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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, 2002
--------------------------------------------------
/ / 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, 2002 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 / /
The number of shares of Common Stock issued and outstanding as of November 1,
2002 was 5,405,856.
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Restated Restated
(in thousands)
Net sales $ 105,153 $ 100,260 $ 307,135 $ 300,955
Cost of goods sold 90,878 80,534 252,099 245,035
--------- --------- --------- ---------
Gross profit 14,275 19,726 55,036 55,920
Selling, general and administrative expenses 20,473 18,365 54,904 58,563
Restructuring charges (Note 3) 5,038 -- 15,738 --
--------- --------- --------- ---------
Income (loss) from operations (11,236) 1,361 (15,606) (2,643)
--------- --------- --------- ---------
Other:
Interest expense 6,135 11,674 21,475 36,783
Gain on early retirement of debt 253 -- 40,488 19,012
Other income (expense) (6,381) 2,079 (6,705) 5,865
--------- --------- --------- ---------
Income (loss) from continuing operations before taxes (23,499) (8,234) (3,298) (14,549)
Tax provision (benefit) (8,130) (2,147) (12,074) (3,317)
--------- --------- --------- ---------
Income (loss) from continuing operations (15,369) (6,087) 8,776 (11,232)
--------- --------- --------- ---------
Discontinued operations:
Income from discontinued operations - net of tax 2,258 1,614 10,601 4,348
Gain on sale - net of tax of $6,725 11,747 -- 11,747 --
--------- --------- --------- ---------
14,005 1,614 22,348 4,348
--------- --------- --------- ---------
Income (loss) before cumulative effect of an
accounting change (1,364) (4,473) 31,124 (6,884)
Cumulative effect of an accounting change (Note 4) -- -- (44,000) --
--------- --------- --------- ---------
Net income (loss) (1,364) (4,473) (12,876) (6,884)
Dividend requirement for preferred stock 4,856 4,827 14,368 15,089
--------- --------- --------- ---------
Net income (loss) applicable to common stock $ (6,220) $ (9,300) $ (27,244) $ (21,973)
========= ========= ========= =========
Basic and diluted per share of common stock
Income (loss) from continuing operations $ (3.79) $ (2.16) $ (1.05) $ (5.32)
Discontinued operations 2.62 0.32 4.20 0.88
Cumulative effect of an accounting change -- -- (8.27) --
--------- --------- --------- ---------
Net income (loss) per share $ (1.17) $ (1.84) $ (5.12) $ (4.44)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, December 31,
2002 2001
- ------------------------------------------------------------------------------------
(Dollars and shares in thousands)
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 125,528 $ 7,789
Short term investments 2,760 244,883
Trade receivables - net 57,632 45,725
Inventories 80,420 85,279
Other current assets 17,004 9,951
--------- ---------
Total current assets 283,344 393,627
Advances to WPC 7,755 8,369
Note Receivable - WPC 31,715 31,005
Property, plant and equipment at cost, less
accumulated depreciation and amortization 110,682 134,923
Prepaid pension 27,594 33,294
Intangibles, net of amortization 215,858 256,831
Assets held for sale 13,901 --
Assets of discontinued operations -- 107,193
Other non-current assets 18,279 26,208
--------- ---------
$ 709,128 $ 991,450
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 64,381 $ 34,131
Deferred income taxes - current 8,982 8,982
Other current liabilities 51,751 22,023
Short-term debt -- 110,946
--------- ---------
Total current liabilities 125,114 176,082
Long-term debt 262,265 432,454
Loss in excess of investment - WPC 40,084 39,374
Deferred income taxes - non-current 3,435 3,227
Liabilities of discontinued operations -- 50,011
Other liabilities 48,527 33,878
--------- ---------
479,425 735,026
Stockholders' Equity:
Preferred Stock $.10 par value -
5,523 shares and 5,571 shares 552 557
Common Stock - $.01 par value -
5,406 shares and 5,357 shares 54 54
Accumulated other comprehensive loss (1,746) (2,268)
Additional paid-in capital 556,008 556,006
Accumulated earnings (deficit) (325,165) (297,925)
--------- ---------
Total stockholders' equity 229,703 256,424
--------- ---------
$ 709,128 $ 991,450
========= =========
See notes to condensed consolidated financial statements.
3
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
2002 2001
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net loss $ (12,876) $ (6,884)
Less: Income from discontinued operaions 10,601 4,348
---------- -----------
Net loss from continuing operations and cumulative effect of an accounting change (23,477) (11,232)
Adjsutments to reconcile net loss from continuing operations and cumulative effect
of an accounting change to net cash provided by operating activities:
Cumulative effect of an accounting change 44,000 --
Restructuring charge 9,199 --
Depreciation and amortization 13,022 18,384
Amortization of debt related costs 1,912 2,813
Gain on early retirement of debt (40,488) (19,012)
Gain on sale of discontinued operations (11,747) --
Other post employment benefits 339 167
Deferred income taxes 208 (535)
Loss (gain) on sale of assets 1,124 (40)
Equity income in affiliated companies (142) (2,836)
Pension expense 5,700 3,607
Decrease (increase) in working capital elements,
Trade receivables (11,907) (7,380)
Inventories 4,859 31,118
Other current assets 1,609 784
Trade payables 30,153 (377)
Other current liabilities 20,190 (2,999)
Short-term investments - net 242,123 60,346
Trading account borrowings (110,946) --
Other items-net (8,635) 5,281
---------- -----------
Net cash provided by operating activities from continuing operations 167,096 78,089
---------- -----------
Cash flows from investing activities:
Capital expenditures (7,600) (10,165)
Net proceeds on sale of discontinued operations 84,695 --
Release of restricted cash -- 33,000
Note receivable - WPC -- (30,453)
Settlement Agreement - WPC -- (32,000)
Dividends from affiliates 141 1,285
Acquisitions (3,057) --
Proceeds from sale of property 81 167
---------- -----------
Net cash used in investing activities from continuing operations 74,260 (38,166)
---------- -----------
Cash flows from financing activities:
Early retirement of long-term debt (78,851) (15,906)
Due from Unimast 3,223 (1,804)
Net (payments)/borrowings of long-term debt (46,679) 7,100
---------- -----------
Net cash used by financing activities from continuing operations (122,307) (10,610)
---------- -----------
Effect of exchange rate changes on net cash 48 (22)
---------- -----------
Net cash provided by continuing operations 119,097 29,291
Net cash (used) / provided by discontinued operations (1,358) 1,016
Cash and cash equivalents at beginning of period 7,789 4,748
---------- -----------
Cash and cash equivalents at end of period $ 125,528 $ 35,055
=========== ===========
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, 2001. The
results of operations for the quarter and nine months ended September 30, 2002
are not necessarily indicative of the operating results for the full year.
The consolidated financial statements include the accounts of all
subsidiary companies except for Wheeling-Pittsburgh Corporation and its
subsidiaries. On November 16, 2000, Wheeling-Pittsburgh Corporation ("WPC"), a
wholly-owned subsidiary of WHX Corporation ("WHX"), and six of its subsidiaries
including Wheeling-Pittsburgh Steel Corporation ("WPSC" and together with WPC
and its other subsidiaries, the "WPC Group") filed a petition seeking
reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code
(see Note 1). As a result of the Bankruptcy Filing, the Company has, as of
November 16, 2000, deconsolidated the balance sheet of its wholly-owned
subsidiary WPC. Accordingly, the accompanying consolidated balance sheets at
September 30, 2002 and December 31, 2001 do not include any of the assets or
liabilities of WPC, and the accompanying consolidated statement of operations
and the consolidated statement of cash flows for the quarter and nine months
ended September 30, 2002 and 2001 exclude the operating results of WPC.
Certain reclassifications have been made to prior period balances to
conform to current period presentation. The results from the 2001 periods have
been restated in accordance with FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), and FASB Statement
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). Accordingly, the
Income Statements, Balance Sheets and Cash Flows of Unimast Incorporated have
been classified as discontinued operations and gains on early retirement of debt
have been classified as income from continuing operations for all periods
presented. (see Note 4)
Nature of Operations
- --------------------
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 is Handy & Harman ("H&H"), a diversified manufacturing
company whose strategic business units encompass three segments: precious metal,
wire & tubing, and engineered materials. WHX also owns Pittsburgh-Canfield
Corporation ("PCC"), a manufacturer of electrogalvanized products used in the
construction and appliance industries. In July 2002, the Company sold its
wholly-owned subsidiary Unimast Incorporated ("Unimast"), a leading manufacturer
of steel framing and other products for commercial and residential construction.
As a result, Unimast has been classified as a discontinued operation. The
transaction closed on July 31, 2002. WHX's other business consists of WPC and
six of its subsidiaries including WPSC, a vertically integrated manufacturer of
value-added and flat rolled steel products (see Note 1). 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."
5
Reclassification and Reverse Common Stock Split
- -----------------------------------------------
Certain amounts for prior years have been reclassified to conform to
the current year presentation. All references to common shares and per common
share amounts have been adjusted to reflect a 1-for-3 reverse common stock split
("Reverse Split"), which was approved and declared by the Company's Board of
Directors effective August 22, 2002. The common stockholders of the Company
approved the reverse split at the Company's Annual Meeting held on June 18,
2002.
As a consequence of the reverse split, the conversion ratio for each
series of preferred shares was adjusted August 22, 2002 in accordance with the
terms governing Certificates of Designation, as follows:
Preferred Shares Prior Rates Current Rates
- --------------------------- -------------------- -----------------------
Series A 3.1686 1.0562
Series B 2.4510 0.8170
Note 1 - WPC Group Bankruptcy
- -----------------------------
On November 16, 2000, the WPC Group filed petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Ohio. As a result, subsequent to the commencement of the
Bankruptcy Filing, the WPC Group sought and obtained several orders from the
Bankruptcy Court that were intended to enable the WPC Group to continue business
operations as debtors-in-possession. Since the Petition Date, the WPC Group's
management has been in the process of stabilizing their businesses and
evaluating their operations, while continuing to provide uninterrupted services
to its customers.
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 14, 2002, the
Bankruptcy Court will review a motion to amend the DIP Credit Agreement to
extend the maturity date to May 17, 2003, 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.
WPC borrowings outstanding under the DIP Credit Facility at
September 30, 2002 include the $35.0 million Term Loan, $136.1 million in
revolving credit borrowings and approximately $2.8 million of letters of credit.
