the Company had conditionally agreed 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.
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
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
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 Plan. Under the settlement, among other things, WHX agreed
(a) that the WHX Plan, as it is currently constituted, is a single employer
pension plan, (b) to contribute funds to the WHX 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 agreed that as of the
effective date of the POR, (a) no shutdowns had occurred at any WPC Group
facility, (b) no member of the WPC Group is a participating employer under the
WHX Plan, (c) continuous service for WPC Group employees was 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 WHX Plan would 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 31, 2003 with a monthly benefit equal to $40 multiplied by the
employee's years of service.
Finally, under the settlement, the PBGC agreed (a) that, after the
effective date of the POR, if it terminates the WHX 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, a pre-tax, non-cash charge for the cost of
early retirement incentives of $11.5 million was 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 occurred as a result of the break in
service for WPC Group employees that resulted in a pre-tax, non-cash charge of
$36.6 million in the third quarter of 2003, pursuant to SFAS 88.
8
For WHX 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 WHX Plan assets. Based
on preliminary estimates, using the current statutory discount rate, it is
possible that average annual contributions to the WHX 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 WHX 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 WHX Plan.
In connection with past collective bargaining agreements by and
between the WPC Group and the USWA, the WPC Group was 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 have been triggered in the
event that the WPC Group was to fail to satisfy its OPEB Obligations. WHX's
contingent obligation was 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 and the related WHX
Contributions, a balance of $.5 million remained in the loss in excess of
investment account and was 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.
Pursuant to FASB Statement No. 144 "Accounting for the Impairment of
Disposal of Long-Lived Assets", the unaudited 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 Nine
Months Months
Ended Ended
September 30, September 30,
2002 2002
--------- ---------
(in thousands)
(1) (2)
Net sales $ 23,945 $150,997
Operating income 3,437 17,652
Interest/other (income) expense (86) 806
Income taxes 1,265 6,245
Net income 2,258 10,601
(1) reflects operating results for the month of July 2002.
(2) reflects operating results through the month of July 2002.
9
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
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 September 30,
2003, is $10.0 million related to the Fairfield, CT property. The Company
recorded a charge of $2.2 million in the third quarter of 2003 to write down the
property to its estimated net realizable value. The sale of this property is
expected to occur in 2003 or early 2004.
The following table represents the activity of the restructuring
reserve:
Reserve Reserve
Balance Balance
December 31, Cost September 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 September 30, 2003, the Company has received
$1.4 million for the sale of the Liversedge, England property. The Company
anticipates additional cash proceeds of approximately $1.5 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:
Reserve Reserve
Balance Balance
December 31, Cost September 30,
2002 Incurred Adjustment 2003
----------- --------- ------------ -------------
(in thousands)
Employee separation and related costs $ 1,197 $(1,121) $ (76) $-
Facility closing and refining 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 nine months ended September 30, 2003
represented revisions to the original cost estimates based on actual costs
incurred.
10
NOTE 4 - ACCOUNTING CHANGES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -------------------------------------------------------------------------
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 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 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands - except per share)
Reported:
Income (loss) from continuing operations $(142,565) $ (15,369) $(155,471) $ 8,776
Basic and diluted earnings (loss) per share $ (27.38) $ (3.79) $ (31.75) $ (1.05)
Adjustment to compensation expense for
stock-based awards - net of tax $ (26) $ (97) $ (346) $ (362)
Pro forma:
Income (loss) from continuing operations $(142,591) $ (15,466) $(155,817) $ 8,414
Basic and diluted earnings (loss) per share $ (27.38) $ (3.81) $ (31.82) $ (1.12)
11
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 for all periods ending on or after December 15
2003 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
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 for the three-month and nine-month periods
ended September 30, 2003 and the three-month and nine-month period ended
September 30, 2002, the conversion of preferred stock, redeemable common stock
and the exercise of options would have had an anti-dilutive effect. A
reconciliation of the income and shares used in the computation follows:
12
Reconciliation of Income and Shares in EPS Calculation
(in thousands except per share amounts)
For the Three Months Ended September 30, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- -------------
Net loss from continuing operations $(142,565)
Less: Preferred stock dividends 4,856
---------
BASIC AND DILUTED EPS
Loss from continuing operations
applicable to common stockholders $(147,421) 5,385 $ (27.38)
========= ========= =========
For the Three Months Ended September 30, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- -------------
Net loss from continuing operations $(155,471)
Less: Preferred stock dividends 14,568
---------
BASIC AND DILUTED EPS
Loss from continuing operations
applicable to common stockholders $(170,039) 5,355 $ (31.75)
========= ========= =========
For the Three Months Ended September 30, 2002
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Net loss from continuing operations $(15,369)
Less: Preferred stock dividends 4,856
--------
BASIC AND DILUTED EPS
Loss from continuing operations
applicable to common stockholders $(20,225) 5,338 $ (3.79)
======== ======== ========
For the Nine Months Ended September 30, 2002
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- --------------
Net income from continuing operations $ 8,776
Less: Preferred stock dividends 14,368
-------
BASIC AND DILUTED EPS
Loss from continuing operations
applicable to common stockholders $ (5,592) 5,321 $ (1.05)
======== ======== =======
Outstanding stock options for common stock granted to officers,
directors, key employees and others totaled 1.8 million at September 30, 2003.
