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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002.
OR
/ / TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-2394
WHX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3768097
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 East 59th Street 10022
New York, New York (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 212-355-5200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, $.01 par value New York Stock Exchange
Series A Convertible Preferred Stock, $.10 par value New York Stock Exchange
Series B Convertible Preferred Stock, $.10 par value New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No / /
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the Registrant (1) is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes / / No |X|
The aggregate market value of the voting stock held by
non-affiliates of registrant as of June 30, 2002 totaled approximately $12.7
million based on the then-closing stock price as reported by the New York Stock
Exchange. On March 31, 2003, there were approximately 5,405,856 shares of common
stock, par-value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive proxy statement to be filed pursuant to Regulation 14A in
connection with the 2003 Annual Meeting of Stockholders Part III.
ITEM 1. BUSINESS
OVERVIEW
WHX CORPORATION
WHX Corporation ("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 for all periods presented. The
transaction closed on July 31, 2002. WHX's other business consists of
Wheeling-Pittsburgh Corporation ("WPC") and six of its subsidiaries including
Wheeling-Pittsburgh Steel Corporation ("WPSC"), a vertically integrated
manufacturer of value-added and flat rolled steel products (see Note 3 to the
Consolidated Financial Statements). WPSC, together with WPC and its other
subsidiaries shall be referred to herein as the "WPC Group." WHX, together with
all of its subsidiaries shall be referred to herein as the "Company," and the
Company and its subsidiaries other than the WPC Group shall be referred to
herein as the "WHX Group."
On November 16, 2000 ("Petition Date"), the WPC Group filed
petitions for relief ("Bankruptcy Filing") under Chapter 11 of the United States
Bankruptcy Code ("Bankruptcy Code") in the United States Bankruptcy Court for
the Northern District of Ohio ("Bankruptcy Court"). The WPC Group commenced the
Chapter 11 cases in order to restructure their outstanding debts and to improve
their access to the additional funding that the WPC Group needs for its
continued operations. The WPC Group is in possession of its properties and
assets and continues to manage its businesses with its existing directors and
officers as debtors-in-possession subject to the supervision of the Bankruptcy
Court. WPSC and the other members of the WPC Group are authorized to operate
their businesses, but may not engage in transactions outside of the normal
course of business without approval, after notice and hearing, of the Bankruptcy
Court. The Bankruptcy Court has granted the WPC Group's motion to approve a new
$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 certain lenders ("DIP Lenders"). Pursuant to the DIP
Credit Agreement, Citibank, N.A. has made term loan advances to the WPC Group up
to a maximum aggregate principal amount of $35 million. In addition the DIP
Lenders have 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. The term loans and revolving loans are
secured by first priority liens on the WPC Group's assets, subject to valid
liens existing on November 16, 2000, and have been granted super-priority
administrative status, subject to certain carve-outs for fees payable to the
United States Trustee and professional fees. The terms of the DIP Credit
Agreement include cross default and other customary provisions. 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.
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.
On February 28, 2003, the ESLGB initially rejected the application. WPC and RBC,
however, amended and supplemented the application and it was conditionally
approved on March 26, 2003. The approval of the guaranty is subject to the
satisfaction of various conditions on or before June 30, 2003 including, without
limitation, resolution of the treatment of the WHX Pension Plan that is
acceptable to and approved by the Pension Benefit Guaranty Corporation ("PBGC"),
confirmation of a plan of reorganization for the WPC Group, and the execution of
definitive agreements satisfactory in form and substance to the ESLGB. The
present Plan of Reorganization was filed with the Bankruptcy Court on December
20, 2002.
On March 6, 2003, the PBGC issued its Notice of Determination
("Notice") and on March 7, 2003, the PBGC published its Notice and filed a
Summons and Complaint ("Complaint") in the United States District Court for the
Southern District of New York seeking the involuntary termination of the WHX
Pension Plan ("WHX Pension Plan"). The PBGC stated in its Notice that it took
this action because of its concern that "PBGC's possible long-run loss with
respect to the WHX Pension Plan may reasonably be expected to increase
unreasonably if the WHX Pension Plan is not terminated." WHX filed an answer to
the PBGC complaint on March 25, 2003, contesting the PBGC's action to terminate
the WHX Pension Plan. The PBGC has announced that it contends that the WHX
Pension Plan has roughly $300 million in assets to cover more that $443 million
in benefit liabilities (without accounting for shutdown plant benefits).
Furthermore, the PBGC contends in a press release that plant shutdown
liabilities of the WHX Pension Plan, if they were to occur, would exceed $378
million. WHX disputes the PBGC's calculation of liabilities and shutdown claims.
As described above, obtaining an acceptable resolution of the treatment of the
WHX Pension Plan is a condition to the loan guaranty. If an acceptable
resolution is not obtained on or before June 30, 2003, then a condition to the
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loan guaranty will not have been satisfied. If the loan guaranty is not granted,
it is unlikely that the present Plan of Reorganization, filed with the
Bankruptcy Court on December 20, 2002, or any amended plan of reorganization,
will be confirmed and, in such event, there can be no assurance as to the future
of the WPC Group.
For additional information concerning these developments, see Item 3
- - Legal Proceedings, and Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes 3, 13 and 14 to the
Consolidated Financial Statements.
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 December 31, 2002
and 2001 do not include any of the assets or liabilities of WPC. The
accompanying Consolidated Statement of Operations and the Consolidated Statement
of Cash Flows exclude the operating results of WPC for the periods after
November 16, 2000. As more fully discussed in Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations and Note 3 to the
Consolidated Financial Statements, the Company agreed to provide additional
funds to WPC (subject to certain conditions) amounting to $20.0 million. As a
result, the Company has recorded in the year ended December 31, 2002 Equity in
loss of WPC up to the amount of such funding commitment. In order to simplify
this business section, separations will be made between the WPC business and the
remaining WHX businesses.
THE WHX GROUP
WHX acquired H&H in April 1998. H&H's business segments are
the (a) manufacturing and selling of non-precious metal wire, cable and tubing
products, of stainless steel, carbon steel and specialty alloys; (b)
manufacturing and selling of precious metal brazing products and precision
electroplated materials and stamped parts; and (c) manufacturing and selling of
other engineered materials supplied to the roofing, construction, natural gas,
electric, and water industries. H&H's products are sold to industrial
users in a wide range of applications which include the electric, electronic,
automotive original equipment, computer equipment, oil, refrigeration, utility,
telecommunications, medical and energy related industries.
On June 29, 2001 as part of the settlement agreement with the WPC
Group, WHX acquired certain assets of PCC from the WPC Group. PCC manufactures
and sells electrogalvanized products for application in the appliance and
construction markets and operates as part of the WHX Group's Engineered
Materials segment.
WHX ENTERTAINMENT
In October 1994, WHX Entertainment, a wholly owned subsidiary of
WHX, purchased a 50% interest in the operations of Wheeling-Downs Racing
Association ("Wheeling-Downs") from Sportsystems Corporation. Wheeling-Downs
operates a greyhound racetrack and video lottery facility located in Wheeling,
West Virginia. In December 2001, WHX Entertainment sold its 50% interest in
Wheeling-Downs Racing Association, Inc.
DISCONTINUED OPERATIONS
In July 2002, WHX sold its wholly owned subsidiary, Unimast, a
leading manufacturer of steel framing and related products for commercial and
residential building construction. The consolidated financial statements for all
periods presented have been restated to present Unimast as a discontinued
operation.
BUSINESS STRATEGY
WHX's business strategy has been to enhance the growth and
profitability of each of its businesses and to build upon the strengths of those
businesses through product line and other strategic acquisitions.
H&H will continue to focus on high margin products and
innovative technology, while seeking growth through strategic acquisitions.
H&H's business strategy is to limit exposure to low margin,
capital-intensive businesses and focus on high margin strategic businesses. As
part of that strategy, in 2002 H&H exited certain of its precious metal
activities which had been part of its historical business base. In the mid
1990s, H&H exited its commodity automotive OEM and precious metal refining
businesses, and with its strong brand name and customer recognition, expanded in
specialty metals and materials product markets. H&H focuses on its materials
engineering expertise to expand production of higher value-added products.
H&H has pursued an acquisition strategy designed to: (i) enhance its
offerings of higher value-added products; (ii) leverage its technological
capabilities; and (iii) expand its customer base. In September 1994, H&H
acquired Sumco Inc., a precision electroplating company, which electroplates
electronic connectors and connector stock for the automotive,
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telecommunications, electronic and computer industries, and in June 1996, H&H
acquired ele Corporation, which provides a value-added reel-to-reel molding
capability appropriate for the semiconductor lead frame and sensors marketplace.
In February 1997, H&H completed the acquisition of Olympic Manufacturing Group,
Inc., the leading domestic manufacturer and supplier of fasteners for the
commercial roofing industry.
In June 2001, WHX acquired certain assets of PCC, a manufacturer of
electrogalvanized products for application in the appliance and construction
markets. PCC operates as part of the Engineered Materials segment.
PRODUCTS AND PRODUCT MIX
H&H manufactures a wide variety of non-precious metal wire and
tubing products. Small-diameter precision-drawn tubing fabricated from stainless
steel, nickel alloy and carbon and alloy steel is produced in many sizes and
shapes to critical specifications for use in the semiconductor, aircraft,
petrochemical, automotive, appliance, refrigeration and instrumentation
industries. Additionally, tubular product is manufactured for the medical
industry for use as implants, surgical devices and instrumentation. Nickel
alloy, galvanized carbon steel and stainless steel wire products redrawn from
rods are produced for such diverse applications as bearings, cable lashing, hose
reinforcement, nails, knitted mesh, wire rope, cloth, air bags and antennas in
the aerospace, automotive, chemical, communications, marine, medical,
petrochemical, welding and other industries.
H&H's precious metals activities include the fabrication of precious
metals and their alloys into brazing alloys and the utilization of precious
metals in precision electroplating. H&H's profits from precious metal products
are derived from the "value added" of processing and fabricating and not from
the purchase and resale of precious metals. In accordance with general practice
in the industry, prices to customers are a composite of two factors: (1) the
value of the precious metal content of the product and (2) the "fabrication
value", which includes the cost of base metals, labor, overhead, financing and
profit. Fabricated precious metal brazing alloys are used in many industries
including automotive, air conditioning, general industrial and other
metal-joining industries.
H&H produces precision-stamped, electroplated and molded materials
and stamped parts (often using gold, silver, palladium and various base metals
on such materials and stamped parts) for use in the semiconductor,
telecommunications, automotive, electronics and computer industries. It also
participates in the injection-molded medical plastics market.
H&H, through other subsidiaries, manufactures fasteners, fastening
systems, plastic and steel fittings and connectors, and non-ferrous thermite
welding powders for the roofing, construction, do-it-yourself, natural gas,
electric and water distribution industries.
CUSTOMERS
H&H is diversified across both industrial markets and customers. H&H
sells to the electronics, telecommunications, semiconductor, computer,
aerospace, home appliance OEM, automotive, construction, utility, medical and
general manufacturing industries. In 2002, no customer accounted for more than
5% of H&H's sales. Through PCC, the WHX Group also manufactures and sells
electrogalvanized products for application in the appliance and construction
markets.
RAW MATERIALS
The raw materials used by H&H in its precious metal operations
consist principally of silver, gold, copper, zinc, nickel, tin, and the platinum
group metals in various forms. H&H purchases its precious metals at free market
prices from primary producers or bullion dealers. The prices of silver, gold,
and palladium are subject to fluctuations and are expected to continue to be
affected by world market conditions. Nonetheless, H&H has not experienced any
problem in obtaining the necessary quantities of raw materials and, in the
normal course of business, receives precious metals from suppliers. To the
extent that supplier or customer metals are used by H&H, the amount of inventory
which H&H must own is reduced. All precious metal raw materials are readily
available from several sources. It is H&H's operating policy to maintain its
precious metal inventory levels under the last in, first out ("LIFO") method of
accounting. Precious metals are purchased at the same prices and quantities as
selling commitments to customers. From time-to-time, management reviews the
appropriate inventory levels and may elect to make adjustments.
The raw materials used by H&H in its non-precious metal operations
consist principally of stainless, galvanized, and carbon steel, nickel alloys, a
variety of high-performance alloys, and various plastic compositions. H&H
purchases all such raw materials at open market prices from domestic and foreign
suppliers. H&H has not experienced any problem in obtaining the necessary
quantities of raw materials. Prices and availability, particularly of raw
materials purchased from foreign suppliers, are affected by world market
conditions and government policies.
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BACKLOG
The WHX Group has no material backlog.
CAPITAL INVESTMENTS
The Company believes that its operating business segments must
continuously strive to improve productivity and product quality, and control
manufacturing costs, in order to remain competitive. Accordingly, the Company's
business segments are committed to making necessary capital investments with the
objective of reducing overall manufacturing costs, improving the quality of
products produced and broadening the array of products offered to the Company's
several markets. The WHX Group's capital expenditures for 2002 for continuing
operations were approximately $9.3 million. From 1998 to 2002, capital
expenditures for continuing operations aggregated approximately $68.8 million.
This level of capital expenditure was needed to expand and maintain productive
capacity, improve productivity and upgrade selected facilities to meet
competitive requirements and maintain compliance with environmental laws and
regulations. The Company anticipates funding its capital expenditures for the
WHX Group in 2003 from cash on hand, funds generated by operations and funds
available under the revolving credit facility at H&H. The Company anticipates
that capital expenditures for the WHX Group will approximate depreciation, on
average, over the next few years.
ENERGY REQUIREMENTS
The WHX Group requires significant amounts of electricity and
natural gas to operate its facilities and is subject to price changes in these
commodities. A shortage of electricity or natural gas, or a government
allocation of supplies resulting in a general reduction in supplies, could
increase costs of production and could cause some curtailment of production.
EMPLOYMENT
Total active employment of the WHX Group at December 31, 2002
aggregated 1,694 employees. Of these employees of the WHX Group, 508 were
salaried employees, 518 were covered by collective bargaining agreements and 668
were non-union operating employees.
COMPETITION
H&H is one of the leading fabricators of precious metal brazing
products and precision stamping, electroplating and molding. Although there are
no companies in the precious metals field whose operations exactly parallel
those of H&H in every area, there are a number of competitors in each of the
classes of precious metals products. Many of these competitors also conduct
activities in other product lines in which H&H is not involved. Competition is
based on quality, technology, service and price, each of which is of equal
importance.
There are many companies, domestic and foreign, which manufacture
non-precious wire and tubing products, and other specialty engineered products
of the type manufactured by the WHX Group. Competition is based on quality,
technology, service, price and new product introduction, each of which is of
equal importance.
THE WPC GROUP
WPC GROUP
WPC is a vertically integrated manufacturer of predominately
value-added flat rolled steel products. WPC sells a broad array of value-added
products, including cold rolled steel, tin and zinc-coated steels and fabricated
steel products. WPC's products are sold to the construction industry, steel
service centers, converters, processors, and the container, automotive and
appliance industries.
BUSINESS STRATEGY
The WPC Group is engaged in discussions with the official committees
of creditors in the Chapter 11 cases, with the ultimate aim of proposing a
Chapter 11 Plan of Reorganization.
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PRODUCTS AND PRODUCT MIX
The table below reflects the historical product mix of WPC's
shipments, expressed as a percentage of tons shipped compared to 2002 and
earlier-year levels:
Historical Product Mix
Year Ended December 31
-------------------------------------------------
Product Category: 2002 2001 2000 1999 1998
- ----------------- ---- ---- ---- ---- ----
Higher Value-Added Products:
Cold Rolled Products--Trade 11.6% 9.2% 13.6% 10.6% 11.0%
Cold Rolled Products--Wheeling-Nisshin 20.0 20.0 13.9 19.4 19.0
Coated Products 9.2 7.7 11.5 16.0 17.5
Tin Mill Products 13.0 10.8 10.0 9.8 7.1
Fabricated Products 18.4 21.3 19.6 15.4 15.6
-------- -------- -------- --------- ---------
Higher Value-Added Products as a percentage 72.2% 69.0% 68.6% 71.2% 70.2%
of total shipments
Hot Rolled Products 26.4 31.0 30.9 28.8 29.5
Semi-Finished 1.4 -- 0.5 -- 0.3
-------- -------- -------- --------- ---------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========= =========
Average Net Sales Per Ton $ 443 $ 412 $ 475 $ 461 $ 511
Set forth below is a description of the WPC Group's major customer categories:
WPC
Products produced by WPC are described below. These products are
sold directly to third-party customers, and to Wheeling-Nisshin (as defined
below) and OCC (as defined below) pursuant to long-term supply agreements.
COLD-ROLLED PRODUCTS. Cold-rolled coils are manufactured from
hot-rolled coils by employing a variety of processing techniques, including
pickling, cold reduction, annealing and temper rolling. Cold rolled processing
is designed to reduce the thickness and improve the shape, surface
characteristics and formability of the product.
COATED PRODUCTS. WPC manufactures a number of corrosion-resistant,
zinc-coated products including hot-dipped galvanized sheets for resale to trade
accounts. The coated products are manufactured from a steel substrate of cold
rolled or hot rolled pickled coils by applying zinc to the surface of the
material to enhance its corrosion protection. WPC's trade sales of galvanized
products are heavily oriented to unexposed applications, principally in the
appliance, construction, service center and automotive markets.
TIN MILL PRODUCTS. Tin mill products consist of blackplate and
tinplate. Blackplate is a cold-rolled substrate (uncoated), the thickness of
which is less than .0142 inches, and is utilized extensively in the manufacture
of pails and shelving and sold to OCC for the manufacture of tinplate products.
Tinplate is produced by the electro-deposition of tin to a blackplate substrate
and is utilized principally in the manufacture of food, beverage, general line
and aerosol containers. While the majority of WPC's sales of these products are
concentrated in container markets, WPC also markets products for automotive
applications, such as oil filters and gaskets. WPC produces all of its
tin-coated products through OCC. OCC's $69 million tin coating mill, which
commenced commercial operations in January 1997, has a nominal annual capacity
of 250,000 net tons. WPC has the right to supply up to 230,000 tons of the
substrate requirements of the joint venture through the year 2012, subject to
quality requirements and competitive pricing. WPC is the exclusive distributor
of all of the joint venture's product. However, Nittetsu Shoji America
("Nittetsu"), a U.S. based tin plate importer, has agreed to market
approximately 70% of the product as a distributor for WPC pursuant to an
agreement which was approved by the Bankruptcy Court on March 30, 2001. Prior to
the approval of such agreement, Nittetsu had been a sales representative for
approximately 25% of OCC's product.
HOT-ROLLED PRODUCTS. Hot-rolled coils represent the least processed
of WPC's finished goods. Approximately 72.2% of WPC's 2002 production of
hot-rolled coils was further processed into value-added finished products.
Hot-rolled black or pickled (acid cleaned) coils are sold to a variety of
consumers such as converters/processors, steel service centers and the appliance
industries.
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FABRICATED PRODUCTS. Fabricated products consist of cold-rolled or
coated products further processed mainly via roll forming and sold in the
construction, highway, and agricultural products industries.
CONSTRUCTION PRODUCTS. Construction products consist of roll-formed
sheets, which are utilized in sectors of the non-residential building market
such as commercial, institutional and manufacturing. They are classified into
three basic categories: roof deck, form deck, and composite floor deck.
AGRICULTURAL PRODUCTS. Agricultural products consist of roll-formed
corrugated sheets which are used as roofing and siding in the construction of
barns, farm machinery enclosures, light commercial buildings and certain
residential roofing applications.
HIGHWAY PRODUCTS. Highway products consist of bridge form, which are
roll-formed corrugated sheets utilized as concrete support forms in the
construction of highway bridges.
WHEELING-NISSHIN
WPC owns a 35.7% equity interest in Wheeling-Nisshin, Inc.
("Wheeling-Nisshin") which is a joint venture between WPC and Nisshin Holding,
Incorporated, a wholly owned subsidiary of Nisshin Steel Co., Ltd. ("Nisshin").
Wheeling-Nisshin is a state-of-the-art processing facility located in
Follansbee, West Virginia which produces among the lightest-gauge galvanized
steel products available in the United States. Wheeling-Nisshin products are
marketed through trading companies, and its shipments are not consolidated into
WPC's shipments.
Wheeling-Nisshin has capacity to produce over 700,000 annual tons
and can offer the lightest-gauge galvanized steel products manufactured in the
United States for construction, heating, ventilation and air-conditioning and
after-market automotive applications.
WPC's amended and restated Supply Agreement with Wheeling-Nisshin
expires in 2013. Pursuant to the amended Supply Agreement, WPC provides not less
than 75% of Wheeling-Nisshin's steel substrate requirements, up to an aggregate
maximum of 9,000 tons per week, subject to product quality requirements and
competitive pricing. Shipments of cold-rolled steel by WPC to Wheeling-Nisshin
were approximately 445,000 tons, or 20% of WPC's total tons shipped in 2002 and
approximately 412,000 tons, or 20% in 2001. Pursuant to the terms of the
agreements between WPC and Nisshin, for the 180 day period following the
Petition Date, Nisshin had the right to purchase WPC's interest in
Wheeling-Nisshin for the fair value price to be agreed upon by the parties or as
otherwise determined by a third party if the parties cannot agree. Nisshin did
not exercise such right.
OHIO COATINGS COMPANY
WPC has a 50% equity interest in Ohio Coatings Company ("OCC"),
which is a joint venture between WPC and Dong Yang Tinplate America, Inc., a
leading South Korea-based tin plate producer. Nittetsu Shoji America
("Nittetsu"), a U.S.-based tinplate importer, holds non-voting preferred stock
in OCC. OCC commenced commercial operations in January 1997. The OCC tin-coating
facility is the only domestic electro-tin plating facility constructed in the
past 30 years. WPC produces all of its tin coated products through OCC. As part
of the joint venture agreement, WPC has the right to supply up to 230,000 tons
of the substrate requirements of OCC through the year 2012, subject to quality
requirements and competitive pricing. WPC is the exclusive distributor of all of
OCC's products. However, Nittetsu has agreed to market approximately 70% of the
product as a distributor for the WPC Group pursuant to an agreement, which was
approved by the Bankruptcy Court on March 30, 2001. Prior to the approval of
such agreement, Nittetsu had been a sales representative for approximately 25%
of OCC's product. In 2002, 2001 and 2000, OCC had an operating income of $6.6
million, $3.7 million and $3.8 million, respectively.
CUSTOMERS
WPC markets an extensive mix of products to a wide range of
manufacturers, converters and processors. The WPC Group's 10 largest customers
(including Wheeling-Nisshin) accounted for approximately 50.4% of its net sales
in 2002, 43.9% in 2001, and 38.7% in 2000. Wheeling-Nisshin accounted for 15.6%,
14.6% and 10.9% of net sales in 2002, 2001 and 2000, respectively.
Geographically, the majority of the WPC Group's customers are located within a
350-mile radius of the Ohio Valley. However, the WPC Group has taken advantage
of its river-oriented production facilities to market via barge into more
distant locations such as the Houston, Texas and St. Louis, Missouri areas.
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Shipments historically have been concentrated within seven major
market segments: steel service centers, converters/processors, construction,
agriculture, container, automotive, and appliances. The overall participation in
the construction and the converters/processors markets substantially exceeds the
industry average and its reliance on automotive shipments, as a percentage of
total shipments are substantially less than the industry average.
PERCENT OF TOTAL NET TONS SHIPPED
Year Ended December 31,
--------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Steel Service Centers 29% 29% 33% 30% 29%
Converters/Processors (1) 27 27 24 27 32
Construction 17 22 21 19 19
Agriculture 6 4 5 5 6
Containers (1) 15 11 11 11 8
Automotive 1 1 1 1 1
Appliances 2 2 2 3 2
Exports -- 1 -- 1 1
Other 3 3 3 3 2
---- ---- ---- ---- ----
Total 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
(1) Products shipped to Wheeling-Nisshin and OCC are included primarily
in the Converters/Processors and Containers markets, respectively.
Set forth below is a description of the WPC Group's major customer
categories:
STEEL SERVICE CENTERS. The shipments to steel service centers are
heavily concentrated in the areas of hot rolled and hot dipped galvanized coils.
Due to increased in-house costs to steel companies during the 1980's for
processing services such as slitting, shearing and blanking, steel service
centers have become a major factor in the distribution of hot rolled products to
ultimate end users. In addition, steel service centers have become a significant
factor in the sale of hot dipped galvanized products to a variety of small
consumers such as mechanical contractors, who desire not to be burdened with
large steel inventories.
CONVERTERS/PROCESSORS. The growth of shipments to the
converters/processors market is principally attributable to the increase in
shipments of cold-rolled products to Wheeling-Nisshin, which uses cold-rolled
coils as a substrate to manufacture a variety of coated products, including
hot-dipped galvanized and aluminized coils for the automotive, appliance and
construction markets. The converters/processors industry also represents a major
outlet for their hot rolled products, which are converted into finished
commodities such as pipe, tubing and cold rolled strip.
CONSTRUCTION. The shipments to the construction industry are heavily
influenced by fabricated product sales. WPC services the non-residential and
agricultural building and highway industries, principally through shipments of
hot dipped galvanized and painted cold rolled products. WPC has been able to
market its products into broad geographical areas due to its numerous regional
facilities.
AGRICULTURE. The shipments to the agricultural market are
principally sales of roll-formed, corrugated sheets which are used as roofing
and siding in the construction of barns, farm machinery enclosures and light
commercial buildings.
CONTAINERS. The vast majority of shipments to the container market
are concentrated in tin mill products, which are utilized extensively in the
manufacture of food, aerosol, beverage and general line cans. The container
industry has represented a stable market. The balance of shipments to this
market consists of cold-rolled products for pails and drums. As a result of the
OCC joint venture, the WPC Group phased out its existing tin mill production
facilities. WPC and Nittetsu distribute tin products produced by OCC.
AUTOMOTIVE. Unlike the majority of its competitors, the WPC Group is
not heavily dependent on shipments to the automotive industry. However, the WPC
Group has established higher value-added niches in this market, particularly in
the area of hot-dipped galvanized products for deep drawn automotive underbody
parts. In addition, the WPC Group has been a supplier of tin mill products for
automotive applications, such as oil filters and gaskets.
APPLIANCES. The shipments to the appliance market are concentrated
in hot-dipped galvanized and hot-rolled coils. These products are furnished
directly to appliance manufacturers as well as to blanking, drawing and stamping
companies that supply OEMs. The WPC Group has concentrated on niche product
8
applications primarily used in washer/dryer, refrigerator/freezer and range
appliances.
RAW MATERIALS
The WPC Group has the right under the Bankruptcy Code, subject to
Bankruptcy Court approval and certain other conditions, to assume or reject any
pre-petition executory contracts and unexpired leases. Parties affected by such
rejections may file pre-petition claims with the Bankruptcy Court in accordance
with bankruptcy procedures. In the following discussion, certain existing
contracts of the WPC Group are described without attempting to predict whether
such contracts ultimately will be assumed or rejected in the Chapter 11 cases.
The WPC Group has a long-term contract to purchase a minimum of 75%
of its iron ore needs through 2009. The iron ore price is based upon prevailing
world market prices. The WPC Group generally consumes approximately 3 million
gross tons of iron ore pellets in its blast furnace annually. The WPC Group will
obtain the balance of its iron ore from spot and medium-term purchase agreements
at prevailing world market prices.
The WPC Group has a long-term supply agreement with a third party to
provide the WPC Group with a substantial portion of the WPC Group's
metallurgical coal requirements at competitive prices. The WPC Group's coking
operations require a substantial amount of metallurgical coal.
The WPC Group currently produces coke in excess of its requirements
and typically consumes generally all of the resultant by-product coke oven gas.
In 2002, the WPC Group consumed approximately 1.6 million tons of coking coal in
the production of blast furnace coke. The WPC Group sells its excess coke and
coke oven by-products to third-party trade customers.
The WPC Group's operations require material amounts of other raw
materials, including limestone, oxygen, natural gas and electricity. These raw
materials are readily available and are purchased on the open market. The WPC
Group is presently dependent on external steel scrap for approximately 11.8% of
its steel melt. The cost of these materials has been susceptible in the past to
price fluctuations, but worldwide competition in the steel industry has
frequently limited the ability of steel producers to raise finished product
prices to recover higher material costs. Certain of the WPC Group's raw material
supply contracts provide for price adjustments in the event of increased
commodity or energy prices.
BACKLOG
The WPC Group's Steel Division order backlog was 312,177 net tons at
December 31, 2002, compared to 245,970 net tons at December 31, 2001. All orders
related to the backlog at December 31, 2002 are expected to be shipped during
the first half of 2003, subject to delays at the customers' request. The order
backlog represents orders received but not yet completed or shipped. In times of
strong demand, a higher order backlog may allow the Company to increase
production runs, thereby enhancing production efficiencies.
CAPITAL INVESTMENTS
The WPC Group anticipates that it will fund its capital expenditures
in 2003 from cash on hand, funds generated by operations and funds available
under the DIP Credit Agreement, to the extent available. It is anticipated that
capital expenditures will be minimized during the Chapter 11 proceedings until
liquidity is sufficient and stabilized. There can be no assurance that such
funds will be sufficient to fund required capital expenditures. The WPC Group's
capital expenditures (including capitalized interest) for 2002 were
approximately $11.0 million, including $1.7 million on environmental projects.
From 1998 to 2002 such expenditures aggregated approximately $219.0 million.
The WHX Group has no obligation to fund any of the WPC Group's
future capital expenditures, and does not anticipate doing so. In the event that
the WPC Group is unable to fund its environmental capital expenditures, claims
may be made against WHX for payment of such costs.
ENERGY REQUIREMENTS
Many of the major facilities at the WPC Group that use natural gas
have been equipped to use alternative fuels. During 2002, coal constituted
approximately 71% of the WPC Group's total energy consumption, natural gas 24%
and electricity 5%. The Company continually monitors its operations regarding
potential equipment conversion and fuel substitution to reduce energy costs.
9
EMPLOYMENT
At December 31, 2002, the WPC Group had 3,943 employees of which
3,139 were represented by the United Steel Workers of America ("USWA"), 73 by
other unions, 698 were salaried employees and the remainder of 33 were non-union
operating employees.
On October 22, 2001, the Bankruptcy Court entered an order which,
among other things, approved the terms of the Modified Labor Agreement ("MLA")
by and among WPC, WPSC and the USWA. The Company 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 Chapter 11
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 light of the Chapter 11 cases, the USWA has agreed to temporarily
waive certain provisions of the collective bargaining agreement regarding
guaranteed employment and to temporarily postpone certain "gainsharing" payments
that otherwise would be due.
COMPETITION
The steel industry is cyclical in nature and has been marked
historically by overcapacity, resulting in intense competition. WPC faces
increasing competitive pressures from other domestic integrated producers,
mini-mills and processors. Processors compete with WPC in the areas of slitting,
cold rolling and coating. Mini-mills are generally smaller-volume steel
producers that use ferrous scrap metals as their basic raw material. Compared to
integrated producers, mini-mills, which rely on less capital-intensive steel
production methods, have certain advantages. Since mini-mills typically are not
unionized, they have more flexible work rules that have resulted in lower
employment costs per net ton shipped. Since 1989, significant flat-rolled
mini-mill capacity has been constructed and these mini-mills now compete with
integrated producers in product areas that traditionally have not faced
significant competition from mini-mills. In addition, there has been significant
additional flat-rolled mini-mill capacity constructed in recent years. These
mini-mills and processors compete with WPC primarily in the commodity
flat-rolled steel market. In the long term, such mini-mills and processors may
also compete with WPC in producing value-added products. In addition, the
increased competition in commodity product markets influence certain integrated
producers to increase product offerings to compete with WPC's custom products.
As the single largest steel consuming country in the western world,
the United States has long been a favorite market of steel producers in Europe
and Japan. In addition, steel producers from Korea, Taiwan, and Brazil, and
other large economies such as Russia and China, have also recognized the United
States as a target market. Steel imports of flat-rolled products as a percentage
of domestic apparent consumption, excluding semi-finished steel, have been
approximately 27% in 1998, 23% in 1999, 23% in 2000, 20% in 2001 and 21% in
2002. Imports surged in 1998 due to severe economic conditions in Southeast
Asia, Latin America, Japan and Russia, among others. Average import customs
values in December 2002 continued to be depressed with the average import value
of some key finished steel products below values reported in the depths of the
1998 crisis. World steel demand, world export prices, U.S. dollar exchange rates
and the international competitiveness of the domestic steel industry have all
been factors in these import levels.
In March 2002, the United States Government announced its decision
to enact tariffs on certain imported steel. These tariffs begin at 30% and range
down to 18% over three years. Certain of these tariffs will be imposed on steel
imports that compete directly with WPC. This has had a favorable impact on WPC
and on the United States steel industry.
Total annual steel consumption in the United States has fluctuated
between 88 million and 126 million tons since 1991. A number of steel
substitutes, including plastics, aluminum, composites and glass, have reduced
the growth of domestic steel consumption.
10
ITEM 2. PROPERTIES
WHX GROUP
H&H has 20 active operating plants in the United States, Canada,
Denmark and Singapore (50% owned) with a total area of approximately 1,424,000
square feet, including warehouse, office and laboratory space, but not including
the plant used by the Singapore operation. H&H also owns or leases sales,
service and warehouse facilities at two other locations in the United States
(which, with H&H's general offices, have a total area of approximately 62,000
square feet) and owns ten non-operating or discontinued locations with a total
area of approximately 794,000 square feet. H&H considers its manufacturing
plants and services facilities to be well maintained and efficiently equipped,
and therefore suitable for the work being done. The productive capacity and
extent of utilization of its facilities is dependent in some cases on general
business conditions and in other cases on the seasonality of the utilization of
its products. Capacity can be expanded readily to meet additional demands.
Manufacturing facilities of H&H are located in: Fort Smith, Arkansas; Fontana,
California; Toronto, Canada; Camden, Delaware; Kolding, Denmark; Evansville and
Indianapolis, Indiana; Cockeysville, Maryland; Agawam and Westfield,
Massachusetts; Middlesex, New Jersey; Canastota and Oriskany, New York; Tulsa
and Broken Arrow, Oklahoma; Norristown, Pennsylvania; East Providence, Rhode
Island; Cudahy, Wisconsin; and Singapore (50% owned). PCC has a manufacturing
facility in Canfield, Ohio.
All plants are owned in fee except for the Canastota, Fort Smith,
Middlesex, and Westfield plants, which are leased.
WPC GROUP
The WPC Group has one raw steel producing plant and various other
finishing and fabricating facilities. The Steubenville complex is an integrated
steel producing facility located at Steubenville and Mingo Junction, Ohio and
Follansbee, West Virginia. The Steubenville complex includes coke oven batteries
that produce all coke requirements, two operating blast furnaces, two basic
oxygen furnaces, a two-strand continuous slab caster with an annual slab
production capacity of approximately 2.8 million tons, an 80-inch hot strip mill
and pickling and coil finishing facilities. A railroad bridge owned by WPC
connects the Ohio and West Virginia locations, which are separated by the Ohio
River. A pipeline is maintained for the transfer of coke oven gas for use as
fuel from the coke plant to several other portions of the Steubenville complex.
The Steubenville complex primarily produces hot-rolled products, which are
either sold to third parties or shipped to other of the WPC Group's facilities
for further processing into value-added products.