WPC borrowings outstanding under the DIP Credit Facility for revolving loans
totaled $127.2 million at December 31, 2001. Term loans under the DIP Credit
Facility totaled $34.4 million at December 31, 2001. At September 30, 2002, net
availability under the DIP Credit Facility was $4.2 million. The DIP Credit
Facility currently expires on the earlier of November 17, 2002 or the completion
of a Plan of Reorganization. WPC and the DIP Credit Agreement lenders have
negotiated an extension of the maturity date as set forth above. The extension
is subject to Bankruptcy
6
Court approval and will be heard on November 14, 2002. The extension is intended
to give WPC the time necessary to negotiate and finalize a Plan of
Reorganization.
On September 23, 2002, WPC announced that the Royal Bank of Canada
("RBC") had filed on its behalf an application with the Emergency Steel Loan
Guarantee Board ("ESLGB") for a $250 million federal loan guarantee. An
affiliate of RBC has agreed to underwrite the loan if the guarantee is granted.
Should the ESLGB grant the application and issue the loan guarantee, the loan
would facilitate WPC's efforts to finalize a Plan of Reorganization. There can
be no assurance, however, that the ESGLB will issue a guarantee or that WPC will
be successful in confirming a Plan of Reorganization.
The WPC Group currently has the exclusive right to file a Plan of
Reorganization. The exclusive filing period has been extended most recently
until December 9, 2002, by the Bankruptcy Court at the WPC Group's request, and
while the WPC Group intends to request extensions of the exclusivity period if
necessary, there can be no assurance that the Bankruptcy Court will grant future
extensions. If the exclusivity period were to expire or be terminated, other
interested parties, such as creditors of the WPC Group, would have the right to
propose alternative plans of reorganization.
During the period January 1, 2002 through September 30, 2002, the
WPC Group incurred a net loss of $44.4 million, which is not reflected in the
Company's September 30, 2002 consolidated results of operations. (see Note 12)
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, on November 17, 2000, guaranteed $30 million of the WPC Group's
debtor-in-possession term loan. Such guaranty was terminated effective as of
June 1, 2001 concurrently with WHX's purchase of a participation interest in the
Term Loan as discussed above. 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.
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. Pursuant to the Settlement Agreement certain outstanding claims among
the parties thereto were resolved, including without limitation, all
inter-company receivables and payables between the WHX Group and the WPC Group.
The Settlement Agreement provided, in part, for (1) the payment by
WHX to WPC of $32 million; (2) the exchange of releases between the WPC Group
and the WHX Group; (3) the acquisition by WHX or its designee of certain assets
of Pittsburgh-Canfield Corporation ("PCC"), plus the assumption of certain trade
payables, subject to certain terms and conditions (WHX recorded $5.4 million as
the fair value of the net assets of PCC.); (4) the termination of the Tax
Sharing Agreements between WHX and WPC; (5) WHX to deliver an agreement to the
WPC Group whereby it agreed not to charge or allocate any pension obligations,
expenses or charges to the WPC Group with respect to the WHX Pension Plan,
subject to certain limitations as provided therein, through and including the
earlier of the effective date of a Plan or Plans of Reorganization and December
31, 2002; and (6) the final settlement of all inter-company receivables and
liabilities between the WHX Group and the WPC Group (except for commercial trade
transactions), including the liability for redeemable stock. Such transactions,
other than the acquisition of certain assets of PCC, all occurred effective May
29, 2001. The acquisition of certain assets of PCC closed on June 29, 2001. The
PCC agreement included a one-year repurchase option for the seller. The
repurchase option expired 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 secured financing terms)
7
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 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. Through September 30, 2002, WHX had
advanced $5.0 million of the secured loans and up to $5.5 million of secured
financing. At September 30, 2002, the outstanding balance of these secured
advances was $5.0 million and $2.8 million, respectively.
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 are granted super-priority claim status
in WPSC's Chapter 11 case and are secured by a lien on substantially all of the
assets of WPSC, junior to the liens, security interests and super-priority
claims of the lenders to WPSC under the DIP Credit Agreement. The Supplemental
Agreement also provides, 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 requires WPC to support
certain changes to the WHX Pension Plan.
Additionally, the October Order approved the terms of the Modified
Labor Agreement ("MLA") by and among WPC, WPSC and the USWA. WHX is not a party
to the MLA. The MLA modifies the 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 is part of a comprehensive support
arrangement that also involves concessions from WPSC salaried employees, WPSC's
vendors and other constituencies in the Chapter 11 proceedings.
In January 2002, WPSC finalized a financial support plan which
included a $5.0 million loan from the State of West Virginia, a $7.0 million
loan and a $0.2 million grant from the State of Ohio, a $10.0 million advance by
the WHX Group for future steel purchases (all of which were delivered before
June 30, 2002) and additional wage and salary deferrals from WPSC union and
salaried employees. At September 30, 2002, the balance outstanding with the
State of West Virginia was $5.0 million, and $7.0 million with the State of
Ohio.
Management of the Company cannot at this time determine with
certainty the ultimate outcome of the Chapter 11 proceedings; however it is
possible that the following outcomes could result:
o The WPC Group could reorganize, and its creditors could receive a
portion of their claims in cash or in stock of WPC or WPSC.
o The WPC Group could be sold in its entirety or segments could be
sold, and the proceeds from such sale(s) would be utilized to
satisfy creditor claims.
o The creditors could assume ownership of the WPC Group or WPSC and
continue to operate such businesses.
In each of the above possible outcomes, the WHX Group would have
little or no future ownership in or involvement with the WPC Group, and the WHX
Group future cash obligations to or on behalf of the WPC Group would be minimal
to none (other than the $25 million pension contribution, referred to above). It
is also possible that none of the above outcomes would occur and the WPC Group
may shut down a number of its operations. According to WHX's preliminary
evaluation of potential pension obligations, if a partial shutdown of the WPC
Group's operations were to occur in the immediate future WHX's liability for
early retirement pension benefits could range from approximately $80 million to
$100 million. Under current pension law and regulations, based on WHX's analysis
of the current funded status of the pension plan, if a partial shutdown were to
occur the concomitant cash funding obligations would likely have a material
adverse impact on the liquidity, financial position and capital resources of
WHX. It is also possible that the WPC Group could cease operations in their
entirety and this liability would then be significantly greater. The Pension
Benefit Guaranty Corporation ("PBGC") has advised the Company that the PBGC
believes that on a termination basis, at February 28, 2002, the WHX Pension Plan
8
was underfunded by in excess of $80 million (before the effect of any partial
shutdown, as described above). However, management does not believe that a
cessation of operations or a termination of the Pension Plan is likely. If a
cessation of operations or a termination of the Plan were to occur, the
consequential cash funding obligations to the WHX Pension Plan would have a
material adverse impact on the liquidity, financial position and capital
resources of WHX.
In connection with past collective bargaining agreements by and
between the WPC Group and the United Steelworkers of America, AFL-CIO-CLC
("USWA"), the WPC Group is obligated to provide certain medical insurance, life
insurance, disability and surviving spouse retirement benefits to retired
employees and their dependents ("OPEB Obligations"). WHX is not a signatory to
any of these agreements. However, WHX has separately agreed to be contingently
liable for a portion of the OPEB Obligations. WHX's contingent obligation would
be triggered in the event that the WPC Group was to fail to satisfy its OPEB
Obligations. WHX's contingent obligation is limited to 25% of the Accumulated
Post-Retirement Benefit Obligation with respect to the WPC Group's employees and
retirees represented by the USWA. WPSC's total OPEB Obligation at January 1,
2002 is estimated to be $271.2 million. WHX has estimated that approximately 85%
of employees and retirees entitled to such OPEB Obligations are represented by
the USWA.
WHX's liability for OPEB Obligations exists only so long as (1) a
majority of the directors of WPSC or WPC are affiliated with WHX; (2) WHX
controls the Board of Directors of WPSC or WPC through appointment or election
of a majority of such directors; or (3) WHX, through other means, exercises a
level of control normally associated with (1) or (2) above.
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. In the third quarter, the Company recognized a pre-tax gain on the sale
of approximately $18.5 million. The gain on sale is net of closing costs,
transaction fees, employee related payments, and other costs and expenses. 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 has applied these proceeds in
accordance with the terms of the Indenture for the Company's 10 1/2 % Senior
Notes.
As a result of the sale, the Condensed Consolidated Financial
Statements and related Notes for the periods presented herein reflect Unimast as
a discontinued operation.
Operating results of discontinued operations were as follows:
Three months ended September 30 Nine months ended September 30
2002 (1) 2001 2002 2001
----------------------------------------------------------------------
(in thousands)
Net sales $ 23,945 $ 61,097 $ 150,997 $ 179,262
Operating income 3,437 3,107 17,652 9,207
Interest/ other income (expense) 86 (980) (806) (2,077)
Income taxes 1,265 513 6,245 2,782
Net income 2,258 1,614 10,601 4,348
(1) reflects operating results for the month of July 2002
9
Assets and liabilities of discontinued operations were as follows:
December 31,
2001
--------------
(in thousands)
Current Assets
Cash $ 86
Receivables 22,773
Inventory 29,556
Other current assets 814
Property, plant and equipment - net 36,101
Other long-term assets 17,863
--------
Total assets 107,193
--------
Accounts payable and accrued liabilities 21,293
Long-term debt 22,100
Other long-term liabilities 6,618
--------
Total liabilities 50,011
--------
Net assets of discontinued operations $ 57,182
========
Note 3 - Business Restructuring Charges
- ---------------------------------------
In April 2002, the Company's wholly-owned subsidiary, Handy & Harman,
decided to exit certain of its precious metal activities. The affected product
lines are manufactured at H&H's Fairfield, CT and East Providence, RI
facilities.
The decision to exit these operating activities resulted in a second
quarter restructuring charge of $10.7 million. This charge includes $5.3 million
in employee separation expenses (approximately 220 employees, of which 160 were
terminated by September 30, 2002), $1.1 million of contractual obligations, and
$4.3 million in costs to close the facilities, including refining charges for
inventory remaining after operations cease. In addition, the Company incurred
$0.9 million of incremental costs in the third quarter to maintain the employee
base in order to fulfill customer orders and complete the shutdown activities.
The Company estimates that an additional $0.4 million of such incremental costs
will be incurred during the fourth quarter. Such costs are not included in the
aforementioned restructuring charge.
As of September 30, 2002, the Company has received $7.3 million for the
sale of certain equipment associated with these facilities.