PREFERRED STOCK DIVIDENDS
At September 30, 2003, dividends in arrears to Series A and Series B
Convertible Preferred Shareholders were $25.1 million and $33.2 million,
respectively. Presently management believes that it is not likely that the
Company will be able to pay these dividends in the foreseeable future.
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
13
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 nine-month
periods ended September 30, 2003 and 2002 is as follows:
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----------- ----------- ------------ -----------
Net loss $(142,565) $ (1,364) $(155,471) $ (12,876)
Other comprehensive income (loss):
Minimum pension liability adjustment 38,422 -- 38,422 --
Deferred taxes relating to minimum pension liability (18,710) -- (18,710) --
Write off deferred foreign currency translation losses -- -- 1,142 --
Foreign currency translation adjustments 20 (274) 1,050 522
--------- --------- --------- ---------
Comprehensive income (loss) $(122,833) $ (1,638) $(133,567) $ (12,354)
========= ========= ========= =========
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 September 30, 2003
and December 31, 2002 were comprised as follows:
(in thousands)
September 30, December 31,
2003 2002
------------- -----------
Minimum pension liability adjustment $(15,036) $(53,458)
Deferred taxes - minimum pension liability adjustment -- 18,710
Foreign currency translation adjustment 1,165 (1,027)
-------- --------
$(13,871) $(35,775)
======== ========
NOTE 7 - INCOME TAXES
- ---------------------
Through the nine-months ended September 30, 2003, WHX has recorded
$23.1 million of deferred tax assets relating to the tax benefit of current year
operating losses. In the third quarter of 2003 WHX reduced its minimum pension
liability with corresponding credits to other comprehensive income and
intangible pension asset.. The deferred tax asset associated with this
adjustment of $13.4 million was charged to other comprehensive income.
At September 30, 2003, WHX eliminated the benefit recorded through
September 30, 2003 by recording a valuation allowance of $23.1 million, as in
the opinion of management, it is more likely than not such tax benefits will not
be realized in future periods. In addition the remaining balance of the deferred
tax asset relating to the September 30, 2003 minimum pension liability of $4.3
million was reversed to other comprehensive income thus eliminating the tax
benefit that had been previously recognized in other comprehensive income in
fiscal year 2002.
As a result of management's decision that the deferred tax asset
would not be realizable, WHX reversed the income tax benefit that had been
recognized in the first and second quarters of 2003. This revision in the
estimated tax benefit resulted in a tax expense of $6.7 million for the three
months ended September 30, 2003.
14
NOTE 8 - SHORT TERM INVESTMENTS AND OTHER CURRENT ASSETS
- --------------------------------------------------------
Net realized and unrealized gains and losses on trading securities
included in other income (expense) for the nine-months ended September 30, 2003
and 2002 were income of $3.2 million and losses of $4.3 million, respectively.
Net realized and unrealized gains and losses on trading securities included in
other income for the three-months ended September 30, 2003 and 2002, was income
of $1.4 million and a loss of $4.2 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 September 30,
2003.
NOTE 9- GOODWILL AND OTHER INTANGIBLES
- ---------------------------------------
In the third quarter of 2003 the Company recorded a $89.0 million
non-cash goodwill impairment charge relating to the following businesses; $38.5
specialty tubing, $47.0 million precious metal plating, and $3.5 million
precious metal fabrication. The Company recorded these charges because the fair
value of these reporting units, as determined by estimated cash flow
projections, was less than the reporting units' carrying value.
The changes in the carrying amount of goodwill for the nine-months
ended September 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
Goodwill impairment (50,500) (38,500) -- (89,000)
Pre acquisition foreign NOL utilized -- (100) -- (100)
--------- --------- --------- ---------
Balance at September 30, 2003 $ 56,471 $ 21,864 $ 47,150 $ 125,485
========= ========= ========= =========
As of September 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.
NOTE 10 - PENSION PLAN CURTAILMENT AND SPECIAL TERMINATION CHARGE
- -----------------------------------------------------------------
As discussed in Note 1, WPC Group employees ceased to be active
participants in the WHX Pension Plan effective July 31, 2003 and as a result
such employees will no longer accrue benefits under the WHX Plan. Pursuant to
the provisions SFAS 88 this event constituted a curtailment of the WHX Plan and
required WHX to revalue the pension liability as of July 31, 2003
("remeasurement date"). The curtailment resulted in a pre-tax, non-cash charge
to income of $36.6 million in the third quarter of 2003.
In addition a special termination benefit was offered to up to 650
WPC Group employees. As of September 30, 2003, the offer termination date, 540
employees accepted the early termination benefit. In the third quarter of 2003
WHX recognized a non-cash, pre-tax charge of $11.5 million relating to this
benefit.