The following table lists the other principal plants of the WPC
Group and the annual capacity of the major products produced at each facility:
Location and Operations Capacity Tons/Year Major Products
- ----------------------- ------------------ --------------
Allenport, Pennsylvania:
Continuous pickler, tandem mill,
temper mill and annealing lines............. 950,000 Cold-rolled sheets
Beech Bottom, West Virginia:
Paint line.................................. 308,000 Painted steel in coil form
Martins Ferry, Ohio:
Temper mill, zinc coating lines............ 750,000 Hot-dipped galvanized sheets and coils
Yorkville, Ohio:
Continuous pickler, tandem mill,
temper mills and annealing lines.......... 660,000 Black plate and cold-rolled sheets
All of the above facilities currently owned by the WPC Group are
regularly maintained in good operating condition. However, continuous and
substantial capital and maintenance expenditures are required to maintain the
operating facilities, to modernize finishing facilities in order to remain
competitive and to meet environmental control requirements.
11
The WPC Group has fabricated product facilities at Fort Payne,
Alabama; Houston, Texas; Lenexa, Kansas; Louisville, Kentucky; Minneapolis,
Minnesota; Warren, Ohio; Gary, Indiana; Emporia, Virginia; Grand Junction,
Colorado; Bradenton, Florida; Fallon, Nevada; and Rankin, Pennsylvania.
The WPC Group maintains regional sales offices in Atlanta, Chicago,
Detroit, Philadelphia, Pittsburgh and its corporate headquarters in Wheeling,
West Virginia.
ITEM 3. LEGAL PROCEEDINGS
THE WHX GROUP
SEC ENFORCEMENT ACTION
On June 25, 1998, the Securities and Exchange Commission ("SEC")
instituted an administrative proceeding against the Company alleging that it had
violated certain SEC rules in connection with the tender offer for Dynamics
Corporation of America ("DCA") commenced on March 31, 1997 through the Company's
wholly-owned subsidiary, SB Acquisition Corp. ("Offer"). Specifically, the Order
Instituting Proceedings ("Order") alleges that, in its initial form, the Offer
violated the "All Holders Rule," Rule 14d-10(a)(1) under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), based on the Company's inclusion of a
"record holder condition" in the Offer. No shareholder had tendered any shares
at the time the condition was removed. The Order further alleges that the
Company violated Rules 14d-4(c) and 14d-6(d) under the Exchange Act upon
expiration of the Offer, by allegedly waiving material conditions to the Offer
without prior notice to shareholders and purchasing the approximately 10.6% of
DCA's outstanding shares tendered pursuant to the offer. The SEC does not claim
that the Offer was intended to or in fact defrauded any investor.
The Order institutes proceedings to determine whether the SEC should
enter an order requiring the Company (a) to cease and desist from committing or
causing any future violation of the rules alleged to have been violated and (b)
to pay approximately $1.3 million in disgorgement of profits. The Company filed
an answer denying any violations and seeking dismissal of the proceeding. On
October 6, 2000, the initial decision of the Administrative Law Judge who heard
the case dismissed all charges against the Company, with the finding that the
Company had not violated the law. The Division of Enforcement has filed a
petition for the SEC to review the decision and a brief, but only as to the All
Holders Rule Claim. The Commission, however, has authority to review any issues
on its own accord. WHX has filed its opposition brief.
PBGC ACTION
On March 6, 2003, the Pension Benefit Guaranty Corporation ("PBGC")
issued its Notice of Determination ("Notice") and on March 7, 2003, the PBGC
published its Notice and filed a Summons and Complaint ("Complaint") in United
States District Court for the Southern District of New York seeking the
involuntary termination of the WHX Pension Plan ("WHX Pension Plan"). The PBGC
stated in its Notice that it took this action because of its concern that
"PBGC's possible long-run loss with respect to the WHX Pension Plan may
reasonably be expected to increase unreasonably if the WHX Pension Plan is not
terminated." WHX filed an answer to this complaint on March 25, 2003, contesting
the PBGC's action. The PBGC has announced that it contends that the WHX Pension
Plan has roughly $300 million in assets to cover more than $443 million in
benefit liabilities, resulting in a funding shortfall of roughly $143 million
(without accounting for plant shutdown benefits). Furthermore, the PBGC contends
in a press release that plant shutdown liabilities of the WHX Pension Plan, if
they were to occur, would exceed $378 million. WHX disputes the PBGC's
calculation of liabilities and shutdown claims since the actual amount of these
liabilities may be substantially less, based on alternative actuarial
assumptions. Furthermore, WHX disputes the PBGC's assumption regarding the
likelihood of large scale shutdowns at WPSC. However, there can be no assurance
that WHX's assertions will be accepted or that plant shutdowns would not occur.
If the PBGC's action is successful and the WHX Pension Plan is terminated, the
PBGC could file a claim against WHX and the other members of the WHX Controlled
group in an amount from $143 million to $521 million, which WHX would be unable
to fund. WHX intends to vigorously defend itself against such claims, but there
can be no assurance that WHX will prevail.
For additional information concerning these developments, see Item 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 3, 13 and 14 to the Consolidated Financial Statements.
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.
12
THE WPC GROUP
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.
BANKRUPTCY FILING
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. The WPC Group commenced the Chapter 11 cases in order
to restructure their outstanding debts and to improve their access to the
additional funding that the WPC Group needs for its continued operations. The
WPC Group is in possession of its properties and assets and continues to manage
its businesses with its existing directors and officers as debtors-in-possession
subject to the supervision of the Bankruptcy Court. WPSC and the other members
of the WPC Group are authorized to operate their businesses, but may not engage
in transactions outside of the normal course of business without approval, after
notice and hearing, of the Bankruptcy Court. In the Bankruptcy Filing, the WPC
Group may, with Bankruptcy Court approval, sell assets and settle liabilities,
including for amounts other than those reflected in WPC's financial statements.
The administrative and reorganization expenses resulting from the Bankruptcy
Filing will unfavorably affect results of the WPC Group. Moreover, future
results may be adversely affected by other claims and factors resulting from the
Bankruptcy Filing. For additional information concerning these developments, see
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations and Notes 3, 13, and 14 to the Consolidated Financial Statements.
ENVIRONMENTAL MATTERS
WPC, 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, WPC has
incurred capital expenditures for environmental control projects aggregating
$1.7 million, $0.8 million and $3.4 million for 2002, 2001, 2000, respectively.
WPC anticipates spending approximately $18.2 million in the aggregate on major
environmental compliance projects through the year 2005, estimated to be spent
as follows: $3.7 million in 2003, $11.6 million in 2004 and $2.9 million in
2005. Due to the possibility of unanticipated factual or regulatory developments
and the Bankruptcy Filing, the amount and timing of future expenditures may vary
substantially from such estimates.
In addition, the treatment of environmental liabilities in the
pending Chapter 11 cases may differ depending on whether such liabilities are
determined to be "pre-petition" or "post-petition" liabilities of the WPC Group.
It is not possible or appropriate to predict how environmental liabilities
ultimately may be classified in the WPC Group's Chapter 11 cases, and in the
following discussion the WPC Group has not attempted to distinguish between
pre-petition and post-petition liabilities.
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. WPC 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, WPC is unable to reasonably
estimate the ultimate cost of compliance with Superfund laws. WPC 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 million and $2 million. At four other sites (MIDC Glassport,
Breslube Penn, Four County Landfill and Beazer) WPC estimates the costs to
approximate $500,000. WPC is currently funding its share of remediation costs.
The Clean Air Act Amendments of 1990 ("Clean Air Act") directly
affect the operations of many of WPC's facilities, including coke ovens. WPC is
currently operating in compliance with the provisions of the Clean Air Act.
However, under the Clean Air Act, coke ovens generally will be required to
comply with progressively more stringent standards that will result in an
increase in environmental capital expenditures and costs for environmental
compliance. The forecasted environmental expenditures include amounts that will
be spent on projects relating to compliance with these standards.
In an action brought in 1985 in the U.S. District Court for the
Northern District of West Virginia, the EPA claimed violations of the Solid
Waste Disposal Act at a surface impoundment area at the Follansbee facility. WPC
and the EPA entered into a consent decree in October 1989 requiring certain soil
and groundwater testing and monitoring. The surface impoundment has been removed
and a final closure plan has been submitted to the EPA. WPC is waiting for
approval from the EPA to implement the plan. Until the EPA responds to WPC, the
full extent and cost of remediation cannot be ascertained.
13
In June 1995, the EPA informally requested corrective action
affecting other areas of the Follansbee facility. The EPA sought to require WPC
to perform a site investigation of the Follansbee plant. WPC actively contested
the EPA's jurisdiction to require a site investigation, but subsequently agreed
to comply with a final administrative order issued by the EPA in June 1998 to
conduct a Resource Conservation and Recovery Act ("RCRA") Facility Investigation
("RFI") to determine the nature and extent of soil and groundwater contamination
and appropriate clean up methods. WPC anticipates spending up to $0.5 million in
year 2003 for sampling at the site. It is also expected that remediation
measures will be necessary. Such measures could commence as early as 2004 with
the expenditure of $1.0 million or more. Until the EPA responds to WPC's
investigation report, the full extent and cost of remediation cannot be
ascertained.
WPC is currently operating in substantial compliance with three
consent decrees (two with the EPA and one with the Pennsylvania Department of
Environmental Resources) with respect to wastewater discharges at Allenport,
Pennsylvania, Mingo Junction, Steubenville, and Yorkville, Ohio. All of the
foregoing consent decrees are nearing expiration. A petition to terminate the
Allenport consent decree was filed in 1998.
In March 1993, the EPA notified WPC of Clean Air Act violations
alleging particulate matter and hydrogen sulfide emissions in excess of
allowable concentrations at WPC's Follansbee coke plant. In January 1996, the
EPA and the Company entered into a consent decree. Although WPC has paid the
civil penalties due pursuant to the terms of the consent decree, WPC continues
to accrue stipulated penalties to such consent decree. As of December 2002, WPC
has accrued stipulated penalties of approximately $4.8 million.
In June 1999, the Ohio Attorney General filed a lawsuit against WPC
alleging certain hazardous waste law violations at its Steubenville and
Yorkville, Ohio facilities and certain water pollution law violations at the
Company's Yorkville, Ohio facility relating primarily to the alleged unlawful
discharge of spent pickle liquor. The lawsuit contains forty-four separate
counts and seeks preliminary and permanent injunctive relief in addition to
civil penalties. Settlement negotiations with Ohio EPA are on-going and Ohio EPA
has demanded a civil penalty of $200,000.
As part of WPC's effort to resolve disputed enforcement issues with
Ohio EPA ("OEPA") and the Ohio Attorney General related to the June 1999
lawsuit, WPC agreed to file a plan for closure of a spent pickle liquor storage
transfer system at WPC's Yorkville, Ohio plant. OEPA made unilateral
modifications to the plan that imposed significant additional requirements on
WPC. WPC timely appealed the plan as modified to the Ohio Environmental Review
Appeals Commission ("ERAC") on July 9, 1999, challenging the additional
requirements imposed by OEPA. Pursuant to ongoing settlement discussions, WPC
subsequently agreed to submit a revised closure plan. OEPA again made unilateral
modifications to the revised plan that imposed significant additional
requirements on WPC. WPC timely appealed the revised plan as modified to the
ERAC on May 25, 2000, challenging OEPA's authority to impose the additional
requirements. WPC withdrew both plans in December 2000, and settlement
negotiations with respect to both appeals are on going.
In January 1998, the Ohio Attorney General notified WPC of a draft
consent order and initial civil penalties in the amount of $1 million for
various air violations at its Steubenville and Mingo Junction, Ohio facilities
occurring from 1992 through 1996. In November 1999, OEPA and WPC entered into a
consent decree settling the civil penalties related to this matter for
approximately $250,000. The consent decree also obligates WPC to pay certain
stipulated penalties for future air violations. As of December 31, 2002, the
total stipulated penalty amount is $85,000. An additional $78,000 is due on
demand by OEPA for a supplemental environment project withdrawal by WPC.
WPC has experienced discharges of oil through NPDES permitted
outfalls at its Mingo Junction, Ohio and Allenport, Pennsylvania plants. WPC
spent approximately $3.0 million in each of 2001 and 2000, respectively, to
investigate and clean up oil spills at its Mingo Junction, Ohio facility. WPC
spent approximately $2 million to install a slip-lined pipe in an existing sewer
at its Mingo Junction, Ohio facility. WPC has not yet received any notices of
violation from the regulatory agencies for such oil spills.
On November 8, 2000, the EPA issued a Unilateral Administrative
Order ("UAO"), under alleged authority of Clean Water Act ss.311, to compel WPC
to abate alleged oil discharges at its Mingo Junction plant, undertake remedial
actions, and reimburse certain expenses of the United States. WPC responded to
the UAO, and the EPA has expressed interest in resolving these issues through a
consent order. No further enforcement actions have been initiated against WPC
for any alleged oil discharges at its Mingo Junction, Ohio plant.
The EPA conducted a multimedia inspection of WPC's Steubenville,
Mingo Junction, Yorkville, and Martins Ferry, Ohio facilities in March and June
1999. The inspection covered all environmental regulations applicable to these
plants. WPC has received a Notice of Violation from the EPA for alleged air
violations, but has not yet received notice of any violations of water or waste
laws. The air Notice of Violation does not specify the amount of penalties
14
sought by EPA but an agreement in principle has been tentatively approved. If
this agreement is finalized, WPC would be required to upgrade certain of its air
emission control devices and such upgrades are expected to cost approximately
$12.8 million. WPC is continuing to explore settlement with the EPA regarding
such air violations.
On May 12, 2000, the West Virginia Department of Environmental
Protection ("WVDEP") issued a Unilateral Order requiring that WPC remove certain
seal tar deposits from the bed of the Ohio River. WPC timely appealed the
Unilateral Order to the West Virginia Environmental Quality Board on June 13,
2000. WPC and WVDEP subsequently entered into a Consent Order on or about
September 12, 2000, and the appeal was withdrawn. Under the consent Order, WPC
has agreed to undertake certain actions by particular dates, including
monitoring, development of work plans, and removal of certain coal tar deposits
from the bed of the Ohio River. WPC spent $1.3 million in 2002 and anticipates
spending up to $0.5 million in year 2003 to undertake actions under the Consent
Order.
WPC is aware of potential environmental liabilities resulting from
operations, including leaking underground and aboveground storage tanks, and the
disposal and storage of residuals on its property. Each of these situations is
being assessed and remediated in accordance with regulatory requirements.
WPC's non-current accrued environmental liabilities totaled $18.0
million and $19.0 million at December 31, 2002 and December 31, 2001,
respectively. 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. WPC 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.
Based upon information currently available, including WPC's prior
capital expenditures, anticipated capital expenditures, consent agreements
negotiated with federal and state agencies, and information available to WPC on
pending judicial and administrative proceedings, WPC does not expect its
environmental compliance costs, 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 financial condition of WPC. However, as further
information comes into WPC's possession, it will continue to reassess such
evaluations.
As discussed above, 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 the WHX Group for payment of such liabilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Part II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
A reverse common 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 common stock split was effectuated on August 22, 2002. All
references to common shares have been adjusted to reflect the one-for-three
reverse common stock split.
The number of shares of Common Stock issued and outstanding as of
March 31, 2003 was 5,405,856. There were approximately 11,905 holders of record
of Common Stock as of March 31, 2003. There were no purchases of Common Stock
made by the Company in 2002, 2001 and 2000.
15
The prices set forth in the following table represent the high and
low sales prices for the Company's Common Stock on the New York Stock Exchange:
2002 High Low
First Quarter $ 4.56 $ 1.65
Second Quarter 3.69 1.65
Third Quarter 3.00 1.56
Fourth Quarter 2.80 1.97
2001 High Low
First Quarter $ 5.13 $ 2.43
Second Quarter 5.94 3.03
Third Quarter 6.75 3.48
Fourth Quarter 5.37 3.90
Pursuant to the terms of the Supplemental Indenture to the Company's
10 1/2% Senior Notes, the Company was prohibited from paying dividends on its
Common Stock or Preferred Stock until after October 1, 2002, at the earliest,
and thereafter only in the event that the Company satisfies certain conditions.
Such conditions were not satisfied as of December 31, 2002. (See Note 12 to the
Consolidated Financial Statements). The Company is further prohibited from
paying dividends on its Common Stock during such time as the full cumulative
dividends on the Preferred Stock have not been paid.
16
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR STATISTICAL WHX CORPORATION
(THOUSANDS OF DOLLARS)
2002 2001 2000(a) 1999 1998(b)
----------- ------------- ----------- ------------ -------------
Profit and Loss (c):
Net sales $ 386,393 $ 388,139 $ 1,519,436 $ 1,586,079 $ 1,476,750
Cost of goods sold 318,104 318,670 1,397,715 1,432,517 1,318,992
Selling, general and administrative expenses 73,652 74,304 142,596 137,583 116,465
Restructuring charges 19,994 -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from operations (25,357) (4,835) (20,875) 15,979 41,293
Interest expense on debt 27,257 46,969 83,899 86,529 77,867
Equity in loss of WPC 20,000
Gain on early retirement of debt 42,491 19,011 -- 1,378 3,447
Gain on sale of interest in Wheeling-Downs -- 88,517 -- -- --
Other income/(expense) (5,988) 11,112 (15,400) 30,637 89,696
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations before taxes (36,111) 66,836 (120,174) (38,535) 56,569
Tax provision (benefit) (24,115) (28,869) 68,692 (12,738) 20,860
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations (11,996) 95,705 (188,866) (25,797) 35,709
Income from discontinued operations 22,462 5,416 7,821 10,859 5,961
----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
accounting change 10,466 101,121 (181,045) (14,938) 41,670
Cumulative effect of an accounting change (44,000) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (33,534) $ 101,121 $ (181,045) $ (14,938) $ 41,670
=========== =========== =========== =========== ===========
Net income (loss) applicable to
common stock $ (52,758) $ 81,792 $ (201,652) $ (35,546) $ (21,062)
=========== =========== =========== =========== ===========
Basic income (loss) per share:
Income (loss) from continuing operations
applicable to common shareholders $ (5.86) $ 15.27 $ (43.93) $ (8.77) $ 2.49
Income from discontinued operations 4.22 1.08 1.64 2.05 0.98
Cumulative effect of accounting change (8.26) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) per share
applicable to common shares $ (9.90) $ 16.35 $ (42.29) $ (6.72) $ 3.47
=========== =========== =========== =========== ===========
Diluted income (loss) per share:
Income (loss) from continuing operations
applicable to common shareholders $ (5.86) $ 9.11 $ (43.93) $ (8.77) $ 2.49
Income from discontinued operations 4.22 0.51 1.64 2.05 0.98
Cumulative effect of accounting change (8.26) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) per share
applicable to common shares $ (9.90) $ 9.62 $ (42.29) $ (6.72) $ 3.47
=========== =========== =========== =========== ===========
Average number of common shares
outstanding (in thousands) 5,325 5,004 4,768 5,289 6,066
Financial Position:
Cash, cash equivalents and short term
investments, net of short term
borrowings $ 115,814 $ 141,726 $ 74,067 $ 169,617 $ 229,601
Working capital 145,445 218,268 185,365 290,442 387,899
Property, plant and equipment-net 107,590 134,923 136,987 787,992 793,105
Plant additions and improvements 9,335 11,924 114,971 100,042 43,795
Total assets - continuing operations 834,388 884,257 805,523 2,580,132 2,656,072
Net assets of discontinued operations -- 57,182 51,366 41,595 30,421
Long-term debt 249,706 432,454 481,783 844,641 888,883
Stockholders' equity 213,859 280,904 180,147 377,471 446,512
Number of stockholders of record:
Common 11,107 11,440 11,520 11,666 11,915
Series A Convertible Preferred 29 34 36 32 31
Series B Convertible Preferred 51 61 73 74 69
Employment
Employment costs $ 112,048 $ 152,321 $ 414,842 $ 443,333 $ 394,701
Average number of employees 1,936 2,905 7,270 7,535 7,470
(a) Includes the results of WPC for the period January 1, 2000 through November
16, 2000.
(b) Includes the results of Handy & Harman for the period April 13, 1998 through
December 31, 1998.
(c) Years 1998 through 2001 have been restated to reflect Unimast as a
discontinued operation.
17
NOTES TO FIVE-YEAR SELECTED FINANCIAL DATA
During 1998, the Company purchased and retired $48 million aggregate
principal amount of 10 1/2% Senior Notes in the open market resulting a gain of
$3.4 million.
In April 1998, the Company acquired H&H. The transaction had a total
value of $651.4 million, including the assumption of approximately $229.6
million in debt.
During 1999, the Company purchased and retired $20.5 million
aggregate principal amount of 10 1/2% Senior Notes in the open market resulting
in a gain of $1.4 million.
On November 16, 2000 the Company's WPC Group filed petitions seeking
reorganization under Chapter 11 of Title 11 of the United States Bankruptcy
Code, resulting in a non-cash charge of $133.8 million to provide a valuation
reserve against previously recorded net deferred tax assets. As a result of the
Bankruptcy Filing (see Note 3 to the Consolidated Financial Statements), the
Company has, as of November 16, 2000, deconsolidated the balance sheet of its
wholly owned subsidiary WPC. As a result of such deconsolidation, the
accompanying Consolidated Balance Sheet at December 31, 2000 does not include
any of the assets or liabilities of WPC and the accompanying December 31, 2000
Profit and Loss data includes the operating results of WPC for the period
January 1, 2000 through November 16, 2000. As more fully discussed in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 3 to the Consolidated Financial Statements, the Company
agreed to provide additional funds to the WPC Group (subject to certain
conditions) amounting to $20.0 million. As a result, the Company has recorded in
the year ended December 31, 2002, Equity in loss of WPC up to the amount of such
funding commitments.
During 2002, 2001 and 2000, the Company did not make any purchases
of Common or Preferred Stock. During 1999 and 1998, the Company purchased
1,198,100 and 593,436 shares of Common Stock, respectively, in open market
transactions.
During 2001, the Company purchased and retired $36.4 million
aggregate principal amount of 10 1/2% Senior Notes in the open market, resulting
in a gain of $19.0 million.
In December 2001, the Company sold its interest in Wheeling-Downs
Racing Association, Inc. for $105 million in cash and recognized a gain of $88.5
million.
In July 2002, the Company sold the stock of Unimast, Inc., its
wholly owned subsidiary, for $95.0 million and recognized a gain of $11.9
million, net of tax.
During 2002, the Company purchased and retired $134.6 million
aggregate principal amount of 10 1/2% Senior Notes in the open market resulting
in a gain of $42.5 million.
In the first quarter of 2002, WHX adopted the provisions of
Statement of Financial Standards ("SFAS 142") "Goodwill and Other Intangible
Assets." As a result, WHX recorded a $44.0 million non-cash goodwill impairment
charge. This charge is shown as a cumulative effect of an accounting change. In
addition, as required by SFAS 142, as of January 1, 2002, goodwill is no longer
amortized.
During 2002, WHX recorded restructuring charges of $20.0 million
relating to the closure of certain Handy & Harman operations.
18
ITEM 7. 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 (the "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 term loan portion of the DIP Credit Agreement
provided to the WPC Group. In addition, at December 31, 2002, WHX had balances
due from WPSC totaling $7.4 million in the form of secured advances and
liquidity support. As part of the amended Chapter 11 Plan of Reorganization for
the WPC Group, WHX has agreed conditionally to forgo repayment of these claims
from the reorganized company. If the conditions are not met, WHX Group's
recovery of these amounts is not certain.
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 tax 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 ("The WHX Pension Plan"). While that
pension plan fully complies with ERISA minimum funding requirements at December
31, 2002, there can be no assurance as to the Plan's ongoing funding status.
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 certain types of hourly
workforce reductions resulting from the Bankruptcy Filing or otherwise and (d)
the action taken by the Pension Benefit Guaranty Corporation ("PGBC") to
terminate the WHX Pension Plan (see below). WHX has also agreed to be
contingently liable for a portion of the OPEB Obligations (as defined below),
subject to certain conditions. Funding obligations, if they arise, may have an
adverse impact on the WHX Group's liquidity. The 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 On March 7, 2003, the PBGC published its Notice of
Determination ("Notice") and filed a Summons and Complaint ("Complaint") in
United States District Court for the Southern District of New York seeking to
terminate the WHX Corporation Pension Plan ("WHX Plan"). In the event WHX is not
19
able to reach an acceptable agreement with the PBGC regarding the WHX Pension
Plan, and if the PBGC's action is successful, there will be material adverse
effects upon WHX and the WPC Group, including without limitation, the failure to
satisfy a condition to the $250 million Federal loan guaranty, the uncertainty
of confirming the Plan of Reorganization filed by the WPC Group, and the
imposition of significant additional liabilities upon WHX which WHX would be
unable to pay;
o As a result of the recent action of the PBGC to terminate
the WHX Pension Plan, H&H informed its lenders on March 11, 2003, that the PBGC
action may have been an occurrence that would preclude H&H from making certain
representations to the lenders (as required by the H&H Facilities) in connection
with future borrowings. H&H has elected not to borrow any additional funds
against the H&H Facilities until such time as the PBGC action is resolved. If
the PBGC action is upheld and the WHX Pension Plan is terminated, such
termination would constitute an event of default under the H&H Facilities. If
H&H is unable to cure the default or obtain an amendment to the H&H Facilities,
it could lead to a cancellation of the H&H Facilities and an acceleration of the
outstanding borrowings. If the lenders were to accelerate the obligations under
the H&H Facilities it would have a material adverse effect upon the liquidity,
financial position and capital resources of H&H. In addition the acceleration of
the H&H obligations would be an event of default under WHX's 10 1/2% Senior
Notes. Upon the occurrence of an event of default, the trustee or the holders of
25% in principal amount of the then outstanding notes could accelerate the 10
1/2% Senior Notes. Any such acceleration would have a material adverse effect
upon the liquidity, financial position and capital resources of WHX.
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; and
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
Bankruptcy Filing of the WPC Group
On November 16, 2000, the WPC Group filed petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Ohio. As a result, subsequent to the commencement of the
Bankruptcy Filing, the WPC Group sought and obtained several orders from the
Bankruptcy Court that were intended to enable the WPC Group to continue business
operations as debtors-in-possession. Since the Petition Date, the WPC Group's
management has been in the process of stabilizing their businesses and
evaluating their operations, while continuing to provide uninterrupted services
to their customers.
On November 17, 2000, the Bankruptcy Court granted the WPC Group's
motion to approve a $290 million Debtor in Possession Credit Agreement ("DIP
Credit Agreement") provided by Citibank, N.A., as initial issuing bank, Citicorp
U.S.A., Inc., as administrative agent, and the DIP Lenders. Pursuant to the DIP
Credit Agreement, Citibank, N.A. made term loan advances to the WPC Group up to
a maximum aggregate principal amount of $35 million. In addition, the DIP
Lenders agreed, subject to certain conditions, to provide the WPC Group with
revolving loans, swing loans and letter of credit accommodations in an aggregate
amount of up to $255 million. On January 2, 2002, the WPC Group requested and
received a reduction in the revolving loans, swing loans and letter of credit to
a maximum aggregate amount of up to $175 million. On November 15, 2002, the
Bankruptcy Court approved a motion to amend the DIP Credit Agreement to reduce
the revolving loans, swing loans and letter of credit to a maximum aggregate of
$160 million and to make certain other related changes to the agreement. In
connection with the Bankruptcy Filing, WHX had guaranteed $30 million of the
term loan portion of the DIP Credit Agreement ("Term Loan") and deposited in a
pledged asset account $33 million of funds in support of such guaranty.
Effective as of June 1, 2001, WHX purchased a participation interest comprising
an undivided interest in the Term Loan in the amount of $30 million, plus
interest accrued but not paid on such amount of the Term Loan through June 1,
2001. Concurrently with such transaction, WHX's guaranty of $30 million of the
Term Loan described above was terminated and the $33 million of funds previously
deposited in a pledged asset account in support of such guaranty were released
to WHX. WHX paid to Citibank $30.5 million of such deposited funds to purchase
WHX's participation interest in the Term Loan.
WPC borrowings outstanding under the DIP Credit Facility for
revolving loans totaled $135.5 million and $127.2 million at December 31, 2002
and 2001 respectively. Term loans under the DIP Credit Facility totaled $35.2
million and $34.4 million at December 31, 2002 and 2001 respectively. Letters of
credit outstanding under the facility totaled $2.8 million at December 31, 2002.
At December 31, 2002, net availability under the DIP Credit Facility was $25.7
million. The DIP Credit Facility currently expires on the earlier of May 17,
2003 or the completion of a Plan of Reorganization.
20
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
owns a $32.0 million participation interest in the Term Loan discussed above and
holds other claims against WPC and WPSC totaling approximately $7.4 million. The
recognition of the WPC Group's net loss of $176.6 million, in the year 2000,
eliminated the investment's carrying value of $136.8 million. In November 2000,
WHX recorded a liability of $39.8 million representing the excess of the WPC
Group's loss over the carrying amount of the investment.
During the period November 17, 2000 through December 31, 2002, the
WPC Group incurred cumulative net losses of $271.4 million. Pursuant to the
terms to the amended Plan of Reorganization, WHX has conditionally agreed to
contribute $20.0 million to the WPC Group (see discussion below pertaining to
WHX Contributions). As a result of the Company's probable obligation to fund
$20.0 million to WPC Group, the Company has recorded a $20.0 million charge as
Equity in loss of WPC in the accompanying Statement of Operations.
A Settlement and Release Agreement ("Settlement Agreement") by and
among WPSC, WPC, WHX, and certain affiliates of WPSC, WPC and WHX, received
approval of the United States Bankruptcy Court for the Northern District of Ohio
on May 24, 2001, was entered into on May 25, 2001, and became effective on May
29, 2001.
The Settlement Agreement provided, in part, for (1) the payment by
WHX to WPC of $32 million; (2) the exchange of releases between the WPC Group
and the WHX Group; (3) the acquisition by WHX or its designee of certain assets
of Pittsburgh-Canfield Corporation ("PCC"), plus the assumption of certain trade
payables, subject to certain terms and conditions (WHX recorded $5.4 million as
the fair value of the net assets of PCC.); (4) the termination of the Tax
Sharing Agreements between WHX and WPC; (5) WHX to deliver an agreement to the
WPC Group whereby it agreed not to charge or allocate any pension obligations,
expenses or charges to the WPC Group with respect to the WHX Pension Plan,
subject to certain limitations as provided therein, through and including the
earlier of the effective date of a Plan or Plans of Reorganization and December
31, 2002; and (6) the final settlement of all inter-company receivables and
liabilities between the WHX Group and the WPC Group (except for commercial trade
transactions), including the liability for redeemable stock. Such transactions,
other than the acquisition of certain assets of PCC, all occurred effective May
29, 2001. The acquisition of certain assets of PCC closed on June 29, 2001. The
PCC agreement included a one-year repurchase option for the seller. The
repurchase option expired unexercised on June 29, 2002.
On October 22, 2001, the Bankruptcy Court entered an order ("October
Order"), approving several transactions intended, among other things, to provide
the WPC Group with additional liquidity. As part of the October Order, the
Bankruptcy Court approved a Memorandum of Understanding by and among the
Company, Wheeling-Pittsburgh Corporation ("WPC"), Wheeling-Pittsburgh Steel
Corporation ("WPSC") and the United Steelworkers of America, AFL-CIO-CLC
("USWA"), pursuant to which the Company agreed to provide to WPSC (1) up to $5
million of secured loans and $5 million of liquidity support (part of which
consisted of financing terms) during the period from the Order through January
31, 2002, (2) if certain conditions are met, an additional $2 million of secured
loans (for an aggregate of $7 million) and the maintenance of the $5.0 million
of liquidity support referred to above, during the period from February 1, 2002
through March 31, 2002, (the conditions were not met and accordingly the
additional $2.0 million in secured loans were not made), and (3) a $25 million
contribution to a new WPSC defined benefit pension plan contingent upon, among
other things, a confirmed WPSC Plan of Reorganization (item 3 has since been
superceded by the WHX Contributions described below). Through December 31, 2002,
WHX had advanced $5.0 million of the loans and up to $5.5 million of financing.
At December 31, 2002, the outstanding balance of these secured advances was $5.0
million plus interest of $0.3 million and $2.1 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.
21
In January 2002, WPSC finalized a financial support plan which
included a $5.0 million loan from the State of West Virginia, a $7.0 million
loan and a $0.2 million grant from the State of Ohio, a $10.0 million advance by
the WHX Group for future steel purchases (all of which were delivered before
June 30, 2002) and additional wage and salary deferrals from WPSC union and
salaried employees. At December 31, 2002, the balance outstanding with the State
of West Virginia was $5.0 million, and $7.0 million with the State of Ohio.
On September 23, 2002, WPC announced that the Royal Bank of Canada
("RBC") had filed on its behalf an application with the Emergency Steel Loan
Guarantee Board ("ESLGB") for a $250 million federal loan guarantee. An
affiliate of RBC has agreed to underwrite the loan if the guaranty is granted.
On February 28, 2003, the ESLGB initially rejected the application. WPC and RBC,
however, amended and supplemented the application and it was conditionally
approved on March 26, 2003. The approval of the guaranty is subject to the
satisfaction of various conditions on or before June 30, 2003 including, without
limitation, resolution of the treatment of the WHX Pension Plan that is
acceptable to and approved by the PBGC, confirmation of a Plan of Reorganization
for the WPC Group, and the execution of definitive agreements satisfactory in
form and substance to the ESLGB.
The amended RBC application contained a business plan that assumed a
confirmed Chapter 11 plan of reorganization ("POR") for the WPC Group. As part
of the POR, the Company has agreed conditionally to make certain contributions
(the "WHX Contributions") to the reorganized company. Under the WHX
Contributions, the Company would forgo repayment of its claims against the
debtors of approximately $39 million and, additionally, would contribute to the
reorganized company $20 million of cash, for which the Company would receive a
note in the amount of $10 million. The WHX Contributions would be subject to a
number of conditions including, without limitation, that (1) the POR be
satisfactory to the Company in its sole and absolute discretion, and (2) the
Company's dispute with the PBGC, described below, be resolved to the
satisfaction of the Company in its sole and absolute discretion. As a result of
the Company's probable obligation to fund $20.0 million to WPC, the Company has
recorded a $20.0 million charge as Equity in loss of WPC in the accompanying
Consolidated Statement of Operations.