The following table represents the activity of the restructuring
reserve during the second and third quarter:
Reserve Reserve
Balance Balance
Initial Cost June 30, Cost September 30,
Reserve Incurred 2002 Incurred 2002
------- ---------- ---------- --------- -----------
(in thousands)
Employee separation and related costs $ 5,274 $ 606 $ 4,668 $ 1,944 $ 2,724
Facility closing and refining costs 4,326 580 3,746 799 2,947
Contractual obligations 1,100 -- 1,100 125 975
------- ------- ------- ------- -------
$10,700 $ 1,186 $ 9,514 $ 2,868 $ 6,646
======= ======= ======= ======= =======
In September 2002, the Company decided to exit certain of its stainless
steel wire activities. The affected operations are at H&H's facilities in
Liversedge, England and Willingboro, NJ. The decision to exit these operating
activities resulted in third quarter charges of $7.9 million, including
restructuring charges of $5.0 million. The components of the $5.0 million
restructuring charge are: $0.5 million in employee separation expenses, $3.9
10
million for the write-down of production supplies and consumables and facility
closing costs, and $0.6 million in contractual obligations. The remainder of the
charge amounted to $2.9 million for the write-down of inventory to disposal
value. This charge is included in cost of sales. In addition, the Company
expects to incur incremental costs of approximately $0.7 million above the
aforementioned separation expenses in the fourth quarter of 2002 and the first
quarter of 2003 to maintain the employee base in order to fulfill customer
orders and complete shutdown efforts. Such incremental costs are not included in
the aforementioned restructuring charge. The Company anticipates cash proceeds
in the range of $3.0 million to $4.0 million on the sale of property, plant and
equipment. The Company will incur increased depreciation expense of
approximately $4.7 million on equipment values during the remaining operating
period of the affected businesses, estimated to be three months.
The following table represents the activity of this restructuring
reserve during the third quarter:
Reserve
Balance
Initial Cost September 30,
Reserve Incurred 2002
-------- --------- -------------
(in thousands)
Employee separation and related costs $ 460 $ -- $ 460
Writedown of production supplies and consumables
and related facility closing costs 3,935 2,485 1,450
Contractual obligations 643 -- 643
------ ------ ------
$5,038 $2,485 $2,553
====== ====== ======
Upon communication with the employees of these facilities,
additional separation accruals will be recorded in the fourth quarter in the
range of $3.5 million to $4.0 million.
It is estimated that all of the accrued restructuring costs at
September 30, 2002, will be paid by the end of the first quarter 2003.
Note 4 - New Accounting Standards
- ---------------------------------
In July 2001, FASB issued SFAS 141 and 142, "Business Combinations"
("SFAS 141") and "Goodwill and Other Intangible Assets" ("SFAS 142"),
respectively. SFAS 141 supercedes Accounting Principles Board Opinion No. 16
("APB 16"), "Business Combinations." The most significant changes made by SFAS
141 are: (1) requiring that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill, and
(3) requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain, instead of being amortized.
SFAS 142 supercedes APB 17, "Intangible Assets". SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e., post-acquisition accounting). The provisions of SFAS 142 are
effective for fiscal years beginning after December 15, 2001 and must be adopted
at the beginning of a fiscal year. The most significant changes made by SFAS 142
are 1) goodwill and indefinite lived intangible assets will no longer be
amortized, (2) goodwill be will tested for impairment at least annually at the
reporting unit level, (3) intangible assets deemed to have an indefinite life
will be tested for impairment at least annually, and (4) the amortization period
of intangible assets with finite lives will no longer be limited to forty (40)
years.
The Company has adopted the provisions of SFAS 142 effective January
1, 2002. As a result of the adoption of SFAS 142, the Company will not record
amortization expense for existing goodwill during the year ending December 31,
2002. The Company recorded amortization expense of $5.4 million on this goodwill
for the nine months ended September 30, 2001. Any intangible assets acquired or
11
goodwill arising from transactions after June 30, 2001 will be subject to the
amortization and non-amortization provisions of SFAS 141 and SFAS 142. The
Company has 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 is shown as
a cumulative effect of an accounting change. The Company recorded this charge
because the present value of current estimated cash flow projections will not be
sufficient to recover this Group's recorded goodwill. The Company is still
committed to this business and expects improved performance from this Group in
future periods as a result of management changes, cost reductions,
restructuring, and improving economic conditions.
The following table provides comparative earnings per share had the
non-amortization provisions of SFAS 142 been adopted for all periods presented:
(in thousands)
Three Months Nine Months
Ended September 30 Ended September 30
2002 2001 2002 2001
------------------------- ------------------------
Reported income (loss) before discontinued operations and
cumulative effect of an accounting change $ (20,372) $ (10,914) $ (5,739) $ (26,321)
Goodwill amortization -- 1,811 -- 5,430
---------- ---------- --------- ----------
Adjusted income (loss) before discontinued operations and
cumulative effect of an accounting change $ (20,372) $ (9,103) $ (5,739) $ (20,891)
========== ========== ========= ==========
Basic and Diluted per share of common stock:
Reported income (loss) before discontinued operations and
cumulative effect of an accounting change $ (3.82) $ (2.16) $ (1.08) $ (5.32)
Goodwill amortization -- 0.36 -- 1.11
---------- ---------- --------- ----------
Adjusted income (loss) before discontinued operations and
cumulative effect of an accounting change $ (3.82) $ (1.80) $ (1.08) $ (4.21)
========== ========== ========= ==========
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 were as follows:
(in thousands)
Precious Wire & Engineered
Metals Tubing Materials Total
---------- -------- -------------- -----------------
Balance as of January 1, 2002 $ 106,971 $ 104,918 $ 43,977 $ 255,866
Impairment loss -- (44,000) -- (44,000)
Additions -- -- 3,057 3,057
--------- --------- --------- ---------
Balance at September 30, 2002 $ 106,971 $ 60,918 $ 47,034 $ 214,923
========= ========= ========= =========
The $3.1 million addition in 2002 related to the acquisition of two
businesses, which added complimentary product lines to the Company's existing
Engineered Materials businesses. As of September 30, 2002, the Company had $0.9
million of other intangible assets, which will continue to be amortized over
their remaining useful lives ranging from 3 to 17 years.
In August 2001, the 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
12
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. SFAS 143 will be
effective for the financial statement for fiscal years beginning after June 15,
2002. WHX would be required to adopt the provisions of SFAS 143 in fiscal 2003;
however, SFAS 143 is not expected to have a significant effect on the Company's
financial statements.
In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The Statement also extends the reporting requirements to report separately, as
discontinued operations, components of an entity that have either been disposed
of or classified as held for sale. WHX has adopted the provisions of SFAS 144 as
of the beginning of fiscal 2002.
On July 31, 2002, WHX sold the stock of Unimast, its wholly-owned
subsidiary for $95.0 million. As a result of this transaction, Unimast has been
accounted for as a discontinued operation in accordance with SFAS 144. (see Note
2).
In April 2002, the FASB issued Statement No. 145, "Rescission of
FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". This Statement eliminates the automatic classification
of gain or loss on extinguishment of debt as an extraordinary item of income and
requires that such gain or loss be evaluated for extraordinary classification
under the criteria of Accounting Principles Board No. 30, "Reporting Results of
Operations." This Statement also requires sales-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sales-leaseback transactions, and makes various other technical corrections to
existing pronouncements. The Company has elected to adopt the provisions of SFAS
145 in the second quarter of 2002. As a result, prior period results have been
restated to reflect gains on retirement of debt as income from continuing
operations. These gains were previously accounted for as extraordinary items.
The following table presents the effect of the change on earnings for the 2001
period.
(thousands - except per-share) Three months Nine months
ended ended
September 30 September 30
2001 2001
------------ ------------
Income (loss) from continuing operations
before change in accounting method $ (6,087) $(23,589)
Change in accounting method for
gain on retirement of debt - net of tax -- 12,357
--------- --------
Income (loss) from continuing operations - restated (6,087) (11,232)
Discontinued operations 1,614 4,348
--------- --------
Net income (loss) $ (4,473) $ (6,884)
========= ========
Income (loss) per share - basic and diluted
Income (loss) from continuing operations
before change in accounting method $ (2.16) $ (6.15)
Change in accounting method for
gain on retirement of debt - net of tax -- 0.83
--------- --------
Income (loss) from continuing operations - restated (2.16) (5.32)
Discontinued operations 0.32 0.88
--------- --------
Net income (loss) $ (1.84) $ (4.44)
========= ========
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. The provisions
13
of SFAS 146, as related to exit or disposal activities will be effective for
fiscal 2003. SFAS 146 is not expected to have a significant effect on the
Company's financial statements.
Note 5 - Earnings Per Share
- ---------------------------
The computation of basic earnings per common share is based upon the
average number of shares of Common Stock outstanding. In the computation of
diluted earnings per common share in the nine and three month periods ended
September 30, 2002 and 2001, the conversion of preferred stock and redeemable
common stock and exercise of options would have had an anti-dilutive effect. A
reconciliation of the income and shares used in the computation follows:
Reconciliation of Income and Shares in EPS Calculation
(in thousands except per share amounts)
For the Three Months Ended September 30, 2002
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net income from continuing operations $(15,369)
Less: Preferred stock dividends 4,856
---------
Basic and Diluted EPS
Loss from continuing operations
available 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
Income from continuing operations
available to common stockholders $ (5,592) 5,321 $ (1.05)
======== ===== ========
For the Three Months Ended September 30, 2001
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net income from continuing operations $ (6,087)
Less: Preferred stock dividends 4,827
--------
Basic and Diluted EPS
Income from continuing operations
available to common stockholders $(10,914) 5,046 $ (2.16)
======== ===== ========
For the Nine Months Ended September 30, 2001
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net loss from continuing operations $(11,232)
Less: Preferred stock dividends 15,089
---------
Basic and Diluted EPS
Loss from continuing operations
available to common stockholders $(26,321) 4,954 $ (5.32)
======== ===== ========
Outstanding stock options for common stock granted to officers,
directors, key employees and others totaled 2.2 million at September 30, 2002.
14
Preferred Stock
The Company has accrued $38.8 million representing dividends in
arrears at September 30, 2002 for preferred shares Series A and Series B.