As a result of the curtailment WHX revalued its pension obligation
as of the remeasurement date. The July 31, 2003 valuation estimates a pension
expense for the year of $5.2 million. The January 1, 2003 pension valuation
resulted in an estimated pension expense of $16.1 million and through June 30,
2003 WHX recorded $8.1 million of pension expense. As a result of the lower
annual pension expense as determined by the July 31, 2003 valuation, WHX will
record pension credits of $1.5 million in each of the third and fourth quarters
of 2003.
The July 31, 2003 valuation also resulted in a minimum liability of
$11.4 million, which is $77.9 million lower than the amount recorded at December
31, 2002. As a result WHX reduced the recorded minimum liability with
corresponding credits to other comprehensive income and intangible pension asset
of $38.4 million and $39.5 million, respectively.
15
NOTE 11 - INVENTORIES
- ---------------------
Inventories at September 30, 2003 and December 31, 2002 are
comprised as follows:
(in thousands) September 30, December 31,
2003 2002
------------- -------------
Finished products $ 15,267 $ 13,067
In-process 8,295 11,291
Raw materials 18,215 19,925
Fine and fabricated precious metal in various stages of completion 2,226 25,322
-------- --------
44,003 69,605
LIFO reserve (347) (684)
-------- --------
$ 43,656 $ 68,921
======== ========
The operating loss for the nine-months ended September 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. Included in operating income for the nine-months and
three-months ended September 30, 2003 is a pre-tax gain from the liquidation of
certain precious metal of $3.0 million.
NOTE 12 - LONG-TERM DEBT
- ------------------------
The Company's long-term debt consists of the following debt
instruments:
(in thousands) September 30, December 31,
2003 2002
------------ -------------
Senior Notes due 2005, 10 1/2% $ 92,820 $110,504
Handy & Harman Senior Secured Credit Facility 132,104 130,465
Other 7,500 8,737
-------- --------
232,424 249,706
Less portion due within one year 42,332 --
-------- --------
Total long-term debt $190,092 $249,706
======== ========
In the nine-months ended September 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. The Company has not purchased or retired any Senior Notes since the
second quarter of 2003.
In the nine-months ended September 30, 2002, the Company purchased
and retired $123.5 million aggregate principal amount of 10 1/2% Senior Notes in
the open market for $78.9 million. After the write off of $4.1 million of
deferred debt related costs, the Company recognized a pre-tax gain of $40.5
million. In the quarter ended September 30, 2002, the Company purchased and
retired $1.5 million aggregate principal amount of the 10 1/2% Senior Notes in
the open market for $1.2 million. After the write-off of deferred debt related
costs, the Company recognized a pre-tax gain of $0.3 million.
The H&H senior secured credit facility 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
the second and third quarters of 2003, H&H received capital contributions of
$3.0 million and $5.0 million, respectively, 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
16
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.
The H&H senior secured credit facility includes a revolving credit
facility that matures on July 31, 2004 and a term loan of $4.6 million that
matures on March 31, 2004. This facility also includes a term loan of $98.5
million that matures on July 30, 2006. In addition, H&H has Industrial Revenue
Bonds of $5.0 million and $2.5 million that mature on March 31, 2004 and
September 30, 2004, respectively. In light of H&H's results in 2003 and the
uncertainty and general weakness in the industrial economy, it is possible that
violations of financial covenants could occur before the maturity date of the
credit facility. It is the Company's intention to refinance these obligations
prior to their scheduled maturities. Although the Company believes it will
successfully refinance such obligations, there can be no assurance that such
refinancing will be obtained. In the event the Company is not able to effect
such refinancing, its ability to continue operating as a going concern cannot be
assured. The unaudited condensed consolidated financial statements do not
include any adjustments that might result from the occurrence of this
contingency.
NOTE 13- 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"), and that the Company violated Rules
14d-4(c) and 14d-6(d) under the Exchange Act upon expiration of the Offer. The
SEC does not claim that the Offer was intended to or in fact defrauded any
investor. 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 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" and
Section 14(d)(4) of the Exchange Act. 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. The Court has set a schedule for
briefing and scheduled oral argument of the appeal for March 2004.
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
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
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 Plan. Under the settlement, among other things, WHX agreed
(a) that the WHX Plan, as it is currently constituted, is a single employer
pension plan, (b) to contribute funds to the WHX 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, the PBGC agreed (a) that, after the
effective date of the POR, if it terminates the WHX 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.
17
For additional information concerning these developments, see Part I
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.
ENVIRONMENTAL MATTERS
Prior to the consummation of the POR, WHX was the sole stockholder
of WPC, the parent company of the WPC Group. 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.
In the event the WPC Group is responsible for any environmental
liabilities relating to the period prior to the consummation of the POR, and is
unable to fund these liabilities, claims may be made against WHX for payment of
such liabilities.