On March 7, 2003, the Pension Benefit Guaranty Corporation ("PBGC")
published its Notice of Determination ("Notice") and filed a Summons and
Complaint ("Complaint") in United States District Court for the Southern
District of New York seeking to terminate the WHX Corporation Pension Plan ("WHX
Plan"). The PBGC stated in its Notice that it took this action because of its
concern that "PBGC's possible long-run loss with respect to the WHX Plan may
reasonably be expected to increase unreasonably if the WHX Plan is not
terminated." WHX filed an answer to this complaint on March 27, 2003, contesting
the PBGC's action. The PBGC's action to terminate the WHX Pension Plan was taken
following the initial rejection on February 28, 2003 by the ESLGB of RBC's
application for a $250 million federal loan guaranty. The PBGC has been notified
of the loan guaranty approval on March 26, 2003. As described above, obtaining
an acceptable resolution of the treatment of the WHX Pension Plan is a condition
to the loan guaranty. If an acceptable resolution is not obtained on or before
June 30, 2003, then a condition to the loan guaranty shall not have been
satisfied. If the loan guaranty is not granted it is unlikely that the present
Plan of Reorganization, filed with the Bankruptcy Court on December 20, 2002,
will be confirmed. Furthermore, it is doubtful that an alternative plan could be
confirmed in a reasonable time frame (although WPC management has indicated that
it would attempt to pursue such an alternate plan). In either case there can be
no assurance as to the future of the WPC Group. The PBGC contends that the WHX
Pension Plan has roughly $300 million in assets to cover more than $443 million
in benefit liabilities resulting in a funding shortfall of approximately $143
million (without accounting for shutdown benefits). Furthermore, the PBGC
contends that shutdown liabilities, if they were to occur, could be as much as
$378 million. WHX disputes the PBGC's calculation of liabilities and shutdown
claims since the actual amount of these liabilities may be substantially less,
based on alternative actuarial assumptions. However, there can be no assurance
that WHX's assumptions will be accepted. If the PBGC's action is successful and
the WHX Pension Plan is terminated, WHX expects that it will be subject to a
claim by the PBGC of at least $143 million. WHX intends to vigorously defend
itself against such claims, but there can be no assurance that WHX would
prevail. If the WHX Pension Plan were terminated, WHX believes it is unlikely
that the present Plan of Reorganization, filed with the Bankruptcy Court filed
on December 29, 2002, will be confirmed. Furthermore, it is doubtful that an
alternative plan could be confirmed in a reasonable time frame (although WPC
management has indicated that it would attempt to pursue such an alternate
plan). In either case there can be no assurance as to the future of the WPC
Group. If a cessation of operations of the WPC Group or 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.
Management of the Company cannot at this time determine with
certainty the ultimate outcome of the Chapter 11 proceedings or the related PBGC
action; however it is possible that the following outcomes could result, whether
upon the confirmation of the Plan of Reorganization as submitted or as it may be
amended or modified, or otherwise:
a) The WPC Group could reorganize, and its creditors could receive a
portion of their claims in cash or in stock of WPC or WPSC. In
such a case, the WHX Group would have little or no future
ownership in or involvement with the WPC Group (except as a
creditor) and the WHX Group's future cash obligations to or on
behalf of the WPC Group would be minimal to none (other than the
WHX Contributions, referred to above).
22
b) The PBGC could prevail in its actions to terminate the WHX
Pension Plan, which could result in a partial or complete
liquidation of the WPC Group. If such liquidation were to occur,
WHX could be responsible for significant early retirement pension
benefits. In such a case, the PBGC would likely seek to enforce
claims for shutdown liabilities against WHX in addition to the
$143 million claims for accumulated benefit liabilities referred
to above. The PBGC asserts that shutdown claims arising from a
complete liquidation of the WPC Group would result in claims
against WHX as much as $378 million. A shutdown of only a portion
of the WPC Group's facilities would generate shutdown liabilities
in a lower amount. WHX disputes the PBGC's assertion with regard
to each of their claims. If the PBGC were to prevail against the
Company, the PBGC could file a claim against WHX and the other
members of the WHX controlled group in an amount from $143
million to $521 million, which WHX would be unable to fund.
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,
2003 is estimated to be $314.1 million. WHX has estimated that approximately 85%
of employees and retirees entitled to such OPEB Obligations are represented by
the USWA.
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. If the POR is
confirmed, the Company believes that its liability for the OPEB Obligations
would be eliminated.
OVERVIEW
WHX is a holding company that has been structured to invest in
and/or acquire a diverse group of businesses on a decentralized basis. WHX's
primary business currently is Handy & Harman, a diversified manufacturing
company whose strategic business units encompass three segments: precious metal
plating and fabrication, specialty wire and tubing, and engineered materials.
WHX also owns Pittsburgh-Canfield Corporation, a manufacturer of
electrogalvanized products used in the construction and appliance industries. In
July 2002, the Company sold its wholly owned subsidiary, Unimast Incorporated, a
leading manufacturer of steel framing and other products for commercial and
residential construction. As a result, Unimast has been classified as a
discontinued operation for all periods presented. 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.
23
The following table presents information about reported segments for the years
ended December 31:
in thousands
2002 2001 2000
----------- ----------- -----------
Revenue
Precious Metal $ 142,260 $ 168,308 $ 237,426
Wire & Tubing 132,194 133,621 158,008
Engineered Materials 111,939 86,210 73,412
----------- ----------- -----------
Sub total 386,393 388,139 468,846
WPC Group -- -- 1,050,590
----------- ----------- -----------
Consolidated revenue $ 386,393 $ 388,139 $ 1,519,436
=========== =========== ===========
Segment operating income (loss)
Precious Metal $ (3,536) $ 7,982 $ 22,129
Wire & Tubing (14,071) 3,407 13,862
Engineered Materials 9,624 7,901 7,698
----------- ----------- -----------
Sub total (7,983) 19,290 43,689
WPC Group -- -- (50,035)
----------- ----------- -----------
(7,983) 19,290 (6,346)
Unallocated corporate expenses 17,374 16,732 6,531
Goodwill amortization -- 7,393 7,998
----------- ----------- -----------
Operating income (loss) (25,357) (4,835) (20,875)
Interest expense 27,257 46,969 83,899
Equity in loss of WPC 20,000
Gain on early retirement of debt 42,491 19,011 --
Gain on sale of Wheeling-Downs -- 88,517 --
Other income (expense) (5,988) 11,112 (15,400)
----------- ----------- -----------
Income (loss) before taxes, discontinued operations
and cumulative effect of an accounting change (36,111) 66,836 (120,174)
Income tax expense (benefit) (24,115) (28,869) 68,692
Income from discontinued operations - net of tax 10,601 5,416 7,821
Gain on sale of Unimast - net of tax of $6,886 11,861 -- --
----------- ----------- -----------
Income (loss) before cumulative effect of an
accounting change 10,466 101,121 (181,045)
Cumulative effect of an accounting change - net of tax (44,000) -- --
----------- ----------- -----------
Net income (loss) $ (33,534) $ 101,121 $ (181,045)
=========== =========== ===========
24
2002 COMPARED TO 2001
Sales in 2002 were $386.4 million compared with $388.1 million in
2001. Sales decreased by $26.0 million at the Precious Metal Segment and $1.4
million at the Wire & Tubing Segment. Sales increased by $25.7 million at the
Engineered Materials Segment.
Selling, general and administrative expenses decreased $0.7 million
from $74.3 million in 2001 to $73.6 million in 2002. Excluding the $7.4 million
favorable impact from the non-amortization of goodwill in 2002, selling, general
and administrative expenses increased by $6.7 million. This resulted from
increased pension expense of $3.1 million, insurance costs, a legal settlement,
and bad debt expenses partially offset by the impact of non-recurring expenses
in 2001.
Operating loss at the segment level was $8.0 million in 2002
compared to operating income of $19.3 million in 2001. Operating results for the
Precious Metal and the Wire & Tubing Segments declined by $11.5 million and
$17.5 million, respectively. These declines include restructuring charges of
$12.0 million in the Precious Metal segment and $8.0 million in the Wire &
Tubing segment. Operating income for the Engineered Materials Segment improved
by $1.7 million in 2002. Unallocated corporate expenses increased from $16.7
million in 2001 to $17.4 million in 2002. This resulted from an increase in
unallocated pension expense of $3.1 million offset by non-recurring costs and
expenses incurred in 2001.
Interest expense in 2002 decreased by $19.7 million to $27.3 million
from $47.0 million in 2001. Handy & Harman's interest expense decreased from
$16.0 million in 2001 to $9.5 million in 2002, reflecting lower borrowings and
lower interest rates. The remaining $13.2 million of this decline in interest
expense is primarily related to the early retirement of $134.6 and $36.4 million
of 10 1/2 % Senior Notes in 2002 and 2001, respectively.
As part of the amended Chapter 11 Plan of Reorganization for the WPC
Group, WHX has agreed conditionally to provide additional funds to WPSC
amounting to $20.0 million. As a result of the Company's probable obligation to
fund $20 million to WPC, WHX has recorded a $20 million charge as Equity in loss
of WPC in the accompanying Consolidated Statement of Operations for the year
ended December 31, 2002.
Other income was an expense of $6.0 million for 2002 compared to
$11.1 million of income for 2001. The income in 2001 was primarily related to
income from WHX Entertainment of $15.0 million and net investment losses of $4.4
million. The 2002 period loss included a $4.8 million loss on an interest rate
swap, other expenses of $3.7 million, losses of $2.6 million on the disposal of
fixed assets, partially offset by investment earnings of $5.1 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. In 2002, WHX used a portion of these proceeds in
the first quarter of 2002 to purchase and retire $82.5 million aggregate
principal amount of Senior Notes in the open market for $50.6 million.
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 approximately $25.6
million of Unimast debt. In the third quarter, the Company recognized a pre-tax
gain on the sale of approximately $18.6 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.
25
In 2002 the Company recognized a $42.5 million gain on the early
retirement of $134.6 million principal amount of 10 1/2% Senior Notes.
In 2002, continuing operations recognized a tax benefit of $24.1
million on a $36.1 million pre-tax loss. As a result of the termination of the
Tax Sharing Agreement with the WPC Group, the Company recognized the benefit of
the WPC Group's current year losses and net operating loss carryforwards to
offset taxable income from WHX's other operations.
In 2001, continuing operations recognized a tax benefit of $28.9
million on $66.9 million pre-tax income. As a result of the termination of the
Tax Sharing Agreement with the WPC Group, the Company recognized the benefit of
the WPC Group's current year losses to offset taxable income from WHX's other
operations. The Company was also able to recognize additional benefits from net
operating losses previously unavailable to the Company.
Net loss for 2002 amounted to $33.5 million, or $9.90 loss per share
of common stock after adjusting for preferred stock dividends, as compared to
net income of $101.1 million, or $16.35 per basic share of common stock after
adjusting for preferred stock dividends.
The comments that follow compare revenues and operating income by operating
segment for the years ended 2002 and 2001:
Precious Metal
- --------------
Sales for the Precious Metals Segment decreased $26.0 million from
$168.3 million in 2001 to $142.3 million in 2002. Approximately $10.0 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 due to
the closing of the Fairfield, CT facility at the end of the third quarter of
2002 as well as reduced volume due to the slowdown in the economy. Operating
income decreased $11.5 million from $8.0 million in 2001 to a loss of $3.5
million in 2002. Included in the 2001 period was a $3.3 million precious metal
lower of cost or market adjustment which was partially offset by favorable
precious metal gains of $1.0 million. Included in the 2002 period is a
restructuring charge of $12.0 million, as described below, and additional costs
of $1.4 million to maintain the employee base until operations ceased. Excluding
the 2001 precious metal reserve and precious metal gains and the 2002
restructuring charge and related expense, operating income decreased by $.3
million, primarily due to reduced revenue resulting from the severe fire damage
at Sumco Inc., further described below, partially offset by increased demand
from our silver customers prior to closure of the Fairfield, CT facility.
In April 2002, Handy & Harman announced its decision to exit certain
of its precious metal activities. The affected product lines were manufactured
at Handy & Harman's Fairfield, CT and East Providence, RI facilities. The
decision to exit these operating activities resulted in a restructuring charge
of $12.0 million. This charge includes $6.6 million for employee separation
expenses (approximately 251 employees, of which 213 were terminated by January
1, 2003), $0.6 million of contractual obligations, and $4.8 million for costs to
close the facilities, including refining charges for inventory remaining after
operations ceased. As of December 31, 2002 the Company has received $8.5 million
from the sale of certain equipment. The sale of the Fairfield, CT property is
expected to occur in 2003.
The Company believes that 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 soon after the fire and
repairs to the building, its infrastructure and replacement of machinery and
equipment are to be completed by the end of the first quarter 2003.
Wire & Tubing
- -----------------
Sales for the Wire & Tubing Segment decreased $1.4 million from
$133.6 million in 2001 to $132.2 million in 2002 due to continued weakness in
the semiconductor fabrication and telecommunications markets. Partially
offsetting this reduction was increased sales at the Company's domestic and
foreign units that serve the appliance industry, and increased sales of tubing
products to the medical industry. Operating income decreased by $17.5 million
from $3.4 million in 2001 to a loss of $14.1 million in 2002. Included in the
2001 period are charges for inventory reserves of approximately $2.5 million for
the Wire Group. The 2002 period includes Wire Group charges for restructuring of
$8.0 million, as further described below, accelerated depreciation of $3.4
million during the remaining operating period which ended December 31, 2002,
$2.9 million in charges related to the write down of inventories 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.
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 charges of $10.9 million, including restructuring charges
of $8.0 million. The components of the $8.0 million restructuring charge are:
$2.8 million in employee separation expenses (approximately 121 employees, of
which 108 were terminated by January 1, 2003), $4.8 million for the write-down
26
of production supplies and consumables and facility closing costs, and $0.4
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 will incur incremental costs
related to the restructuring in the range of $1.0 million to $1.5 million, above
the aforementioned separation expenses, in the first half 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. As
discussed above, the Company incurred accelerated depreciation expense of
approximately $3.4 million on equipment values during the fourth quarter of
2002. Additional employee separation accruals including the settlement of
certain pension obligations will be made in 2003 in the range of $1.5 million to
$2.0 million.
Engineered Materials
- --------------------
Sales for the Engineered Materials segment increased $25.7 million
from $86.2 million in 2001 to $111.9 million in 2002, primarily from the
purchase of PCC on June 29, 2001, which contributed an increase of $20.8 million
in sales for the year. The remainder of the increase resulted from an increase
in the customer base for product lines which were introduced in 2001. Operating
income increased $1.7 million from $7.9 million in 2001 to $9.6 million in 2002
as a result of the inclusion of PCC's results for the entire year and the
aforementioned growth of new product lines, partially offset by the costs of a
litigation settlement in the fourth quarter of 2002.
2001 COMPARED TO 2000
The Bankruptcy Filing and the resultant deconsolidation of WPC as of
November 16, 2000 have affected comparisons between year 2001 and year 2000
results.
Sales in 2001 were $388.1 million compared with $1.5 billion in
2000, which included WPC Group sales of $1.0 billion. Excluding the WPC Group
sales, net sales for 2001 declined $80.7 million. Sales decreased by $69.1
million at the Precious Metal Segment and $24.4 million at the Wire & Tubing
Segment. Sales increased by $12.8 million at the Engineered Materials Segment.
Selling, general and administrative expenses decreased $68.3 million
from $142.6 million in 2000 to $74.3 million in 2001. After excluding WPC Group
selling, general and administrative expenses of $64.8 million, SG&A expenses for
the WHX Group decreased by $3.5 million.
Operating income for 2001 was a loss of $4.8 million compared to an
operating loss of $20.9 million in 2000. The WPC Group reported an operating
loss of $50.0 million in 2000. Operating income at the remaining three reported
segments declined from $43.7 million in 2000 to $19.3 million in 2001.
Unallocated corporate expenses increased from $6.5 million to $16.7 million. The
increase is primarily due to legal and professional fees due to the WPC
bankruptcy, and to costs and expenses no longer allocated to the WPC Segment,
including pension expense of $4.5 million.
Interest expense in 2001 decreased by $36.9 million to $47.0 million
from $83.9 million in 2000. After excluding WPC Group interest of $34.1 million
in the 2000 period, interest expense decreased by $2.8 million. Handy & Harman's
interest expense decreased from $18.6 million in 2000 to $16.0 million in 2001,
reflecting lower borrowings and lower interest rates. The remaining decline in
interest expense is primarily related to the early retirement of $36.4 million
of 10 1/2 % Senior Notes, offset by increased amortization of consent fees.
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. In the first quarter of 2002, WHX used a portion
of these proceeds to purchase and retire $82.5 million aggregate principal
amount of Senior Notes in the open market for $50.6 million.
Other income was $11.1 million for 2001 compared to $15.4 million of
expense for 2000. The income in 2001 was primarily related to income from WHX
Entertainment of $15.0 million and net investment losses of $4.4 million. The
2000 period loss included net investment losses of $17.2 million, minority
interest expense of $2.2 million, other expenses of $6.5 million including
losses related to the WPC Group, and income from WHX Entertainment of $10.7
million.
In 2001, the Company recognized a gain of $19.0 million on the early
retirement of $36.4 million principal amount of 10 1/2% Senior Notes.
In 2001, continuing operations recognized a tax benefit of $28.9
million on $66.8 million of pre-tax income. As a result of the termination of
the Tax Sharing Agreement with the WPC Group, the Company recognized the benefit
of the WPC Group's current year losses to offset taxable income from WHX's other
operations. The Company was also able to recognize additional benefits from net
operating losses previously unavailable to the Company.
27
The 2000 tax provision included a reversal of $25.3 million of
provisions for prior year taxes that are no longer required. In addition, a
non-cash charge of $133.8 million was made to provide a valuation reserve
against previously recognized net deferral tax assets as a result of the
November 16, 2000 Bankruptcy Filing.
Net income for 2001 amounted to $101.1 million, or $16.35 income per
basic share of common stock after adjusting for preferred stock dividends, as
compared to a net loss of $181.0 million, or $42.29 loss per basic share of
common stock after adjusting for preferred dividends.
The comments that follow compare revenues and operating income by
operating segment for the years ended 2001 and 2000:
Precious Metal
- --------------
Sales for the Precious Metals Segment decreased $69.1 million to
$168.3 million. Approximately 20% of the sales decrease was attributable to the
decline in the market price of precious metals, 29% was due to the dissolution
of a fully consolidated joint venture as of December 31, 2000, which had $19.9
million in sales and $7.4 million operating income (at 100%) in fiscal 2000, and
the balance of the decrease was primarily due to the slowdown in the economy.
Operating income decreased $14.1 million to $8.0 million. Included in the 2001
period was a $3.3 million precious metals lower of cost or market reserve
established in the first quarter and a $0.4 million LIFO loss on the sale of
precious metals, partially offset by favorable precious metal gains of $1.4
million. The 2000 period includes a bad debt reserve of $1.0 million, a LIFO
loss of $2.3 million on the sale of precious metal, facility closure cost of
$0.8 million and $1.0 million of legal costs associated with the dissolution of
a precious metal plating joint venture. Excluding these charges, the LIFO loss,
and the favorable precious metal gains, operating income decreased $17.0 million
due to the dissolution of a fully consolidated joint venture, as stated above,
and the slowdown in the economy.
Wire & Tubing
- ------------------
Sales for the Wire & Tubing Segment decreased $24.4 million to
$133.6 million and operating income declined by $10.5 million to $3.4 million
due to weakness in the automotive, semiconductor fabrication and
telecommunications markets and startup costs on new refrigeration programs of
approximately $3.0 million. Charges for inventory reserves of approximately $2.5
million were recorded in 2001. The 2000 period included a charge of
approximately $2.3 million for legal and settlement costs for this segment's
cable division.
Engineered Materials
- --------------------
On June 29, 2001, WHX acquired certain assets of PCC from the WPC
Group. The results of operations of PCC are included in the Engineered Materials
segment beginning July 1, 2001. Sales for the Engineered Materials segment
increased $12.8 million to $86.2 million. This increase includes $11.9 million
in sales for PCC. Operating income for this segment increased $0.2 million to
$7.9 million. PCC contributed $1.6 million in operating income in 2001.
Excluding PCC, operating income declined by $1.4 million in 2001 due to obsolete
and slow moving inventory charges of approximately $0.8 million, additional
expenses associated with product and market expansion activities, and lower
selling prices.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
As more fully discussed above, the PBGC has announced its intention
to seek to terminate the WHX Pension Plan. If the PGBC were to prevail against
WHX, the PGBC could file a claim in an amount from $143 million to $521 million,
which WHX would be unable to fund. An unfavorable resolution of the PGBC action
would have a material adverse effect on the liquidity, capital resources and
results of operations and financial position of the WHX Group. The following
discussion of Liquidity and Capital Resources of the Company has been prepared
and is presented without giving effect to any resulting effects of the PGBC
action.
Cash flows provided by (used in) operating, investing and financing
activities for 2002 totaled $66.5 million, $82.3 million and ($135.8) million,
respectively. As a result of the Bankruptcy Filing, any future cash flow
generated or required by the WPC Group will not be available to or provided by
the WHX Group. However, while WHX has no current intention to provide the WPC
Group with additional funding other than the probable obligation relating to the
contingent WHX Contributions of $20 million previously discussed, it may elect
in the future to do so if it determines that it is in WHX's best interest.
Short-term trading investments and related short-term borrowings, reported as
cash flow from operating activities, provided a net $36.5 million of funds in
28
2002 versus using $64.6 million in 2001. Working capital accounts (excluding
cash, short-term investments, short-term borrowings and current maturities of
long term debt) provided $46.9 million of funds. Other current assets used $1.6
million. Accounts receivable provided $2.2 million, inventories provided $16.4
million, trade payables provided $26.0 million, and other current liabilities
provided $4.0 million. Other non working capital items used $4.7 million.
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 $18.6 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 the proceeds from the sale
to reduce other corporate debt pursuant to the terms of the Indenture for the
Company's 10 1/2 % Senior Notes.
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. During the first quarter of 2002, WHX used $50.6
million of these proceeds to purchase $82.5 million aggregate principal amount
of Senior Notes in the open market. WHX received a management fee from
Wheeling-Downs Racing Association, Inc. of $12.9 million and $7.7 million, which
are included in cash provided by operating activities in 2001 and 2000,
respectively.
In 2002, the Company purchased and retired $134.6 million aggregate
principal amount of the Notes in the open market resulting in a gain of $42.5
million, and a use of cash of $87.6 million. As a result of the 2002 purchases
and an additional $5.7 million aggregate principal purchased through March 31,
2003, future cash interest expense will be reduced by $14.7 million annually.
Other retirement of long-term debt used $48.2 million in 2002.
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 December 31, 2002, WHX had balances due from WPSC
totaling $7.4 million in the form of advances and liquidity support. As part of
the POR the Company has agreed conditionally to make certain contributions to
the reorganized company. Under the WHX contribution the Company will forgo
repayment of the above claims and a will contribute $20 million in cash to the
reorganized company.
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 terms of 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 unexercised on June 29, 2002.
As a result of the total cash payments of $32 million to the WPC
Group by WHX, all inter-company receivables and liabilities (except for
commercial trade transactions) including the liability for redeemable common
stock were settled. In addition, WHX recorded the fair value of the net assets
of PCC of $5.4 million.
Acquisition activity used $3.1 million in 2002. This was primarily
the acquisition of product lines in the Engineered Materials segment.
In 2002, $9.3 million was spent on capital improvements in the WHX
Group. It is anticipated that capital expenditures for the WPC Group will be
minimized during the Chapter 11 proceedings until liquidity is sufficient and
stabilized. These capital expenditures will be obligations of the WPC Group. To
the extent the WPC Group does not have the funds required to make such
expenditures, there may be a material adverse effect on the business and
operations of the WPC Group. The WHX Group has no obligation to fund any of the
29
WPC Group's future capital expenditures, and does not anticipate on doing so. In
the event that the WPC Group is unable to fund its environmental capital
expenditures, claims may be made against WHX for payment of such costs.
Proceeds from the sale of fixed assets amounted to $8.6 million in
2002. This is primarily related to the sale of certain equipment from the
Fairfield, CT facility.
The WHX Group has a significant amount of outstanding indebtedness,
and its ability to access capital markets in the future may be limited. However,
management believes that cash on hand and future operating cash flow will enable
the WHX Group to meet its cash needs for the next twelve months. The credit
agreement of H&H has certain financial covenants that limit the amount of cash
distributions that can be paid to WHX.
The Company's Handy & Harman subsidiary and the WPC Group maintain
separate and distinct credit facilities with various financial institutions.
WHX GROUP
On October 4, 2000, WHX successfully completed a solicitation of
consents from holders of its 10 1/2 % Senior Notes due 2005 ("Notes") to amend
certain covenants and other provisions of the indenture dated as of April 7,
1998 ("Indenture") governing the Notes. The Supplemental Indenture reflecting
such amendment ("Supplemental Indenture") provides, among other things, for
amendments to certain covenants which restrict the Company's ability to make
restricted payments (as defined in the Indenture), incur additional
indebtedness, make permitted investments or utilize proceeds from asset sales.
The Supplemental Indenture also prohibited the payment of dividends on the
Company's preferred stock until October 1, 2002, at the earliest, and thereafter
only in the event that the Company satisfies certain conditions set forth in the
Indenture, as amended by the Supplemental Indenture. Such conditions were not
satisfied as of December 31, 2002. In addition, the amendments also remove as
events of default under the Indenture those relating to defaults under any
mortgage, indenture or instrument by, judgments against and bankruptcy,
insolvency and related filings and other events of, the WPC Group or any of its
direct or indirect subsidiaries. Accordingly, the Bankruptcy Filing is not an
event of default under the Notes. In connection with the solicitation the
Company made a payment equal to 2% of the principal amount of the Notes ($20 in
cash for each $1,000 principal amount of Notes) to each holder of Notes whose
consent was received and accepted prior to the expiration date. Such payments to
bond holders aggregated approximately $5.5 million.
On July 30, 1998, H&H entered into a $300 million Senior Credit
facility ("H&H Facilities") with Citibank, N.A., as agent. The H&H Facilities
are comprised of (i) a $100 million 6-year Revolving Credit Facility, (ii) a $25
million Delayed Draw Term Loan Facility (now expired), (iii) a $50 million
6-year Term Loan A Facility, and (iv) a $125 million 8-year Term Loan B
Facility. Interest under the H&H Facilities is calculated at a rate determined
either using (i) the Citibank prime rate or (ii) LIBOR, plus the Applicable
Margin in effect from time to time. Applicable Margin means a percentage per
annum determined by reference to the total leverage ratio of H&H. The rates in
effect at December 31, 2002 are (a) in the case of the Term A Facility and the
Revolving Credit Facility, calculated at LIBOR + 1.5% and (b) in the case of the
Term B facility, calculated at LIBOR + 2.25%. Borrowings under the H&H
Facilities are collateralized by the pledge of 100% of the capital stock of all
H&H's active U.S. subsidiaries and 65% of the stock of H&H's non-U.S.
subsidiaries. In addition, H&H provided a perfected first priority lien on and
security interest in substantially all the assets of H&H and its subsidiaries.
The H&H Facilities have 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 2002 and 2001, H&H received capital
contributions of $5.0 million and $6.3 million, respectively from WHX in order
to remain in compliance with certain of these financial covenants. Such funds
were utilized to reduce H&H debt. At December 31, 2002, H&H was in compliance
with all covenants. Borrowings outstanding under the H&H Facilities at December
31, 2002 totaled $130.5 million. Letters of credit outstanding under the H&H
Facilities were $24.5 million at December 31, 2002. Total funds available under
the H&H Facilities at December 31, 2002 were $23.5 million. The Bankruptcy
Filing of the WPC Group is not an event of default under the H&H Facilities.
On March 6, 2003, the PBGC issued its Notice on March 7, 2003, the
PBGC published its Notice and filed a Complaint in the United States District
Court for the Southern District of New York seeking the involuntary termination
of the WHX Pension Plan. On March 11, 2003 H&H informed its lenders that
the PBGC action may have been an occurrence that would preclude H&H from
making certain representations to the lenders (as required by the H&H
Facilities) in connection with future borrowings. H&H has elected not to
borrow any additional funds against the H&H Facilities until such time as
the PBGC action is resolved. If the PBGC action is upheld and the WHX Pension
Plan is terminated, such termination would constitute an event of default under
the H&H Facilities. If H&H is unable to cure the default or obtain
an amendment to the H&H Facilities, it could lead to a cancellation of the
H&H Facilities and an acceleration of the outstanding borrowings. If the
lenders were to accelerate the obligations under the H&H
30
Facilities it would have a material adverse effect upon the liquidity, financial
position and capital resources of H&H.
In addition, an acceleration of the obligations under the H&H
Facilities would be an event of default under WHX's 10 1/2 % Senior Notes. Upon
the occurrence of an event of default, the trustee or the holders of 25% in
principal amount of the then outstanding notes could accelerate the 10 1/2%
Senior Notes. Any such acceleration would have a material adverse effect upon
the liquidity, financial position and capital resources of the Company.
As described above the H&H loan agreement contains provisions
restricting cash payments to WHX. The agreement allows the payment of management
fees, income taxes pursuant to tax sharing agreements, and certain other
expenses. In addition dividends may be paid under certain conditions. At
December 31, 2002 the net assets of H&H amounted to $206.1 million, of which
approximately $1.0 million was not restricted as to the payment of dividends to
WHX.
As of December 31, 2002, the WHX Group had consolidated cash and
short-term investments, net of related investment borrowings, of $115.8 million,
as compared to $141.8 million at December 31, 2001. The decrease in cash and
short term investments in 2002 includes the payment of WHX term loan interest in
the amount of $18.4 million and the payment of $87.6 million for the purchase
and retirement of $134.6 million principal amount of 10 1/2 % Senior Notes
offset by $85.0 million in proceeds from the sale of Unimast. During the period
January 1, 2003 through March 31, 2003, WHX utilized $4.5 million of these funds
to purchase $5.7 million aggregate of principal amount of Senior Notes in the
open market.
The Company is required to record income tax expense at statutory
rates. However, as a result of the termination of the Tax Sharing Agreement with
the WPC Group, the Company is able to utilize significant income tax loss carry
forwards to minimize its actual income tax payments, so long as the WPC Group
remains as a member of the WHX consolidated tax return.
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 Revolving Credit Facility and funds generated
from operations. The WHX Group believes that, cash on hand, assuming it is able
to sustain the current outstanding borrowings under the H&H Facilities, will
provide the WHX Group for the next twelve months with the funds required to
satisfy working capital and capital expenditure requirements. However, factors,
such as the PBGC's announced intention to terminate the WHX Pension Plan and
economic conditions, could materially affect the WHX Group's results of
operations, financial condition and liquidity.
As of December 31, 2002, the total of the WHX Groups future
contractual commitments, including the repayment of debt obligations is
summarized as follows:
Payments Due by Period
---------------------------------------------------------------
Contractual
Obligations Total 2003 2004 - 2005 2006 2007
- ------------------------------------------------------------------------------------
Long-term Debt $ 249,706 $ 11,250 $ 157,730 $ 80,726 -
Operating Leases $ 7,445 $ 2,189 $ 2,988 $ 1,335 $ 933
At December 31, 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 amount equal to $3.25 per annum per share of
Series A and $3.75 per annum per share of Series B. Pursuant to the terms of the
Supplemental Indenture to the Company's 10 1/2% Senior Notes, the Company was
prohibited from paying dividends on this Preferred Stock until after October 31,
2002, at the earliest and thereafter only in the event that the Company
satisfies certain conditions set forth in the Indenture. Such conditions were
not satisfied at December 31, 2002. Presently, management believes that it is
not likely that the Company will be able to pay these dividends in the
foreseeable future. The holders of the Preferred Stock are eligible to elect two
directors to the Company's Board of Directors upon the Company's failure to pay
six quarterly dividend payments, whether or not consecutive. Dividends on the
Preferred Stock have not been paid since the dividend payment of October 31,
2000. Accordingly, the holders of the Preferred Stock have the right to elect
two directors to the Company's Board of Directors. To date, the holders of the
Preferred Stock have not elected such directors. At December 31, 2002, preferred
dividends in arrears totaled $43.7 million.
In addition to the above obligations, certain customers and
suppliers of the H&H Precious Metal Segment choose to do business on a "pool"
basis. That is, to furnish precious metal to H&H for return in fabricated form
(customer metal) or for purchase from or return to the supplier. When the
customer's precious metal is returned in fabricated form, the customer is
31
charged a fabrication charge. The value of consigned precious metal is not
included in the Company's balance sheet. To the extent that the quantity of
customer and supplier precious metal, as well as precious metal owned by the
Company, does not meet operating needs, the Company can lease precious metal
through its Consignment Facility. At December 31, 2002, 4,675,000 ounces of
silver and 6,200 ounces of gold were leased to the Company under the Consignment
Facility.
WPC GROUP
The matters described under this caption, to the extent that they
relate to future events or expectations, may be significantly affected by the
Chapter 11 proceedings. Those proceedings will involve, or may result in,
various restrictions on the WPC Group's activities, limitations on financing,
the need to obtain Bankruptcy Court approval for various matters and uncertainty
as to relationships with vendors, suppliers, customers and others with whom the
WPC Group may conduct or seek to conduct business.
Net cash flow provided by the WPC Group's operating, investing and
financing activities for the twelve months ended December 31, 2002 was $1.0
million. Working capital accounts (excluding cash, short-term borrowings and
current maturities of long term debt) used $10.5 million of funds. Accounts
receivable increased by $24.1 million. Inventories, valued principally by the
LIFO method for financial reporting purposes, totaled $184.1 million at December
31, 2002, an increase of $11.0 million from December 31, 2001. Trade payables
increased by $10.7 million.
In 2002, $11.0 million was spent on capital improvements including
$1.7 million on environmental control projects. Continuous and substantial
capital and maintenance expenditures may be required to maintain operating
facilities, modernize finishing facilities to remain competitive and to comply
with environmental control requirements. It is anticipated that capital
expenditures will be minimized during the Chapter 11 proceedings until liquidity
is sufficient and stabilized.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon its Consolidated Financial Statements,
which have been prepared in accordance with generally accepted accounting
principles in the United States of America. Preparation of these financial
statements requires the Company to make estimates and judgements that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to bad debts,
inventories, intangibles, income taxes, pensions and other post-retirement
benefits, and contingencies and litigation. Estimates are based on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgements about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Financial Reporting Release No. 60, which was recently released by
the Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 to the Consolidated Financial Statements, included
elsewhere in this Form 10-K, includes a summary of the significant accounting
policies and methods used in the preparation of the Company's financial
statements. The following is a brief discussion of the more significant
accounting policies and methods used by the Company.
Principles of Consolidation
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
("WPC Group") filed petitions seeking reorganization under Chapter 11 of Title
11 of the United States Bankruptcy Code. (See Note 3 to the Consolidated
Financial Statements). 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 Consolidated Balance Sheets at December 31,
2002 and 2001 do not include any of the assets or liabilities of WPC. The
Consolidated Statement of Operations and the Consolidated Statement of Cash
Flows exclude the operating results of WPC for the periods after November 16,
2000. As discussed in this Item 7 and Note 3 to the Consolidated Financial
Statements, the Company agreed to provide additional funds to WPC (subject to
certain conditions) amounting to $20.0 million. As a result of the Company's
probable obligation, the Company has recorded in the year ended December 31,
2002 a charge as Equity in loss of WPC up to the amount of such funding
commitment.
32
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in first-out ("LIFO") method for precious metal
inventories. The revaluation of H&H's precious metals inventory at the time of
acquisition created the potential for a lower of cost or market non-cash charge,
which would occur if market values fall below LIFO cost. Non-precious metal
inventory is evaluated for estimated excess and obsolescence based upon
assumptions about future demand and market conditions, and is adjusted
accordingly. If actual market conditions are less favorable than those projected
by the Company, additional write-downs may be required.
Goodwill
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
other Intangible Assets." The Company adopted the provisions of SFAS 142
effective January 1, 2002. As a result of the adoption of SFAS 142, the Company
recorded a $44.0 million non-cash goodwill impairment charge related to the H&H
Wire Group in the first quarter of 2002. This charge was classified as a
cumulative effect of an accounting change.