Redeemable Common Stock
At December 31, 2000 certain present and former employees of the WPC
Group held, through an Employee Stock Ownership Plan ("ESOP"), 81,502 shares of
common stock of WHX. These employees received such shares as part of the 1991
Plan of Reorganization in exchange for Series C preferred shares of
Wheeling-Pittsburgh Steel Corporation (WPC's predecessor company prior to the
1990 bankruptcy). Beneficial owners of such shares who were active employees on
August 15, 1990 and who have either retired, died or become disabled, or who
reach 30 years of service, may sell their shares to the Company at a price of
$45 or, upon qualified retirement, $60 per share. These contingent obligations
are expected to extend over many years, as participants in the ESOP satisfy the
criteria for selling shares to the Company. In addition, each beneficiary can
direct the ESOP to sell any or all of its common stock into the public markets
at any time; provided, however, that the ESOP will not on any day sell in the
public markets more than 20% of the number of shares of Common Stock traded
during the previous day. Management had estimated the liability for future
redemptions to be approximately $2.6 million at December 31, 2001. As a result
of the Settlement Agreement discussed in Note 1, the liability for redeemable
common shares was assumed by WPC, accordingly participants will sell their
shares to WPC. Approximately 67,066 shares of Common Stock of WHX were held by
the ESOP at September 30, 2002.
Note 6 - Comprehensive Income (Loss)
- ------------------------------------
Comprehensive income (loss) for the three-month and nine-month
periods ended September 30, 2002 and 2001 is as follows:
(in thousands) Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ (1,364) $ (4,473) $(12,876) $ (6,884)
Other comprehensive income (loss):
Foreign currency translation adjustments (274) 399 522 (403)
Cumulative effect on equity of SFAS No. 133 adoption - net of tax of $227 -- -- -- (423)
Interest rate hedge, net of tax of $333 and ($227) -- 619 -- 423
-------- -------- -------- --------
Comprehensive income (loss) $ (1,638) $ (3,455) $(12,354) $ (7,287)
======== ======== ======== ========
Accumulated other comprehensive income (loss) balances as of September 30, 2002
and December 31, 2001 consisted of foreign currency translation adjustments as
follows:
15
(in thousands)
September 30, 2002
- ------------------------------
Balance on January 1, 2002 $(2,268)
Period change 522
-------
Balance on September 30, 2002 $(1,746)
=======
December 31, 2001
- -----------------------------
Balance on January 1, 2001 $(1,501)
Period change (767)
-------
Balance on December 31, 2001 $(2,268)
=======
Note 7 - Short Term Investments
- -------------------------------
Net realized and unrealized losses on trading securities included in
other income (expense) for the third quarter of 2002 and 2001 were losses of
$4.2 million and $3.9 million, respectively.
Net realized and unrealized losses on trading securities included in
other income (expense) for the nine-months ended September 30, 2002 and 2001
were losses of $4.3 million and $12.2 million, respectively.
During the year ended December 31, 2001 and the nine-month period
ended September 30, 2002, the Company used short-term margin borrowings in
connection with its short-term investing activities. The Company used $77.1
million of proceeds from the sale of Unimast to reduce its margin borrowings and
to permanently reduce its margin borrowing commitment.
Note 8 - Inventory
- ------------------
Inventories at September 30, 2002 and December 31, 2001 are
comprised as follows:
(in thousands) September 30, December 31,
2002 2001
------------- ------------
Finished products $ 8,831 $ 17,134
In-process 14,874 13,854
Raw materials 22,541 19,251
Fine and fabricated precious metal in various stages of completion 34,263 36,027
-------- --------
80,509 86,266
LIFO reserve (89) (987)
-------- --------
$ 80,420 $ 85,279
======== ========
Note 9 - Long-Term Debt
- -----------------------
The Company's long-term debt consists of the following debt
instruments:
16
(in thousands) September 30, December 31,
2002 2001
---- ----
Senior Notes due 2005, 10 1/2% $121,549 $245,059
Handy & Harman Senior Secured Credit Facility 132,582 168,155
Unimast Revolving Credit Facility -- 11,045
Other 8,134 8,195
-------- --------
262,265 432,454
Less portion due within one year -- --
-------- --------
Total long-term debt $262,265 $432,454
======== ========
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. 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 gain of $0.3 million. Subsequent to September 30, 2002, the
Company purchased and retired $10.8 million aggregate principal amount of the 10
1/2% Senior Notes in the open market for $8.5 million.
In the nine-months ended September 30, 2001, the Company purchased
and retired $36.4 million aggregate principal amount of the 10 1/2% Senior Notes
in the open market for $15.9 million. After the write off of $1.5 million of
deferred debt related costs, the Company recognized a gain of $19.0 million.
Note 10- Contingencies
- ----------------------
SEC Enforcement Action
On June 25, 1998, the Securities and Exchange Commission ("SEC")
instituted an administrative proceeding against the Company alleging that it had
violated certain SEC rules in connection with the tender offer for Dynamics
Corporation of America ("DCA") commenced on March 31, 1997 through the Company's
wholly-owned subsidiary, SB Acquisition Corp. ("Offer"). The Company previously
disclosed that the SEC intended to institute this proceeding. Specifically, the
Order Instituting Proceedings (the "Order") alleges that, in its initial form,
the Offer violated the "All Holders Rule," Rule 14d-10(a)(1) under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), based on the
Company's inclusion of a "record holder condition" in the Offer. No shareholder
had tendered any shares at the time the condition was removed. The Order further
alleges that the Company violated Rules 14d-4(c) and 14d-6(d) under the Exchange
Act upon expiration of the Offer, by allegedly waiving material conditions to
the Offer without prior notice to shareholders and purchasing the approximately
10.6% of DCA's outstanding shares tendered pursuant to the offer. The SEC does
not claim that the Offer was intended to or in fact defrauded any investor.
The Order institutes proceedings to determine whether the SEC should
enter an order requiring the Company (a) to cease and desist from committing or
causing any future violation of the rules alleged to have been violated and (b)
to pay approximately $1.3 million in disgorgement of profits. The Company filed
an answer denying any violations and seeking dismissal of the proceeding. On
October 6, 2000, the initial decision of the Administrative Law Judge who heard
the case dismissed all charges against the Company, with the finding that the
Company had not violated the law. The Division of Enforcement has filed a
petition for the SEC to review the decision and a brief, but only as to the All
Holders Rule Claim. The Commission, however, has authority to review any issues
on its own accord. WHX has filed its opposition brief.
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.
17
The WPC Group General Litigation
The WPC Group is a party to various litigation matters including
general liability claims covered by insurance. Claims that are "pre-petition"
claims for Chapter 11 purposes will ultimately be handled in accordance with the
terms of a confirmed Plan of Reorganization in Chapter 11 cases. In the opinion
of management, litigation claims are not expected to have a material adverse
effect on the WPC Group's results of operations or its ability to reorganize.
Environmental Matters
WPC 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. Due to the technical and regulatory complexity of remedial
activities and the difficulties attendant to identifying potentially responsible
parties and allocating or determining liability among them, the WPC Group is
unable to reasonably estimate the ultimate cost of compliance with Superfund
Laws. The WPC Group believes, based upon information currently available, that
its liability for clean up and remediation costs in connection with the Buckeye
Reclamation Landfill will be between $1.5 and $2.0 million. At several other
sites the WPC Group estimates costs of approximately $0.5 million. The WPC Group
is currently funding its share of remediation costs.
The WPC Group, as are other industrial manufacturers, is subject to
increasingly stringent standards relating to the protection of the environment.
In order to facilitate compliance with these environmental standards, the WPC
Group has incurred capital expenditures for environmental control projects
aggregating $3.4 million, $0.8 million and $0.9 million for 2000, 2001, and the
nine months ended September 30, 2002, respectively. WPC anticipates spending
approximately $20.8 million in the aggregate on major environmental compliance
projects through the year 2004, estimated to be spent as follows: $1.7 million
in 2002, $9.3 million in 2003, and $9.8 million in 2004. However, due to the
possibility of unanticipated factual or regulatory developments and in light of
limitations imposed by the pending Chapter 11 cases, the amount and timing of
future expenditures may vary substantially from such estimates. Should WPC
finalize a Plan of Reorganization and emerge from bankruptcy, certain
restructuring projects, including significantly higher environmental spendings
are likely to occur.
WPC's non-current accrued environmental liabilities totaled $18.9
million at September 30, 2002. These accruals were initially determined by WPC,
based on all available information. As new information becomes available,
including information provided by third parties, and changing laws and
regulation, the liabilities are reviewed and the accruals adjusted quarterly.
Management believes, based on its best estimate, that WPC has adequately
provided for remediation costs that might be incurred or penalties that might be
imposed under present environmental laws and regulations.
The Bankruptcy Code may distinguish between environmental
liabilities that represent pre-petition liabilities and those that represent
ongoing post-petition liabilities. Based on information currently available,
including the WPC Group's prior capital expenditures, anticipated capital
expenditures, consent agreements negotiated with Federal and State agencies and
information available to the WPC Group on pending judicial and administrative
proceedings, the WPC Group does not expect its environmental compliance,
including the incurrence of additional fines and penalties, if any, relating to
the operation of its facilities, to have a material adverse effect on the
results of operations of the WPC Group or on the WPC Group's ability to
reorganize. However, it is possible that litigation and environmental
contingencies could have a material effect on quarterly or annual operating
results when they are resolved in future periods. As further information comes
into the WPC Group's possession, it will continue to reassess such evaluations.
In the event the WPC Group is unable to fund these liabilities,
claims may be made against WHX for payment of such liabilities.
18
Note 11 - Reported Segments
- ---------------------------
The Company has three reportable segments: (1) Precious Metal. This
segment manufactures and sells precious metal products and electroplated
material, containing silver, gold, and palladium in combination with base metals
for use in a wide variety of industrial applications; (2) Wire & Tubing. This
segment manufactures and sells metal wire, cable and tubing products and
fabrications primarily from stainless steel, carbon steel and specialty alloys,
for use in a wide variety of industrial applications; (3) Engineered Materials.
This segment manufactures specialty roofing and construction fasteners and
products for gas, electricity and water distribution using steel and plastic
which are sold to the construction, and natural gas and water distribution
industries. As a result of the sale of Unimast, the operating results of PCC
have been reclassified to the Engineered Materials Segment. PCC was previously
in the Unimast Segment. PCC is a manufacturer of 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 and for the 2001 period, goodwill amortization. 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.