NOTE 14 - 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.
18
The following table presents information about reported segments for
the three and nine-month period ending September 30, 2003 and 2002:
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2003 (a) 2002 2003 (a) 2002
---------- --------- ---------- ----------
Revenue
Precious Metal $ 19,547 $ 41,663 $ 63,266 $ 119,326
Wire & Tubing 29,371 31,510 92,278 101,651
Engineered Materials 34,351 31,980 92,244 86,158
--------- --------- --------- ---------
Consolidated revenue $ 83,269 $ 105,153 $ 247,788 $ 307,135
========= ========= ========= =========
Segment operating income
Precious Metal $ (46,682) $ 2,137 $ (48,058) $ (4,033)
Wire & Tubing (40,236) (12,408) (40,802) (8,269)
Engineered Materials 3,967 3,510 7,488 9,904
--------- --------- --------- ---------
(82,951) (6,761) (81,372) (2,398)
--------- --------- --------- ---------
Unallocated corporate expenses 1,640 4,475 15,538 13,208
Pension - curtailment and special termination benefits 48,102 -- 48,102 --
--------- --------- --------- ---------
Operating loss (132,693) (11,236) (145,012) (15,606)
Interest expense 4,537 6,135 14,457 21,475
Equity in gain on WPC 534 -- 534 --
Gain on early retirement of debt -- 253 2,999 40,488
Other income (expense) 842 (6,381) 1,030 (6,705)
--------- --------- --------- ---------
Loss before taxes, discontinued operations
and cumulative effect of an accounting change (135,854) (23,499) (154,906) (3,298)
Income tax expense (benefit) 6,711 (8,130) 565 (12,074)
Income from discontinued operations - net of tax -- 2,258 -- 10,601
Gain on sale of Unimast - net of tax of $6,725 -- 11,747 -- 11,747
--------- --------- --------- ---------
Income (loss) before cumulative effect of an
accounting change (142,565) (1,364) (155,471) 31,124
Cumulative effect of an accounting change - net of tax -- -- -- (44,000)
--------- --------- --------- ---------
Net loss $(142,565) $ (1,364) $(155,471) $ (12,876)
========= ========= ========= =========
(a) Segment operating income includes a third quarter 2003 $89.0 million
non-cash goodwill impairment charge relating to the following businesses; $38.5
Wire & Tubing, $50.5 million Precious Metal. The Company recorded these charges
because the fair value of these reporting units, as determined by estimated cash
flow projections, was less than the reporting units' carrying value.
NOTE 15 - SUPPLEMENTAL WPC GROUP INCOME STATEMENT DATA
- ------------------------------------------------------
During the seven months ended July 31, 2003 (the date of
reorganization) the WPC Group incurred a net loss of $77.2 million. During the
nine months ended September 30, 2002 the WPC Group incurred a net loss of $44.4
million. These results are not reflected in WHX's September 30, 2003 and 2002
consolidated results of operations. (See Note 1) The WPC Group's summarized
income statement data for the three and nine-months ended September 30, 2003 and
2002 is as follows (in thousands):
19
Three months ended Nine months ended
September 30, September 30,
2003 (1) 2002 2003 (1) 2002
---------- --------- --------- ----------
Net sales $ 81,298 $ 277,868 $ 570,439 $ 725,591
Cost of goods sold, excluding depreciation 77,629 235,690 564,584 663,806
Depreciation 6,095 18,428 39,889 55,681
Selling, general and administrative expenses 4,648 10,528 29,906 33,982
Reorganzation expenses 1,995 3,155 8,140 8,455
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating profit/(loss) (9,069) 10,067 (72,080) (36,333)
Interest expense 1,462 4,308 9,185 12,168
Reorganization income (expense) -- -- 160 1,295
Other income (expense) 382 1,333 3,228 2,797
--------- --------- --------- ---------
Pre-tax profit/(loss) (10,149) 7,092 (77,877) (44,409)
Tax provision (12) 6 (641) 16
--------- --------- --------- ---------
Net income/(loss) $ (10,137) $ 7,086 $ (77,236) $ (44,425)
========= ========= ========= =========
(1) Contains results through July 31, 2003 (the date of reorganization).
20
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 and (iii) the impact of competition. 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 H&H is a party to a senior secured credit facility which includes
a revolving credit facility that matures on July 31, 2004. During 2003,
H&H received $8.0 million in capital contributions from WHX in order to
comply with certain financial covenants of its credit facility. In light
of H&H's results in 2003 and the uncertainty and general weakness in the
industrial economy, it is possible that violations of these financial
covenants could occur before the maturity date of the credit facility. It
is the Company's intention to refinance this and other debt obligations
prior to their scheduled maturities. Although the Company believes it will
successfully refinance such obligations, there can be no assurance that
such refinancing will be obtained. In the event the Company is not able to
effect such refinancing, its ability to continue operating as a going
concern cannot be assured. The unaudited condensed consolidated financial
statements do not include any adjustments that might result from the
occurrence of this contingency;
o The WHX 10 1/2% Senior Notes in the amount of $92.8 million are
due on April 15, 2005. The Company's access to capital markets in the
future to refinance such indebtedness may be limited;
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 Prior to the consummation of the POR, WHX was the sole stockholder
of WPC, the parent company of the WPC Group. 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. In the event the WPC Group is
responsible for any environmental liabilities relating to the period prior
to the consummation of the POR, and is unable to fund these liabilities,
claims may be made against WHX for payment of such liabilities.