The evaluation of the recoverability of the unamortized balance of
goodwill is based on a comparison of the respective reporting units fair value
to its carrying value, including allocated goodwill. Fair values were determined
by discounting estimated future cash flows. The recoverability of goodwill will
be impacted if estimated future operating cash flows are not achieved. Purchased
patents are stated at cost, which is amortized over the respective remaining
lives of the patents.
NEW ACCOUNTING STANDARDS
In July 2001, the 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 will be 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 and has changed
its accounting accordingly effective January 1, 2002. As a result of the
adoption of SFAS 142, the Company did not record amortization expense for
existing goodwill during the year ending December 31, 2002. The Company recorded
amortization expense of $7.4 million and $8.0 million on this goodwill for the
years ended December 31, 2001 and 2000, respectively. Any intangible assets
acquired or goodwill arising from transactions after June 30, 2001 are subject
to the amortization and non-amortization provisions of SFAS 141 and SFAS 142.
The Company recorded a $44.0 million non-cash goodwill impairment charge related
to the H&H Wire Group in the first quarter of 2002. This charge is shown as a
cumulative effect of an accounting change. The Company recorded this charge
because the fair value of this reporting unit as determined by estimated cash
flow projections, was less than the reporting units carrying value. 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 obligations
associated with the retirement of a tangible long-lived asset be recorded as a
liability when those obligations are incurred, with the amount of the liability
initially measured at fair value. Upon initially recognizing a liability for an
asset-retirement obligation ("ARO"), an entity must capitalize the cost by
recognizing an increase in the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
33
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.
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 adopted the provisions of SFAS 145 in the
second quarter of 2002 and has changed its accounting accordingly. 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.
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to SFAS No. 123's fair value method of accounting for
stock-based employee compensation. While the Statement does not amend SFAS No.
123 to require companies to account for employee stock options using the fair
value method, the disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS No. 123 or the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure provisions of SFAS 148 and is
currently evaluating whether to adopt the provisions of SFAS No. 148 relating to
the SFAS No. 123 fair value method of accounting for stock-based employee
compensation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of business, the Company is exposed to market
risk or price fluctuation related to the purchase of natural gas, electricity,
precious metals, steel products and certain non-ferrous metals used as raw
material. To a lesser extent, the Company is exposed to the risk of price
fluctuation on coal, coke, and natural gas liquids. The Company is also exposed
to the effects of price fluctuations on the value of its commodity inventories,
specifically, H&H's precious metals inventories.
The Company's market risk strategy has generally been to obtain
competitive prices for its products and services and allow operating results to
reflect market price movements dictated by supply and demand.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for capital
expenditures and existing assets or liabilities denominated in currencies other
than U.S. dollars. The Company has not generally used derivative instruments to
manage this risk.
34
EQUITY PRICE RISK
The Company is subject to equity price risk resulting from its
investments in certain marketable equity securities of unrelated parties. The
Company accounts for its investment in these securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." ("SFAS 115").
At December 31, 2002, the WHX Group held $4.7 million in equity
securities classified as "trading" in accordance with SFAS 115. Each quarter the
Company adjusts the carrying amount of its trading securities to fair market
value, with any resulting adjustment being charged or credited to other income.
At year-end 2002 a hypothetical 10% decrease in the value of the equity trading
securities would have resulted in a $0.5 million unfavorable impact on pre-tax
income. Such a decrease in value might also reduce the future cash flows
generated from the ultimate liquidation of the investment in trading securities.
(See Note 8 to the Consolidated Financial Statements)
INTEREST RATE RISK
Fair value of cash and cash equivalents, receivables, short-term
borrowings, accounts payable, accrued interest and variable-rate long-term debt
approximate their carrying values and are relatively insensitive to changes in
interest rates due to the short-term maturity of the instruments or the variable
nature of underlying interest rates.
At December 31, 2002, the Company's investment portfolio included
fixed income securities totaling $200.6 million. The fair value of these
instruments will increase or decrease as a result of changes in market interest
rates. The Company accounts for these investments as "trading securities" as
defined by SFAS 115. Accordingly, each quarter the Company adjusts the balance
of its portfolio to fair market value, with any resulting adjustment being
charged or credited to income as an unrealized loss or gain and included in
other income. Realized gains and losses resulting from the disposition of such
investments are recorded as income in the period during which such disposition
took place. During 2002, the Company recognized realized and unrealized net
losses totaling $2.0 million in connection with its fixed-income securities
investment portfolio as well as its common stock investments. The Company's
exposure to increase in interest rates that might result in a corresponding
decrease in the fair value of its fixed-income securities investment portfolio
could have an unfavorable effect on the Company's results of operations and cash
flows. For additional information, see Note 8 to the Consolidated Financial
Statements.
The Company attempts to maintain a reasonable balance between fixed
and floating-rate debt in an attempt to keep financing costs as low as possible.
At December 31, 2002, the Company's portfolio of long-term debt included
fixed-rate instruments. Accordingly, the fair value of such instruments may be
relatively sensitive to effects of interest rate fluctuations. In addition, the
fair value of such instruments is also affected by investors' assessments of the
risks associated with industries in which the Company operates as well as the
Company's overall creditworthiness and ability to satisfy such obligations upon
their maturity. However, the Company's sensitivity to interest rate declines and
other market risks that might result in a corresponding increase in the fair
value of its fixed-rate debt portfolio would only have an unfavorable effect on
the Company's result of operations and cash flows to the extent that the Company
elected to repurchase or retire all or a portion of its fixed-rate debt
portfolio at an amount in excess of the corresponding carrying value.
SAFE HARBOR
The Company's quantitative and qualitative disclosures about market
risk include forward-looking statements with respect to management's opinion
about the risk associated with the Company's financial instruments. These
statements are based on certain assumptions with respect to market prices,
interest rates and other industry-specific risk factors. To the extent these
assumptions prove to be inaccurate, future outcomes may differ materially from
those discussed above.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of WHX Corporation
In our opinion, the accompanying Consolidated Balance Sheets and the
related Consolidated Statements of Operations, Cash Flows and of Changes in
Stockholders' Equity and Comprehensive Income present fairly, in all material
respects, the financial position of WHX Corporation and its subsidiaries (the
"Company") at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and the significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2, the Company changed its method of accounting
for goodwill and other intangible assets in fiscal 2002.
As discussed in Notes 3 and 11, on November 16, 2000, the Company's
wholly-owned subsidiary, Wheeling-Pittsburgh Corporation and Subsidiaries filed
for reorganization under Chapter 11 of the Federal Bankruptcy Code and on March
7, 2003, the Pension Benefit Guaranty Corporation announced its intentions to
seek to terminate the WHX Corporation Pension Plan. The bankruptcy filing and
the Pension Benefit Guaranty Corporation action have given rise to a number of
uncertainties relating to environmental obligations, pension and other post
retirement benefit obligations and potential violations of certain debt
agreement covenants.
PricewaterhouseCoopers LLP
New York, New York
April 11, 2003
36
WHX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31
------------------------------------------
2002 2001 2000
----------- ------------- ------------
(in thousands except per share)
Net sales $ 386,393 $ 388,139 $ 1,519,436
Cost of goods sold 318,104 318,670 1,397,715
----------- ----------- -----------
Gross profit 68,289 69,469 121,721
Selling, general and administrative expenses 73,652 74,304 142,596
Restructuring charges 19,994 -- --
----------- ----------- -----------
Income (loss) from operations (25,357) (4,835) (20,875)
----------- ----------- -----------
Other:
Interest expense 27,257 46,969 83,899
Equity in loss of WPC 20,000
Gain on early retirement of debt 42,491 19,011 --
Gain on sale of interest in Wheeling-Downs -- 88,517 --
Other income (expense) (5,988) 11,112 (15,400)
----------- ----------- -----------
Income (loss) from continuing operations before taxes (36,111) 66,836 (120,174)
Tax provision (benefit) (24,115) (28,869) 68,692
----------- ----------- -----------
Income (loss) from continuing operations (11,996) 95,705 (188,866)
----------- ----------- -----------
Discontinued operations:
Income from discontinued operations - net of tax 10,601 5,416 7,821
Gain on sale - net of tax 11,861 -- --
----------- ----------- -----------
22,462 5,416 7,821
----------- ----------- -----------
Income (loss) before cumulative effect of
accounting change 10,466 101,121 (181,045)
Cumulative effect of accounting change (44,000) -- --
----------- ----------- -----------
Net income (loss) (33,534) 101,121 (181,045)
Dividend requirement for preferred stock 19,224 19,329 20,607
----------- ----------- -----------
Net income (loss) applicable to common stock $ (52,758) $ 81,792 $ (201,652)
=========== =========== ===========
Basic per share of common stock
Income (loss) from continuing operations
net of preferred dividends $ (5.86) $ 15.27 $ (43.93)
Discontinued operations 4.22 1.08 1.64
Cumulative effect of accounting change (8.26) -- --
----------- ----------- -----------
Net income (loss) per share applicable to common shares $ (9.90) $ 16.35 $ (42.29)
=========== =========== ===========
Diluted per share of common stock
Income (loss) from continuing operations $ (5.86) $ 9.11 $ (43.93)
Discontinued operations 4.22 0.51 1.64
Cumulative effect of accounting change (8.26) -- --
----------- ----------- -----------
Net income (loss) per share applicable to common shares $ (9.90) $ 9.62 $ (42.29)
=========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
37
WHX CORPORATION
CONSOLIDATED BALANCE SHEETS YEAR ENDED DECEMBER 31
------------------------
2002 2001
---------- ----------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 18,396 $ 7,789
Short term investments 205,275 244,883
Trade receivables, less allowance for doubtful accounts
of $2,307 and $1,564 43,540 45,725
Inventories 68,921 85,279
Other current assets 15,412 10,674
--------- ---------
Total current assets 351,544 394,350
Advances to WPC 7,458 8,369
Note receivable - WPC 31,959 31,005
Property, plant and equipment, at cost less
accumulated depreciation and amortization 107,590 134,923
Goodwill and other intangibles 215,426 256,831
Intangibles - pension asset 40,270 --
Assets held for sale 11,751 --
Assets of discontinued operations -- 107,193
Prepaid pension asset 26,385 33,754
Deferred taxes - non-current 24,315 --
Other non-current assets 17,690 25,025
--------- ---------
$ 834,388 $ 991,450
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 60,172 $ 34,131
Accrued liabilities 20,924 13,278
Short-term debt 107,857 110,946
Restructuring 5,424 --
Deferred income taxes - current 6,432 8,982
Interest payable 2,514 5,504
Payroll and employee benefits 2,776 3,241
--------- ---------
Total current liabilities 206,099 176,082
Long-term debt 249,706 432,454
Deferred income taxes - non current -- 3,227
Other employee benefit liabilities 8,784 8,309
Loss in excess of investment in WPC 60,667 39,374
Liabilities of discontinued operations -- 50,011
Additional minimum pension liability 93,728 --
Other liabilities 1,543 1,089
--------- ---------
620,527 710,546
--------- ---------
Commitments
Stockholders' Equity:
Preferred stock - $.10 par value; authorized 10,000
shares; issued and outstanding: 5,523 and 5,571 shares 552 557
Common stock - $.01 par value; authorized 60,000
shares; issued and outstanding: 5,406 and 5,357 shares 54 54
Accumulated other comprehensive income (loss) (35,775) (2,268)
Additional paid-in capital 556,009 556,006
Accumulated earnings (deficit) (306,979) (273,445)
--------- ---------
213,861 280,904
--------- ---------
$ 834,388 $ 991,450
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38
WHX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31
------------------------------------
2002 2001 2000
--------- --------- ----------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ (33,534) $ 101,121 $(181,045)
Less: Income from discontinued operations 10,601 5,416 7,821
--------- --------- ---------
Net income (loss) from continuing operations and
cumulative effect of an accounting change (44,135) 95,705 (188,866)
Items not affecting cash from operating activities:
Cumulative effect of an accounting change 44,000 -- --
Restructuring charge 5,424 -- --
Depreciation and amortization 22,865 27,861 96,664
Other postretirement benefits 200 108 (7,871)
Gain on early retirement of debt (42,491) (19,011) --
Gain on sale of discontinued operations (18,747) -- --
Deferred income taxes (10,822) (25,428) 72,354
(Gain) loss on asset dispositions 2,576 18 (43)
Gain on sale of interest in Wheeling Downs -- (88,517) --
Pension expense 7,736 4,461 2,090
Equity loss (income) in affiliated companies 20,045 (2,016) (4,086)
Decrease (increase) in working capital elements, net of effect of acquisitions:
Trade receivables 2,185 18,552 5,880
Trade receivables sold -- -- 5,000
Inventories 16,358 33,747 60,208
Short term investments-trading 39,608 (175,564) 590,037
Investment account borrowings (3,089) 110,946 (495,542)
Other current assets (1,623) (72) (8,692)
Other current liabilities 29,989 (10,384) 46,418
Other items-net (4,666) 6,580 14,284
--------- --------- ---------
Net cash provided by (used in) operating activities 65,413 (23,014) 187,835
--------- --------- ---------
Cash flows from investing activities:
Guarantee of WPC DIP Term Note -- -- (33,000)
Net proceeds on sale of discontinued operations 84,869 -- --
Release of restricted cash (DIP) -- 33,000 --
Note receivable - WPC -- (30,453) --
Receipts from/(advances to) WPC 1,250 (8,369) --
Acquisitions (3,057) -- --
Settlement Agreement - WPC -- (32,000) --
Purchase of note receivable -- -- (5,000)
Plant additions and improvements (9,335) (11,924) (114,971)
Short term investments-available for sale -- -- (1,450)
Other investments -- -- 131
Proceeds from sale of interest in Wheeling Downs -- 105,000 --
Proceeds from sales of assets 8,630 5 3,657
Dividends from affiliated companies -- -- 3,750
--------- --------- ---------
Net cash provided by (used in) investing activities 82,357 55,259 (146,883)
--------- --------- ---------
Cash flows from financing activities:
Long-term debt retirements - net (48,193) (61,279) (8,174)
Long-term debt proceeds -- 48,381 --
Cash paid on early extinguishment of debt (87,612) (15,906) --
Short-term borrowings (payments) -- -- 7,796
Consent solicitation fees -- -- (8,538)
Preferred stock dividends -- -- (15,456)
Redemption of equity issues -- -- (686)
Dividends on minority interest in consolidated subsidiaries -- -- (1,731)
--------- --------- ---------
Net cash used in financing activities (135,805) (28,804) (26,789)
--------- --------- ---------
Net cash provided by continuing operations 11,965 3,441 14,163
Net cash (used)/provided by discontinued operations (1,358) (400) (1,329)
Cash and cash equivalents at beginning of year 7,789 4,748 9,626
Effect of deconsolidation of Wheeling-Pittsburgh Corporation -- -- (17,712)
--------- --------- ---------
Cash and cash equivalents at end of year $ 18,396 $ 7,789 $ 4,748
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
WHX CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
Year Ended December 31
2002 2001 2000
---------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------
(Dollars and shares in thousands)
Common Stock
Balance at beginning of year 5,357 $ 54 4,864 $ 49 4,715 $ 47
401(k) contribution -- -- 89 1 147 2
Conversion of preferred shares 49 -- 324 3 -- --
EIP shares -- -- 80 1 2 --
--------------------------------------------------------------------------
Balance at end of year 5,406 54 5,357 54 4,864 49
--------------------------------------------------------------------------
Preferred Stock
Balance at beginning of year 5,571 557 5,883 589 5,883 589
Conversion to common shares (48) (5) (312) (32) -- --
--------------------------------------------------------------------------
Balance at end of year 5,523 552 5,571 557 5,883 589
--------------------------------------------------------------------------
Accumulated Other Comprehensive
Income (Loss)
Balance at beginning of year (2,268) (1,501) 945
Current period change (33,507) (767) (2,446)
--------- --------- ---------
Balance at end of year (35,775) (2,268) (1,501)
--------- --------- ---------
Retained Earnings
Balance at beginning of year (273,445) (374,566) (178,065)
Net income (loss) (33,534) 101,121 (181,045)
Dividends declared to preferred stockholders -- -- (15,456)
--------- --------- ---------
Balance at end of year (306,979) (273,445) (374,566)
--------- --------- ---------
Capital in Excess of Par Value
Balance at beginning of year 556,006 555,576 553,955
EIP shares sold -- -- 76
401(k) contribution -- 401 1,545
Preferred stock conversion 3 29 --
--------- --------- ---------
Balance at end of year 556,009 556,006 555,576
Total Stockholder's Equity $ 213,861 $ 280,904 $ 180,147
========= ========= ==========
Net Income (Loss) $ (33,534) $ 101,121 $(181,045)
Other Comprehensive Income (Loss)
Foreign currency translation adjustment 1,241 (767) (997)
Minimum pension liability adjustment - net of tax (34,748) -- --
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) -- -- (13,614)
Tax benefit (expense) -- -- 4,765
Reclassification of gains to net earnings -- -- 11,383
Tax benefit (expense) -- -- (3,984)
--------- -------- ---------
Comprehensive Income (Loss) $ (67,041) $ 100,354 $(183,492)
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
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
("WPC Group") filed petitions seeking reorganization under Chapter 11 of Title
11 of the United States Bankruptcy Code. (See Note 3 to the Consolidated
Financial Statements). As a result of the Bankruptcy Filing the Company has, as
of November 16, 2000, deconsolidated the balance sheet of WPC. Accordingly, the
accompanying Consolidated Balance Sheets at December 31, 2002 and 2001 do not
include any of the assets or liabilities of WPC. The accompanying Consolidated
Statement of Operations and the Consolidated Statement of Cash Flows exclude the
operating results of WPC for the periods after November 16, 2000. As discussed
in Note 3, the Company agreed to provide additional funds to WPC (subject to
certain conditions) amounting to $20.0 million. As a result of the Company's
probable obligation, the Company has recorded in the year ended December 31,
2002 a charge as Equity in loss of WPC up to the amount of such funding
commitment.
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 for all periods
presented. 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
3 to the Consolidated Financial Statements). WPSC, together with WPC and its
other subsidiaries shall be referred to herein as the "WPC Group." WHX, together
with all of its subsidiaries shall be referred to herein as the "Company," and
the Company and its subsidiaries other than the WPC Group shall be referred to
herein as the "WHX Group."
(See Note 18 to the Consolidated Financial Statements)
USE OF ESTIMATES
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 the
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and on deposit and
highly liquid debt instruments with original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents, receivables,
short-term borrowings, accounts payable, accrued interest, and variable-rate
long-term debt approximate fair value because of the short maturity of those
instruments or the variable nature of underlying interest rates. Short-term
investments are recorded at fair market value based on trading in the public
market. See Note 11 to the Consolidated Financial Statements for a description
of fair value of debt instruments.
41
REVENUE RECOGNITION
Revenue is recognized on the sale of product when the related goods
have been shipped and title has passed to the customer.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in first-out ("LIFO") method for precious metal
inventories. Non-precious metals inventories are stated at the lower of cost
(principally average) or market. For precious metals inventories no segregation
among raw materials, work in process and finished goods is practicable.
PROPERTY, PLANT AND EQUIPMENT
Depreciation of property, plant and equipment is provided
principally on the straight-line method over the estimated useful lives of the
assets, which range as follows: machinery & equipment 3 - 20 years, buildings
and improvements 10 - 50 years. Interest cost is capitalized for qualifying
assets during the assets' acquisition period. Capitalized interest cost is
amortized over the life of the asset. Maintenance and repairs are charged to
income and renewals and betterments are capitalized. Profit or loss on
dispositions is credited or charged to income.
INTANGIBLES AND AMORTIZATION
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002, as discussed in Note 2 to the Consolidated Financial
Statements. As a result, goodwill is no longer amortized, but instead is
reviewed annually for impairment in accordance with the provisions of the
Statement. The evaluation of the recoverability of the unamortized balance of
goodwill is based on a comparison of the respective reporting units fair value
to its carrying value, including allocated goodwill. Fair values were determined
by discounting estimated future cash flows. The recoverability of goodwill will
be impacted if estimated future operating cash flows are not achieved. Purchased
patents are stated at cost, which is amortized over the respective remaining
lives of the patents.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the
intrinsic value method, whereby compensation expense is recorded in amounts
equal to the difference between the exercise price of the stock option and the
fair market value of the underlying stock at the date of the option grant. For
disclosure purposes only, the Company estimates the impact on net income of
applying the fair value method of measuring compensation cost on stock options
with the fair value determined under the minimum value method as provided by
SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
The following table illustrates the effect on net income and
earnings per share if WHX Corporation had applied the fair-value recognition
provisions of SFAS 123 to stock-based employee compensation.
(IN THOUSANDS - EXCEPT PER SHARE DATA)
2002 2001 2000
----------- ----------- ------------
Net income (loss), as reported $ (33,534) $ 101,121 $ (181,045)
Deduct: total stock-based employee
compensation expense determined
under fair-value based method
for all awards 470 1,529 1,700
---------- ----------- -----------
Pro forma net income (loss) $ (34,004) $ 99,592 $ (182,745)
========== =========== ===========
Income (loss) per share:
Basic - as reported $ (9.90) $ 16.35 $ (42.29)
Basic - pro forma (9.99) 16.03 (42.65)
Diluted - as reported (9.90) 9.62 (42.29)
Diluted - pro forma (9.99) 9.47 (42.65)
42
ENVIRONMENTAL MATTERS
The Company accrues for losses associated with environmental
remediation obligations when such losses are probable and reasonably estimable.
Accruals for estimated losses from environmental remediation obligations
generally are recognized no later than completion of the remedial feasibility
study.
Such accruals are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental remediation
obligations are not discounted to their present value. Recoveries of
environmental remediation costs from other parties are recorded as assets when
their receipt is deemed probable.
EARNINGS PER SHARE
Pursuant to SFAS 128, "Earnings per Share," basic earnings per share
is based on the weighted average number of shares of Common Stock outstanding
during each year, excluding redeemable common shares. Diluted earnings per share
gives effect to dilutive potential common shares outstanding during the period.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries have been translated
at current exchange rates, and related revenues and expenses have been
translated at average rates of exchange in effect during the year. Resulting
cumulative translation adjustments have been recorded as a separate component of
accumulated other comprehensive income.
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 2 - ACCOUNTING CHANGES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the 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 will be 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 and has changed
its accounting accordingly effective January 1, 2002. As a result of the
adoption of SFAS 142, the Company did not record amortization expense for
existing goodwill during the year ending December 31, 2002. The Company recorded
amortization expense of $7.4 million and $8.0 million on this goodwill for the
years ended December 31, 2001 and 2000, respectively. Any intangible assets
acquired or goodwill arising from transactions after June 30, 2001 are subject
to the amortization and non-amortization provisions of SFAS 141 and SFAS 142.
The Company recorded a $44.0 million non-cash goodwill impairment charge related
to the H&H Wire Group in the first quarter of 2002. This charge is shown as a
cumulative effect of an accounting change. The Company recorded this charge
43
because the fair value of this reporting unit, as determined by estimated cash
flow projections, was less than the reporting unit's carrying value. The 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, after
deducting preferred dividends, had the non-amortization provisions of SFAS 142
been adopted for all periods presented:
(in thousands)
Year ended December 31,
2002 2001 2000
---------------------------------------
Reported income (loss) before discontinued operations and
cumulative effect of an accounting change $ (31,220) $ 76,376 $ (209,473)
Goodwill amortization -- 7,393 7,998
---------- ----------- -----------
Adjusted income (loss) before discontinued operations and
cumulative effect of an accounting change $ (31,220) $ 83,769 $ (201,475)
========== =========== ===========
Basic per share of common stock:
Reported income (loss) before discontinued operations and
cumulative effect of an accounting change $ (5.86) $ 15.27 $ (43.93)
Goodwill amortization -- 1.48 1.68
---------- ----------- -----------
Adjusted income (loss) before discontinued operations and
cumulative effect of an accounting change $ (5.86) $ 16.75$ (42.25)
========== =========== ===========
Diluted per share of common stock:
Reported income (loss) before discontinued operations and
cumulative effect of an accounting change $ (5.86) $ 9.11 $ (43.93)
Goodwill amortization -- 0.70 1.68
---------- ----------- -----------
Adjusted income (loss) before discontinued operations and
cumulative effect of an accounting change $ (5.86) $ 9.81 $ (42.25)
========== =========== ===========
The changes in the carrying amount of goodwill for the year ended December 31,
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)
Pre acquisition foreign NOL utilized -- (454) -- (454)
Additions -- -- 3,173 3,173
--------- --------- --------- ---------
Balance at December 31, 2002 $ 106,971 $ 60,464 $ 47,150 $ 214,585
========= ========= ========= =========
The $3.2 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 December 31, 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
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.
44
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 for all periods presented in
accordance with SFAS 144. (See Note 4 to the Consolidated Financial Statements).
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 adopted the provisions of SFAS 145 in the
second quarter of 2002 and has changed its accounting accordingly. 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.
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to SFAS No. 123's fair value method of accounting for
stock-based employee compensation. While the Statement does not amend SFAS No.
123 to require companies to account for employee stock options using the fair
value method, the disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS No. 123 or the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure provisions of SFAS 148 and is
currently evaluating whether to adopt the provisions of SFAS No. 148 relating to
the SFAS No. 123 fair value method of accounting for stock-based employee
compensation.
NOTE 3 - 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 their 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 15, 2002, the
Bankruptcy Court approved a motion to amend the DIP Credit Agreement to reduce
45
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 for
revolving loans totaled $135.5 million and $127.2 million at December 31, 2002
and 2001 respectively. Term loans under the DIP Credit Facility totaled $35.2
million and $34.4 million at December 31, 2002 and 2001 respectively. Letters of
credit outstanding under the facility totaled $2.8 million at December 31, 2002.
At December 31, 2002, net availability under the DIP Credit Facility was $25.7
million. The DIP Credit Facility currently expires on the earlier of May 17,
2003 or the completion of a Plan of Reorganization.
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
owns a $32.0 million participation interest in the Term Loan discussed above and
holds other claims against WPC and WPSC totaling approximately $7.4 million. The
recognition of the WPC Group's net loss of $176.6 million, in the year 2000,
eliminated the investment's carrying value of $136.8 million. In November 2000,
WHX recorded a liability of $39.8 million representing the excess of the WPC
Group's loss over the carrying amount of the investment.
During the period November 17, 2000 through December 31, 2002, the
WPC Group incurred cumulative net losses of $271.4 million. Pursuant to the
terms to the amended Plan of Reorganization, WHX has conditionally agreed to
contribute $20.0 million to the WPC Group (see discussion below pertaining to
WHX Contributions). As a result of the Company's probable obligation to fund
$20.0 million to WPC Group, the Company has recorded a $20 million charge as
Equity in loss of WPC in the accompanying Consolidated Statement of Operations.
A Settlement and Release Agreement ("Settlement Agreement") by and
among WPSC, WPC, WHX, and certain affiliates of WPSC, WPC and WHX, received
approval of the United States Bankruptcy Court for the Northern District of Ohio
on May 24, 2001, was entered into on May 25, 2001, and became effective on May
29, 2001.
The Settlement Agreement provided, in part, for (1) the payment by
WHX to WPC of $32 million; (2) the exchange of releases between the WPC Group
and the WHX Group; (3) the acquisition by WHX or its designee of certain assets
of Pittsburgh-Canfield Corporation ("PCC"), plus the assumption of certain trade
payables, subject to certain terms and conditions (WHX recorded $5.4 million as
the fair value of the net assets of PCC.); (4) the termination of the Tax
Sharing Agreements between WHX and WPC; (5) WHX to deliver an agreement to the
WPC Group whereby it agreed not to charge or allocate any pension obligations,
expenses or charges to the WPC Group with respect to the WHX Pension Plan,
subject to certain limitations as provided therein, through and including the
earlier of the effective date of a Plan or Plans of Reorganization and December
31, 2002; and (6) the final settlement of all inter-company receivables and
liabilities between the WHX Group and the WPC Group (except for commercial trade
transactions), including the liability for redeemable stock. Such transactions,
other than the acquisition of certain assets of PCC, all occurred effective May
29, 2001. The acquisition of certain assets of PCC closed on June 29, 2001. The
PCC agreement included a one-year repurchase option for the seller. The
repurchase option expired unexercised on June 29, 2002.
On October 22, 2001, the Bankruptcy Court entered an order ("October
Order"), approving several transactions intended, among other things, to provide
the WPC Group with additional liquidity. As part of the October Order, the
Bankruptcy Court approved a Memorandum of Understanding by and among the
Company, Wheeling-Pittsburgh Corporation ("WPC"), Wheeling-Pittsburgh Steel
Corporation ("WPSC") and the United Steelworkers of America, AFL-CIO-CLC
("USWA"), pursuant to which the Company agreed to provide to WPSC (1) up to $5
million of secured loans and $5 million of liquidity support (part of which
consisted of financing terms) during the period from the Order through January
31, 2002, (2) if certain conditions are met, an additional $2 million of secured
loans (for an aggregate of $7 million) and the maintenance of the $5.0 million
of liquidity support referred to above, during the period from February 1, 2002
through March 31, 2002, (the conditions were not met and accordingly the
additional $2.0 million in secured loans were not made), and (3) a $25 million
contribution to a new WPSC defined benefit pension plan contingent upon, among
other things, a confirmed WPSC Plan of Reorganization (Item 3 has since been
superceded by the WHX Contributions described below). Through December 31, 2002,
WHX had advanced $5.0 million of the loans and up to $5.5 million of financing.
At December 31, 2002, the outstanding balance of these secured advances was $5.0
million plus interest of $0.3 million and $2.1 million, respectively.
46
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 December 31, 2002, the balance outstanding with the State
of West Virginia was $5.0 million, and $7.0 million with the State of Ohio.
On September 23, 2002, WPC announced that the Royal Bank of Canada
("RBC") had filed on its behalf an application with the Emergency Steel Loan
Guarantee Board ("ESLGB") for a $250 million federal loan guarantee. An
affiliate of RBC has agreed to underwrite the loan if the guarantee is granted.
On February 28, 2003, the ESLGB initially rejected the application. WPC and RBC,
however, amended and supplemented the application and it was conditionally
approved on March 26, 2003. The approval of the guaranty is subject to the
satisfaction of various conditions on or before June 30, 2003 including, without
limitation, resolution of the treatment of the WHX Pension Plan that is
acceptable to and approved by the PBGC, confirmation of a plan of reorganization
for the WPC Group, and the execution of definitive agreements satisfactory in
form and substance to the ESLGB.
The amended RBC application contained a business plan that assumed a
confirmed Chapter 11 plan of reorganization ("POR") for the WPC Group. As part
of the POR, the Company has agreed conditionally to make certain contributions
(the "WHX Contributions") to the reorganized company. Under the WHX
contributions, the Company would forgo repayment of its claims against the
debtors of approximately $39 million and, additionally, would contribute to the
reorganized company $20 million of cash, for which the Company would receive a
note in the amount of $10 million. The WHX Contributions would be subject to a
number of conditions including, without limitation, that (1) the POR be
satisfactory to the Company in its sole and absolute discretion, and (2) the
Company's dispute with the PBGC, described below, be resolved to the
satisfaction of the Company in its sole and absolute discretion. As a result of
the Company's probable obligation to fund $20.0 million to WPC, the Company has
recorded a $20.0 million charge as Equity in loss of WPC in the accompanying
Consolidated Statement of Operations.
On March 6, 2003, the Pension Benefit Guaranty Corporation ("PBGC")
issued its Notice of Determination ("Notice") and on March 7, 2003 the PBGC
published its Notice and filed a Summons and Complaint ("Complaint") in United
States District Court for the Southern District of New York seeking the
involuntary termination of the WHX Pension Plan ("WHX Pension Plan"). The PBGC
stated in its Notice that it took this action because of its concern that
"PBGC's possible long-run loss with respect to the WHX Pension Plan may
reasonably be expected to increase unreasonably if the WHX Pension Plan is not
terminated." WHX filed an answer to this complaint on March 27, 2003, contesting
the PBGC's action. The PBGC's action to terminate the WHX Pension Plan was taken
following the initial rejection on February 28, 2003 by the ESLGB of RBC's
application for a $250 million federal loan guaranty. As discussed above, the
ESLGB subsequently conditionally approved the loan. The PBGC has been notified
of the subsequent loan guaranty conditional approval on March 26, 2003. As
described above, obtaining an acceptable resolution of the treatment of the WHX
Pension Plan is a condition to the loan guaranty. If an acceptable resolution is
not obtained on or before June 30, 2003, then a condition to the loan guaranty
will not have been satisfied. If the loan guaranty is not granted it is unlikely
that the present Plan of Reorganization, filed with the Bankruptcy Court on
December 29, 2002, will be confirmed. Furthermore, it is doubtful that an
alternative plan could be confirmed in a reasonable time frame (although WPC
management has indicated that it would attempt to pursue such an alternate
plan). In either case there can be no assurance as to the future of the WPC
Group. In a press release, the PBGC contends that the WHX Plan has roughly $300
million in assets to cover more than $443 million in benefit liabilities
resulting in a funding shortfall of approximately $143 million (without
accounting for plant shutdown benefits). Furthermore, in a press release, the
PBGC contends that plant shutdown liabilities, if they were to occur, could be
as much as $378 million. WHX disputes the PBGC's calculation of liabilities and
shutdown claims since the actual amount of these liabilities may be
substantially less, based on alternative actuarial assumptions. However, there
can be no assurance that WHX's assertions will be accepted. If the PBGC's action
47
is successful and the WHX Plan is terminated, WHX expects that it will be
subject to a claim by the PBGC of at least $143 million. WHX intends to
vigorously defend itself against such claims, but there can be no assurance that
WHX will prevail. If the WHX Pension Plan were terminated, WHX believes it is
unlikely that the present Plan of Reorganization, filed with the Bankruptcy
Court filed on December 29, 2002, will be confirmed. Furthermore, it is doubtful
that an alternative plan could be confirmed in a reasonable time frame (although
WPC management has indicated that it would attempt to pursue such an alternate
plan). In either case there can be no assurance as to the future of the WPC
Group. If a cessation of operations of the WPC Group or 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.
Management of the Company cannot at this time determine with
certainty the ultimate outcome of the Chapter 11 proceedings or the related PBGC
action; however it is possible that the following outcomes could result, whether
upon the confirmation of the Plan of Reorganization as submitted or as it may be
amended or modified, or otherwise:
a) The WPC Group could reorganize, and its creditors could receive a
portion of their claims in cash or in stock of WPC or WPSC. In
such a case, the WHX Group would have little or no future
ownership in or involvement with the WPC Group (except as a
creditor) and the WHX Group's future cash obligations to or on
behalf of the WPC Group would be minimal to none (other than the
WHX Contributions, referred to above).
b) The PGBC could prevail in its actions to terminate the WHX
Pension Plan, which could result in a partial or complete
liquidation of the WPC Group. If such liquidation were to occur,
WHX could be responsible for significant early retirement pension
benefits. In such a case, the PBGC would likely seek to enforce
claims for shutdown liabilities against WHX in addition to the
$143 million claims for accumulated benefit liabilities referred
to above. The PBGC asserts that shutdown claims arising from a
complete liquidation of the WPC Group would result in claims
against WHX as much as $378 million. A shutdown of only a portion
of the WPC Group's facilities would generate shutdown liabilities
in a lower amount. WHX disputes the PGBC's assertion with regard
to each of their claims. If the PGBC were to prevail against the
Company, the PGBC could file a claim against WHX and the other
member of the WHX controlled group in an amount from $143 million
to $521 million, which WHX would be unable to fund.