The following table presents information about reported segments for
the three-month and nine-month periods ending September 30, 2002 and 2001:
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(Restated) (Restated)
Revenue
Precious Metal $ 41,663 $ 38,173 $ 119,326 $ 130,919
Wire & Tubing 31,510 33,416 101,651 104,791
Engineered Materials 31,980 28,671 86,158 65,245
--------- --------- --------- ---------
Consolidated revenue $ 105,153 $ 100,260 $ 307,135 $ 300,955
========= ========= ========= =========
Segment operating income
Precious Metal $ 2,137 $ 2,206 $ (4,033) $ 6,253
Wire & Tubing (12,408) 855 (8,269) 3,870
Engineered Materials 3,510 3,831 9,904 6,521
--------- --------- --------- ---------
(6,761) 6,892 (2,398) 16,644
--------- --------- --------- ---------
Unallocated corporate expenses 4,475 3,720 13,208 13,857
Goodwill amortization -- 1,811 -- 5,430
--------- --------- --------- ---------
Operating income (loss) (11,236) 1,361 (15,606) (2,643)
Interest expense 6,135 11,674 21,475 36,783
Gain on early retirement of debt 253 -- 40,488 19,012
Other income (expense) (6,381) 2,079 (6,705) 5,865
--------- --------- --------- ---------
Income (loss) before taxes, discontinued operations
and cumulative effect of an accounting change (23,499) (8,234) (3,298) (14,549)
Income tax expense (benefit) (8,130) (2,147) (12,074) (3,317)
Income from discontinued operations - net of tax 2,258 1,614 10,601 4,348
Gain on sale of Unimast - net of tax of $6,725 11,747 -- 11,747 --
--------- --------- --------- ---------
Income (loss) before cumulative effect of an
accounting change (1,364) (4,473) 31,124 (6,884)
Cumulative effect of an accounting change - net of tax -- -- (44,000) --
--------- --------- --------- ---------
Net income (loss) $ (1,364) $ (4,473) $ (12,876) $ (6,884)
========= ========= ========= =========
20
Note 12 - Supplemental WPC Group Income Statement Data
- ------------------------------------------------------
During the nine months ended September 30, 2002 and 2001, the WPC
Group incurred a net loss of $44.4 million and $142.7 million, respectively.
These results are not reflected in WHX's September 30, 2002 and 2001
consolidated results of operations. (see Note 1) The WPC Group's summarized
income statement data for the three and nine months ended September 30, 2002 and
2001 is as follows (in thousands):
Three months ended Nine months ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales $ 277,868 $ 224,301 $ 725,591 $ 634,948
Cost of goods sold, excluding depreciation 235,690 227,405 663,806 669,266
Depreciation 18,428 18,811 55,681 55,784
Selling, general and administrative expenses 10,528 12,316 33,982 38,925
Reorganzation expenses 3,155 3,133 8,455 11,327
--------- --------- --------- ---------
Operating profit/(loss) 10,067 (37,364) (36,333) (140,354)
Interest expense 4,308 4,106 12,168 12,988
Reorganization income (expense) -- (1,050) 1,295 10,926
Other income (expense) 1,333 1,345 2,797 (266)
--------- --------- --------- ---------
Pre-tax profit/(loss) 7,092 (41,175) (44,409) (142,682)
Tax provision 6 5 16 16
--------- --------- --------- ---------
Net income/(loss) $ 7,086 $ (41,180) $ (44,425) $(142,698)
========= ========= ========= =========
21
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Risk Factors and Cautionary Statements
This Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
including, in particular, forward-looking statements under the headings "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data." These
statements appear in a number of places in this Report and include statements
regarding WHX's intent, belief or current expectations with respect to (i) its
financing plans, (ii) trends affecting its financial condition or results of
operations, (iii) the impact of competition and (iv) the impact and effect of
the Bankruptcy Filing by the WPC Group. The words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate," and similar expressions are
intended to identify such forward-looking statements; however, this Report also
contains other forward-looking statements in addition to historical information.
Any forward-looking statements made by WHX are not guarantees of
future performance and there are various important factors that could cause
actual results to differ materially from those indicated in the forward-looking
statements. This means that indicated results may not be realized.
Factors that could cause the actual results of the WHX Group in
future periods to differ materially include, but are not limited to, the
following:
o The WHX Group's businesses operate in highly competitive markets
and are subject to significant competition from other businesses;
o A decline in the general economic and business conditions and
industry trends and the other factors detailed from time to time in the
Company's filings with the Securities and Exchange Commission could continue to
adversely affect the Company's results of operations;
o WHX's senior management may be required to expend a substantial
amount of time and effort dealing with issues arising from the WPC Group's
Bankruptcy Filing, which could have a disruptive impact on management's ability
to focus on the operation of its businesses;
o In connection with the Bankruptcy Filing, WHX purchased $30.5
million of the senior secured term loan portion of the DIP Credit Agreement
provided to the WPC Group. In addition, at September 30, 2002, WHX had balances
due from WPSC totaling $7.8 million in the form of secured advances and
liquidity support. There can be no assurance that the WPC Group will be able to
repay these loans and advances in full;
o Due to the Bankruptcy Filing, the operations of the WPC Group are
subject to the jurisdiction of the Bankruptcy Court and, as a result, WHX's
access to the cash flows of the WPC Group is restricted. Accordingly, the WHX
Group will have to fund its operations and debt service obligations without
access to the cash flow of the WPC Group;
o The WPC Group has a large net operating loss carryforward 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. Depending on the final outcome
of the WPC Group's Bankruptcy Filing, the WPC Group's tax attributes may no
longer be available to the WHX Group;
o Various subsidiaries of the WPC Group participate in the pension
plan sponsored by the Company. While the Company's pension plan was fully funded
at December 31, 2001, there can be no assurance that the plan will remain fully
funded. Various developments could adversely affect the funded status of the
plan. Such developments include (but are not limited to): (a) a material
reduction in the value of the pension assets; (b) a change in actuarial
assumptions relating to asset accumulation and liability discount rates; (c)
events triggering early retirement obligations such as plant shutdowns and/or
22
large-scale hourly workforce reductions resulting from the Bankruptcy Filing or
otherwise; and (d) a termination of the Plan. WHX has also agreed to be
contingently liable for a portion of the OPEB Obligations (as defined above),
subject to certain conditions. Funding obligations, if they arise, may have an
adverse impact on WHX's liquidity. WPC Group's ability to maintain its current
operating configurations and levels of permanent employment are dependent upon
its ability to maintain adequate liquidity. There can be no assurances that the
WPC Group will be able to maintain adequate resources;
o Various members of the WPC Group have existing and contingent
liabilities relating to environmental matters, including environmental capital
expenditures, costs of remediation and potential fines and penalties relating to
possible violations of national and state environmental laws. In the event the
WPC Group is unable to fund these liabilities, claims may be made against WHX
for payment of such liabilities;
o WHX and H&H each have a significant amount of outstanding
indebtedness, and their ability to access capital markets in the future to
refinance such indebtedness may be limited; and
o The credit agreement of H&H has certain financial covenants that
limit the amount of cash distributions that can be paid to WHX.
Bankruptcy Filing of the WPC Group
On November 16, 2000, the WPC Group filed petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Ohio. As a result, subsequent to the commencement of the
Bankruptcy Filing, the WPC Group sought and obtained several orders from the
Bankruptcy Court that were intended to enable the WPC Group to continue business
operations as debtors-in-possession. Since the Petition Date, the WPC Group's
management has been in the process of stabilizing their businesses and
evaluating their operations, while continuing to provide uninterrupted services
to its customers.
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 14, 2002, the
Bankruptcy Court will review a motion to amend the DIP Credit Agreement to
extend the maturity date to May 17, 2003, 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.
WPC borrowings outstanding under the DIP Credit Facility at
September 30, 2002 include the $35.0 million Term Loan, $136.1 million in
revolving credit borrowings and approximately $2.8 million of letters of credit.
WPC borrowings outstanding under the DIP Credit Facility for revolving loans
totaled $127.2 million at December 31, 2001. Term loans under the DIP Credit
Facility totaled $34.4 million at December 31, 2001. At September 30, 2002, net
availability under the DIP Credit Facility was $4.2 million. The DIP Credit
Facility currently expires on the earlier of November 17, 2002 or the completion
of a Plan of Reorganization. WPC and the DIP Credit Agreement lenders have
negotiated an extension of the maturity date as set forth above. The extension
23
is subject to Bankruptcy Court approval and will be heard on November 14, 2002.
The extension is intended to give WPC the time necessary to negotiate and
finalize a Plan of Reorganization.
On September 23, 2002, WPC announced that the Royal Bank of Canada
("RBC") had filed on its behalf an application with the Emergency Steel Loan
Guarantee Board ("ESLGB") for a $250 million federal loan guarantee. An
affiliate of RBC has agreed to underwrite the loan if the guarantee is granted.
Should the ESLGB grant the application and issue the loan guarantee, the loan
would facilitate WPC's efforts to finalize a Plan of Reorganization. There can
be no assurance, however, that the ESGLB will issue a guarantee or that WPC will
be successful in confirming a Plan of Reorganization.
The WPC Group currently has the exclusive right to file a Plan of
Reorganization. The exclusive filing period has been extended most recently
until December 9, 2002, by the Bankruptcy Court at the WPC Group's request, and
while the WPC Group intends to request extensions of the exclusivity period if
necessary, there can be no assurance that the Bankruptcy Court will grant future
extensions. If the exclusivity period were to expire or be terminated, other
interested parties, such as creditors of the WPC Group, would have the right to
propose alternative plans of reorganization.
During the period January 1, 2002 through September 30, 2002, the
WPC Group incurred a net loss of $44.4 million, which is not reflected in the
Company's September 30, 2002 consolidated results of operations. (see Note 12)
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, on November 17, 2000, guaranteed $30 million of the WPC Group's
debtor-in-possession term loan. Such guaranty was terminated effective as of
June 1, 2001 concurrently with WHX's purchase of a participation interest in the
Term Loan as discussed above. 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.
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. Pursuant to the Settlement Agreement certain outstanding claims among
the parties thereto were resolved, including without limitation, all
inter-company receivables and payables between the WHX Group and the WPC Group.
The Settlement Agreement provided, in part, for (1) the payment by
WHX to WPC of $32 million; (2) the exchange of releases between the WPC Group
and the WHX Group; (3) the acquisition by WHX or its designee of certain assets
of Pittsburgh-Canfield Corporation ("PCC"), plus the assumption of certain trade
payables, subject to certain terms and conditions (WHX recorded $5.4 million as
the fair value of the net assets of PCC.); (4) the termination of the Tax
Sharing Agreements between WHX and WPC; (5) WHX to deliver an agreement to the
WPC Group whereby it agreed not to charge or allocate any pension obligations,
expenses or charges to the WPC Group with respect to the WHX Pension Plan,
subject to certain limitations as provided therein, through and including the
earlier of the effective date of a Plan or Plans of Reorganization and December
31, 2002; and (6) the final settlement of all inter-company receivables and
liabilities between the WHX Group and the WPC Group (except for commercial trade
transactions), including the liability for redeemable stock. Such transactions,
other than the acquisition of certain assets of PCC, all occurred effective May
29, 2001. The acquisition of certain assets of PCC closed on June 29, 2001. The
PCC agreement included a one-year repurchase option for the seller. The
repurchase option expired 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 secured financing terms) during the period from the Order through
January 31, 2002, (2) if certain conditions are met, an additional $2 million of
24
secured loans (for an aggregate of $7 million) and the maintenance of the $5
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. Through September 30,
2002, WHX had advanced $5.0 million of the secured loans and up to $5.5 million
of secured financing. At September 30, 2002, the outstanding balance of these
secured advances was $5.0 million and $2.8 million, respectively.