21
o The credit agreement of H&H has certain financial covenants that
limit the amount of cash distributions that can be paid to WHX and may,
under certain circumstances, restrict H&H's capital expenditures.
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
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 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 Agreement for
revolving loans totaled $137.2 million and $ 135.5 million at July 31, 2003 and
December 31, 2002 respectively. Term Loans under the DIP Credit Agreement
totaled $35.7 million and $35.2 million at July 31, 2003 and December 31, 2002
respectively. Letters of credit outstanding under the facility totaled $2.8
million at July 31, 2003. At July 31, 2003, net availability under the DIP
Credit Agreement was $2.4 million. As a result of the consummation of the POR
the DIP credit Agreement 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 July31, 2003, the WPC
Group incurred cumulative net losses of $348.6 million. Pursuant to the terms to
the 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
22
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
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 ("the
WHX 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 was superceded by
the WHX Contributions described below). Through July 31, 2003, WHX had advanced
$5.0 million of the loans and up to $5.5 million of financing. At July 31, 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 collateralized 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 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.
23
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 agreed to underwrite the loan if the guaranty was 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
limitation, resolution of the treatment of the WHX Pension Plan that was
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
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
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 Plan. Under the settlement, among other things, WHX
agreed (a) that the WHX Plan, as it is currently constituted, is a single
employer pension plan, (b) to contribute funds to the WHX 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 agreed that as of the
effective date of the POR, (a) no shutdowns had occurred at any WPC Group
facility, (b) no member of the WPC Group is a participating employer under the
WHX Plan, (c) continuous service for WPC Group employees was 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 WHX Plan would 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 31, 2003 with a monthly benefit equal to $40 multiplied by the
employee's years of service.
Finally, under the settlement, the PBGC agreed (a) that, after the
effective date of the POR, if it terminates the WHX 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, a pre-tax, non-cash charge for the cost of
early retirement incentives of $11.5 million was 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 occurred as a result of the break in
service for WPC Group employees that resulted in a pre-tax non-cash charge of
$36.6 million in the third quarter of 2003, pursuant to SFAS 88.
24
For WHX 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 WHX 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 WHX 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 WHX Plan.
In connection with past collective bargaining agreements by and
between the WPC Group and the 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 were 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 and the related WHX
Contributions, a balance of $.5 million remained in the loss in excess of
investment account and was 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 THIRD QUARTER OF 2003 WITH THE THIRD QUARTER OF 2002
- ----------------------------------------------------------------------
Net sales for the third quarter of 2003 were $83.3 million compared
to $105.2 million in the third quarter of 2002. Sales decreased at the Precious
Metal Segment by $22.1 million and by $2.1 million at the Wire & Tubing Segment.
Sales increased by $2.4 million at the Engineered Materials Segment. Gross
profit percentage increased in the third quarter of 2003 to 20.2% from 13.6% in
the third quarter of 2002 primarily due to a $3.0 million gain on the
liquidation of certain precious metal inventory in the third quarter of 2003 and
write-downs of inventory to disposal values and reserves for excess and
slow-moving inventories at the Company's stainless steel wire operations of $7.4
25
million recorded in the 2002 period. Additionally the 2002 period includes lower
margin sales associated with the Fairfield, CT facility which was closed at the
end of the third quarter of 2002.
Selling, general and administrative expenses decreased $8.1 million
to $12.4 million in the third quarter of 2003 from $20.5 million in the
comparable 2002 period. This resulted from a $3.4 million decrease in net
pension expense, a $3.0 million gain on insurance proceeds in 2003 and costs
eliminated by the closure of certain H&H operations in the second half of 2002.
This was partially offset by a $2.2 million writedown of the Fairfield, CT
property.
Operating loss for the third quarter of 2003 was $132.7 million
compared to an operating loss of $11.2 million for the third quarter of 2002.
The 2003 period results include a $48.1 million non-cash pension curtailment and
special termination benefit charge related to the consummation of the WPC Group
Plan of Reorganization and a non-cash goodwill impairment charge of $89.0
million. Operating loss at the segment level was $82.9 million compared to an
operating loss of $6.8 million in 2002. The 2003 operating loss at the segment
level includes the aforementioned non-cash goodwill impairment charge of $89.0
million relating to the Company's specialty tubing and precious metal
operations, a $3.0 million gain on insurance proceeds, a $3.0 million gain on
the liquidation of certain precious metal inventory, and a $2.2 million write
down of the Fairfield, CT property. The 2002 operating results at the segment
level included a $5.0 million restructuring charge and writedowns and reserves
for excess and slow moving inventory of $7.4 million related to the Company's
stainless steel wire operations.