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,
2003 is estimated to be $314.1 million. WHX has estimated that approximately 85%
of employees and retirees entitled to such OPEB Obligations are represented by
the USWA.
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. If the POR is
confirmed, the Company believes that its liability for the OPEB Obligations
would be eliminated.
NOTE 4 - 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 $18.6 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 the proceeds from the sale
to reduce other corporate debt pursuant to the terms of the Indenture for the
Company's 10 1/2 % Senior Notes.
As a result of the sale, the Consolidated Financial Statements and
related Notes for the periods presented herein reflect Unimast as a discontinued
operation.
48
Operating results of discontinued operations were as follows:
Year ended December 31
2002 (a) 2001 2000
-----------------------------------
(in thousands)
Net sales $ 150,997 $ 232,384 $ 239,276
Operating income 17,652 11,410 14,860
Interest/ other income (expense) (806) (2,442) (2,131)
Income taxes 6,245 3,552 4,908
Net income 10,601 5,416 7,821
(a) Seven month period ended 07/31/2002.
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 5 - BUSINESS RESTRUCTURING CHARGES
During April 2002, the Company's wholly owned subsidiary, Handy &
Harman, decided to exit certain of its precious metal activities. The affected
product lines were manufactured at H&H's Fairfield, CT and East Providence, RI
facilities. The decision to exit these operating activities resulted in a
restructuring charge of $12.0 million. This charge includes $6.6 million in
employee separation expenses (approximately 251 employees, of which 213 were
terminated by January 1, 2003); $0.6 million of contractual obligations, and
$4.8 million in costs to close the facilities, including refining charges for
inventory remaining after operations ceased. In addition, the Company incurred
$1.4 million of incremental costs in the second half of the year to maintain the
employee base in order to fulfill customer orders and complete the shutdown
activities. The Company estimates that an additional $0.2 million of such
incremental costs will be incurred during the first half of 2003. Such costs are
not included in the aforementioned restructuring charge.
As of December 31, 2002, the Company has received $8.5 million for
the sale of certain equipment associated with these facilities. Included in the
Company's Balance Sheet as Assets Held For Sale at December 31, 2002, is $11.8
million related to the Fairfield, CT property. The sale of this property is
expected to occur in 2003.
49
The following table represents the activity of this restructuring
reserve during the year:
Reserve
Balance
Initial Additional Cost December 31,
Reserve Reserve Incurred 2002
------- ---------- --------- ------------
(in thousands)
Employee separation and related costs $ 5,274 $ 1,362 $(5,278) $ 1,358
Facility closing and refining costs 4,326 417 (3,626) 1,117
Contractual obligations 1,100 (475) (488) 137
------- ------- ------- -------
$10,700 $ 1,304 $(9,392) $ 2,612
======= ======= ======= =======
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 charges of $10.9 million, including restructuring charges
of $8.0 million. The components of the $8.0 million restructuring charge are:
$2.8 million in employee separation expenses (approximately 121 employees, of
which 108 were terminated by January 1, 2003), $4.8 million for the write-down
of production supplies and consumables and facility closing costs, and $0.4
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 will incur incremental costs
related to the restructuring in the range of $1.0 million to $1.5 million, above
the aforementioned separation expenses, in the first half 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 incurred accelerated depreciation expense of approximately $3.4 million
on equipment values during the fourth quarter of 2002. Additional employee
separation accruals including the settlement of certain pension obligations will
be made in 2003 in the range of $1.0 million to $1.5 million.
The following table represents the activity of this restructuring
reserve during the year:
Reserve
Balance
Initial Additional Cost December 31,
Reserve Reserve Incurred 2002
------- ---------- -------- ------------
(in thousands)
Employee separation and related costs $ 460 $ 2,310 $(1,573) $ 1,197
Writedown of production supplies and consumables
and related facility closing costs 3,935 898 (3,592) 1,241
Contractual obligations 643 (256) (13) 374
------- ------- ------- -------
$ 5,038 $ 2,952 $(5,178) $ 2,812
======= ======= ======= =======
It is estimated that all of the accrued restructuring costs for the
precious metals and stainless steel wire activities at December 31, 2002, will
be paid by the end of the second quarter 2003.
NOTE 6 - PENSIONS, OTHER POSTRETIREMENT AND POST-EMPLOYMENT BENEFITS
The Company maintains several qualified and non-qualified pension
plans and other postretirement benefit plans covering substantially all of its
employees. The Company's pension, health care benefit and significant defined
contribution plans are discussed below. The Company's other defined contribution
plans are not significant individually or in the aggregate.
50
PENSION PLANS
The Company's defined benefit plan, the WHX Pension Plan, covers
substantially all WHX, H&H and WPC employees. The WHX Pension Plan was
established in May 1998, as a result of the merger of the former Handy & Harman
plans, which covered substantially all H&H employees, and the WPC plan. The WPC
plan, covering most USWA represented employees, was created pursuant to a
collective bargaining agreement ratified on August 12, 1997. Prior to that date,
benefits were provided through a defined contribution plan, the
Wheeling-Pittsburgh Steel Corporation Retirement Security Plan ("Retirement
Security Plan"). The assets of the Retirement Security Plan were merged into the
WPC plan as of December 1, 1997. Under the terms of the WHX Pension Plan, the
benefit formula and provisions for the WPC and H&H participants continued as
they were designed under each of the respective plans prior to the merger.
Pension benefits for the H&H participants included in the WHX
Pension Plan are based on years of services and the amount of compensation at
the time of retirement.
Pension benefits for the WPC participants include both defined
benefit and defined contribution features, since the plan includes the account
balances from the Retirement Security Plan. The gross benefit, before offsets,
is calculated based on years of service and the current benefit multiplier under
the plan. This gross amount is then offset for the benefits payable from the
Retirement Security Plan and benefits payable under by the Pension Benefit
Guaranty Corporation from previously terminated plans. Individual employee
accounts established under the Retirement Security Plan are maintained until
retirement. Upon retirement, participants who are eligible for the WHX Pension
Plan and maintain RSP account balances, will normally receive benefits from the
WHX Pension Plan. When these participants become eligible for benefits under the
Plan, their vested balances in the RSP Plan become assets of the WHX Pension
Plan. Aggregate account balances held in trust in individual employees' accounts
totaled $134.5 million at December 31, 2002. Such individual account balances
can only be utilized to fund all or a portion of the respective individual's
total pension benefit as determined by the defined benefit plan's benefit
formula. These assets cannot be utilized to fund any of the defined benefit
plan's benefit obligation at December 31, 2002.
The Company's funding policy is to contribute annually an amount
that satisfies the minimum funding standards of ERISA.
In 1998, WPC established a supplemental defined benefit plan
covering WPC salaried employees employed as of January 31, 1998, which provides
a guaranteed minimum benefit based on years of service and compensation. The
gross benefit from this plan is offset by the annuitized value of the defined
contribution plan account balance and any benefits payable from the Pension
Benefit Guaranty Corporation from a previously terminated defined benefit
pension plan. This supplemental plan is not funded.
In addition to the WHX Pension Plan, H&H provides pension
coverage for employees of its U.K. subsidiary through a separate plan governed
by U.K. statutory requirements.
51
The following table presents a reconciliation of beginning and ending balances
of the projected benefit obligation.
Domestic Plan Foreign Plan
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in thousands)
Benefit obligation at January 1 $ 314,093 $ 304,485 $ 8,323 $ 7,593
Service cost 6,472 6,142 211 225
Interest cost 23,551 22,447 536 469
Actuarial (gain)/loss 50,051 10,332 192 369
Benefits paid (26,153) (25,771) (203) (109)
Plan amendments - implementation 239 (6,594) -- --
Foreign currency exchange rate changes -- -- 967 (224)
Transfers from DC plans 4,514 3,052 -- --
--------- --------- --------- ---------
Benefit obligation at December 31 $ 372,767 $ 314,093 $ 10,026 $ 8,323
========= ========= ========= =========
The following table presents a reconciliation of beginning and ending balances
of the fair value of plan assets.
Domestic Plan Foreign Plan
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in thousands)
Fair value of plan assets at January 1 $ 319,392 $ 315,631 $ 6,336 $ 7,189
Actual returns on plan assets 6,384 26,480 (1,650) (760)
Benefits paid (26,153) (25,771) (203) (109)
Employer contributions -- -- 315 239
Foreign currency exchange rate changes -- -- 588 (223)
Transfers from DC plans 4,514 3,052 -- --
--------- --------- --------- ---------
Fair value of plan assets at December 31 $ 304,137 $ 319,392 $ 5,386 $ 6,336
========= ========= ========= =========
Funded status $ (68,630) $ (2,316) $ (4,640) $ (1,987)
Unrecognized prior service cost 40,228 45,758 -- --
Unrecognized actuarial (gain)/loss 54,250 (10,148) 5,134 2,405
Unrecognized transition obligation -- -- 43 42
--------- --------- --------- ---------
Net amount recognized $ 25,848 $ 33,294 $ 537 $ 460
========= ========= ========= =========
The following table provides the amount recognized in the consolidated balance
sheets as of December 31:
Domestic Plan Foreign Plan
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands)
Prepaid pension asset $ 25,848 $ 33,294 $ 537 $ 460
Additional minimum liability (89,255) -- (4,473) --
Intangible asset 40,228 -- 42 --
Accumulated other comprehensive income - net of tax 31,868 -- 2,880 --
Deferred tax asset 17,159 -- 1,551 --
-------- -------- -------- --------
$ 25,848 $ 33,294 $ 537 $ 460
======== ======== ======== ========
52
The following table presents the components of net periodic pension cost.
Domestic Plan Foreign Plan
-------------------------------- --------------------------------
2002 2001 2000 2002 2001 2000
-------------------------------- --------------------------------
(In thousands)
Service cost $ 6,472 $ 6,142 $ 5,511 $ 211 $ 225 $ 453
Interest cost 23,551 22,447 21,869 536 469 409
Expected return on plan assets (28,346) (30,386) (29,729) (461) (559) (676)
Amortization of prior service cost 5,769 6,601 6,556 -- -- --
Recognized actuarial (gain)/loss -- (343) (1,623) -- -- --
Amortization of unrecognized transition obligation -- -- -- 4 4 3
-------- -------- -------- -------- -------- --------
$ 7,446 $ 4,461 $ 2,584 $ 290 $ 139 $ 189
======== ======== ======== ======== ======== ========
The following table presents weighted-average assumptions at December 31,
Domestic Plan Foreign Plan
--------------------- ---------------------
2002 2001 2000 2002 2001 2000
--------------------- ---------------------
Discount rate 6.75% 7.25% 7.75% 5.60% 6.25% 6.50%
Expected return on assets (A) 8.50% 9.25% 10.00% 7.00% 8.00% 8.50%
Rate of compensation increase 4.00% 4.00% 4.00% 3.40% 4.50% 4.50%
(A) - used in the determination of subsequent year's net pension expense
As more fully discussed in Note 3, the Pension Benefit Guaranty Corporation
announced its intention on March 7, 2003, to seek to terminate the WHX Pension
Plan. If the PBGC were to prevail and the WHX Pension Plan were terminated the
resulting benefit obligation liability and the funded status of the Plan would
be materially different from the amounts shown above.
In addition to the aforementioned benefit plans, H&H has a non-qualified
pension plan for certain current and retired employees.
The following table presents the amounts recognized in the Consolidated
Balance Sheets for this plan at December 31:
2002 2001
------- -------
(in thousands)
Projected benefit obligation $(1,100) $ (953)
Fair value of assets -- --
------- -------
Funded status (1,100) (953)
Unrecognized prior service cost 255 168
Unrecognized loss (111) 24
------- -------
$ (956) $ (761)
======= =======
401(K) PLANS
The WPC salaried employees participate in a 401(k) defined
contribution plan. WPC matches 50% of the employee's contribution, and through
the date of the WPC bankruptcy (November 16, 2000) such matching contribution
was made with shares of WHX common stock. The employer contribution is limited
to a maximum of 3% of an employee's salary. The amount of such contributions
charged to WPC operations for the period January 1 through November 16, 2000 was
$1.1 million.
Certain H&H employees participate in an H&H sponsored savings plan,
which qualifies under Section 401(k) of the Internal Revenue Code. This savings
plan allows eligible employees to contribute from 1% to 15% of their income on a
53
pretax basis. H&H matches 50% of the first 3% of the employee's contribution.
H&H's contributions are invested in shares of WHX common stock and become
immediately vested. The charge to operations for the Company's matching
contribution amounted to $494,000, $597,000 and $529,000 for the years ending
2002, 2001 and 2000, respectively.
The number of shares of the Company's common stock held by the
401(k) plans was 519,379; 374,249 and 294,289 at December 31, 2002, 2001 and
2000, respectively.
OTHER POSTRETIREMENT BENEFITS
Certain current and retired employees of Handy & Harman are
covered by postretirement medical benefit plans. The benefits provided are for
medical and prescription drugs. Contributions from a majority of the
participants are required and for those retirees and spouses, the Company's
payments are capped.
The following table presents a reconciliation of beginning and
ending balances of the Accumulated Other Postretirement Benefit Obligation
("APBO").
2002 2001
------- -------
(in thousands)
APBO at January 1, $ 7,060 $ 7,987
Service cost 19 26
Interest cost 490 530
Actuarial (gain) loss 83 (575)
Plan amendments 10 --
Benefits paid (658) (908)
Curtailments 403 --
------- -------
APBO at December 31, $ 7,407 $ 7,060
======= =======
The above H&H other post-retirement benefit plans are unfunded.
As a result of the deconsolidation of the WPC Group, the APBO of the WPC
Group is excluded from the WHX Consolidated Financial Statements. See Note 3 to
the Consolidated Financial Statements.
54
The following table presents the weighted average assumptions at December 31,
2002 2001 2000
------ ------ ------
Discount rate 6.75% 7.25% 7.75%
Expected return on assets - - -
Health care cost trend rate 12.00% 8.00% 9.00%
The following table presents the amounts recognized in the Consolidated Balance
Sheets as of December 31.
2002 2001
------- -------
(in thousands)
Funded status $(7,407) $(7,060)
Unrecognized prior service cost (credit) 10 251
Unrecognized actuarial gain (431) (739)
------- -------
Net amount recognized $(7,828) $(7,548)
======= =======
The following table presents the components of net periodic benefit cost.
2002 2001 2000(a)
-------- -------- --------
(in thousands)
Service cost $ 19 $ 26 $ 1,855
Interest cost 490 530 17,753
Expected return on plan assets -- -- --
Amortization of prior service cost 177 178 (3,428)
Amortization of net (gain) (28) (39) --
Recognized acturial gain -- -- (6,282)
Curtailment loss 280 -- --
-------- -------- --------
Net periodic benefit cost $ 938 $ 695 $ 9,898
======== ======== ========
(a) Includes a pro rata portion of the annual WPC amounts to reflect such
amounts through November 16, 2000.
At December 31, 2002, the health care cost trend rate was 12% decreasing to
an ultimate rate of 5% beginning in 2007. A one percentage point increase in
healthcare cost trend rates in each year would increase the accumulated
postretirement benefit obligation as of December 31, 2002 by $110,000 and the
aggregate of the service cost and interest cost components of 2002 annual
expense by $17,000. A one percentage point decrease in healthcare cost trend
rates in each year would decrease the accumulated postretirement benefit
obligation as of December 31, 2002 by $99,000 and the aggregate of the service
cost and interest cost components of 2002 annual expense by $12,000.
55
NOTE 7 - INCOME TAXES
Year ended December 31,
2002 2001 2000
-------- -------- --------
(in thousands)
Income Taxes From Continuing Operations
Current
Federal tax provision $ -- $ -- $ --
State tax provision 1,510 490 2,068
Foreign tax provision 376 771 436
-------- -------- --------
Total income taxes current 1,886 1,261 2,504
-------- -------- --------
Deferred
Federal tax provision (benefit) (26,001) (30,130) 66,188
State tax provision -- -- --
-------- -------- --------
Income tax provision (benefit) $(24,115) $(28,869) $ 68,692
======== ======== ========
Total Income Taxes
Current
Federal tax provision $ -- $ -- $ --
State tax provision 2,359 885 2,521
Foreign tax provision 376 771 436
-------- -------- --------
2,735 1,656 2,957
-------- -------- --------
Deferred
Federal tax provision (benefit) (13,719) (26,973) 70,643
State tax provision -- -- --
-------- -------- --------
Income tax provision (benefit) $(10,984) $(25,317) $ 73,600
======== ======== ========
Components of Total Income Taxes
Continuing operations $(24,115) $(28,869) $ 68,692
Discontinued operations 13,131 3,552 4,908
-------- -------- --------
Income tax provision (benefit) $(10,984) $(25,317) $ 73,600
======== ======== ========
Deferred income taxes result from temporary differences in the financial basis
and tax basis of assets and liabilities. The amounts shown on the following
table represent the total differences between the Company's consolidated tax
return basis of assets and liabilities and the basis for financial reporting.
56
Deferred Income Tax Sources
2002 2001
------- -------
(in millions)
Assets
Postretirement and postemployment employee benefits $ 2.7 $ 2.7
Operating loss carryforwards 28.9 24.7
Minimum tax credit carryforwards (indefinite carryforward) 0.8 0.8
Additional minimum pension liability 18.7 --
Miscellaneous other 1.5 --
------- -------
Deferred Tax Assets $ 52.6 $ 28.2
======= =======
Liabilities
Property plant and equipment $ (12.3) $ (14.0)
Inventory (6.4) (9.0)
Pension (9.1) (11.7)
State income taxes (1.5) (3.0)
Miscellaneous other -- (0.3)
------- -------
Deferred Tax Liability (29.3) (38.0)
------- -------
Valuation Allowance (5.4) (2.4)
------- -------
Net Deferred Income Tax Asset (Liability) $ 17.9 $ (12.2)
======= =======
As a result of the Settlement Agreement (See Note 3 to the
Consolidated Financial Statements) with the WPC Group and the related
termination of the Tax Sharing Agreement, the Company recognized a benefit from
net operating losses of $13.6 million at December 31, 2001, which was previously
fully reserved. In 2002, the Company recognized a tax benefit of $4.5 million
from net operating loss carryforwards of the WPC Group of $12.9 million. Net
operating loss carryforwards of the WPC Group amounting to $410.0 million and
$413.2 million are not reflected in the above table as of December 31, 2002 and
2001, respectively. Alternative Minimum Tax credits of the WPC Group amounting
to $14.5 million are not reflected in the above table as of December 31, 2002
and 2001, respectively.
The WPC Group, for tax return purposes, is consolidated with WHX
and its other subsidiaries. At December 31, 2002, WHX has $477.0 million of net
operating tax loss carryforwards of which $410.0 million pertain to the WPC
Group operations and for which no benefit has been recognized in the
accompanying consolidated financial statements.
The WPC Group operating loss carryforwards expire between 2005 and
2021 and the tax credit carryforwards expire between 2003 and 2010. WHX can
utilize these operating loss and credit carryforwards to reduce future income
tax liabilities, so long as WPC remains a member of the WHX consolidated tax
return. However, management at the present time does not believe that any
benefit from these carryforwards will be realized since the ultimate resolution
of the Bankruptcy Filing cannot be determined.
During 2000, the Company adjusted its tax accounts, the most
significant of which related to the reversal of prior year provisions for taxes
that are deemed no longer required. The total adjustment amounted to $32.9
million of which $7.6 million was credited to goodwill and $25.3 million was
credited to income tax expense.
Deferred income taxes have not been provided on the undistributed
earnings of foreign subsidiaries and other foreign investments carried at
equity. These earnings have been substantially reinvested, and the Company does
not plan to initiate any action that would precipitate the payment of income
taxes thereon.
During 1994, the Company experienced an ownership change as defined
by Section 382 of the Internal Revenue Code. As the result of this event,
pre-change of control net operating losses that can be used to offset
post-change of control pre-tax income will be limited to approximately $32
million in any year. Post-change of control net operating losses do not have an
annual offset limitation.
Total federal and state income taxes paid in 2002, 2001 and 2000 by
continuing operations were $0.2 million, $1.4 million, and $2.8 million,
respectively.
For federal income tax purposes, the statute of limitations for
audit by the Internal Revenue Service ("IRS") is open for years 1999 through
2002. Management believes it has adequately provided for all taxes on income.
The provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income tax rate
to pretax income as follows:
57
Year Ended December 31,
----------------------------------------------
2002 2001 2000
----------------------------------------------
(in thousands)
Income (loss) before taxes and extraordinary item $ (36,111) $ 66,836 $(120,174)
========= ========= =========
Tax provision (benefit) at statutory rate $ (12,639) $ 23,393 $ (42,061)
Increase (decrease) in tax due to:
Equity earnings (34) (89) (1,525)
Equity in loss of WPC 7,000
Goodwill amortization -- 2,289 2,530
Other permanent differences (127) 1,339 --
State income tax net of federal effect 1,510 172 1,344
Change in valuation allowance 3,000 500 133,823
Net effect of foreign tax rate 456 101 (582)
Benefit of current year losses of
non-consolidated subsidiary (WPC) (16,662) (44,388) --
Benefit of net operating loss carryforwards of
non-consolidated subsidiary (WPC) (4,520) -- --
Recognition of AMT credit (1,655) -- --
Recognition of NOLs available due to
termination of WPC Tax Sharing Agreement -- (13,642) --
Adjustment of prior year's tax -- -- (25,288)
Other (444) 1,456 451
--------- --------- ---------
Tax provision (benefit) $ (24,115) $ (28,869) $ 68,692
========= ========= =========
58
NOTE 8 - SHORT TERM INVESTMENTS
The composition of the Company's short-term investments are as follows:
Year Ended December 31,
------------------------
2002 2001
-------- --------
(in thousands)
Trading Securities:
U. S. Treasury Securities $200,625 $130,235
Reverse Repurchase Agreement -- 105,000
Equities 4,650 9,540
Other -- 108
-------- --------
$205,275 $244,883
======== ========
These investments are subject to price volatility associated with
any interest-bearing instrument. Fluctuations in general interest rates affect
the value of these investments.
Net unrealized holding gains and losses on trading securities held
at period end and included in other income for 2002 and 2001 were a loss of $4.9
million and $12.3 million, respectively. At December 31, 2002 and 2001, the
Company had short-term margin borrowings of $107.9 million and $110.9 million,
respectively related to the short-term investments.
In 2000, the Company reclassified $19.6 million of
available-for-sale investments to the trading category and recorded a realized
loss upon the subsequent sale of $13.1 million. As a result of the
reclassification, the Company recorded a favorable reclassification adjustment
within other comprehensive income of $7.2 million, net of related income tax
benefit of $3.9 million.
During the year ended December 31, 2002 and 2001, the Company used
short-term borrowings in connection with its short-term investing activities. At
December 31 2002 and 2001 WHX had short-term borrowings of $107.9 million and
$110.9 million, respectively in support of WHX's short-term investments.
NOTE 9 - INVENTORIES
Year Ended December 31,
-------------------------
2002 2001
-------- --------
(in thousands)
Finished products $ 13,067 $ 17,134
In-process 11,291 13,854
Raw materials 19,925 19,251
Fine and fabricated precious metal in various stages of completion 25,322 36,027
-------- --------
69,605 86,266
LIFO reserve (684) (987)
-------- --------
$ 68,921 $ 85,279
======== ========
During 2002, 2001 and 2000, certain inventory quantities were
reduced, resulting in liquidations of LIFO inventories, the effect of which
increased (decreased) pre-tax income by approximately, $0.2 million, $(0.4)
million, and $(1.2) million in 2002, 2001 and 2000, respectively. The operating
income for 2001 includes a non-cash charge resulting from the lower of cost or
market adjustment to precious metal inventories in the amount of $3.3 million.
Certain customers and suppliers of the H&H Precious Metal Segment
choose to do business on a "pool" basis. That is, to furnish precious metal to
H&H for return in fabricated form (customer metal) or for purchase from or
return to the supplier. When the customer's precious metal is returned in
fabricated form, the customer is charged a fabrication charge. The value of
consigned precious metal is not included in the Company's balance sheet. To the
extent that the quantity of customer and supplier precious metal, as well as
precious metal owned by the Company, does not meet operating needs, the Company
can lease precious metal through its Consignment Facility. At December 31, 2002,
4,675,000 ounces of silver and 6,200 ounces of gold were leased to the Company
under the Consignment Facility. The weighted-average consignment rates under the
Consignment Facility for gold were 2.0% and 2.9% at December 31, 2002 and 2001,
respectively and for silver 2.1% and 5.9% per annum at December 31, 2002 and
59
2001, respectively, based on the market value of the related leased precious
metal.
The following table summarizes customer and leased precious metal
quantities:
Year Ended December 31
--------------------------------------
2002 2001
--------- ---------
Silver ounces:
Customer metal 191,000 1,382,000
Leased 4,675,000 2,700,000
--------- ---------
Total 4,866,000 4,082,000
========= =========
Gold ounces:
Customer metal 4,240 4,200
Leased 6,200 8,600
--------- ---------
Total 10,440 12,800
========= =========
Palladium ounces:
Customer metal 1,171 1,414
========= =========
Supplemental inventory information:
Year Ended December 31
2002 2001
-------------- --------------
(in thousands, except per ounce)
Precious metals stated at LIFO cost $ 24,638 $ 33,739
Market value per ounce:
Silver $ 4.790 $ 4.650
Gold $ 344.80 $ 276.50
Palladium $ 239.00 $ 440.00
NOTE 10 - PROPERTY, PLANT AND EQUIPMENT
Year Ended December 31
--------------------------
2002 2001
-------- --------
(in thousands)
Land $ 9,185 $ 16,105
Buildings, machinery and equipment 126,937 169,948
Construction in progress 5,256 2,450
-------- --------
141,378 188,503
Accumulated depreciation and amortization 33,788 53,580
-------- --------
$107,590 $134,923
======== ========
Depreciation expense for continuing operations for the years 2002, 2001
and 2000 was $20.1 million, $16.3 million, and $16.0 million, respectively.
Included in depreciation expense for 2002 is $3.4 million in accelereated
depreciation on equipment values related to the exit of certain stainless steel
wire activities. (See Note 5 to the Consolidated Financial Statements).
60
NOTE 11 - LONG-TERM DEBT
Year Ended December 31
--------------------------
2002 2001
-------- --------
(IN THOUSANDS)
Senior Notes due 2005, 10 1/2% $110,504 $245,059
Handy & Harman Senior Secured Credit Facility 130,465 168,155
Unimast Revolving Credit Agreement -- 11,045
Other 8,737 8,195
-------- --------
249,706 432,454
Less portion due within one year -- --
-------- --------
Total long-term debt $249,706 $432,454
======== ========
The fair value of long-term debt at December 31, 2002 and 2001 was
$219,321 and $313,524, respectively. Fair value of long-term debt is estimated
based on trading in the public market and current market rates for similar debt
instruments.
Long-term debt maturing in each of the next five years is as
follows: 2003, $11,250; 2004, $22,226; 2005, $135,504; 2006, $80,726; 2007, $0.
The Company has the ability, under its revolving credit facility (see discussion
below) and the intent to refinance on a long-term basis the current portion of
its outstanding indebtedness. Accordingly, the Company has reclassified current
portions of long-term debt amounting to $11.3 million and $10.3 million as
long-term debt as of December 31, 2002 and 2001, respectively.
A summary of the financial agreements at December 31, 2002 follows:
WHX CORPORATION 10 1/2% SENIOR NOTES DUE 2005:
On April 7, 1998, WHX issued $350 million principal amount of 10
1/2% Senior Notes ("Notes"), which replaced privately placed notes of the same
amount. Interest on the Notes is payable semi-annually on April 15 and October
15 of each year, commencing October 15, 1998. The Notes mature on April 15,
2005.
The Notes are redeemable at the option of WHX, in whole or in part,
on or after April 15, 2002 at specified prices, plus accrued interest and
liquidated damages, if any, thereon to the date of redemption.
Upon the occurrence of a Change of Control (as defined), the Company
will be required to make an offer to repurchase all or any part of each holder's
Notes at 101% of the principal amount thereof, plus accrued interest and
liquidated damages, if any, thereon to the date of repurchase.
The Notes are unsecured obligations of WHX, ranking senior in right
of payment to all existing and future subordinated indebtedness of WHX, and pari
passu with all existing and future senior unsecured indebtedness of WHX.
The Notes indenture, dated as of April 7, 1998 ("Indenture"),
contains certain covenants, including, but not limited to, covenants with
respect to: (i) limitations on indebtedness and preferred stock; (ii)
limitations on restricted payments; (iii) limitations on transactions with
affiliates; (iv) limitations on liens; (v) limitations on sales of assets; (vi)
limitations on dividends and other payment restrictions affecting subsidiaries;
and (vii) restrictions on consolidations, mergers and sales of assets.
During 2001, the Company purchased and retired $36.4 million
aggregate principal amount of the Notes in the open market resulting in a gain
of $19.0 million.
During 2002, the Company purchased and retired $134.6 million
aggregate principal amount of Senior Notes in the open market resulting in a
gain of $42.5 million.
During the period January 1, 2003 through March 31, 2003, the
Company purchased and retired $5.7 million aggregate principal amount of Senior
Notes in the open market for $4.5 million
On October 4, 2000, WHX successfully completed a solicitation of
consents from holders of the Notes to amend certain covenants and other
provisions of the Indenture. The amendments are set forth in the Supplemental
Indenture and provide, among other things, for amendments to certain covenants
which restrict the Company's ability to make restricted payments, incur
additional indebtedness, make permitted investments or utilize proceeds from
asset sales. The Supplemental Indenture prohibited the payment of dividends on
the Company's preferred stock until October 1, 2002, at the earliest, and
thereafter only in the event that the Company satisfies certain conditions set
forth in the Indenture, as amended by the Supplemental Indenture. Such
conditions were not satisfied as of December 31, 2002. In addition, the
amendments remove as events of default under the Indenture those relating to
defaults under any mortgage, indenture or instrument by, judgments against and
61
bankruptcy, insolvency and related filings and other events of WPC, or any of
its direct or indirect subsidiaries. Accordingly, the Bankruptcy Filing is not
an event of default under the Notes. In connection with the solicitation WHX
made a payment equal to 2% of the principal amount of the Notes ($20 in cash for
each $1,000 principal amount of Notes) to each holder of Notes whose consent was
received and accepted prior to the expiration date. Such payments amounted to
$5.5 million and will be amortized to interest expense over the remaining term
of the Notes. The PGBC action discussed in Note 3 could lead to an event of
default with respect to the H&H Credit Facilities (see below), which could
result in an event of default under the Notes.
HANDY & Harman Senior Secured Credit Facility
On July 30, 1998, H&H entered into a $300 million Senior Secured
Credit facility ("Facilities") with Citibank, N.A., as agent. The Facilities are
comprised of (i) a $100 million 6-year Revolving Credit Facility, (ii) a $25
million Delayed Draw Term Loan Facility (now expired) (iii) a $50 million 6-year
Term Loan A Facility, and (iv) a $125 million 8-year Term Loan B Facility.
Interest under the Facilities is calculated at a rate determined either using
(i) the Citibank prime rate or (ii) LIBOR, plus the Applicable Margin in effect
from time to time. Applicable Margin means a percentage per annum determined by
reference to the total leverage ratio of H&H. The rates in effect at December
31, 2002 are (a) in the case of the Term A Facility and the Revolving Credit
Facility, calculated at LIBOR + 1.50% and (b) in the case of the Term B
facility, calculated at LIBOR + 2.25%. Borrowings under the Facilities are
collateralized by the pledge of 100% of the capital stock of all H&H's active
U.S. subsidiaries and 65% of the stock of H&H's non-U.S. subsidiaries. In
addition, H&H provided a perfected first priority lien on and security interest
in substantially all the assets of H&H and its subsidiaries. The Facilities have
certain financial covenants restricting indebtedness, liens and 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 2002 and 2001, H&H received capital contributions of $5.0
million and $6.3 million, respectively, from WHX in order to remain in
compliance with certain of these financial covenants. Such funds were utilized
to reduce H&H debt. At December 31, 2002, H&H was in compliance with all
covenants. In April 2002, H&H entered into an interest rate swap to convert $100
million of its variable-rate debt to a fixed rate with Citibank, N.A. New York.
The fixed rate is 4.79%, effective January 1, 2003 with a termination date of
July 1, 2004. At December 31, 2002, the Company has recognized a $4.8 million
unrealized loss on this interest rate swap. In September 2000, H&H entered into
a cancelable interest-rate swap to convert $125 million of its variable-rate
debt to a fixed rate with Citibank, N.A., New York. The fixed rate was 6.75%
percent, effective October 1, 2000, with a termination date of September 30,
2001. Borrowings outstanding under the Facilities at December 31, 2002 totaled
$130.5 million. Letters of credit outstanding under the facilities totaled $24.5
million at December 31, 2002.
As discussed in Note 3, on March 7, 2003, the PBGC published its
Notice and filed a Complaint in the United States District Court for the
Southern District of New York seeking the involuntary termination of the WHX
Pension Plan. On March 11, 2003 H&H informed its lenders that the PBGC
action may be an occurrence that would preclude H&H from making certain
representations to the lenders (as required by the Facilities) in connection
with future borrowings. H&H has elected not to borrow any additional
funds against the Facilities until such time as the PBGC action is resolved.
H&H believes that it has adequate cash on hand, or available from WHX
should the need arise, to meet its operating needs for the next twelve months.
If the PBGC action is upheld and the WHX Pension Plan is terminated, such
termination would constitute an event of default under the Facilities. If
H&H is unable to cure the default or obtain an amendment to the
Facilities, it could lead to a cancellation of the Facilities and an
acceleration of the outstanding borrowings. If the lenders were to accelerate
the obligations under the Facilities it would have a material adverse effect
upon the liquidity, financial position and capital resources of H&H. In
addition the acceleration of the H&H obligations would be an event of
default under WHX's 10 1/2% Senior Notes. Upon the occurrence of an event of
default, the trustee or the holders of 25% in principal amount of the then
outstanding notes could accelerate the 10 1/2% Senior Notes. Any such
acceleration would have a material adverse effect upon the liquidity, financial
position and capital resources of WHX.
RESTRICTED NET ASSETS OF SUBSIDIARIES
As described above the Handy & Harman loan agreement contains
provisions restricting cash payments to WHX. The agreement allows the payment of
management fees, income taxes pursuant to a tax sharing agreement and certain
other expenses. In addition dividends may be paid under certain conditions. At
December 31, 2002, the net assets of H&H amounted to $206.1 million, of which
approximately $1.0 million was not restricted as to the payment of dividends to
WHX.
62
Interest Cost
Aggregate interest costs on debt and amounts capitalized during the three years
ended December 31 are as follows:
2002 2001 2000
------- ------- -------
(in thousands)
Aggregate interest expense $27,257 $46,969 $83,899
Less: Capitalized interest -- -- 4,953
------- ------- -------
Interest expense $27,257 $46,969 $78,946
======= ======= =======
Interest paid $27,358 $45,555 $73,315
======= ======= =======
NOTE 12 - STOCKHOLDERS' EQUITY
The authorized capital stock of WHX consists of 60,000,000 shares of
Common Stock, $.01 par value, of which 5,405,856 shares were outstanding as of
December 31, 2002, and 10,000,000 shares of Preferred Stock, $.10 par value, of
which 2,573,926 shares of Series A Convertible Preferred Stock and 2,949,000
shares of Series B Convertible Preferred Stock were outstanding as of December
31, 2002.