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 are granted super-priority claim status
in WPSC's Chapter 11 case and are secured by a lien on substantially all of the
assets of WPSC, junior to the liens, security interests and super-priority
claims of the lenders to WPSC under the DIP Credit Agreement. The Supplemental
Agreement also provides, 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 requires WPC to support
certain changes to the WHX Pension Plan.
Additionally, the October Order approved the terms of the Modified
Labor Agreement ("MLA") by and among WPC, WPSC and the USWA. WHX is not a party
to the MLA. The MLA modifies the 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 is part of a comprehensive support
arrangement that also involves concessions from WPSC salaried employees, WPSC's
vendors and other constituencies in the Chapter 11 proceedings.
In January 2002, WPSC finalized a financial support plan which
included a $5.0 million loan from the State of West Virginia, a $7.0 million
loan and a $0.2 million grant from the State of Ohio, a $10.0 million advance by
the WHX Group for future steel purchases (all of which were delivered before
June 30, 2002) and additional wage and salary deferrals from WPSC union and
salaried employees. At September 30, 2002, the balance outstanding with the
State of West Virginia was $5.0 million, and $7.0 million with the State of
Ohio.
Management of the Company cannot at this time determine with
certainty the ultimate outcome of the Chapter 11 proceedings; however it is
possible that the following outcomes could result:
o The WPC Group could reorganize, and its creditors could receive a
portion of their claims in cash or in stock of WPC or WPSC.
o The WPC Group could be sold in its entirety or segments could be
sold, and the proceeds from such sale(s) would be utilized to
satisfy creditor claims.
o The creditors could assume ownership of the WPC Group or WPSC and
continue to operate such businesses.
In each of the above possible outcomes, the WHX Group would have
little or no future ownership in or involvement with the WPC Group, and the WHX
Group future cash obligations to or on behalf of the WPC Group would be minimal
to none (other than the $25 million pension contribution, referred to above). It
is also possible that none of the above outcomes would occur and the WPC Group
may shut down a number of its operations. According to WHX's preliminary
evaluation of potential pension obligations, if a partial shutdown of the WPC
Group's operations were to occur in the immediate future WHX's liability for
early retirement pension benefits could range from approximately $80 million to
$100 million. Under current pension law and regulations, based on WHX's analysis
of the current funded status of the pension plan, if a partial shutdown were to
occur the concomitant cash funding obligations would likely have a material
adverse impact on the liquidity, financial position and capital resources of
WHX. It is also possible that the WPC Group could cease operations in their
entirety and this liability would then be significantly greater. The Pension
Benefit Guaranty Corporation ("PBGC") has advised the Company that the PBGC
believes that on a termination basis, at February 28, 2002, the WHX Pension Plan
25
was underfunded by in excess of $80 million (before the effect of any partial
shutdown, as described above). However, management does not believe that a
cessation of operations or a termination of the Pension Plan is likely. If a
cessation of operations or a termination of the Plan were to occur, the
consequential cash funding obligations to the WHX Pension Plan would have a
material adverse impact on the liquidity, financial position and capital
resources of WHX.
In connection with past collective bargaining agreements by and
between the WPC Group and the United Steelworkers of America, AFL-CIO-CLC
("USWA"), the WPC Group is obligated to provide certain medical insurance, life
insurance, disability and surviving spouse retirement benefits to retired
employees and their dependents ("OPEB Obligations"). WHX is not a signatory to
any of these agreements. However, WHX has separately agreed to be contingently
liable for a portion of the OPEB Obligations. WHX's contingent obligation would
be triggered in the event that the WPC Group was to fail to satisfy its OPEB
Obligations. WHX's contingent obligation is limited to 25% of the Accumulated
Post-Retirement Benefit Obligation with respect to the WPC Group's employees and
retirees represented by the USWA. WPSC's total OPEB Obligation at January 1,
2002 is estimated to be $271.2 million. WHX has estimated that approximately 85%
of employees and retirees entitled to such OPEB Obligations are represented by
the USWA.
WHX's liability for OPEB Obligations exists only so long as (1) a
majority of the directors of WPSC or WPC are affiliated with WHX; (2) WHX
controls the Board of Directors of WPSC or WPC through appointment or election
of a majority of such directors; or (3) WHX, through other means, exercises a
level of control normally associated with (1) or (2) above.
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 is H&H, a diversified manufacturing company whose strategic
business segments encompass, precious metal plating and fabrication, specialty
wire and tubing, and engineered materials. WHX also owns PCC, a manufacturer of
electrogalvinized products used in the construction and appliance industries. On
June 24, 2002, the Company announced the pending sale of its wholly-owned
subsidiary, Unimast, Inc., a leading manufacturer of steel framing and other
products for commercial and residential construction. The sale closed on July
31, 2002. As a result, Unimast, Inc. has been classified as a discontinued
operation. WHX's other business consists of 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.
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 2002 with the Third Quarter of 2001
- ----------------------------------------------------------------------
Net sales for the third quarter of 2002 were $105.2 million compared
to $100.3 million in the third quarter of 2001. Sales increased at the Precious
Metal Segment by $3.5 million and by $3.3 million at the Engineered Materials
Segment. Sales decreased by $1.9 million at the Wire & Tubing Segment. Gross
profit percentage declined in the third quarter of 2002 to 13.6% from 19.7% in
the third quarter of 2001 primarily from write-downs of inventory to disposal
values and reserves for excess and slow moving inventories at the Company's
stainless steel wire operations.
Selling, general and administrative expenses increased $2.1 million
to $20.5 million in the third quarter of 2002 from $18.4 million in the
comparable 2001 period. This resulted from increased pension expense of $1.1
million, increased insurance costs, bad debt expenses, and incremental costs
26
related to the decision to exit certain precious metal activities. These amounts
were partially offset by the non-amortization of goodwill in the 2002 period,
which resulted in a $1.8 reduction in selling, general and administrative
expenses over the 2001 period.
Operating loss for the third quarter of 2002 was $11.2 million
compared to operating income of $1.4 million for the third quarter of 2001.
Operating loss at the segment level was $6.8 million compared to operating
income of $6.9 million in 2001. The operating results in the 2002 quarter
include a $5.0 million restructuring charge related to the Company's Wire and
Tubing Segment.
Unallocated corporate expenses increased from $3.7 million to $4.5
million. This increase is related to increased pension expense of $1.1million.
Interest expense for the third quarter of 2002 decreased $5.5
million to $6.2 million from $11.7 million in the third quarter of 2001. This
decrease was due to lower borrowings, primarily from the retirement of $123.5
million aggregate principal amount of 10 1/2% Senior Notes in the first nine
months of 2002, lower interest rates and reduced amortization of deferred
financing and consent fees.
Other expense was $6.4 million in the third quarter of 2002 compared
to income of $2.1 million in 2001. 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
$0.4 million, and investment income of $1.0 million. The income in 2001 was
primarily related to income from WHX Entertainment of $4.8 million offset by net
investment losses. In December 2001, WHX Entertainment sold its 50% interest in
Wheeling-Downs Racing Association, Inc.
In the quarter ended September 30, 2002 the Company purchased and
retired $1.5 million aggregate principal amount of 10 1/2% Senior Notes in the
open market for $1.2 million.
The Company has adopted the provisions of SFAS 142 effective January
1, 2002. As a result of the adoption of SFAS 142, the Company will not record
amortization expense for existing goodwill during the year ending December 31,
2002. The Company recorded amortization expense of $1.8 million on this goodwill
for the three months ended September 30, 2001. Any intangible assets acquired or
goodwill arising from transactions after June 30, 2001 will be subject to the
amortization and non-amortization provisions of SFAS 141 and SFAS 142.
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 a carryback claim for AMT paid
in prior years, as a result of changes in the tax law. The 2001 third quarter
tax provision is based on a federal benefit of 35%, offset by permanent
differences and state and foreign tax expense.
The comments that follow compare revenues and operating income from
continuing operations by segment for the third quarter 2002 and 2001:
Precious Metal
- --------------
Sales for the Precious Metal Segment increased $3.5 million from
$38.2 million in 2001 to $41.7 million in 2002. This was due to increased
customer demand prior to the shutdown of the Fairfield facility discussed below,
partially offset by the continued revenue weakness from the electronics
industry. Operating income decreased $0.1 million from $2.2 million in 2001 to
$2.1 million in 2002. Included in 2001 were favorable precious metal gains of
$0.5 million. Excluding these 2001 gains, operating income increased $0.4
million.
In April 2002, Handy & Harman, announced its decision to exit
certain of its precious metal activities. The affected product lines are
manufactured at H&H's Fairfield, CT and East Providence, RI facilities.
The decision to exit these operating activities resulted in a second
quarter restructuring charge of $10.7 million. This charge includes $5.3 million
for employee separation expenses, $1.1 million of contractual obligations, and
27
$4.3 million for costs to close the facilities, including refining charges for
inventory remaining after operations cease. In addition, the Company incurred
$0.9 million of incremental costs in the third quarter to maintain the employee
base in order to fulfill customer orders and complete the shutdown activities.
The Company estimates that an additional $0.4 million of such incremental costs
will be incurred during the fourth quarter. Such costs are not included in the
abovementioned restructuring charge. As of September 30, 2002, the Company has
received $7.3 million from the sale of certain equipment.
Wire & Tubing
- -------------
Sales for the Wire & Tubing Segment decreased $1.9 million from
$33.4 million in 2001 to $31.5 million in 2002 due to the continued weakness in
the semiconductor fabrication and telecommunications markets as well as some
slowdown in the appliance industry. Operating income decreased by $13.3 million
from $0.9 million in 2001 to an operating loss of $12.4 million in 2002
primarily due to the Wire Group's 2002 third quarter restructuring charge of
$5.0 million, as further discussed below, $2.9 million in charges related to the
write-down of inventories to disposal value located at the Liversedge, England
and Willingboro, NJ facilities and charges of $4.5 million for excess and slow
moving inventories and allowances for doubtful accounts. The balance of the
decrease was due to the Wire Group's decreased sales in the telecommunications
market.