Unallocated corporate expenses decreased from $4.5 million to $1.6
million. This decrease is primarily related to a decrease in net pension expense
of $3.4 million partially offset by increased insurance expense. The decreased
pension expense is primarily related to the reduction in active participants as
a result of the POR.
In the third quarter of 2003 the Company recorded a $89.0 million
non-cash goodwill impairment charge relating to the following businesses; $38.5
specialty tubing, $47.0 million precious metal plating, and $3.5 million
precious metal fabrication. The Company recorded these charges because the fair
value of these reporting units, as determined by estimated cash flow
projections, was less than the reporting units' carrying value.
Interest expense for the third quarter of 2003 decreased $1.6
million to $4.5 million from $6.1 million in the third 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 $0.9 million in the third quarter of 2003 compared
to expense of $6.4 million in 2002. Included in 2003 is net investment income of
$1.3 million. The expense for 2002 included an unrealized loss on an investment
of $4.5 million, an unrealized loss on an interest rate swap of $2.3 million,
losses on disposal of property, plant and equipment of $.4 million, and
investment income of $1.0 million.
In the quarter ended September 30, 2002, the Company purchased and
retired $1.5 million aggregate principal amount of the 10 1/2% Senior Notes in
the open market for $1.2 million. After the write off of deferred debt related
costs, the Company recognized a pre-tax gain of $0.3 million. The Company has
not purchased or retired any Senior Notes since the second quarter of 2003.
In the third quarter of 2003, the Company determined that it is more
likely than not that net deferred tax assets previously recognized would not be
realizable. As such, the Company reversed the income tax benefit that had been
recorded in the first and second quarters of 2003, and provided no benefit for
third quarter 2003 losses. This revision in the estimated tax benefit
substantially contributed to the tax expense of $6.7 million recorded for the
three months ended September 30, 2003. There is no tax effect related to the
Goodwill impairment charge of $89.0 recorded in 2003. The 2002 third 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. In addition, the Company recognized a benefit of $1.6 million
related to the carryback claim for AMT paid in prior years, as a result of
changes in the tax laws.
The comments that follow compare revenues and operating income from
continuing operations by segment for the third quarter 2003 and 2002:
26
PRECIOUS METAL
- --------------
Sales for the Precious Metal Segment decreased $22.1 million from
$41.7 million in 2002 to $19.6 million in 2003. Approximately $19.2 million of
this decrease was due to the closing of the Fairfield, CT facility at the end of
the third quarter 2002.
Operating income decreased $48.8 million from $2.1 million in 2002
to a loss of $46.7 million in 2003. The 2003 period includes a $50.5 million
non-cash charge for goodwill impairment. Before this charge, operating income
increased by $1.7 million. This increase includes a $3.0 million gain on the
liquidation of certain precious metal inventories and a $3.0 million gain on
insurance proceeds, partially offset by a $2.2 million write-down of the
Fairfield, CT property and continued weakness in the electronics sector.
WIRE & TUBING
- -------------
Sales for the Wire & Tubing Segment decreased $2.1 million from
$31.5 million in 2002 to $29.4 million in 2003 due to the shutdown of the
Liversedge, England and Willingboro, N.J. specialty wire facilities at the end
of 2002. These specialty wire facilities had sales of $3.8 million in the 2002
period.
Operating income decreased by $27.8 million from a loss of $12.4
million in 2002 to a loss of $40.2 million in 2003. The 2003 period includes a
$38.5 million non-cash goodwill impairment charge related to the specialty
tubing operations. The 2002 period includes a $5.0 million restructuring charge
related to the decision to close two stainless steel wire facilities and
reserves and write downs of $7.4 million for excess and slow moving inventory.
The balance of the decrease in operating income is due to increased raw material
costs and declining sales prices associated with this segment's refrigeration
business and lower margins in the stainless steel tubing markets.
ENGINEERED MATERIALS
- --------------------
Sales for the Engineered Materials Segment increased $2.4 million
from $32.0 million in 2002 to $34.4 million in 2003 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 segments
electro-galvanizing business.
Operating income increased by $0.5 million from $3.5 million in 2002
to $4.0 million in 2003. The increase in operating income is due to increased
sales 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.
COMPARISON OF THE FIRST NINE MONTHS OF 2003 WITH THE FIRST NINE MONTHS OF 2002
- ------------------------------------------------------------------------------
Net sales for the first nine months of 2003 were $247.8 million
compared to $307.1 million in the first nine months of 2002. Sales decreased by
$56.1 million at the Precious Metal Segment and by $9.4 million at the Wire &
Tubing Segment. Sales increased by $6.1 million at the Engineered Materials
Segment. Gross profit percentage increased in the nine month period of 2003 to
19.1% from 17.9% in the comparable 2002 period. This increase is primarily due
to a gain from the liquidation of certain precious metal inventory of $3.0
million in 2003 and $7.4 million in writedowns of inventory to disposal values
and reserves for excess and slow moving inventories at the Company's stainless
steel wire facilities in 2002 as well as the absence in 2003 of lower margin
sales associated with the Fairfield, CT facility included in the 2002 period.