SERIES A CONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE PREFERRED STOCK
In July 1993, the Company issued 3,000,000 shares of Series A
Convertible Preferred Stock for net proceeds of $145 million. On October 4,
2000, pursuant to a solicitation of consents from holders of its 10 1/2% Senior
Notes, certain covenants and other provisions of the indebtedness were amended.
The Supplemental Indenture prohibited the payment of dividends on the Company's
preferred stock until October 1, 2002, at the earliest, and thereafter only in
the event that the Company satisfies certain conditions set forth in the
Indenture, as amended by the Supplemental Indenture. Such conditions were not
satisfied as of December 31, 2002. Dividends on the shares of the Series A
Convertible Preferred Stock are cumulative and are payable quarterly in arrears
on January 1, April 1, July 1 and October 1 of each year, in an amount equal to
$3.25 per share per annum.
Each share of the Series A Convertible Preferred Stock is
convertible at the option of the holder thereof at any time into shares of
Common Stock of the Company, par value $.01 per share, at a conversion rate of
1.0562 shares of Common Stock for each share of Series A Convertible Preferred
Stock, subject to adjustment under certain conditions.
The Series A Convertible Preferred Stock is redeemable at the option
of the Company, in whole or in part, for cash, initially at $52.275 per share
and thereafter at prices declining ratably to $50 per share on and after July 1,
2003, plus in each case accrued and unpaid dividends to the redemption date. The
Series A Convertible Preferred Stock is not entitled to the benefit of any
sinking fund. During 2002 and 2001, 40,300 and 293,599 shares respectively were
converted into Common Stock. There were no conversions in 2000.
The Company issued 3,500,000 shares of Series B Convertible
Preferred Stock in September 1994 for net proceeds of $169.8 million. On October
4, 2000, pursuant to a solicitation of consents from holders of its 10 1/2%
Senior Notes, certain covenants and other provisions of the indebtedness were
amended. The Supplemental Indenture prohibited the payment of dividends on the
Company's preferred stock until October 1, 2002, at the earliest, and thereafter
only in the event that the Company satisfies certain conditions set forth in the
Indenture, as amended by the Supplemental Indenture. Such conditions were not
satisfied as of December 31, 2002. Dividends on the shares of the Series B
Convertible Preferred Stock, are cumulative, and are payable quarterly in
arrears on January 1, April 1, July 1 and October 1 of each year, in an amount
equal to $3.75 per share per annum.
Each share of the Series B Convertible Preferred Stock is
convertible at the option of the holder thereof at any time into shares of
Common Stock of the Company, par value $.01 per share, at a conversion rate of
0.8170 shares of Common Stock for each share of Series B Convertible Preferred
Stock, subject to adjustment under certain conditions.
The Series B Convertible Preferred Stock is redeemable at the option
of the Company, in whole or in part, for cash, initially at $52.625 per share
and thereafter at prices declining ratably to $50 per share on and after October
1, 2004, plus in each case accrued and unpaid dividends to the redemption date.
The Series B Convertible Preferred Stock is not entitled to the benefit of any
sinking fund. During 2002 and 2001, 7,700 and 18,400 shares, respectively were
converted into Common Stock. There were no conversions in 2000.
63
In 2001 and 2000, the Company accrued undeclared dividends in
arrears of $19.3 million and $5.1 million, respectively for Series A and Series
B Convertible Preferred Stock. The undeclared dividends should not have been
accrued and, accordingly, the Company has restated its Consolidated Balance
Sheet, and Statement of Changes in Stockholder's Equity and Comprehensive
Income. For 2001 and 2000, retained earnings has been increased by $24.4 million
and $5.1 million respectively, with a corresponding decrease in liabilities. At
December 31, 2002, dividends in arrears to Series A and Series B Convertible
Preferred Shareholders were $18.8 million and $24.9 million, respectively.
Presently, management believes that it is not likely that the Company will be
able to pay these dividends in the foreseeable future.
REDEEMABLE COMMON STOCK
As of December 31, 2000 certain present and former employees of the
WPC Group hold, 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
Chapter 11 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. As a result of the Settlement Agreement discussed in
Note 3 of the Notes to the Consolidated Financial Statements, the liability for
redeemable common shares was assumed by WPC, accordingly participants will sell
their shares to WPC. The ESOP held approximately 67,000 shares of Common Stock
of WHX at December 31, 2002.
2001 STOCK OPTION PLAN
The WHX Corporation 2001 Stock Option Plan ("2001 Plan"), is
intended to assist the Company in securing and retaining in the employ of the
Company (and any subsidiary to the Company) directors, officers, consultants,
advisors and employees by allowing them to participate in the ownership and the
development and financial success of the Company through the grant of incentive
and non-qualified options (collectively, the "Options"). Incentive stock options
granted under the Option Plan are intended to be "Incentive Stock Options" as
defined by Section 422 of the Code.
An aggregate of 500,000 shares of Common Stock have been reserved
for issuance upon exercise of Options under the 2001 Plan. The 2001 Plan is
administered by a committee ("Committee") consisting of two or more non-employee
members of the Board of Directors. The term of Options granted under the 2001
Plan may not exceed 10 years (five years in the case of an incentive Option
granted to an optionee owning more than 10% of the voting stock of the Company
(a"10% Holder)). The Option price for Options shall not be less than 100% of the
fair market value of the shares of Common Stock at the time the Option is
granted; provided, however, that with respect to an incentive option, in the
case of a 10% Holder, the purchase price per share shall be at least 110% of
such fair market value. The aggregate fair market value of the shares of Common
Stock as to which an optionee may first exercise incentive stock options in any
calendar year may not exceed $100,000. Payment for shares purchased upon
exercise of Options is to be made in cash, but, at the discretion of the
Committee, may be made by delivery of other shares of Common Stock of comparable
value.
1991 STOCK OPTION PLAN
The WHX Corporation Stock Option Plan ("1991 Plan"), as amended, is
intended to assist the Company in securing and retaining key employees by
allowing them to participate in the ownership and growth of the Company through
the grant of incentive and non-qualified options (collectively, the "Options")
to full-time employees of the Company and its subsidiaries. In 2001, the 1991
Plan was amended. This amendment expanded the definition of persons eligible to
receive grants of options under the 1991 Plan to directors, officers,
consultants, advisors and employees of WHX and its subsidiaries. Incentive stock
options granted under the Option Plan are intended to be "Incentive Stock
Options" as defined by Section 422 of the Code.
An aggregate of 1,250,000 shares of Common Stock have been reserved
for issuance upon exercise of Options under the 1991 Plan, as amended. The 1991
Plan is administered by a committee (the "Committee") consisting of not less
than two non-employee members of the Board of Directors. The term of Options
granted under the 1991 Plan may not exceed 15 years (five years in the case of
an incentive Option granted to an optionee owning more than 10% of the voting
stock of the Company (a "10% Holder")). The Option price for Options shall not
be less than 100% of the fair market value of the shares of Common Stock at the
time the Option is granted; provided, however, that with respect to an incentive
option, in the case of a 10% Holder, the purchase price per share shall be at
least 110% of such fair market value. The aggregate fair market value of the
shares of Common Stock as to which an optionee may first exercise incentive
stock options in any calendar year may not exceed $100,000. Payment for shares
64
purchased upon exercise of Options is to be made in cash, but, at the discretion
of the Committee, may be made by delivery of other shares of Common Stock of
comparable value.
DIRECTORS OPTION PLANS
The 1993 Directors D&O Plan ("1993 D&O Plan") is authorized to issue
shares of Common Stock pursuant to the exercise of options with respect to a
maximum of 133,333 shares of Common Stock. The options vest over three years
from the date of grant. The 1997 Directors Stock Option Plan ("1997 D&O Plan")
is authorized to issue an additional 133,333 shares of Common Stock.
OPTION GRANTS TO WPN CORPORATION
On July 29, 1993 ("Approval Date"), the Board of Directors approved
the grant of options to WPN Corp. (See Note 11 to the Consolidated Financial
Statements) to purchase 333,333 shares of Common Stock ("Option Grants"). The
Option Grants were approved by the stockholders on March 31, 1994.
On August 4, 1997 the compensation committee of the Board of
Directors granted an option to purchase 333,333 shares of Common Stock to WPN
Corp, at the then market price per share, subject to stockholder approval. The
Board of Directors approved such grant on September 25, 1997, and the
stockholders approved it on December 1, 1997 (measurement date).
The options under each plan are exercisable with respect to
one-third of the shares of Common Stock issuable upon the exercise thereunder at
any time on or after the date of stockholder approval of the Option Grants. The
options with respect to an additional one-third of the shares of Common Stock
may be exercised on the first and second anniversaries of the Approval Date,
respectively. The options, to the extent not previously exercised, will expire
on April 29, 2003 and August 4, 2007, respectively.
A SUMMARY OF THE OPTION PLANS:
Number of Options
1991 D&O WPN 2001 Prices Weighted Average
Plan Plan Grant Plan Low High Option Price
------------- -------- --------- ------------ ----------------------- ------------------
Balance 01/01/00 909,759 178,889 666,667 -- $18.3750 $49.8750 $ 36.030
Granted 83,333 8,333 -- -- 20.5500 20.6250 20.619
Cancelled (43,814) -- -- -- 26.2500 43.8750 35.070
-------- -------- -------- --------
Balance 12/31/00 949,278 187,222 666,667 -- 18.3750 49.8750 35.730
Granted 95,000 -- -- 366,667 4.8900 4.8900 4.890
Cancelled (104,393) -- -- (10,000) 4.8900 49.8750 39.627
-------- -------- -------- --------
Balance 12/31/01 939,885 187,222 666,667 356,667 4.8900 49.8750 28.602
Granted -- -- -- 86,000 2.3000 2.3000 2.300
Cancelled (132,254) (25,222) -- (65,667) 4.8900 49.8750 25.459
-------- -------- -------- --------
Balance 12/31/02 807,631 162,000 666,667 377,000 2.3000 49.8750 27.805
======== ======== ======== ========
Options outstanding at December 31, 2002, which are exercisable,
totaled 1,773,770 and have a weighted average option price of $30.80. Options
outstanding at December 31, 2002 had a weighted-average remaining life of 4.8
years.
The Company adopted SFAS No. 123, and elected to continue to account
for stock options, under the provisions of APB 25. Therefore, no compensation
costs have been recognized for the stock option plans in 2002, 2001 or 2000. Had
the Company elected to account for stock-based compensation under the provision
of SFAS No. 123 during 2002, the effect on net income would have been an
additional expense of $0.5 million, net of related income tax benefit of $0.2
million or $0.09 per share of Common Stock after deduction of Preferred Stock
Dividends on a basic and diluted basis, respectively. During 2001, the effect on
net income would have been an additional expense of $1.5 million, net of related
income tax benefit of $0.8 million, or $0.32 and $0.15 per share of common stock
after deduction of preferred stock dividends, on a basic and diluted basis,
respectively. During 2000, the effect on net income would have been an
additional expense of $1.7 million, net of related tax benefit of $1.2 million
or $0.36 per share of common stock after deduction of preferred stock dividends
on a basic and diluted basis. The fair value of the option grants is estimated
on the measurement date using the Black-Scholes option-pricing model. The
65
following weighted-average assumptions were used in the Black-Scholes
calculation: expected volatility of 80.4% in 2002, 69.7% in 2001, and 40.6% in
2000; risk-free interest rate of 3.1% in 2002, 4.8% in 2001, and 6.7% in 2000,
an expected life of 5 years and a dividend yield of zero.
EARNINGS PER SHARE
The computation of dilutive earnings per common share in 2001
assumes conversion of preferred stock and redeemable common stock. The
computation of basic earnings per common share is based upon the weighted
average number of shares of Common Stock outstanding. In 2002 and 2000, the
conversion of preferred stock, 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:
Year ended December 31, 2002
Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------------- --------------- ------------
(Dollars and shares in thousands)
Loss from continuing operations $ (11,996)
Less: Preferred stock dividends 19,224
-------------------
Basic EPS and Diluted EPS
Loss available to common stockholders $ (31,220) 5,325 $ (5.86)
=================== =============== ============
The assumed conversion of stock options, preferred stock and
redeemable common stock would have an anti-dilutive effect on earnings per-share
in 2002.
66
Year ended December 31, 2001
Income Shares Per-Share
(Numerator) (Denominator) Amount
------- ------- ------
(Dollars and shares in thousands)
Income from continuing operations $95,705
Less: Preferred stock dividends 19,329
-------
Basic EPS
Income available to common stockholders 76,376 5,004 $15.27
------- ------- ------
Effect of Dilutive Securities
Convertible preferred stock 19,329 5,432
Redeemable common stock -- 72
------- ------
Diluted EPS
Income available to common stockholders
plus assumed conversions $95,705 10,508 $ 9.11
======= ======= ======
Year ended December 31, 2000
Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ----------- ---------
(Dollars and shares in thousands)
Income from continuing operations $(188,866)
Less: Preferred stock dividends 20,607
---------
Basic EPS and Diluted EPS
Loss available to common stockholders $(209,473) 4,768 $(43.93)
========= ========= ========
The assumed conversion of stock options, preferred stock and redeemable
common stock would have an anti-dilutive effect on earnings per-share in 2000.
The assumed conversion of stock options would have an anti-dilutive effect
on earnings per-share in 2001.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments:
Rent expense for continuing operations for the WHX Group in 2002,
2001 and 2000 was $3.0 million, $3.1 million and $2.8 million respectively.
Operating lease and rental commitments for future years are as follows (in
thousands):
2003 $ 2,189
2004 1,574
2005 1,414
2006 1,335
2007 933
2008 and beyond --
---------------
$ 7,445
===============
67
SEC ENFORCEMENT ACTION
On June 25, 1998, the Securities and Exchange Commission ("SEC")
instituted an administrative proceeding against the Company alleging that it had
violated certain SEC rules in connection with the tender offer for Dynamics
Corporation of America ("DCA") commenced on March 31, 1997 through the Company's
wholly-owned subsidiary, SB Acquisition Corp. ("Offer"). Specifically, the Order
Instituting Proceedings ("Order") alleges that, in its initial form, the Offer
violated the "All Holders Rule," Rule 14d-10(a)(1) under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), based on the Company's inclusion of a
"record holder condition" in the Offer. No shareholder had tendered any shares
at the time the condition was removed. The Order further alleges that the
Company violated Rules 14d-4(c) and 14d-6(d) under the Exchange Act upon
expiration of the Offer, by allegedly waiving material conditions to the Offer
without prior notice to shareholders and purchasing the approximately 10.6% of
DCA's outstanding shares tendered pursuant to the offer. The SEC does not claim
that the Offer was intended to or in fact defrauded any investor.
The Order institutes proceedings to determine whether the SEC should
enter an order requiring the Company (a) to cease and desist from committing or
causing any future violation of the rules alleged to have been violated and (b)
to pay approximately $1.3 million in disgorgement of profits. The Company filed
an answer denying any violations and seeking dismissal of the proceeding. On
October 6, 2000, the initial decision of the Administrative Law Judge who heard
the case dismissed all charges against the Company, with the finding that the
Company had not violated the law. The Division of Enforcement has filed a
petition for the SEC to review the decision and a brief, but only as to the All
Holders Rule Claim. The Commission, however, has authority to review any issues
on its own accord. WHX has filed its opposition brief.
PBGC ACTION
On March 6, 2003, the Pension Benefit Guaranty Corporation ("PBGC")
issued its Notice of Determination ("Notice") and on March 7, 2003, the PBGC
published its Notice and filed a Summons and Complaint ("Complaint") in United
States District Court for the Southern District of New York seeking the
involuntary termination of the WHX Pension Plan ("WHX Plan"). The PBGC stated in
its Notice that it took this action because of its concern that "PBGC's possible
long-run loss with respect to the WHX Plan may reasonably be expected to
increase unreasonably if the WHX Plan is not terminated." WHX filed an answer to
this complaint on March 27, 2003, contesting the PBGC's action. The PBGC has
announced that it contends that the WHX Pension Plan has roughly $300 million in
assets to cover more than $443 million in benefit liabilities, resulting in a
funding shortfall of roughly $143 million (without accounting for shutdown
benefits). Furthermore, the PBGC contends that shutdown liabilities of the WHX
Pension Plan, if they were to occur, would exceed $378 million. WHX disputes the
PBGC's calculation of liabilities and shutdown claims since the actual amount of
these liabilities may be substantially less, based on alternative actuarial
assumptions. Furthermore, WHX disputes the PBGC's assumption regarding the
likelihood of large-scale shutdowns at WPC. However, there can be no assurance
that WHX's assumptions will be accepted and that shutdowns would not occur. If
the PBGC's action is successful and the WHX Pension Plan is terminated, the PGBC
could file a claim in an amount from $143 million to $521 million, which WHX
would be unable to fund. WHX intends to vigorously defend itself against such
claims, but there can be no assurance that WHX would prevail.
For additional information concerning these developments, see Item 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 3 and 14 to the Consolidated Financial Statements.
THE WHX GROUP GENERAL LITIGATION
The WHX Group is a party to various litigation matters including
general liability claims covered by insurance. In the opinion of management,
such claims are not expected to have a material adverse effect on the financial
condition or results of operations of the Company. However, it is possible that
the ultimate resolution of such litigation matters and claims could have a
material adverse effect on quarterly or annual operating results when they are
resolved in future periods.
THE WPC GROUP GENERAL LITIGATION
The WPC Group is a party to various litigation matters including
general liability claims covered by insurance. Claims that are "pre-petition"
claims for Chapter 11 purposes will ultimately be handled in accordance with the
terms of a confirmed Plan of Reorganization in Chapter 11 cases. In the opinion
of management, litigation claims are not expected to have a material adverse
effect on the WPC Group's results of operations or its ability to reorganize.
ENVIRONMENTAL MATTERS
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
68
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 $1.7 million, $0.8 million and $3.4 million for 2002, 2001, and
2000, respectively. WPC anticipates spending approximately $18.2 million in the
aggregate on major environmental compliance projects through the year 2005,
estimated to be spent as follows: $3.7 million in 2003, $11.6 million in 2004
and $2.9 million in 2005. However, due to the possibility of unanticipated
factual or regulatory developments and in light of limitations imposed by the
pending Chapter 11 cases, the amount and timing of future expenditures may vary
substantially from such estimates. 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 $18.0
million and $19.0 million at December 31, 2002 and 2001, respectively. 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.
NOTE 14 - RELATED PARTY TRANSACTIONS
The Chairman of the Board of the Company is the president and sole
shareholder of WPN Corp. ("WPN"). Pursuant to a management agreement as amended,
and approved by a majority of the non-management directors of the Company, WPN
provides certain financial, management advisory and consulting services to the
Company. Such services include, among others, identification, evaluation and
negotiation of acquisitions, responsibility for financing matters for the
Company and its subsidiaries, review of annual and quarterly budgets,
supervision and administration, as appropriate, of all the Company's accounting
and financial functions and review and supervision of reporting obligations
under Federal and state securities laws. In exchange for such services, WPN
received a monthly fee of $520,833 in 2002, 2001 and 2000. The management
agreement has a two-year term and is renewable automatically for successive
two-year periods, unless terminated by either party upon 60 days' prior written
notice of the renewal date.
The WPC Group is included in the Company's consolidated federal
income tax return. WHX and the WPC Group had entered into a tax sharing
agreement, dated July 26, 1994, which provided that the WPC Group would be paid
for any reduction in the combined consolidated federal income tax liability
resulting from the utilization or deemed utilization of deductions, losses and
credits whether from current or prior years which are attributable to WPC. The
Tax Sharing Agreement was terminated in 2001 as part of the Settlement
Agreement. As a result, WHX was able to recognize benefits from WPC's net
operating losses (See Note 7 to the Consolidated Financial Statements).
As part of the Settlement Agreement, WHX paid $32.0 million to the
WPC Group in 2001. As a result of the Settlement Agreement, among other things,
all intercompany receivables and liabilities were settled. In addition WHX
acquired the net assets of PCC from the WPC Group.
69
The WPC Group participates in the WHX defined benefit pension plan.
As a result of the Settlement Agreement, WHX may not charge any pension expense
to the WPC Group with respect to the WHX Pension Plan through December 31, 2002.
As a result, WHX incurred non-cash pension expense of approximately $14.0
million and $15.0 million for the WPC Group in 2002 and 2001, respectively. (See
Note 6 to the Consolidated Financial Statements).
On June 1, 2001, WHX purchased from Citibank a $30.5 million
participation in the DIP credit agreement for the WPC Group for which WHX
receives interest at a rate of 13% per annum, paid monthly and an additional
3.0% per annum payment in-kind.
As a result of the October Order, WHX provided the WPC Group with
$5.0 million in financing in 2001. In addition, WHX provided up to $5.0 million
in liquidity support to the WPC Group. At December 31, 2002, the outstanding
balance of these advances was $5.0 million plus interest of $0.3 million, and
$2.1 million, respectively.
On October 9, 2000 and November 14, 2000, WHX transferred precious
metal to WPC with a market value of $35.2 million and a tax basis of a
significantly lower amount. Such proceeds were applied to the WHX net liability
due to WPC. In connection with the precious metal transfer, WPC agreed to amend
the provisions of the tax sharing agreement relating to the utilization, by WHX
of WPC's net operating losses in an amount equal to the tax gain realized on the
sale of such metals. WPC immediately sold the precious metals in the open market
and received proceeds of $35.2 million.
See Note 3 to the Consolidated Financial Statements.
NOTE 15 - OTHER INCOME AND (EXPENSE)
Year Ended December 31,
2002 2001 2000
-------- -------- --------
(in thousands)
Interest and investment income/(loss) $ 5,115 $ (4,411) $(17,198)
Interest rate swap (4,781) -- --
Fixed asset disposal (2,576) -- --
Wheeling-Downs Racing Association, Inc. -- 14,957 10,680
Minority interest expense -- -- (2,171)
WPC -- -- (2,637)
Other, net (3,746) 566 (4,074)
-------- -------- --------
$ (5,988) $ 11,112 $(15,400)
======== ======== ========
WHX Entertainment received management fees from Wheeling-Downs
Racing Association, Inc. of $12.9 million, and $7.7 million in the years ended
December 31, 2001, and 2000, respectively. These fees are included in the above
table as part of the Wheeling-Downs Racing Association, Inc. other income.
NOTE 16 - GAIN ON SALE OF INTEREST IN WHEELING-DOWNS RACING ASSOCIATION, INC.
In December 2001, WHX Entertainment sold its 50% interest in
Wheeling-Downs Racing Association, Inc. for $105.0 million, resulting in an
$88.5 million pre-tax gain.
70
NOTE 17 - GAIN ON EARLY RETIREMENT OF DEBT
Year Ended December 31,
2001 2001 2000
-------- -------- --------
(in thousands)
Discount on early debt retirement $ 46,943 $ 20,525 $ -
Unamortized debt issuance cost (1,729) (592) -
Unamortized consent fee (2,723) (922) -
-------- -------- --------
$ 42,491 $ 19,011 $ -
======== ======== ========
In 2002, the Company purchased and retired $134.6 million aggregate
principal amount of 10 1/2% Senior Notes in the open market resulting in a $42.5
million gain. In 2001, the Company purchased and retired $36.4 million aggregate
principal amount of 10 1/2% Senior Notes in the open market resulting in a $19.0
million gain.
71
NOTE 18 - 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 and 2000 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.
72
The following table presents information about reported segments for the years
ending December 31:
(in thousands)
2002 2001 2000
----------- ----------- -----------
Revenue
Precious Metal $ 142,260 $ 168,308 $ 237,426
Wire & Tubing 132,194 133,621 158,008
Engineered Materials 111,939 86,210 73,412
----------- ----------- -----------
Sub total 386,393 388,139 468,846
WPC Group -- -- 1,050,590
----------- ----------- -----------
Consolidated revenue $ 386,393 $ 388,139 $ 1,519,436
=========== =========== ===========
Segment operating income (loss)
Precious Metal $ (3,536) $ 7,982 $ 22,129
Wire & Tubing (14,071) 3,407 13,862
Engineered Materials 9,624 7,901 7,698
----------- ----------- -----------
Sub total (7,983) 19,290 43,689
WPC Group -- -- (50,035)
----------- ----------- -----------
(7,983) 19,290 (6,346)
Unallocated corporate expenses 17,374 16,732 6,531
Goodwill amortization -- 7,393 7,998
----------- ----------- -----------
Operating income (loss) (25,357) (4,835) (20,875)
Interest expense 27,257 46,969 83,899
Equity in loss of WPC 20,000
Gain on early retirement of debt 42,491 19,011 --
Gain on sale of Wheeling-Downs -- 88,517 --
Other income (expense) (5,988) 11,112 (15,400)
----------- ----------- -----------
Income (loss) before taxes, discontinued operations
and cumulative effect of an accounting change (36,111) 66,836 (120,174)
Income tax expense (benefit) (24,115) (28,869) 68,692
Income from discontinued operations - net of tax 10,601 5,416 7,821
Gain on sale of Unimast - net of tax of $6,886 11,861 -- --
----------- ----------- -----------
Income (loss) before cumulative effect of an
accounting change 10,466 101,121 (181,045)
Cumulative effect of an accounting change - net of tax (44,000) -- --
----------- ----------- -----------
Net income (loss) $ (33,534) $ 101,121 $ (181,045)
=========== =========== ===========
73
The following table presents revenue and long-lived asset information
by geographic area as of and for the years ended December 31:
GEOGRAPHIC INFORMATION
Revenue Long-Lived Assets
(in thousands) 2002 2001 2000 2002 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
United States $ 361,679 $ 364,268 $1,494,315 $ 97,191 $ 125,232 $ 128,091
Foreign 24,714 23,871 25,121 14,186 13,770 13,499
---------- ---------- ---------- ---------- ---------- ----------
$ 386,393 $ 388,139 $1,519,436 $ 111,377 $ 139,002 $ 141,590
========== ========== ========== ========== ========== ==========
Foreign revenue is based on the country in which the legal subsidiary is
domiciled. Revenue from no single foreign country was material to the
consolidated revenues of the Company.
NOTE 19 - QUARTERLY INFORMATION (UNAUDITED)
Financial results by quarter for the two fiscal years ended December 31,
2002 and 2001 are as follows:
Basic
Earnings Basic Diluted
(Loss) Earnings Earnings
Per Share (Loss) (Loss) Per Share (Loss) (Loss)
Operating Discontinued Net From Per Share Per Share
Net Income Operations Income Continuing On Net On Net
Sales (Loss) (net of tax) (Loss) Operations Income Income
-------- -------- -------- -------- ------ ------ ------
(in thousands - except per share)
2002:
1st Quarter $ 92,823 $ 614 $ 1,851 $(19,298)(a) $(4.90) $(4.55) $(1.83)
2nd Quarter 109,159 (4,984) 6,492 7,786 (b) (0.66) 0.57 0.57
3rd Quarter 105,153 (11,236) 14,005(c) (1,364)(d) (3.79) (1.17) 1.17
4th Quarter 79,258 (9,751) 114 (20,658)(e) (4.81) (4.79) (4.79)
2001:
1st Quarter $ 99,654 $ (1,677) $ 672 $(10,194) $(3.29) $(3.15) $(3.15)
2nd Quarter 101,041 (2,327) 2,062 7,783 (f) 0.12 0.54 0.54
3rd Quarter 100,260 1,361 1,614 (4,473) (2.16) (1.84) (1.84)
4th Quarter 87,184 (2,192) 1,068 108,005(g) 19.92 20.13 10.26
(a) Includes $44,000 charge for cumulative effect of an accounting change and
$18,861 gain on early retirement of debt.
(b) Includes $6,955 in restructuring charges and $7,292 gain on early
retirement of debt.
(c) Includes $11,747 gain on sale of discontinued operation.
(d) Includes $3,275 in restructuring charges and $164 gain on early retirement
of debt.
(e) Includes $2,766 in restructuring charges, $1,302 gain on early retirement
of debt and $20,000 Equity in loss of WPC.
(f) Includes $12,358 gain on early retirement of debt.
(g) Includes $88,517 gain on sale of interest in Wheeling-Downs Racing
Association, Inc.
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
NOT APPLICABLE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required under this item is incorporated by reference
to the Company's Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated by reference
to the Company's Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated by reference
to the Company's Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated by reference
to the Company's Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 14. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our Principal Executive Officer ("PEO") and Chief Financial Officer
("CFO") have evaluated WHX Corporation's disclosure controls and procedures, as
defined in the rules of the SEC, within 90 days of the filing date of this
report and have determined that such controls and procedures were effective in
ensuring that material information relating to WHX Corporation and its
consolidated subsidiaries was made known to them during the period covered by
this report.
Internal Controls
75
Our PEO and CFO are primarily responsible for the accuracy of the
financial information that is presented in this report. To meet their
responsibility for financial reporting, they have established internal controls
and procedures, which they believe are adequate to provide reasonable assurance
that WHX Corporation's assets are protected from loss. These internal controls
are reviewed by WHX Corporation's internal auditors in order to monitor
compliance and by our independent accountants to support their audit work. In
addition, our Board's Audit Committee, which is composed entirely of outside
directors, meets regularly with management, internal auditors and the
independent accountants to review accounting, auditing and financial matters.
This committee and the independent accountants have free access to each other,
with or without management being present.
There were no significant changes in WHX Corporation's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the PEO's and CFO's most recent evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 3. EXHIBITS
2.1 Confirmation Order of the United States Bankruptcy Court for the
Western District of Pennsylvania, dated December 18, 1990,
containing the Amended Joint Plan of Reorganization of
Wheeling-Pittsburgh Steel Corporation, dated October 18, 1990, as
modified and approved -- Incorporated herein by reference to Exhibit
2.1 to WPC's Form 8-K filed December 28, 1990.
2.2 Form of Plan and Agreement of Merger, dated as of July 26, 1994
among WPC, WHX and WHEELING-PITTSBURGH STEEL CORPORATION Merger
Co.-- Incorporated herein by reference to Exhibit 2.2. to Company's
Form S-4 Registration Statement (No. 33-53591).
3.1 Certificate of Incorporation of the Company-- Incorporated herein
by reference to Exhibit 3.2 to the Company's Form S-4 Registration
Statement (No. 33-53591).
3.2 Certificate of Designations filed with the Delaware Secretary of
State on September 22, 1994 - - Incorporated herein by reference to
Exhibit 4.3 to the Company's Form S-3 Registration Statement (No.
33-54831).
3.3 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on January 23, 1997.
3.4 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on January 23, 1997 - Incorporated
herein by reference to Exhibit 99.2 to the Form 8-K filed November
11, 1999.
3.5 Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on August 22, 2002.
3.6 Amended and Restated By-Laws of the Company - Incorporated herein
by reference to Exhibit 99.2 to the Form 8-K filed November 11,
1999.
4.1 Indenture ("Senior Note Indenture"), between WPC and Bank One,
Columbus, NA, as Trustee-- Incorporated herein by reference to
Exhibit 4.1 to WPC's Form S-4 Registration Statement (No.
333-43867).
76
4.2 Term Loan Agreement dated as of November 20, 1997 between
Wheeling-Pittsburgh Corporation and DLJ Capital Funding, Inc., as
syndication agent, and the lenders party thereto -- Incorporated
herein by reference to Exhibit 4.2 to the 1997 Form 10-K.
4.3 Amendment No. 1 to Term Loan Agreement dated as of December 31,
1997 between Wheeling-Pittsburgh Corporation and DLJ Capital
Funding, Inc., as syndication agent, and the Lenders party thereto--
Incorporated herein by reference to Exhibit 4.3 to the 1997 Form
10-K.
4.4 Debtor in Possession Credit Agreement dated as of November 17, 2000
among Wheeling-Pittsburgh Corporation, Wheeling-Pittsburgh Steel
Corporation, W-P Steel Venture Corporation, Consumers Mining
Company, W-P Coal Company, Mingo Oxygen Company, Monessen
Southwestern Railway Company, Wheeling-Empire Company and
Pittsburgh-Canfield Corporation, the lenders party thereto and
Citibank, N.A. as initial issuing bank and Citicorp USA, Inc., as
agent.
4.5 Credit Agreement dated as of July 30, 1998 among Handy & Harman,
Handy & Harman of Canada, Limited, Handy & Harman Europe Limited,
Rigby-Maryland (Stainless) Limited and Indiana Tube Danmark A/S and
the Initial Lenders, Initial Issuing Banks and Swing Line Bank named
therein and Citicorp USA, Inc. as collateral agent and
administrative agent. - Incorporated herein by reference to Exhibit
4.11 to the 1998 Form 10-K.
10.1 Form of Key Employee Deferred Compensation Agreement -- Incorporated
herein by reference to Exhibit 10.1 to the 1990 10-K.
10.2 Cooperation Agreement dated February 7, 1984 between the Company and
Nisshin Steel Co., Ltd. --Incorporated herein by reference to
Exhibit 10.24 to the Company's Form S-1 Registration Statement No.
2-89295 as filed with the Securities and Exchange Commission on
February 7, 1984.
10.3 Close Corporation and Shareholder's Agreement effective as of
March 24, 1994, by and among Dong Yang Tinplate America Corp., WPC,
Nittetsu Shoji American, Inc. and Ohio Coatings Company.
10.4 Second Amended and Restated Shareholders Agreement dated as of
November 12, 1990 between the Company and Nisshin Steel Co. Ltd.--
Incorporated herein by reference to Exhibit 10.9 to the 1990 10-K.
10.5 Management Agreement dated as of January 3, 1991 between the Company
and WPN Corp. --Incorporated herein by reference to Exhibit 10.11 to
the 1990 10-K.
10.6 Amendment No. 1 to Management Agreement dated as of January 1, 1993
between the Company and WPN Corp.-- Incorporated herein by reference
to Exhibit 10.8 to the Company's Form S-2 Registration Statement
filed February 23, 1993 (the "February Form S-2"). 10.7 Amendment
No. 2 to Management Agreement dated as of April 11, 1994 between the
Company and WPN Corp.-- Incorporated herein by reference to Exhibit
10.9 to the 1994 Form 10-K.
10.8 Amendment No. 3 to Management Agreement dated as of April 1, 1996
between the Company and WPN Corporation -- Incorporated herein by
reference to Exhibit 10.9 to the 1996 Form 10-K.
10.9 Amendment No. 4 to Management Agreement dated as of April 13, 1998
between the Company and WPN Corporation-- Incorporated herein by
reference to Exhibit 10.9 to the 1998 Form 10-K.
10.10 Amended and Restated 1991 Incentive and Nonqualified Stock Option
Plan - Incorporated herein by reference to Exhibit 4.1 to WHX's Form
S-8 filed July 9, 2001.
10.11 1993 Directors and Non-Employee Officers Stock Option Plan--
Incorporated herein by reference to Exhibit 4.D to WPC's Form S-8
filed April 8, 1994.
10.12 1997 Directors Stock Option Plan-- Incorporated herein by reference
to Exhibit 10.11 to the 1997 Form 10-K.