In September 2002, the Company decided to exit certain of its
stainless steel wire activities. The affected operations are at H&H's facilities
in Liversedge, England and Willingboro, NJ. The decision to exit these operating
activities resulted in third quarter charges of $7.9 million, including
restructuring charges of $5.0 million. The components of the $5.0 million
restructuring charge are: $0.5 million in employee separation expenses, $3.9
million for the write-down of production supplies and consumables and facility
closing costs, and $0.6 million in contractual obligations. The remainder of the
charge amounted to $2.9 million for the write-down of inventory to disposal
value. This charge is included in cost of sales. In addition, the Company
expects to incur incremental costs of approximately $0.7 million above the
aforementioned separation expenses in the fourth quarter of 2002 and the first
quarter of 2003 to maintain the employee base in order to fulfill customer
orders and complete shutdown activities. Such incremental costs are not included
in the aforementioned restructuring charge. The Company anticipates cash
proceeds in the range of $3.0 million to $4.0 million on the sale of property,
plant and equipment. The Company will incur increased depreciation expense of
approximately $4.7 million on equipment values during the remaining operating
period of the affected businesses, estimated to be three months. Upon
communication with these facilities employees, additional separation accruals
will be made in the fourth quarter in the range of $3.5 million to $4.0 million.
Engineered Materials
- --------------------
Sales for the Engineered Materials Segment increased $3.3 million
from $28.7 million in 2001 to $32.0 million in 2002 due to an increase in the
customer base for certain product lines. The additional operating income derived
from these new customers was more than offset by continued weakness in the
telecommunications and construction markets resulting in a decrease in operating
income of $0.3 million from $3.8 million in 2001 to $3.5 million in 2002.
Comparison of the First Nine Months of 2002 with the First Nine Months of 2001
- ------------------------------------------------------------------------------
Net sales for the first nine months of 2002 were $307.1 million
compared to $301.0 million in the first nine months of 2001. Sales decreased by
$11.6 million at the Precious Metal Segment and by $3.1 million at the Wire &
Tubing Segment. Sales increased by $20.9 million at the Engineered Materials
Segment. The sales increase in the Engineered Materials Segment is primarily
related to the acquisition of PCC by WHX from the WPC Group on June 29, 2001.
Gross profit percentage declined in the first nine months of 2002 to 17.9% from
18.6% in the comparable 2001 period primarily due to the write-downs of
inventory to disposal values and reserves for excess and slow moving inventory
at the Company's stainless steel wire operations.
28
Selling, general and administrative expenses decreased $3.7 million
to $54.9 million in the nine-month period ended September 30, 2002 from $58.6
million in the comparable 2001 period. Excluding the $5.4 million favorable
impact from the non-amortization of goodwill in the 2002 period, selling,
general and administrative expenses increased by $1.7 million. This resulted
from increased pension expense of $2.1 million, insurance costs, and bad debt
expenses partially offset by the impact of non-recurring expenses in the 2001
period.
Operating loss for the first nine months of 2002 was $15.6 million
compared to a $2.6 million operating loss for the first nine months of 2001.
Operating loss at the segment level was $2.4 million compared to operating
income of $16.6 million in 2001. The operating results in the 2002 period
include a $10.7 million and $5.0 million restructuring charge related to the
Company's Precious Metal and Wire & Tubing Segments, respectively.
Unallocated corporate expenses decreased from $13.9 million to $13.2
million. This decrease is primarily related to non-recurring costs and expenses
in 2001, partially offset by increased pension expense of $2.1 million in the
2002 period.
Interest expense for the first nine months of 2002 decreased $15.3
million to $21.5 million from $36.8 million in the first nine months of 2001.
This decrease was due to lower borrowings, primarily from the retirement of
$123.5 million of 10 1/2% Senior Notes in the first nine months of 2002, lower
interest rates and reduced amortization of deferred financing and consent fees.
Other expense was $6.7 million in the first nine months of 2002
compared to income of $5.9 million in 2001. The expense for 2002 included 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 investment income of $5.7 million. The income in
2001 was primarily related to a favorable settlement of an H&H lawsuit of $3.2
million, income from WHX Entertainment of $12.0 million, net investment loss of
$9.2 million, and other expenses of $0.1 million. In December 2001, WHX
Entertainment sold its 50% interest in Wheeling-Downs Racing Association, Inc.
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 has adopted the provisions of SFAS 142 effective January
1, 2002. As a result of the adoption of SFAS 142, the Company will not record
amortization expense for existing goodwill during the year ending December 31,
2002. The Company recorded amortization expense of $5.4 million on this goodwill
for the nine months ended September 30, 2001. Any intangible assets acquired or
goodwill arising from transactions after June 30, 2001 will be subject to the
amortization and non-amortization provisions of SFAS 141 and SFAS 142. The
Company has 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 is shown as a
cumulative effect of an accounting change. The Company recorded this charge
because the present value of current estimated cash flow projections will not be
sufficient to recover this Group's recorded goodwill. The Company is still
committed to this business and expects improved performance from this Group in
future periods as a result of management changes, cost reductions, and improving
economic conditions.
The 2002 nine-month 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 a carryback claim for AMT paid
in prior years, as a result of changes in the tax law. The 2001 period tax
provision is based on a federal benefit of 35%, offset by permanent differences
and state and foreign tax expense.
The comments that follow compare revenues and operating income from
continuing operations by segment for the nine-month periods 2002 and 2001:
29
Precious Metal
- --------------
Sales for the Precious Metal Segment decreased $11.6 million from
$130.9 million in 2001 to $119.3 million in 2002. Approximately $8.0 million of
this decrease was due to a temporary shutdown as a result of a fire at Sumco
Inc., which occurred on January 20, 2002. The balance of the decrease was caused
by reduced volume due to the slowdown in the economy. Operating income decreased
$10.3 million from $6.3 million in 2001 to an operating loss of $4.0 million in
2002. Included in the 2002 period is a restructuring charge of $10.7 million, as
previously described, and additional costs of $0.9 million to maintain the
employee base until operations cease. Included in the 2001 period was a $3.3
million precious metals lower of cost or market adjustment which was partially
offset by favorable precious metal gains of $0.9 million. Excluding the 2002
restructuring charge and related expenses and the 2001 precious metal reserve
and precious metal gains, operating income decreased by $1.1 million, primarily
due to reduced revenue resulting from the severe fire damage at Sumco Inc., as
previously discussed, partially offset by increased demand from our silver
customers prior to closure of the Fairfield, CT facility.
The Company believes it has adequate insurance for both the physical
property damage and business interruption resulting from the fire at Sumco Inc.
Partial resumption of operations occurred on February 11, 2002 and repairs to
the building, its infrastructure and replacement of machinery and equipment are
expected to be completed by year-end.
Wire & Tubing
- -------------
Sales for the Wire & Tubing Segment decreased $3.1 million from
$104.8 million in 2001 to $101.7 million in 2002 primarily due to weakness in
the semiconductor fabrication and telecommunications markets. Partially
offsetting this reduction was increased sales at domestic and foreign units that
serve the appliance industry, and increased sales of tubing products to the
medical industry. Operating income decreased by $12.2 million from $3.9 million
in 2001 to an operating loss of $8.3 million in 2002. The 2002 period includes
$12.4 million of charges, as previously discussed in the quarterly analysis.
In the first quarter of 2002, the Company recorded a $44.0 million
non-cash goodwill impairment charge related to the Wire Group. This charge is
shown as a cumulative effect of an accounting change. The Company recorded this
charge because the present value of current estimated cash flow projections will
not be sufficient to recover this Group's recorded goodwill. The Company is
still committed to this business and expects improved performance from this
Group in future periods as a result of management changes, cost reductions,
restructuring and improving economic conditions.
Engineered Materials
- --------------------
Sales for the Engineered Materials Segment increased $21.0 million
from $65.2 in 2001 to $86.2 million in 2002 primarily due to the purchase of PCC
on June 29, 2001, which contributed an increase of $16.6 million in sales for
the period. Operating income increased $3.4 million from $6.5 million in 2001 to
$9.9 million in 2002 primarily due to the inclusion of PCC's results for the
entire 2002 period. PCC was acquired June 29, 2001.
Financial Position
- ------------------
Net cash flow provided by operating activities from continuing
operations for the nine months ended September 30, 2002 totaled $167.1 million.
Income from continuing operations adjusted for non-cash income and expense items
used $0.4 million. Working capital accounts provided $176.1 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 $131.2
million of funds in the first nine months of 2002. Accounts receivable used
$11.9 million, trade payables provided $30.2 million, and net other current
items provided $21.8 million. Inventories, valued principally by the LIFO method
for financial reporting purposes, totaled $87.3 million at September 30, 2002,
and provided $4.9 million.
30
Other non-working capital items included in operating activities
used $8.6 million.
In the first nine months of 2002, $7.6 million was spent on capital
improvements.
The Company spent $3.1 million for the acquisition of two
businesses, which added complimentary product lines to the Company's existing
Engineered Materials businesses.
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, 2002 totaled $132.6 million. Letters of credit
outstanding under the H&H Revolving Credit Facility were $24.5 million at
September 30, 2002. At December 31, 2001, borrowings outstanding under the H&H
Senior Secured Credit Facility were $168.2 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, 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.
Unimast borrowings, not assumed by the buyer, amounting to $11.0
million at December 31, 2001, were paid off in July 2002.
Other long-term debt decreased $0.1 million from December 31, 2001
through September 30, 2002 due to working capital requirements.
Liquidity
- ---------
At September 30, 2002 the WHX Group had cash and cash equivalents of
$125.5 million and short-term investments of $2.8 million.
In December 2001, WHX Entertainment sold its 50% interest in
Wheeling-Downs Racing Association, Inc. for $105 million in cash, resulting in
an $88.5 million pre-tax gain. WHX received a management fee from Wheeling-Downs
Racing Association, Inc. of $9.8 million during the nine months ended September
30, 2001.
In the twelve months ended December 31, 2001, the Company purchased
and retired $36.4 million aggregate principal amount of 10 1/2% Senior Notes in
the open market for $15.9 million. During the period January 1, 2002 through
September 30, 2002, WHX used $78.9 million of the proceeds from the sale of
Wheeling Downs Racing Association, Inc. to purchase $123.5 million aggregate
principal amount of Senior Notes in the open market. Subsequent to September 30,
2002, WHX purchased and retired an additional $10.8 million aggregate principal
amount of 10 1/2% Senior Notes in the open market for $8.5 million. The
cumulative result of these purchases amounted to a reduction of principal of
$169.2 million and annual reduction in future cash interest expense of $17.8
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. In the third quarter, the Company recognized a pre-tax
gain on the sale of approximately $18.5 million. The gain on sale is net of
closing costs, transaction fees, employee related payments, and other costs and
expenses. 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 has applied these proceeds in
accordance with the terms of the Indenture for the Company's 10 1/2 % Senior
Notes.