This was partially offset in 2003 by increased raw material costs, lower sales
volume and a $1.3 million lower of cost or market adjustment for precious metal
inventory.
Selling, general and administrative expenses increased $0.3 million
to $55.2 million in the first nine months of 2003 from $54.9 million in the
comparable 2002 period. Included in the 2003 results are increased legal and
professional fees related to the PBGC action, a $3.5 million charge related to a
reduction of executive, administrative and information technology personnel at
H&H, increased pension expense of $0.9 million, and a $2.2 million write down of
the Fairfield CT. property. The impact of these items was offset by a $3.0
million gain on insurance proceeds and the elimination of S.G. & A. expenses
associated with the facilities which were shut down in the second half of 2002.
27
Operating loss for the first nine months of 2003 was $145.0 million
compared to a $15.6 million operating loss for the first nine months of 2002.
The 2003 period results include a $48.1 million non-cash pension curtailment and
special termination benefit charge related to the consummation of the WPC Group
Plan of Reorganization and a non-cash goodwill impairment charge of $89.0
million. Operating income at the segment level was a loss of $81.4 million
compared to operating loss of $2.4 million in 2002. The 2003 operating results
at the segment level includes the aforementioned non-cash goodwill impairment
charge of $89.0 million relating to the Company's specialty tubing and precious
metal operations, a $3.5 million charge for employee separation and related
expenses discussed above, a $3.0 million gain on insurance proceeds, a $3.0
million gain on the liquidation of certain precious metal inventories, and a
$1.3 lower of cost or market charge related to precious metal inventory. The
operating results in the 2002 period include a $10.7 and $5.0 million
restructuring charge related to the Company's Precious Metal and Wire & Tubing
Segments, respectively. The 2002 period also includes a $2.9 million writedown
of inventory to disposal value and a $4.5 million reserve for excess and slow
moving inventory at the Company's stainless steel wire operations.
Unallocated corporate expenses increased from $13.2 million to $15.5
million. This increase is primarily related to increased legal and professional
fees related to the PBGC action seeking to terminate the WHX Pension Plan, a
$0.9 million increase in pension expense, and a $.5 million increase in
insurance expense.
Interest expense for the first nine months of 2003 decreased $7.0
million to $14.5 million from $21.5 million in the first nine 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 $1.0 million in the first nine months of 2003
compared to expense of $6.7 million in 2002. Included in 2003 is net investment
income of $4.6 million, a loss on an interest rate swap of $0.7 million, loss on
the disposal of assets of $.8 million, and the recognition of $1.1 million of
accumulated foreign currency translation losses related to the disposal of the
UK subsidiary. The expense for 2002 was primarily related to an unrealized loss
on an investment of $6.8 million, an unrealized loss on an interest rate swap of
$3.7 million, losses on disposal of property, plant and equipment of $1.0
million, and net investment income of $5.7 million.
In the nine-months ended September 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 $.4 million of
deferred debt related costs, the Company recognized a gain of $3.0 million. The
Company has not purchased or retired any Senior Notes since the second quarter
of 2003.
In the nine months ended September 30, 2002, the Company purchased
and retired $123.5 million aggregate principal amount of 10 1/2% Senior Notes in
the open market for $78.9 million. After the write-off of $4.1 million of
deferred debt related costs, the Company recognized a gain of $40.5 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.
In the third quarter of 2003 the Company recorded a $89.0 million
non-cash goodwill impairment charge relating to the following businesses; $38.5
specialty tubing, $47.0 million precious metal plating, and $3.5 million
precious metal fabrication. The Company recorded these charges because the fair
value of these reporting units, as determined by estimated cash flow
projections, was less than the reporting units' carrying value.
In the third quarter of 2003, the Company determined that it was
more likely than not that net deferred tax assets previously recognized would
not be realizable. As such, the Company did not record any federal tax benefit
related to 2003 losses. The 2002 nine-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. In addition, the Company
recognized a benefit of $1.6 million related to the carryback claim for AMT paid
in prior years, as a result of changes in the tax laws. The cumulative effect of
an accounting change in 2002 had no tax consequence as it relates to
non-deductible goodwill.
28
The comments that follow compare revenues and operating income from
continuing operations by segment for the nine-month periods 2003 and 2002:
PRECIOUS METAL
- --------------
Sales for the Precious Metal Segment decreased $56.0 million from
$119.3 million in 2002 to $63.3 million in 2003. Approximately $51.5 million of
this decrease was due to the closing of the Fairfield, CT facility at the end of
the third quarter 2002. The balance of the decline reflects continued weakness
in the electronics sector.