10.13 2001 Stock Option Plan - Incorporated herein by reference to Exhibit
4.2 to WHX's Form S-8 filed July 9, 2001.
77
10.14 WPN Corp. Stock Option Grant Letter dated July 29, 1993--
Incorporated herein by reference to Exhibit 10.13 to the 1998 Form
10-K.
10.15 WPN Corp. Stock Option Grant Letter dated August 4, 1997--
Incorporated herein by reference to Exhibit 10.12 to the 1997 Form
10-K.
10.17 Agreement dated as of April 23, 1998 by and between the Company and
James G. Bradley. Incorporated herein by reference to Exhibit 10.17
to the 1998 Form 10-K.
10.18 Agreement dated as of April 17, 1998 by and between the Company and
Robert D. LeBlanc. Incorporated herein by reference to Exhibit 10.17
to the 1998 Form 10-K.
10.19 Settlement and Release Agreement, dated as of May 25, 2001, by and
among Wheeling- Pittsburgh Steel Corporation and Wheeling-Pittsburgh
Corporation, WHX Corporation and certain affiliates of WPSC, WPC and
WHX as specified on the signature pages thereto - Incorporated
herein by reference to Exhibit 99.1 to the Form 8-K filed May 30,
2001.
* 10.21 Stock Redemption Agreement dated as of November 16, 2001 by and
among WHX Entertainment Corp., Sportsystems Corporation and Wheeling
Downs Racing Association, Inc.
* 10.22 Stock Purchase Agreement dated as of June 24, 2002 by and between
Worthington Industries, Inc. and WHX Corporation.
21.1 Subsidiaries of Registrant - Incorporated herein by reference to
Exhibit 21.1 to the 1999 Form 10-K.
*23.1 Consent of PricewaterhouseCoopers LLP
99.1 Certification of Principal Executive Officer
99.2 Certification of Principal Financial Officer
(b) Financial Statements:
1. Audited Financial Statements of WHX Corporation (Parent Only).
2. Audited Financial Statements of Wheeling-Pittsburgh Corporation
and Subsidiaries.
(c) Reports on Form 8-K Filed:
October 9, 2002
November 8, 2002
* - filed herewith.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has signed this report by the undersigned,
thereunto duly authorized in the City of New York, State of New York on April
14, 2003.
WHX CORPORATION
By /s/ Neil D. Arnold Date April 14, 2003
----------------------------------
Neil D. Arnold, Vice Chairman
POWER OF ATTORNEY
WHX Corporation and each of the undersigned do hereby appoint Ronald LaBow
and Marvin Olshan, and each of them severally, its or his true and lawful
attorney to execute on behalf of WHX Corporation and the undersigned any and all
amendments to this Annual Report on Form 10-K and to file the same with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission; each of such attorneys shall have the power
to act hereunder with or without the other.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
By /s/ Robert K. Hynes April 14, 2003
------------------------------------------------------------- -------------------------------------
Robert K. Hynes, Chief Financial Officer Date
(Principal Accounting Officer)
By /s/ Ronald LaBow April 14, 2003
------------------------------------------------------------- -------------------------------------
Ronald LaBow, Chairman of the Board Date
By /s/ Neil D. Arnold April 14, 2003
------------------------------------------------------------- -------------------------------------
Neil D. Arnold, Vice Chairman Date
By /s/ Robert A. Davidow April 14, 2003
------------------------------------------------------------- -------------------------------------
Robert A. Davidow, Director Date
By /s/ William Goldsmith April 14, 2003
------------------------------------------------------------- -------------------------------------
William Goldsmith, Director Date
By /s/ Louis Klein Jr. April 14, 2003
------------------------------------------------------------- -------------------------------------
Louis Klein Jr., Director Date
By /s/ Howard Mileaf April 14, 2003
------------------------------------------------------------- -------------------------------------
Howard Mileaf, Director Date
By /s/ Marvin L. Olshan April 14, 2003
------------------------------------------------------------- -------------------------------------
Marvin L. Olshan, Director Date
By /s/ Garen W. Smith April 14, 2003
------------------------------------------------------------- -------------------------------------
Garen W. Smith, Director Date
By /s/ Raymond S. Troubh April 14, 2003
------------------------------------------------------------- -------------------------------------
Raymond S. Troubh, Director Date
79
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350)
I, Neil D. Arnold, certify that:
1. I have reviewed this annual report on Form 10-K of WHX Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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/ Neil D. Arnold
---------------------------
Neil D. Arnold
Vice Chairman
April 14, 2003
80
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 annual report on Form 10-K of WHX Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
I 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 annual
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 annual report
(the "Evaluation Date"); and
c) presented in this annual 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
annual 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
Chief Financial Officer
April 14, 2003
81
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and
Stockholders of WHX Corporation
Our audits of the consolidated financial statements referred to in our report
dated April 11, 2003 appearing in the WHX Corporation 2002 Annual Report on Form
10 K (which report and consolidated financial statements are included in Item 8
of this Form 10 K) also included an audit of the financial statement schedule of
the Condensed Financial Statements of the registrant listed in Item 14(b) (1) of
this Form 10 K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
April 11, 2003
82
WHX CORPORATION (PARENT ONLY)
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31,
---------------------------------------
2002 2001 2000
--------- --------- ---------
(in thousands)
Cost and expenses:
Precious metals - LIFO liquidation $ -- $ 503 $ 3,075
Precious metals - lower of cost or market reserve -- 2,664 --
Depreciation 1,072 1,072 1,072
Management fee income - continuing operations (750) (750) (2,833)
Management fee income - discontinued operations (146) (250) (250)
Pension expense 7,446 4,461 2,584
Pension charge - WPC Group -- -- (2,584)
Administrative and general expense 9,781 11,930 8,414
--------- --------- ---------
Subtotal - expenses 17,403 19,630 9,478
--------- --------- ---------
Interest expense 16,976 30,468 31,251
Gain on sale of interest in Wheeling Downs -- 88,517 --
Gain on sale of discontinued operations - net of tax 11,861 -- --
Equity in earnings of discontinued operations 10,601 5,416 7,821
Equity in earnings of subsidiaries (87,978) 653 (167,948)
Gain on early retirement of debt 42,491 19,011 --
Other income (expense) - net 3,293 5,358 (10,256)
--------- --------- ---------
Income (loss) before taxes (54,111) 68,857 (211,112)
Tax provision (benefit) (20,577) (32,264) (30,067)
--------- --------- ---------
Net income (loss) (33,534) 101,121 (181,045)
Dividend requirement for preferred stock 19,224 19,329 20,607
--------- --------- ---------
Net income (loss) applicable to common stock $ (52,758) $ 81,792 $(201,652)
========= ========= =========
SEE NOTES TO PARENT ONLY FINANCIAL STATEMENTS
83
WHX CORPORATION (PARENT ONLY)
CONSOLIDATED BALANCE SHEETS Year ended December 31,
------------------------
2002 2001
--------- ---------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 1,643 $ 997
Short term investments 205,275 244,883
Receivables 659 387
Inventories 21,999 21,999
Due from Unimast - current 3,204 2,000
Other current assets 2,873 1,074
--------- ---------
Total current assets 235,653 271,340
Investment in and advances to subsidiaries - net 193,103 262,565
Investment in and advances to Unimast -- 57,543
Plant and equipment, at cost less
accumulated depreciation and amortization 7,302 8,361
Intangibles 40,270 --
Prepaid pension asset 25,848 33,294
Deferred charges and other assets 5,172 8,776
Due from Unimast -- 3,204
Deferred income taxes 31,449 4,614
--------- ---------
$ 538,797 $ 649,697
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses $ 5,637 $ 5,579
Short-term debt 107,858 110,946
Deferred income taxes - current 7,209 7,209
--------- ---------
Total current liabilities 120,704 123,734
Long-term debt 110,504 245,059
Additional minimum pension liability 93,728 --
--------- ---------
324,936 368,793
--------- ---------
Stockholders' Equity:
Preferred stock - $.10 par value; authorized 10,000
shares; issued and outstanding: 5,253 and 5,571 shares 552 557
Common stock - $.01 par value; authorized 60,000
shares; issued and outstanding: 5,406 and 5,357 shares 54 54
Accumulated other comprehensive income (loss) (35,775) (2,268)
Additional paid-in capital 556,009 556,006
Accumulated earnings (deficit) (306,979) (273,445)
--------- ---------
213,861 280,904
--------- ---------
$ 538,797 $ 649,697
========= =========
SEE NOTES TO PARENT ONLY FINANCIAL STATEMENTS
84
WHX CORPORATION (PARENT ONLY)
CONSOLIDATED STATEMENT OF CASH FLOWS Year ended December 31,
---------------------------------------
2002 2001 2000
--------- --------- ---------
(in thousands)
Cash Flows From Operating Activities
Net income (loss) $ (33,534) $ 101,121 $(181,045)
Non cash income and expenses
Depreciation and amortization 2,724 4,174 2,582
Income taxes (9,901) (26,324) (18,698)
Equity in (earnings)/loss of subsidiaries - continuing 87,778 (653) 167,948
Equity in earnings of subsidiaries - discontinued (10,601) (4,833) (7,325)
Gain on sale of discontinued operations (18,747) -- --
Gain on sale of interest in Wheeling-Downs -- (88,517) --
Pension expense 7,446 4,460 2,581
Gain on early retirement of debt (42,491) (19,011) --
Decrease/(increase) in working capital elements
Receivables - including affiliated companies (12,131) 2,245 (20,965)
Receivables - Unimast 8,534 5,941 6,665
Inventories -- 22,992 47,453
Other current assets (1,799) 153 (286)
Other current liabilities (2,703) 22,449 (13,651)
Short term investments - trading 39,608 (175,565) 590,037
Investment account borrowings (3,089) 110,946 (495,542)
Other items (net) (3,943) (6,521) (23,505)
--------- --------- ---------
Net cash (used)/provided by operating activities 7,151 (46,943) 56,249
--------- --------- ---------
Cash Flows from Investing Activities
Note receivable - WPC -- (30,453) --
Release of restricted cash - DIP -- 33,000 --
Receipts from/(advances to) WPC 1,250 (8,369) --
Purchase of fixed asset (12) -- --
Settlement of Intercompany balances - WPC -- (32,000) --
Dividend from affiliated companies -- 2,800 --
Guarantee of DIP Term Note -- -- (33,000)
Proceeds from sale of discontinued operations 84,869 -- --
Proceeds from sale of interest in Wheeling-Downs -- 105,000 --
Contribution to Handy & Harman (5,000) (6,300) --
Loan to Unimast -- (48,381) --
Unimast loan repayment -- 48,381 --
--------- --------- ---------
Net cash provided/(used) by investing activities 81,107 63,678 (33,000)
--------- --------- ---------
Cash flows from financing activities
Cash paid on extinguishment of debt (87,612) (15,906) --
Preferred stock dividends -- -- (15,456)
Consent solicitation fees -- -- (8,538)
--------- --------- ---------
Net cash used by financing activities (87,612) (15,906) (23,994)
--------- --------- ---------
Increase/(Decrease) in cash and cash equivalents 646 829 (745)
Cash and cash equivalents at beginning of period 997 168 913
--------- --------- ---------
Cash and cash equivalents at end of period $ 1,643 $ 997 $ 168
========= ========= =========
SEE NOTES TO PARENT ONLY FINANCIAL STATEMENTS
85
NOTES TO WHX PARENT ONLY FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The parent only financial statements include the accounts of all
subsidiary companies accounted for under the equity method of accounting. On
November 16, 2000, Wheeling-Pittsburgh Corporation ("WPC"), a wholly owned
subsidiary of WHX Corporation ("WHX"), and six of its subsidiaries ("the WPC
Group") filed petitions seeking reorganization under Chapter 11 of Title 11 of
the United States Bankruptcy Code. (See Note 2 to the WHX Parent Only Financial
Statements). As a result of the Bankruptcy Filing, the accompanying parent only
statements of operations and statements of cash flows exclude the equity loss of
WPC for the periods after November 16, 2000.
The WHX parent company consists of WHX, WHX Aviation, WHX Metals, WHX
Entertainment, and Wheeling-Pittsburgh Capital Corporation. WHX is a holding
company that has been structured to invest in and/or acquire a diverse group of
businesses on a decentralized basis. Its subsidiary companies are: Handy &
Harman ("H&H"), a diversified manufacturing company whose strategic business
segments encompass specialty wire & tubing, precious metals plating and
fabrication, and engineered materials; and Pittsburgh-Canfield Corporation
("PCC"), a manufacturer of electrogalvanized products used in the construction
and appliance industries. WHX's other business consists of Wheeling-Pittsburgh
Corporation ("WPC") and its subsidiaries including Wheeling-Pittsburgh Steel
Corporation ("WPSC" and together with WPC and its other subsidiaries, the "WPC
Group"), a vertically integrated manufacturer of value-added and flat rolled
steel products. WHX, together with all of its subsidiaries shall be referred to
herein as the "Company."
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 the
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect 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 the
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These WHX Parent Only Financial
Statements should be read in conjunction with the Company's audited Consolidated
Financial Statements contained in this Form 10K for the year ended December 31,
2002.
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 $18.6 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 Parent Only Financial Statements and
related Notes for the periods presented herein reflect Unimast as a discontinued
operation.
Included in the WHX Corporation (Parent Only) Balance Sheet for 2002 and
2001 is $3.2 million and $5.2 million, respectively of notes receivable from
Unimast due to WHX. These amounts earn interest at a variable rate and mature in
March 2003. Interest remitted by Unimast to WHX amounted to $130,000, $463,000
and $603,000 for 2002, 2001 and 2000, respectively. Principal payments amounting
to $2.0 million, $2.0 million and $1.0 million were remitted by Unimast to WHX
in 2002, 2001 and 2000, respectively.
WHX received management fees from Unimast of $146,000, $250,000 and
$250,000 in 2002, 2001, and 2000, respectively.
NOTE 3 - WPC GROUP BANKRUPTCY AND RELATED CONTINGENCIES
86
On November 16, 2000, the WPC Group filed petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Ohio. As a result, subsequent to the commencement of the
Bankruptcy Filing, the WPC Group sought and obtained several orders from the
Bankruptcy Court that were intended to enable the WPC Group to continue business
operations as debtors-in-possession. Since the Petition Date, the WPC Group's
management has been in the process of stabilizing their businesses and
evaluating their operations, while continuing to provide uninterrupted services
to their customers.
On November 17, 2000, the Bankruptcy Court granted the WPC Group's
motion to approve a $290 million Debtor in Possession Credit Agreement ("DIP
Credit Agreement") provided by Citibank, N.A., as initial issuing bank, Citicorp
U.S.A., Inc., as administrative agent, and the DIP Lenders. Pursuant to the DIP
Credit Agreement, Citibank, N.A. made term loan advances to the WPC Group up to
a maximum aggregate principal amount of $35 million. In addition, the DIP
Lenders agreed, subject to certain conditions, to provide the WPC Group with
revolving loans, swing loans and letter of credit accommodations in an aggregate
amount of up to $255 million. On January 2, 2002, the WPC Group requested and
received a reduction in the revolving loans, swing loans and letter of credit to
a maximum aggregate amount of up to $175 million. On November 15, 2002, the
Bankruptcy Court approved a motion to amend the DIP Credit Agreement to reduce
the revolving loans, swing loans and letter of credit to a maximum aggregate of
$160 million and to make certain other related changes to the agreement. In
connection with the Bankruptcy Filing, WHX had guaranteed $30 million of the
term loan portion of the DIP Credit Agreement ("Term Loan") and deposited in a
pledged asset account $33 million of funds in support of such guaranty.
Effective as of June 1, 2001, WHX purchased a participation interest comprising
an undivided interest in the Term Loan in the amount of $30 million, plus
interest accrued but not paid on such amount of the Term Loan through June 1,
2001. Concurrently with such transaction, WHX's guaranty of $30 million of the
Term Loan described above was terminated and the $33 million of funds previously
deposited in a pledged asset account in support of such guaranty were released
to WHX. WHX paid to Citibank $30.5 million of such deposited funds to purchase
WHX's participation interest in the Term Loan.
WPC borrowings outstanding under the DIP Credit Facility for revolving
loans totaled $135.5 million and $127.2 million at December 31, 2002 and 2001
respectively. Term loans under the DIP Credit Facility totaled $35.2 million and
$34.4 million at December 31, 2002 and 2001 respectively. Letters of credit
outstanding under the facility totaled $2.8 million at December 31, 2002. At
December 31, 2002, net availability under the DIP Credit Facility was $25.7
million. The DIP Credit Facility currently expires on the earlier of May 17,
2003 or the completion of a Plan of Reorganization.
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
owns a $32.0 million participation interest in the Term Loan discussed above and
holds other claims against WPC and WPSC totaling approximately $7.4 million. The
recognition of the WPC Group's net loss of $176.6 million, in the year 2000,
eliminated the investment's carrying value of $136.8 million. In November 2000,
WHX recorded a liability of $39.8 million representing the excess of the WPC
Group's loss over the carrying amount of the investment.
During the period November 17, 2000 through December 31, 2002, the WPC
Group incurred cumulative net losses of $271.4 million. Pursuant to the terms to
the amended Plan of Reorganization, WHX has conditionally agreed to contribute
$20.0 million to the WPC Group (see discussion below pertaining to WHX
Contributions). As a result of the Company's probable obligation to fund $20.0
million to WPC Group, the Company has recorded a $20 million charge as Equity in
loss of WPC in the accompanying Consolidated Statement of Operations.
A Settlement and Release Agreement ("Settlement Agreement") by and among
WPSC, WPC, WHX, and certain affiliates of WPSC, WPC and WHX, received approval
of the United States Bankruptcy Court for the Northern District of Ohio on May
24, 2001, was entered into on May 25, 2001, and became effective on May 29,
2001.
The Settlement Agreement provided, in part, for (1) the payment by WHX
to WPC of $32 million; (2) the exchange of releases between the WPC Group and
the WHX Group; (3) the acquisition by WHX or its designee of certain assets of
Pittsburgh-Canfield Corporation ("PCC"), plus the assumption of certain trade
payables, subject to certain terms and conditions (WHX recorded $5.4 million as
the fair value of the net assets of PCC.); (4) the termination of the Tax
Sharing Agreements between WHX and WPC; (5) WHX to deliver an agreement to the
WPC Group whereby it agreed not to charge or allocate any pension obligations,
expenses or charges to the WPC Group with respect to the WHX Pension Plan,
subject to certain limitations as provided therein, through and including the
earlier of the effective date of a Plan or Plans of Reorganization and December
31, 2002; and (6) the final settlement of all inter-company receivables and
liabilities between the WHX Group and the WPC Group (except for commercial trade
transactions), including the liability for redeemable stock. Such transactions,
other than the acquisition of certain assets of PCC, all occurred effective May
29, 2001. The acquisition of certain assets of PCC closed on June 29, 2001. The
PCC agreement included a one-year repurchase option for the seller. The
repurchase option expired unexercised on June 29, 2002.
87
On October 22, 2001, the Bankruptcy Court entered an order ("October
Order"), approving several transactions intended, among other things, to provide
the WPC Group with additional liquidity. As part of the October Order, the
Bankruptcy Court approved a Memorandum of Understanding by and among the
Company, Wheeling-Pittsburgh Corporation ("WPC"), Wheeling-Pittsburgh Steel
Corporation ("WPSC") and the United Steelworkers of America, AFL-CIO-CLC
("USWA"), pursuant to which the Company agreed to provide to WPSC (1) up to $5
million of secured loans and $5 million of liquidity support (part of which
consisted of financing terms) during the period from the Order through January
31, 2002, (2) if certain conditions are met, an additional $2 million of secured
loans (for an aggregate of $7 million) and the maintenance of the $5.0 million
of liquidity support referred to above, during the period from February 1, 2002
through March 31, 2002, (the conditions were not met and accordingly the
additional $2.0 million in secured loans were not made), and (3) a $25 million
contribution to a new WPSC defined benefit pension plan contingent upon, among
other things, a confirmed WPSC Plan of Reorganization (item 3 has since been
superceded by the WHX Contributions described below). Through December 31, 2002,
WHX had advanced $5.0 million of the loans and up to $5.5 million of financing.
At December 31, 2002, the outstanding balance of these secured advances was $5.0
million plus interest of $0.3 million and $2.1 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 December 31, 2002, the balance outstanding with the State of West
Virginia was $5.0 million, and $7.0 million with the State of Ohio.
On September 23, 2002, WPC announced that the Royal Bank of Canada
("RBC") had filed on its behalf an application with the Emergency Steel Loan
Guarantee Board ("ESLGB") for a $250 million federal loan guarantee. An
affiliate of RBC has agreed to underwrite the loan if the guarantee is granted.
On February 28, 2003, the ESLGB initially rejected the application. WPC and RBC,
however, amended and supplemented the application and it was conditionally
approved on March 26, 2003. The approval of the guaranty is subject to the
satisfaction of various conditions on or before June 30, 2003 including, without
limitation, resolution of the treatment of the WHX Pension Plan that is
acceptable to and approved by the PBGC, confirmation of a plan of reorganization
for the WPC Group, and the execution of definitive agreements satisfactory in
form and substance to the ESLGB.
The amended RBC application contained a business plan that assumed a
confirmed Chapter 11 plan of reorganization ("POR") for the WPC Group. As part
of the POR, the Company has agreed conditionally to make certain contributions
(the "WHX Contributions") to the reorganized company. Under the WHX
contributions, The Company would forgo repayment of its claims against the
debtors of approximately $39 million and, additionally, would contribute to the
reorganized company $20 million of cash, for which the Company would receive a
note in the amount of $10 million. The WHX Contributions would be subject to a
number of conditions including, without limitation, that (1) the POR be
satisfactory to the Company in its sole and absolute discretion, and (2) the
Company's dispute with the PBGC, described below, be resolved to the
satisfaction of the Company in its sole and absolute discretion. As a result of
the Company's probable obligation to fund $20.0 million to WPC, the Company has
recorded a $20.0 million charge as Equity in loss of WPC in the accompanying
Consolidated Statement of Operations.
On March 6, 2003, the Pension Benefit Guaranty Corporation ("PBGC")
issued its Notice of Determination ("Notice") and filed a Summons and Complaint
("Complaint") in United States District Court for the Southern District of New
York seeking the involuntary termination of the WHX Pension Plan ("WHX Plan").
The PBGC stated in its Notice that it took this action because of its concern
that "PBGC's possible long-run loss with respect to the WHX Pension Plan may
reasonably be expected to increase unreasonably if the WHX Plan is not
terminated." WHX filed an answer to this complaint on March 25, 2003, contesting
88
the PBGC's action. The PBGC's action to terminate the WHX Pension Plan was taken
following the initial rejection on February 28, 2003 by the ESLGB of RBC's
application for a $250 million federal loan guaranty. As discussed above, the
ESLGB subsequently conditionally approved the loan. The PBGC has been notified
of the subsequent loan guaranty conditional approval on March 26, 2003. As
described above, obtaining an acceptable resolution of the treatment of the WHX
Pension Plan is a condition to the loan guaranty. If an acceptable resolution is
not obtained on or before June 30, 2003, then a condition to the loan guaranty
will not have been satisfied. If the loan guaranty is not granted it is unlikely
that the present Plan of Reorganization, filed with the Bankruptcy Court on
December 29, 2002, will be confirmed. Furthermore, it is doubtful that an
alternative plan could be confirmed in a reasonable time frame (although WPC
management has indicated that it would attempt to pursue such an alternate
plan). In either case there can be no assurance as to the future of the WPC
Group. In a press release, the PBGC contends that the WHX Pension Plan has
roughly $300 million in assets to cover more than $443 million in benefit
liabilities resulting in a funding shortfall of approximately $143 million
(without accounting for plant shutdown benefits). Furthermore, in a press lease,
the PBGC contends that plant shutdown liabilities, could be as much as $378
million. WHX disputes the PBGC's calculation of liabilities and shutdown claims
since the actual amount of these liabilities may be substantially less, based on
alternative actuarial assumptions. However, there can be no assurance that WHX's
assertions will be accepted. If the PBGC's action is successful and the WHX
Pension Plan is terminated, WHX expects that it will be subject to a claim by
the PBGC of at least $143 million. WHX intends to vigorously defend itself
against such claims, but there can be no assurance that WHX would prevail. If
the WHX Pension Plan were terminated, WHX believes it is unlikely that the
present Plan of Reorganization, filed with the Bankruptcy Court filed on
December 29, 2002, will be confirmed. Furthermore, it is doubtful that an
alternative plan could be confirmed in a reasonable time frame (although WPC
management has indicated that it would attempt to pursue such an alternate
plan). In either case there can be no assurance as to the future of the WPC
Group. If a cessation of operations of the WPC Group or 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.
Management of the Company cannot at this time determine with certainty
the ultimate outcome of the Chapter 11 proceedings or the related PBGC action;
however it is possible that the following outcomes could result, whether upon
the confirmation of the Plan of Reorganization as submitted or as it may be
amended or modified, or otherwise:
a) The WPC Group could reorganize, and its creditors could receive a
portion of their claims in cash or in stock of WPC or WPSC. In
such a case, the WHX Group would have little or no future
ownership in or involvement with the WPC Group (except as a
creditor) and the WHX Group's future cash obligations to or on
behalf of thw WPC Group would be minimal to none (other than the
WHX Contributions, referred to above).
b) The PGBC could prevail in its actions to terminate the WHX
Pension Plan, which could result in a partial or complete
liquidation of the WPC Group. If such liquidation were to occur,
WHX could be responsible for significant early retirement pension
benefits. In such a case, the PBGC would likely seek to enforce
claims for shutdown liabilities against WHX in addition to the
$143 million claims for accumulated benefit liabilities referred
to above. The PBGC asserts that shutdown claims arising from a
complete liquidation of the WPC Group would result in claims
against WHX as much as $378 million. A shutdown of only a portion
of the WPC Group's facilities would generate shutdown liabilities
in a lower amount. WHX disputes the PGBC's assertion with regard
to each of their claims. If the PGBC were to prevail against WHX,
the PGBC could file a claim in an amount from $143 million to
$521 million, which WHX would be unable to fund.
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, 2003 is
estimated to be $314.1 million. WHX has estimated that approximately 85% of
employees and retirees entitled to such OPEB Obligations are represented by the
USWA.
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. If the POR is
confirmed, the Company believes that its liability for the OPEB Obligations
would be eliminated.
89
NOTE 4 - SHORT TERM INVESTMENTS
The composition of the Company's short-term inversments are as follows:
Year Ended December 31,
---------------------
2002 2001
-------- --------
(in thousands)
Trading Securities:
U.S. Treasury securities $200,625 $130,235
Reverse Repurchase Agreement -- 105,000
Equities 4,650 9,540
Other -- 108
-------- --------
$205,275 $244,883
======== ========
These investments are subject to price volatility associated with
any interest-bearing instrument. Fluctuations in general interest rates affect
the value of these investments.
Net unrealized holding gains and losses on trading securities held
at period end and included in other income for 2002 and 2001 were a loss of $4.9
million and $12.3 million, respectively. At December 2002 and 2001, the Company
had short-term margin borrowings of $107.9 million and $110.9 million,
respectively related to the short-term investments.
In 2000, the Company reclassified $19.6 million of
available-for-sale investments to the trading category and recorded a realized
loss upon the subsequent sale of $13.1 million. As a result of the
reclassification, the Company recorded a favorable reclassification adjustment
within other comprehensive income of $7.2 million, net of related income tax
benefit of $3.9 million.
During the year ended December 31, 2002 and 2001, the Company
used short-term borrowings in connection with its short-term investing
activities. At December 31 2002 and 2001 WHX had short-term borrowings of $107.9
million and $110.9 million, respectively in support of WHX's short-term
investments
NOTE 5 - INVENTORIES
Year Ended December 31
----------------------
2002 2001
-------- --------
(Dollars in Thousands)
Precious metals $ 23,046 $ 21,842
LIFO reserve (1,047) 157
-------- --------
$ 21,999 $ 21,999
======== ========
Inventories consist of gold and silver, which are currently leased to
Handy & Harman. (See Note 8 to the Notes of the Parent Only Financial
Statements). Inventory consisted of 9,117 ounces of gold and 4,155,000 ounces of
silver at December 31, 2002 and 2001.
During 2001 and 2000, certain inventory quantities were reduced,
resulting in liquidations of LIFO inventories, the effect of which decreased
income by approximately, $0.5 million and $3.0 million in 2001 and 2000,
respectively. A non-cash charge resulting from the lower of cost or market
adjustment to precious metal inventories decreased income by $2.7 million in
2001 and $2.0 million in 1999.
In 2001, $3,000,000 of gold, at fair market value, was contributed to
Handy & Harman.
90
Supplemental inventory information:
Year Ended December 31
---------------------------
2002 2001
----------- -----------
(in thousands, except per ounce)
Precious metals stated at LIFO cost $ 21,999 $ 21,999
Market value per ounce:
Silver $ 4.790 $ 4.650
Gold $ 344.80 $ 276.50
NOTE 6 - INVESTMENT IN AND ADVANCES TO SUBSIDIARIES - NET
The following table details the investments in associated companies, accounted
for under the equity method of accounting.
Year Ended December 31,
------------------------
2002 2001
--------- ---------
(in thousands)
Investment in:
Handy & Harman $ 206,117 $ 270,297
PCC 3,244 747
--------- ---------
209,361 271,044
--------- ---------
Advances to/(Due to):
Handy & Harman 1,175 1,310
PCC 3,822 (9,789)
--------- ---------
4,997 (8,479)
--------- ---------
WPC Group - DIP Agreement 31,959 31,005
WPC Group - Other 7,453 8,369
--------- ---------
39,412 39,374
--------- ---------
Loss in excess of investment in WPC Group (60,667) (39,374)
--------- ---------
Investment in and advances to subsidiaries - net $ 193,103 $ 262,565
========= =========
The Handy & Harman loan agreement contains provisions restricting cash
payments to WHX. The agreement allows the payment of management fees, income
taxes pursuant to tax sharing agreements, and certain other expenses. In
addition dividends may be paid under certain conditions. At December 31, 2002
the net assets of H&H amounted to $206.1 million, of which approximately $1.0
million was not restricted as to the payment of dividends to WHX.
NOTE 7 - LONG-TERM DEBT
Year Ended December 31
------------------------
2002 2001
-------- --------
(IN THOUSANDS)
Senior Notes due 2005, 10 1/2% $110,504 $245,059
======== ========
The fair value of long-term debt at December 31, 2002 and 2001 was
$87,851 and $120,079, respectively. Fair value of long-term debt is estimated
based on trading in the public market.
91
A summary of the financial agreement at December 31, 2002 follows:
WHX CORPORATION 10 1/2% SENIOR NOTES DUE 2005:
On April 7, 1998, WHX issued $350 million principal amount of 10 1/2%
Senior Notes ("Notes"), which replaced privately placed notes of the same
amount. Interest on the Notes is payable semi-annually on April 15 and October
15 of each year, commencing October 15, 1998. The Notes mature on April 15,
2005.
The Notes are redeemable at the option of WHX, in whole or in part, on
or after April 15, 2002 at specified prices, plus accrued interest and
liquidated damages, if any, thereon to the date of redemption.
Upon the occurrence of a Change of Control (as defined), the Company
will be required to make an offer to repurchase all or any part of each holder's
Notes at 101% of the principal amount thereof, plus accrued interest and
liquidated damages, if any, thereon to the date of repurchase.
The Notes are unsecured obligations of WHX, ranking senior in right of
payment to all existing and future subordinated indebtedness of WHX, and pari
passu with all existing and future senior unsecured indebtedness
The Notes indenture, dated as of April 7, 1998 ("Indenture"), contains
certain covenants, including, but not limited to, covenants with respect to: (i)
limitations on indebtedness and preferred stock; (ii) limitations on restricted
payments; (iii) limitations on transactions with affiliates; (iv) limitations on
liens; (v) limitations on sales of assets; (vi) limitations on dividends and
other payment restrictions affecting subsidiaries; and (vii) restrictions on
consolidations, mergers and sales of assets.
During 2001, the Company purchased and retired $36.4 million aggregate
principal amount of the Notes in the open market resulting in a gain of $19.0
million.
During 2002, the Company purchased and retired $134.6 million aggregate
principal amount of Senior Notes in the open market resulting in a gain of $42.5
million.
During the period January 1, 2003 through January 31, 2003, the Company
purchased and retired $5.7 million aggregate principal amount of Senior Notes in
the open market for $4.5 million
On October 4, 2000, WHX successfully completed a solicitation of
consents from holders of the Notes to amend certain covenants and other
provisions of the Indenture. The amendments are set forth in the Supplemental
Indenture and provide, among other things, for amendments to certain covenants
which restrict the Company's ability to make restricted payments, incur
additional indebtedness, make permitted investments or utilize proceeds from
asset sales. The Supplemental Indenture also prohibits the payment of dividends
on the Company's preferred stock until October 1, 2002, and thereafter only in
the event such payments satisfy certain conditions set forth in the Indenture,
as amended by the Supplemental Indenture. Such conditions were not satisfied as
of December 31, 2002. In addition, the amendments remove as events of default
under the Indenture those relating to defaults under any mortgage, indenture or
instrument by, judgments against and bankruptcy, insolvency and related filings
and other events of WPC, or any of its direct or indirect subsidiaries.
Accordingly, the Bankruptcy Filing is not an event of default under the Notes.
In connection with the solicitation WHX made a payment equal to 2% of the
principal amount of the Notes ($20 in cash for each $1,000 principal amount of
Notes) to each holder of Notes whose consent was received and accepted prior to
the expiration date. Such payments amounted to $5.5 million and will be
amortized to interest expense over the remaining term of the Notes.
As discussed in Note 2, on March 7, 2003, the PBGC published its Notice
and filed a Complaint in the United States District Court for the Southern
District of New York seeking to terminate the WHX Corporation Pension Plan ("WHX
Plan"). On March 11, 2003 H&H informed its lenders that the PBGC action may be
an occurrence that would preclude H&H from making certain representations to the
lenders (as required by the Facilities) in connection with future borrowings.
H&H has elected not to borrow any additional funds against the Facilities until
such time as the PBGC action is resolved. H&H believes that it has adequate cash
on hand, or available from WHX should the need arise, to meet its operating
needs for the next twelve months. If the PBGC action is upheld and the WHX
Pension Plan is terminated, such termination would constitute an event of
default under the Facilities. If H&H is unable to cure the default or obtain an
amendment to the Facilities, it could lead to a cancellation of the Facilities
and an acceleration of the outstanding borrowings. If the lenders were to
accelerate the obligations under the Facilities it would have a material adverse
effect upon the liquidity, financial position and capital resources of H&H. In
addition the acceleration of the H&H obligations would be an event of default
under WHX's 10 1/2% Senior Notes. Upon the occurrence of an event of default,
the trustee or the holders of 25% in principal amount of the then outstanding
notes could accelerate the 10 1/2% Senior Notes. Any such acceleration would
have a material adverse effect upon the liquidity, financial position and
capital resources of WHX.
92
Interest Cost
Aggregate interest costs on debt during the three years ended December 31 is as
follows:
2002 2001 2000
------- ------- -------
(in thousands)
Interest expense $16,315 $30,468 $31,251
======= ======= =======
Interest paid $18,236 $27,644 $29,556
======= ======= =======
NOTE 8 - STOCKHOLDERS' EQUITY
The authorized capital stock of WHX consists of 60,000,000 shares of
Common Stock, $.01 par value, of which 5,405,856 shares were outstanding as of
December 31, 2002, and 10,000,000 shares of Preferred Stock, $.10 par value, of
which 2,573,926 shares of Series A Convertible Preferred Stock and 2,949,000
shares of Series B Convertible Preferred Stock were outstanding as of December
31, 2002.