31
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 September 30, 2002, WHX had balances due from WPSC
totaling $7.8 million in the form of secured advances and liquidity support.
There can be no assurances that the WPC Group will be able to repay these loans
and advances in full.
The WHX Group has a significant amount of outstanding indebtedness,
and their ability to access capital markets in the future may be limited.
However, management believes that cash on hand and future operating cash flow
will enable the WHX Group to meet its cash needs for the foreseeable future. The
credit agreement of H&H has certain financial covenants restricting
indebtedness, liens and limiting cash distributions that can be made to WHX.
Certain financial covenants associated with leverage, fixed charge coverage,
capital spending and interest coverage must be maintained. In the third quarter
of 2002, H&H received a capital contribution of $5.0 million from WHX in order
to remain in compliance with certain of these financial covenants. Such funds
were utilized to reduce H&H debt. The H&H credit agreement allows for the
payment of management fees, income taxes pursuant to a tax sharing agreement,
precious metal lease repayments and related interest, and certain other
expenses. In addition, dividends may be paid under certain conditions. At
December 31, 2001, the net assets of H&H amounted to $270.3 million, of which
approximately $0.6 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, 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 Revolving Credit Facility and funds
generated from operations. The WHX Group believes that such sources will provide
the WHX Group for the next twelve months with the funds required to satisfy
working capital and capital expenditure requirements. External factors, such as
world economic conditions, could materially affect the WHX Group's results of
operations and financial condition.
At September 30, 2002, 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 is
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. 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, 2002, the Company had
accrued $38.8 million for dividends in arrears.
New Accounting Standards
- ------------------------
In July 2001, FASB issued SFAS 141 and 142, "Business Combinations"
("SFAS 141") and "Goodwill and Other Intangible Assets" ("SFAS 142"),
respectively. SFAS 141 supercedes Accounting Principles Board Opinion No. 16
("APB 16"), "Business Combinations." The most significant changes made by SFAS
141 are: (1) requiring that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill, and
(3) requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain, instead of being amortized.
SFAS 142 supercedes APB 17, "Intangible Assets". SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e., post-acquisition accounting). The provisions of SFAS 142 is
effective for fiscal years beginning after December 15, 2001 and must be adopted
at the beginning of a fiscal year. The most significant changes made by SFAS 142
are 1) goodwill and indefinite lived intangible assets will no longer be
amortized, (2) goodwill be will tested for impairment at least annually at the
reporting unit level, (3) intangible assets deemed to have an indefinite life
will be tested for impairment at least annually, and (4) the amortization period
of intangible assets with finite lives will no longer be limited to forty (40)
years.
32
The Company has adopted the provisions of SFAS 142 effective January
1, 2002. As a result of the adoption of SFAS 142, the Company will not record
amortization expense for existing goodwill during the year ending December 31,
2002. The Company recorded amortization expense of $5.4 million on this goodwill
for the nine months ended September 30, 2001. Any intangible assets acquired or
goodwill arising from transactions after June 30, 2001 will be subject to the
amortization and non-amortization provisions of SFAS 141 and SFAS 142. The
Company has 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 is shown as a
cumulative effect of an accounting change. The Company recorded this charge
because the present value of current estimated cash flow projections will not be
sufficient to recover this Group's recorded goodwill. The Company is still
committed to this business and expects improved performance from this Group in
future periods as a result of management changes, cost reductions, restructuring
and improving economic conditions.
In August 2001, the FASB issued Statement No. 143, "Accounting for
Asset Retirement Obligation" ("SFAS 143"). SFAS 143 requires that obligation
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. SFAS 143 will be
effective for the financial statement for fiscal years beginning after June 15,
2002. WHX would be required to adopt the provisions of SFAS 143 in fiscal 2003;
however, SFAS 143 is not expected to have a significant effect on WHX's
financial statements.
In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The Statement also extends the reporting requirements to
report separately, as discontinued operations, components of an entity that have
either been disposed of or classified as held for sale. WHX has adopted the
provisions of SFAS 144 as of the beginning of fiscal 2002.
On July 31, 2002, WHX sold the stock of Unimast, its wholly-owned
subsidiary for $95.0. As a result of this transaction, Unimast, has been
accounted for as a discontinued operation in accordance with SFAS 144. (see Note
2).
In April 2002, the FASB issued Statement No. 145, "Rescission of
FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"). This Statement eliminates the automatic
classification of gain or loss on extinguishment of debt as an extraordinary
item of income and requires that such gain or loss be evaluated for
extraordinary classification under the criteria of Accounting Principles Board
No. 30, "Reporting Results of Operations." This Statement also requires
sales-leaseback accounting for certain lease modifications that have economic
effects that are similar to sales-leaseback transactions, and makes various
other technical corrections to existing pronouncements. The Company has elected
to adopt the provisions of SFAS 145 in the second quarter of 2002. As a result,
prior period results have been restated to reflect gains on retirement of debt
as income from continuing operations. These gains were previously accounted for
as extraordinary items. The following table presents the effect of the change on
earnings for the 2001 period.
33
(thousands - except per-share) Three months Nine months
ended ended
September 30 September 30
2001 2001
---- ----
Income (loss) from continuing operations
before change in accounting method $ (6,087) $ (23,589)
Change in accounting method for
gain on retirement of debt - net of tax -- 12,357
--------- ----------
Income (loss) from continuing operations - restated (6,087) (11,232)
Discontinued operations 1,614 4,348
--------- ----------
Net income (loss) $ (4,473) $ (6,884)
========= ==========
Income (loss) per share - basic and diluted
Income (loss) from continuing operations
before change in accounting method $ (2.16) $ (6.15)
Change in accounting method for
gain on retirement of debt - net of tax -- 0.83
--------- ----------
Income (loss) from continuing operations - restated (2.16) (5.32)
Discontinued operations 0.32 0.88
--------- ----------
Net income (loss) $ (1.84) $ (4.44)
========= ==========
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. The provisions
of SFAS 146, as related to exit or disposal activities will be effective for
fiscal 2003. SFAS 146 is not expected to have a significant effect on the
Company's financial statements.
*******
When used in the Management's Discussion and Analysis, the words
"anticipate", "estimate" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which are intended to be covered by the
safe harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, general
economic conditions and, the ability of the Company to develop markets and sell
its products and the effects of competition and pricing. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included herein will prove
to be accurate.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no changes in financial market risk as originally
discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
ITEM 4. Controls and Procedures
Based on their evaluation, as of a date within 90 days of the filing of
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-14 and 15d-14 under the Securities
Exchange Act of 1934) are effective. There have been no significant
changes in internal controls or in the factors that could significantly
affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
34
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
On November 16, 2000, the WPC Group filed petitions for relief under
Chapter 11 of the Bankruptcy Code. The Bankruptcy Filing was made in the United
States Bankruptcy Court for the Northern District of Ohio. As a result,
subsequent to the commencement of the Bankruptcy Filing, the WPC Group sought
and obtained several orders from the Bankruptcy Court that were intended to
enable the WPC Group to continue business operations as debtors-in-possession.
Since the Petition Date, the WPC Group's management has been in the process of
stabilizing their businesses and evaluating their operations, while continuing
to provide uninterrupted services to its customers. Reference is made to Note 1
of the Consolidated Financial Statements included herewith and to the Company's
Annual Report Form 10-K for a more detailed description of the matters referred
to in this paragraph.
Reference is hereby made to Item 3. Legal Proceedings of the
Company's Annual Report on Form 10-K for the year ended December 31, 2001, as
well as to Note 10 to the Condensed Consolidated Financial Statements included
herein, for information regarding additional matters.
ITEM 2. Changes in Securities and use of Proceeds
Effective August 22, 2002, the Company amended its Certificate of
Incorporation to effect a reverse stock split of all outstanding shares of the
Company's Common Stock, par value, $.01 per share, at a ratio of one-to-three.
The reverse stock split affected all stockholders equally and did not affect any
stockholders proportionate equity interest in the Company or any of the other
rights.
ITEM 3. Defaults Upon Senior Securities
At September 30, 2002, 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 is
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. 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, 2002, the Company had
accrued $38.8 million for dividends in arrears.
ITEM 5. Other Matters
In March 2002, the Company was notified by the New York Stock
Exchange ("NYSE") that its share price had fallen below the NYSE's continued
listing criteria requiring an average closing price of not less than $1.00 over
a consecutive 30 trading-day period. Following such notification by the NYSE,
the Company has up to six months by which time its share price and average share
price over a consecutive 30 trading-day period may not be less than $1.00. In
the event these requirements were not met by the end of the six-month period,
the Company would be subject to NYSE trading suspension and delisting. A reverse
stock split was approved by a vote of stockholders at the 2002 Annual Meeting of
Stockholders held on June 18, 2002, and a one-for-three reverse stock split was
effectuated on August 22, 2002. On October 7, 2002, the NYSE notified the
Company that the Company's average closing price for the 30 trading days ending
October 4, 2002 was above $1.00. Accordingly, the Company is no longer
considered by the NYSE to be below the $1.00 continued listing criterion.
35
ITEM 6. Exhibits And Reports On Form 8-K
Exhibit 99.1 Certification of Principal Executive Officer
Exhibit 99.2 Certificate of Principal Financial Officer
Form 8-K filed on August 1, 2002
Form 8-K filed on August 7, 2002
Form 8-K filed on August 14, 2002
36
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
Vice President-Finance
(Principal Accounting Officer)
November 12, 2002
37
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
I, Robert D. LeBlanc, certify that:
1. I have reviewed this quarterly report of Form 10-Q of WHX
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and we are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date.
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's Board of Directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Robert D. LeBlanc
---------------------
Robert D. LeBlanc
President and Chief Executive
Officer of Handy & Harman and
Executive Vice President of WHX
Corporation
November 12, 2002
38
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350)
I, Robert K. Hynes, certify that:
1. I have reviewed this quarterly report of Form 10-Q of WHX
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and we are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date.
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's Board of Directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Robert K. Hynes
-------------------
Robert K. Hynes
Vice President-Finance
November 12, 2002
39