Operating loss was $48.1 million in 2003 compared to an operating
loss of $4.0 million in 2002. Included in the 2002 period is a restructuring
charge of $10.7 million relating to the closure of the Fairfield CT facility,
which was partially offset by increased demand for silver products prior to this
facility's closure. The operating loss for 2003 includes a non-cash $50.5
million goodwill impairment charge, a $3.0 million gain on the liquidation of
certain precious metal inventory, a $3.0 million gain from insurance proceeds, a
non -cash lower of cost or market charge of $1.3 million related to precious
metal inventory, a $2.2 million write-down of the Fairfield, CT property, 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 continued weakness in the electronic sector.
WIRE & TUBING
- -------------
Sales for the Wire & Tubing Segment decreased $9.4 million from
$101.7 million in 2002 to $92.3 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 $13.0 million in
the 2002 period.
Operating income decreased by $32.5 million from an operating loss
of $8.3 million in 2002 to an operating loss of $40.8 million in 2003. The
operating loss for 2003 includes a non-cash goodwill impairment charge of $38.5
million related to this segment's specialty tubing operations. 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. The 2002 period
includes a $5.0 million restructuring charge, $2.9 million write-down of
inventory to disposal value, and a $4.5 million reserve for excess and slow
moving inventory related to the stainless steel wire operations. The balance of
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.
ENGINEERED MATERIALS
- --------------------
Sales for the Engineered Materials Segment increased $6.1 million
from $86.2 in 2002 to $92.3 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 $2.4 million from $9.9 million in 2002 to
$7.5 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 nine months ended September 30, 2003 totaled $88.3 million.
Income from continuing operations adjusted for non-cash income and expense items
used $3.9 million of cash. Working capital accounts provided $89.8 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 $97.4 million of funds in the first nine months of 2003. Accounts receivable
used $4.6 million, trade payables used $23.9 million, and net other current
items used $4.5 million. Inventories totaled $43.7 million at September 30, 2003
29
and provided $25.3 million, including $24.5 million from the liquidation of
certain precious metal inventory. The sale of precious metal inventory resulted
in a gain of $3.0 million in the third quarter of 2003.
In the nine months of 2003, $10.2 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 September 30,
2003.
On August 1, 2003, upon consummation of the POR, the Company
contributed $20.0 million to the reorganized WPC Group.
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 September 30, 2003 totaled $132.1 million. Letters of credit
outstanding under the H&H Revolving Credit Facility were $12.7 million at
September 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 nine months ended September 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. The
Company has not purchased or retired any Senior Notes since the second quarter
of 2003.
LIQUIDITY
- ---------
At September 30, 2003 the WHX Group had cash and cash equivalents of
$50.9 million.
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 has a significant amount of outstanding indebtedness,
and its 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 the second and third quarters of 2003,
H&H received capital contributions of $3.0 million and $5.0 million,
respectively, 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.
Short-term liquidity is dependent, in large part, on cash on hand,
investments, 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
During 2003, H&H received $8.0 million in capital contributions from
WHX in order to comply with certain financial covenants of its credit facility.
In light of H&H's results in 2003 and the uncertainty and general weakness in
30
the industrial economy, it is possible that violations of these financial
covenants could occur before the maturity date of the credit facility. It is the
Company's intention to refinance this and other debt obligations prior to their
scheduled maturities. Although the Company believes it will successfully
refinance such obligations, there can be no assurance that such refinancing will
be obtained. In the event the Company is not able to effect such refinancing,
its ability to continue operating as a going concern cannot be assured. The
unaudited condensed consolidated financial statements do not include any
adjustments that might result from the occurrence of this contingency.
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
September 30, 2003, the Company purchased $17.7 million aggregate principal
amount of 10 1/2% 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.
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 July 31, 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.
At September 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 September 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 September 30, 2003,
preferred dividends in arrears totaled $58.3 million.
NEW ACCOUNTING STANDARDS
- ------------------------
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 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
31
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 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 for all periods ending on or after December 15,
2003 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
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.
32
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.
A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
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"), and that the Company violated Rules
14d-4(c) and 14d-6(d) under the Exchange Act upon expiration of the Offer. The
SEC does not claim that the Offer was intended to or in fact defrauded any
investor. 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 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" and
Section 14(d)(4) of the exchange Act. 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. The Court has set a schedule for
briefing and scheduled oral argument of the appeal for March 2004.
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. 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.
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
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
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 Plan. Under the settlement, among other things, WHX agreed
(a) that the WHX Plan, as it is currently constituted, is a single employer
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pension plan, (b) to contribute funds to the WHX 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, the PBGC agreed (a) that, after the
effective date of the POR, if it terminates the WHX 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 Part I Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 1 and 9 to the Consolidated Financial Statements.
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 September 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 September 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 September 30, 2003 dividends in arrears amounted to $58.3
million.
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 July 25, 2003
Form 8-K filed on August 1, 2003
Form 8-K filed on August 4, 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)
November 13, 2003
35