SERIES A CONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE PREFERRED STOCK
In July 1993, the Company issued 3,000,000 shares of Series A
Convertible Preferred Stock for net proceeds of $145 million. On October 4,
2000, pursuant to a solicitation of consents from holders of its 10 1/2% Senior
Notes, certain covenants and other provisions of the indebtedness were amended.
The Supplemental Indenture prohibited the payment of dividends on the Company's
preferred stock until October 1, 2002, at the earliest, and thereafter only in
the event that the Company satisfies certain conditions set forth in the
Indenture, as amended by the Supplemental Indenture. Such conditions were not
satisfied as of December 31, 2002. Dividends on the shares of the Series A
Convertible Preferred Stock are cumulative and are payable quarterly in arrears
on January 1, April 1, July 1 and October 1 of each year, in an amount equal to
$3.25 per share per annum.
Each share of the Series A Convertible Preferred Stock is convertible at
the option of the holder thereof at any time into shares of Common Stock of the
Company, par value $.01 per share, at a conversion rate of 1.0562 shares of
Common Stock for each share of Series A Convertible Preferred Stock, subject to
adjustment under certain conditions.
The Series A Convertible Preferred Stock is redeemable at the option of
the Company, in whole or in part, for cash, initially at $52.275 per share and
thereafter at prices declining ratably to $50 per share on and after July 1,
2003, plus in each case accrued and unpaid dividends to the redemption date. The
Series A Convertible Preferred Stock is not entitled to the benefit of any
sinking fund. During 2002 and 2001, 40,300 and 293,599 shares respectively were
converted into Common Stock. There were no conversions in 2000.
The Company issued 3,500,000 shares of Series B Convertible Preferred
Stock in September 1994 for net proceeds of $169.8 million. On October 4, 2000,
pursuant to a solicitation of consents from holders of its 10 1/2% Senior Notes,
certain covenants and other provisions of the indebtedness were amended. The
Supplemental Indenture prohibited the payment of dividends on the Company's
preferred stock until October 1, 2002, and thereafter only in the event such
payments satisfy certain conditions set forth in the Indenture, as amended by
the Supplemental Indenture. Such conditions were not satisfied as of December
31, 2002. Dividends on the shares of the Series B Convertible Preferred Stock,
are cumulative, and are payable quarterly in arrears on January 1, April 1, July
1 and October 1 of each year, in an amount equal to $3.75 per share per annum.
Each share of the Series B Convertible Preferred Stock is convertible at
the option of the holder thereof at any time into shares of Common Stock of the
Company, par value $.01 per share, at a conversion rate of 0.8170 shares of
Common Stock for each share of Series B Convertible Preferred Stock, subject to
adjustment under certain conditions.
The Series B Convertible Preferred Stock is redeemable at the option of
the Company, in whole or in part, for cash, initially at $52.625 per share and
thereafter at prices declining ratably to $50 per share on and after October 1,
2004, plus in each case accrued and unpaid dividends to the redemption date. The
Series B Convertible Preferred Stock is not entitled to the benefit of any
93
sinking fund. During 2002 and 2001, 7,700 and 18,400 shares, respectively were
converted into Common Stock. There were no conversions in 2000.
In 2001 and 2000, the Company accrued undeclared dividends in arrears of
$19.3 million and $5.1 million, respectively for Series A and Series B
Convertible Preferred Stock. The undeclared dividends should not have been
accrued and, accordingly, the Company has restated its balance sheet and
statement of changes in stockholder's equity. For 2001 and 2000, retained
earnings has been increased by $24.4 million and $5.1 million respectively, with
a corresponding decrease in liabilities. At December 31, 2002, dividends in
arrears to Series A and Series B Convertible Preferred Shareholders were $18.8
million and $24.9 million, respectively. Presently, management believes that it
is not likely that the Company will be able to pay these dividends in the
foreseeable future.
REDEEMABLE COMMON STOCK
As of December 31, 2000 certain present and former employees of the WPC
Group hold, through an Employee Stock Ownership Plan ("ESOP"), 244,507 shares of
common stock of WHX. These employees received such shares as part of the 1991
Chapter 11 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
$15 or, upon qualified retirement, $20 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. As a result of the Settlement
Agreement discussed in Note 2, the liability for redeemable common shares was
assumed by WPC, accordingly participants will sell their shares to WPC.
Approximately 67,000 shares of Common Stock of WHX were held by the ESOP at
December 31, 2002.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Chairman of the Board of WHX Corporation is the president and sole
shareholder of WPN Corp. ("WPN"). Pursuant to a management agreement as amended,
and approved by a majority of the non-management directors of the Company, WPN
provides certain financial, management advisory and consulting services to WHX
Corporation. Such services include, among others, identification, evaluation and
negotiation of acquisitions, responsibility for financing matters for WHX
Corporation and its subsidiaries, review of annual and quarterly budgets,
supervision and administration, as appropriate, of all the Company's accounting
and financial functions and review and supervision of reporting obligations
under Federal and state securities laws. In exchange for such services, WPN
received a monthly fee of $520,833 in 2002, 2001 and 2000. The accompanying
parent only financial statements reflect $2.5 million of this annual amount in
net other income/expense as an offset to investment income/expense. The
management agreement has a two-year term and is renewable automatically for
successive one-year periods, unless terminated by either party upon 60 days'
prior written notice of the renewal date.
The WPC Group is included in the Company's consolidated federal income
tax return. WHX and the WPC Group had entered into a tax sharing agreement,
dated July 26, 1994, which provided that the WPC Group would be paid for any
reduction in the combined consolidated federal income tax liability resulting
from the utilization or deemed utilization of deductions, losses and credits
whether from current or prior years which are attributable to WPC. The Tax
Sharing Agreement was terminated in 2001 as part of the Settlement Agreement. As
a result, WHX was able to recognize benefits from WPC's net operating losses
(See Note 4 to the Consolidated Financial Statements).
As part of the Settlement Agreement, WHX paid $32.0 million to the WPC
Group in 2001. As a result of the Settlement Agreement, among other things, all
intercompany receivables and liabilities were settled. In addition WHX acquired
the net assets of PCC from the WPC Group.
The WPC Group participates in the WHX defined benefit pension plan. As a
result of the Settlement Agreement, WHX may not charge any pension expense to
the WPC Group with respect to the WHX Pension Plan through December 31, 2002. As
a result, WHX incurred non-cash pension expense of approximately $14.0 million
and $15.0 million for the WPC Group in 2002 and 2001, respectively. (See Note 6
to the Consolidated Financial Statements).
On June 1, 2001, WHX purchased from Citibank a $30.5 million
participation in the DIP credit agreement for the WPC Group for which WHX
receives interest at a rate of 13% per annum, paid monthly and an additional
3.0% per annum payment in-kind.
94
As a result of the October Order, WHX provided the WPC Group with $5.0
million in financing in 2001. In addition, WHX provided up to $5.0 million in
liquidity support to the WPC Group. At December 31, 2001, the outstanding
balance of these advances was $5.0 million and $3.4 million liquidity support.
On October 9, 2000 and November 14, 2000, WHX transferred precious metal
to WPC with a market value of $35.2 million and a tax basis of a significantly
lower amount. Such proceeds were applied to the WHX net liability due to WPC. In
connection with the precious metal transfer, WPC agreed to amend the provisions
of the tax sharing agreement relating to the utilization, by WHX of WPC's net
operating losses in an amount equal to the tax gain realized on the sale of such
metals. WPC immediately sold the precious metals in the open market and received
proceeds of $35.2 million.
The parent company charged its wholly-owned subsidiary Handy & Harman a
management fee of $750,000 for 2002, 2001 and 2000. Unimast, now classified as a
discontinued operation, was charged a management fee of $146,000 through July
31, 2002, and $250,000 for each of the years ended December 31, 2001 and 2000.
The WPC Group was charged a management fee of $2,083,000 for 2000.
WHX Entertainment received a management fee from Wheeling-Downs Racing
Association (a 50% owned joint venture) of $12,899,000 and $7,740,000 in 2001
and 2000, respectively. In December 2001, WHX Entertainment sold its 50%
interest in Wheeling-Downs Racing Association.
Handy & Harman is included in WHX Corporation's consolidated tax return.
The Tax Sharing Agreement with Handy & Harman specifies funding requirements to
the parent company "as if" Handy & Harman continued to be an independent
corporation. Estimated income tax payments to the parent company from Handy &
Harman in 2002, 2001 and 2000 amounted to $0; $2,250,000; and $9,063,000
respectively.
Unimast is included in WHX Corporation's consolidated tax return, up to
its sale on July 31, 2002. The Tax Sharing Agreement with Unimast specifies
funding requirements to the parent company as pre-tax income multiplied by the
federal statutory rate. To the extent that this cash payment to the parent
company exceeds or is less than the requirement "as if" Unimast were an
independent corporation, a dividend or capital contribution is recorded by the
parent company. Income tax payments to the parent company from Unimast in 2002,
2001 and 2000 amounted to $6,225,000, $3,228,000 and $4,812,000, respectively.
Included in the parent company only balance sheets is $3,204,000 and
$5,204,000 in 2002 and 2001, respectively of notes receivable from Unimast due
to WHX. These amounts earn interest at a variable rate and mature March 2003.
Interest remitted by Unimast to WHX amounted to $163,000, $463,000, and $603,000
in 2002, 2001 and 2000, respectively. Principal payments amounting to
$2,000,000, $2,000,000 and $1,000,000 in 2002, 2001 and 2000, respectively were
remitted by Unimast to WHX.
On July 31, 1998, Handy & Harman transferred 97,000 ounces of gold and
13,000,000 ounces of silver to WHX by way of an in-kind dividend having an
aggregate fair value, net of deferred tax liabilities, of $62,750,000. WHX in
turn made an in-kind contribution to WHX Metals Corporation, a separate wholly
owned subsidiary of WHX. Handy & Harman will lease from WHX Metals Corporation
amounts of gold and silver as required for its operating needs. Handy & Harman
will pay to WHX Metals Corporation interest on the metal ounces leased. At
December 31, 2002 and December 31, 2001, Handy & Harman was leasing 9,117 ounces
of gold. At December 31, 2002 and December 31, 2001, Handy & Harman was leasing
4,155,000 ounces of silver. The rates for the leasing of gold and silver to
Handy & Harman are 2.0% and 3.0% per annum, respectively. Metal interest charged
to Handy & Harman was $661,000, $753,000 and $2,062,000 for 2002, 2001 and 2000,
respectively.
In 2002, WHX contributed $5,000,000 to Handy & Harman.
In 2001, WHX contributed $3,000,000 in gold, at fair market value, and
$3,300,000 in cash to Handy & Harman. Also in 2001, Handy & Harman paid a
dividend to WHX of $2,800,000.
See Note 2 to the Parent Only Financial Statements.
95
NOTE 10 - OTHER INCOME
Year Ended December 31,
2002 2001 2000
-------- -------- --------
(in thousands)
Interest and investment income/(loss) $ 5,115 $ (4,411) $(17,198)
Interest income - Handy & Harman 661 711 2,009
Wheeling-Downs management fee -- 12,899 7,740
WPN management fee (2,500) (2,500) (2,500)
Gain on sale of aircraft -- -- 932
Other, net 17 (1,341) (1,239)
-------- -------- --------
$ 3,293 $ 5,358 $(10,256)
======== ======== ========
NOTE 11 - GAIN ON SALE OF INTEREST IN WHEELING-DOWNS RACING ASSOCIATION, INC.
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.
NOTE 12 - EQUITY IN EARNINGS (LOSS) OF SUBSIDIARIES
Year ended December 31,
---------------------------------------------
2002 2001 2000
--------- --------- ---------
(in thousands)
Handy & Harman $ (70,474) $ (2,594) $ 6,137
PCC 2,696 747 --
WPC Group (20,000) -- (176,581)
Wheeling-Downs -- 2,500 2,496
--------- --------- ---------
$ (87,778) $ 653 $(167,948)
========= ========= =========
NOTE 13 - MANAGEMENT FEE
The following table details management fees charged to continuing
operations by the parent: [OBJECT OMITTED]
96
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Wheeling-Pittsburgh Corporation
(a wholly-owned subsidiary of WHX Corporation)
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations and of cash flows present fairly,
in all material respects, the financial position of Wheeling-Pittsburgh
Corporation and its subsidiaries (the "Company") at December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern. As discussed in
Note A, on November 16, 2000, the Company filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court in Youngstown, Ohio. Although the Company is continuing its
on-going business operations as a Debtor-in-Possession under the jurisdiction of
the Bankruptcy Court, its ability to continue as a going concern is contingent
upon, among other matters, developing a reorganization plan that is acceptable
to the Bankruptcy Court and the Company's creditors. The approval and
implementation of a reorganization plan could materially change the recorded
amounts and classifications of assets and liabilities. Substantial losses from
operations, liquidity issues, shareholders deficits, and the uncertainty as to
whether the Company will be able to develop an acceptable reorganization plan
raises substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments to the carrying value of the assets or amounts of liabilities that
might be necessary as a consequence of implementing a reorganization plan or any
adjustments relating to the recoverability of assets or liquidation of
liabilities in the ordinary course of business that might result if the Company
is unable to continue as a going concern.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 28, 2003, except as to Note R which is dated as of March 26, 2003
97
WHEELING-PITTSBURGH CORPORATION
Debtor-in-possession as of November 16, 2000
(a wholly-owned subsidiary of WHX Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
-------------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Revenues:
Net sales $ 979,993 $ 835,640 $ 1,119,031
Cost and expenses:
Cost of products sold, excluding depreciation 894,449 866,065 1,054,386
Depreciation 74,194 72,551 78,859
Selling, administrative and general expense 46,993 47,173 68,165
Reorganization and professional fee expense 11,755 14,200 4,140
----------- ----------- -----------
1,027,391 999,989 1,205,550
----------- ----------- -----------
Operating loss (47,398) (164,349) (86,519)
Reorganization income (expense) 1,262 9,249 (2,592)
Interest expense on debt (15,987) (17,448) (35,969)
Other income (expense) 4,567 351 (3,015)
----------- ----------- -----------
Loss before taxes (57,556) (172,197) (128,095)
Tax provision 11 17 90,092
----------- ----------- -----------
Net loss $ (57,567) $ (172,214) $ (218,187)
=========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
98
WHEELING-PITTSBURGH CORPORATION
Debtor-in-possession as of November 16, 2000
(a wholly-owned subsidiary of WHX Corporation)
CONSOLIDATED BALANCE SHEET
December 31,
-----------------------------
2002 2001
---- ----
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 8,543 $ 7,586
Trade receivables, less allowance for doubtful
accounts of $1,314 and $1,274 130,593 106,462
Inventories 184,091 173,117
Prepaid expenses and deferred charges 7,477 8,902
----------- -----------
Total current assets 330,704 296,067
Investment in associated companies 60,767 58,650
Property, plant and equipment, at cost less
accumulated depreciation 530,568 593,888
Deferred income tax benefits 27,342 28,881
Deferred charges and other assets 9,735 13,379
----------- -----------
$ 959,116 $ 990,865
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade payables $ 71,048 $ 60,342
Short term debt 135,490 127,204
Payroll and employee benefits payable 36,339 26,273
Accrued federal, state and local taxes 8,839 7,697
Deferred income tax liabilities 27,342 28,881
Accrued interest and other liabilities 8,326 5,513
Long-term debt due in one year 43,575 40,344
----------- -----------
Total current liabilities 330,959 296,254
Long-term debt 13,177 --
Other employee benefit liabilities 15,514 13,711
Other liabilities 20,336 19,386
Liabilities subject to compromise 890,301 915,118
----------- -----------
Total liabilities 1,270,287 1,244,469
----------- -----------
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock - $.01 Par value; 100 shares
issued and outstanding -- --
Additional paid-in capital 335,138 335,138
Accumulated deficit (646,309) (588,742)
----------- -----------
(311,171) (253,604)
----------- -----------
$ 959,116 $ 990,865
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
99
WHEELING-PITTSBURGH CORPORATION
DEBTOR-IN-POSSESSION AS OF NOVEMBER 16, 2000
(A WHOLLY-OWNED SUBSIDIARY OF WHX CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Cash flows from operating activities:
Net loss $ (57,567) $(172,214) $(218,187)
Items not affecting cash from operating activities:
Depreciation 74,194 72,551 78,859
Other postretirement benefits (10,708) (9,025) (9,494)
Deferred income taxes -- -- 90,010
Pension expense -- 860 2,581
Equity income of affiliated companies (3,882) (1,274) (1,810)
Reorganization expense (income) (1,262) (9,249) 2,592
Decrease (increase) from working capital elements:
Trade receivables (24,131) 21,206 27,309
Trade receivables sold (purchased) -- -- (100,000)
Inventories (10,974) 36,705 41,029
Trade payables 10,706 7,251 69,191
Other current assets 1,425 9,824 (14,441)
Other current liabilities 12,483 (9,019) (18,291)
Other items--net (6,135) 2,732 35,431
--------- --------- ---------
Net cash used in operating activities (15,851) (49,652) (15,221)
--------- --------- ---------
Cash flows from investing activities:
Plant additions and improvements (10,971) (5,033) (97,287)
Payments from affiliates -- 1,031 131
Proceeds from sales of assets due to Chapter 11 proceedings 1,320 16,808 2,967
Dividends from affiliated companies 1,765 3,750 3,750
--------- --------- ---------
Net cash provided by (used in) investing activities (7,886) 16,556 (90,439)
--------- --------- ---------
Cash flows from financing activities:
Long-term debt borrowings 16,408 5,253 37,582
Short term debt (DIP Facility) borrowings 8,286 3,293 123,911
Short term debt borrowings (payments) -- -- (79,900)
Receivables from affiliates -- 16,602 39,601
--------- --------- ---------
Net cash provided by financing activities 24,694 25,148 121,194
--------- --------- ---------
(Decrease) increase in cash and cash equivalents 957 (7,948) 15,534
Cash and cash equivalents at beginning of year 7,586 15,534 --
--------- --------- ---------
Cash and cash equivalents at end of year $ 8,543 $ 7,586 $ 15,534
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BANKRUPTCY AND REORGANIZATION
OVERVIEW
Wheeling-Pittsburgh Corporation ("WPC") and together with its
subsidiaries, (the "Company"), is a wholly-owned subsidiary of WHX Corporation
("WHX"). Wheeling-Pittsburgh Steel Corporation ("WPSC") is a wholly-owned
subsidiary of WPC.
Beginning in 1998 and continuing through 2001, record high levels of
foreign steel imports caused a marked deterioration of steel prices. This record
high level of foreign steel imports over a four year period, coupled with the
indebtedness incurred by the Company as a result of a ten-month work stoppage
which ended in August 1997, and approximately $200 million of capital
expenditures used to modernize its facilities to increase quality, efficiency,
safety and environmental conditions, resulted in substantial losses and the
severe erosion of the Company's financial position and liquidity.
CHAPTER 11 FILING
On November 16, 2000, Wheeling-Pittsburgh Corporation and eight of
its wholly-owned subsidiaries, representing substantially all of the
consolidated group's business, (Wheeling-Pittsburgh Steel Corporation,
Pittsburgh-Canfield Corporation, Consumers Mining Company, Wheeling-Empire
Company, Mingo Oxygen Company, WP Steel Venture Corporation, W-P Coal Company
and Monessen Southwestern Railway Company (collectively the "Debtors")) filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court in Youngstown, Ohio ("Bankruptcy Court").
Under Chapter 11, certain claims against the Debtors in existence
prior to the filing of the petitions for relief under the Federal bankruptcy
laws ("pre-petition") are stayed while the Debtors continue business operations
as debtors-in-possession. Claims secured against the Debtors' assets ("secured
claims") are also stayed, although the holders of such claims have the right to
move the court for relief from stay or adequate protection. Secured claims are
secured primarily by liens on the Company's land, buildings and equipment.
The Company is currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code. As such, actions to
collect pre-petition indebtedness of the Company and other contractual
obligations of the Company generally may not be enforced. In addition, under the
Bankruptcy Code, the Company may assume or reject executory contracts and
unexpired leases subject to Bankruptcy Court approval. Additional pre-petition
claims may arise from such rejections, and from the determination by the
Bankruptcy Court (or as agreed by the parties in interest) to allow claims for
contingencies and other disputed amounts. From time to time since the Chapter 11
filing, the Bankruptcy Court has approved motions allowing the Company to reject
certain business contracts that were deemed burdensome or of no value to the
Company. As of February 28, 2003, the Company has not completed their review of
all their pre-petition executory contracts and leases for assumption or
rejection. See Note H - Liabilities Subject to Compromise and Pre-Petition Long
Term Debt.
The Company received approval from the Bankruptcy Court to pay or
otherwise honor certain of their pre-petition obligations, including employee
wages. In addition, the Bankruptcy Court authorized the Company to maintain
their employee benefit programs. Funds of qualified pension plans and savings
plans are in trusts and protected under federal regulations. All required
contributions are current in the respective plans.
The Federal bankruptcy laws provide that the Debtors have an
exclusive period during which only they may propose and file and solicit
acceptances of a plan of reorganization. The exclusive period to propose a plan
for reorganization currently expires on May 9, 2003. If the Debtors fail to file
a plan of reorganization during the exclusive period (including any extensions
thereof) or, after such plan has been filed, if the Debtors fail to obtain
acceptance of such plan from the requisite impaired classes of creditors and
101
equity security holders during the exclusive solicitation period, any party in
interest, including a creditor, an equity security holder, a committee of
creditors or equity security holders, or an indenture trustee, may file their
own plan of reorganization for the Debtors.
A plan of reorganization and disclosure statement was filed with the
Bankruptcy Court on December 20, 2002. Among other things, the plan is
contingent on approval of a $250 million loan guarantee from the Emergency Steel
Loan Guarantee Board. See Note R - Subsequent Events.
After a plan of reorganization has been filed with the Bankruptcy
Court, the plan, along with a disclosure statement approved by the Bankruptcy
Court, will be sent to impaired creditors and equity security holders who are
entitled to vote.
Subject to certain exceptions set forth in the Bankruptcy Code,
acceptance of a plan of reorganization requires approval of the Bankruptcy Court
and the affirmative vote (i.e. more than 50% of the number and at least 66-"% of
the dollar amount, both with regard to claims actually voted) of each class of
creditors and equity holders whose claims are impaired by the plan.
Alternatively, absent the requisite approvals, the Company may seek Bankruptcy
Court approval of its reorganization plan under "cramdown" provisions of the
Bankruptcy Code, assuming certain tests are met. These requirements may, among
other things, necessitate payment in full for senior classes of creditors before
payment to a junior class can be made.
May 16, 2001 was set by the Bankruptcy Court as the last date
creditors could file proofs of claim under the Bankruptcy Code. There may be
differences between the amounts recorded in the Company's schedules and
financial statements and the amounts claimed by the Company's creditors.
Litigation may be required to resolve such disputes. See Note H - Liabilities
Subject to Compromise and Pre-Petition Long Term Debt.
The Company has incurred and will continue to incur significant
costs associated with the reorganization. The amount of these expenses, which
are being expensed as incurred, is expected to significantly affect future
results of operations. See Note N - Reorganization Items.
DEBTOR IN POSSESSION CREDIT FACILITY
The Company has negotiated a financing arrangement (the "DIP Credit
Facility") with Citibank, N.A., as initial issuing bank, Citicorp U.S., Inc., as
administrative agent (the "Agent"), and the lenders named therein (the "DIP
Lenders"). The purpose of the DIP Credit Facility is to provide access to needed
funds during the Debtors' Chapter 11 cases.
The DIP Lenders agreed to make term loan advances to the Debtors up
to a maximum aggregate principal amount of $35 million. WPC's parent company,
WHX, has a $30 million participation in the term loan. In addition, the DIP
Lenders agreed, subject to certain conditions, to provide the Debtors with
revolving loans, swing loans and letter of credit accommodations in an initial
aggregate amount of up to $255 million. The aggregate maximum amount was
subsequently reduced to $225 million in May 2001, to $175 million in January
2002, and to $160 million in November 2002. The availability under the DIP
Credit Facility is based on various advance rates on Accounts Receivable and
Inventories, less certain reserves. The post-petition term loans and revolving
loans are collateralized by first priority liens on the Debtors' assets (subject
to valid liens existing on the petition date) and have been granted
superpriority administrative status, subject to certain carve-outs for fees
payable to the United States Trustee and for professional fees.
In order to negotiate the DIP Credit Facility, the Company was
required to immediately repay all of the outstanding obligations under the
pre-petition Revolving Credit Agreement (the "Pre-petition Credit Agreement")
that WPSC entered into with certain financial institutions and Citibank, N.A.,
as agent. The Pre-petition Credit Agreement provided WPSC with a revolving line
of credit for borrowings up to $150 million, with a $25 million sub-limit for
letters of credit. As of the petition date, the Debtors were obligated for
approximately $84.7 million in loans under the Pre-petition Credit Agreement and
contingently liable for letters of credit in the amount of approximately $17
million. Those obligations were collateralized primarily by 100% of the
102
inventory of WPSC and Pittsburgh-Canfield Corporation and were guaranteed by WPC
and by Pittsburgh-Canfield Corporation.
The DIP Credit Facility also required the immediate repurchase of
accounts receivable from a pre-petition securitization facility. This repurchase
of receivables was required to provide unencumbered collateral for post-petition
date loans.
Other terms of the DIP Credit Facility are as follows:
o Revolving loans bear interest at (i) the base rate plus the
applicable margin for base rate loans or (ii) the applicable
Eurodollar rate plus the applicable margin for Eurodollar rate
loans. The applicable margin ranges from 1.75% to 2.25% for
base rate loans and from 2.75% to 3.25% for Eurodollar rate
loans, in each case depending on the Debtors' performance
level. The base rate is the rate announced from time to time by
Citibank, N.A. as its base rate and the Eurodollar rate is the
rate calculated by the Agent with reference to the rate per
annum offered for certain deposits in dollars at Citibank,
N.A.'s London office. During the continuance of an Event of
Default, interest on term loans and revolving loans will be
payable on demand at 2% per annum above the rate that would
otherwise be in effect.
o Term loans bear interest at 16% per annum (of which 3% may, at
the Debtors' option, be paid in kind).
o A commitment fee is payable on the daily unused portion of the
revolving loan commitment under the DIP Credit Facility at a
rate per annum determined by reference to an applicable
percentage, which ranges from 0.500% to 0.625% depending on the
Debtors' performance level.
o An administrative fee for letter of credit accommodations is
payable on the average daily maximum amount available under
outstanding letters of credit at a rate per annum equal to the
applicable margin for letter of credit fees, which ranges from
2.50% to 3.00% depending on the Debtors' performance level.
During the continuance of an Event of Default, letter of credit
fees will be payable on demand at 2% per annum above the rate
that would otherwise be in effect.
Borrowings under the DIP Credit Facility for revolving loans totaled
$135.5 million and $127.2 million at December 31, 2002 and 2001, respectively.
The weighted average interest rates on the DIP Credit Facility for revolving
loans were 5.2% and 7.4% in 2002 and 2001, respectively. Term loans under the
DIP Credit Facility totaled $35.2 million and $34.4 million at December 31, 2002
and 2001, respectively. At February 22, 2003 availability under the DIP Credit
Facility was $5.4 million. The DIP Credit Facility was to expire on the earlier
of November 17, 2002 or the completion of a Plan of Reorganization. Amendment
No. 8 to the DIP Credit Agreement extended the termination date to May 17, 2003
or the completion of a Plan of Reorganization. The Company intends to have
completed a Plan of Reorganization by May 17, 2003. If a Plan is not completed
by then, the Company will pursue an extension of or a replacement of the current
DIP Facility. There can be no guarantee that this will occur.
SETTLEMENT AND RELEASE AGREEMENT WITH WHX
On May 29, 2001, WPC entered into a Settlement and Release Agreement
with WHX as a compromise of disputed claims and issues, which was approved by
the Bankruptcy Court. The principal terms of the agreement were that (i) WHX
would pay $17 million to WPC; (ii) WHX agreed to purchase specified assets of
Pittsburgh-Canfield Corporation (PCC) for an aggregate purchase price of $15
million plus the assumption of certain trade payables of PCC; (iii) the Tax
Sharing Agreements between WHX and WPC would be terminated; (iv) WHX agreed not
to charge WPC or any of its subsidiaries for any funding contributions or
expense with respect to any defined benefit pension plans through and including
the earlier of the effective date of a Plan of Reorganization or December 31,
2002; and (v) WPC and/or any of its subsidiaries agreed to forego any claims
then existing against WHX and its subsidiaries that were not part of WPC.
103
SALE OF PITTSBURGH-CANFIELD COMPANY ASSETS
On June 29, 2001, the Company executed an Asset Purchase Agreement
with PCC Acquisition Co. Inc. ("PCC Acquisition Co."), a wholly-owned subsidiary
of WHX. The agreement provided for the sale of all assets to and the assumption
of certain liabilities of PCC by PCC Acquisition Co. in exchange for $15
million. A Transition Services Agreement and a Steel Supply Agreement were also
executed to facilitate the continuing operation of the business. PCC loaned the
net proceeds to WPSC. An intercompany note receivable was recorded on PCC's
books. As part of the agreement, PCC changed its name to PCC Survivor Corp.
NOTE B--MODIFIED LABOR AGREEMENT
The Company and the United Steelworkers of America (USWA) reached
agreement on a Modified Labor Agreement (MLA) which provides for temporary wage
reductions, immediate staff reductions, the elimination of gainsharing and other
obligations and long-term changes to health benefits that will dramatically
reduce ongoing costs. The MLA became effective October 1, 2001 and will expire
(if not previously terminated) on February 1, 2006. The Company estimates that
the MLA, together with related salary reductions, reduced cash outlays for
wages, salaries and other benefits by more than $47 million (unaudited) during
the period through December 31, 2002. As a provision of the MLA, the Company
agreed to make special bonus payments in the amount of $5.0 million during each
of 2005 and 2006. As such, the Company recorded a $10 million liability in 2001
which is included in Other Employee Benefit Liabilities.
The MLA delayed a February 2002 wage increase until December 2003.
Wage increases of 52.5 cents, 50 cents and 60 cents per hour are scheduled in
December 2003, June 2004 and June 2005, respectively.
The regular pension multiplier will increase to $50 per month for
each year of service up to 30 years and $65 per month for years in excess of 30.
The MLA provides for an employee stock plan of 20% of common equity
of the reorganized company and also provides profit-sharing at a level equal to
10% of quarterly profits in 2002 and 2003 and 20% of quarterly profits
thereafter.
The MLA will remain effective only upon the USWA's reasonable and
continuing satisfaction that support is also being provided by other
constituents, including salaried employees, trade creditors, outside
professionals and WHX.
As a condition of the MLA, WHX agreed to provide short-term loans in
the amount of $5 million and other credit support to the Company. The agreement
also provides that the WHX pension plan may be split, upon confirmation of a
Plan of Reorganization, so as to provide for a separate pension plan covering
WPC employees and retirees, and that WHX will make a contribution of $25 million
to the new WPC pension plan.
NOTE C-- ACCOUNTING POLICIES
The accounting policies presented below have been followed in
preparing the accompanying consolidated financial statements.
BASIS OF PRESENTATION
The Company's financial statements have been prepared on a
"going-concern" basis which contemplates the continuity of operations, the
realization of assets and the payment of post petition liabilities in the
ordinary course of business. The financial statements do not include any
adjustments or reclassifications that might be necessary should the Company be
unable to continue in existence. As a result of the Company's Chapter 11 filing,
such matters are subject to significant uncertainty.
104
The Company's financial statements have been presented in conformity
with the AICPA's Statement of Position 90-7, "Financial Reporting By Entities In
Reorganization Under the Bankruptcy Code", issued November 9, 1990 ("SOP 90-7").
SOP 90-7 requires a segregation of liabilities subject to compromise by the
Bankruptcy Court as of the bankruptcy filing date and identification of all
transactions and events that are directly associated with the reorganization of
the Company. See Note H - Liabilities Subject to Compromise and Pre-Petition
Long Term Debt and Note N - Reorganization Items. Schedules have been filed by
the Company with the Bankruptcy Court setting forth the assets and liabilities
of the Company as of November 16, 2000, the bankruptcy filing date, as reflected
in the Company's accounting records. Differences between amounts reflected in
such schedules and claims filed by creditors are currently being investigated
and either resolved by mutual consent or adjudicated. The final amounts of such
claims are not presently determinable.
USE OF ESTIMATES
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
subsidiary companies. All significant intercompany accounts and transactions are
eliminated in consolidation. The Company uses the equity method of accounting
for investments in unconsolidated companies owned 20% or more.
EARNINGS PER SHARE
Presentation of earnings per share is not meaningful since the
Company is a wholly-owned subsidiary of WHX.
BUSINESS SEGMENT
The Company is primarily engaged in one line of business and has one
industry segment, which is the making, processing and fabricating of steel and
steel products. The Company's products include hot rolled and cold rolled sheet,
and coated products such as galvanized, prepainted and tin mill sheet. The
Company also manufactures a variety of fabricated steel products including roll
formed corrugated roofing, roof deck, form deck, floor deck, culvert, bridge
form and other products used primarily by the construction, highway and
agricultural markets.
Through an extensive mix of products, the Company markets to a wide
range of manufacturers, converters and processors. The Company's 10 largest
customers (including Wheeling-Nisshin, an affiliate in which the Company has a
35.7% ownership interest) accounted for approximately 50.4% of its net sales in
2002, 43.9% in 2001 and 38.7% in 2000. Wheeling-Nisshin, Ohio Coatings Company
("OCC"), an affiliate in which the Company has a 50% ownership interest and
Nittetsu Shoji America, were the only customers to account for more than 10% of
net sales in 2002. Wheeling-Nisshin accounted for 15.6% of net sales in 2002,
14.6% in 2001 and 10.9% in 2000. OCC accounted for 10.6% of net sales in 2002.
Nittetsu Shoji America accounted for 10.3% of net sales in 2002. Geographically,
the majority of the Company's customers are located within a 350-mile radius of
the Ohio Valley. However, the Company has taken advantage of its river-oriented
production facilities to market via barge into more distant locations such as
the Houston, Texas and St. Louis, Missouri areas. The Company has acquired
regional facilities to service an even broader geographical area.
105
REVENUE RECOGNITION
Revenue from the sale of products is recognized when both risk of
loss and title have transferred to the customer, which generally coincides with
the time such products are shipped. Shipping charges billed to customers are
recorded as revenues.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and on deposit and
highly liquid debt instruments with original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in first-out ("LIFO") method for substantially all
inventories. In 2002 and 2001, approximately 92% and 90%, respectively, of
inventories are valued using the LIFO method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at historical cost less
accumulated depreciation. The Company periodically evaluates property, plant and
equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Given the Company's
integrated operations, asset impairment evaluations are generally done on a
group basis as that is the lowest level at which cash flows can be separately
identified.
Depreciation is computed on the straight line and the modified units
of production methods for financial statement purposes and accelerated methods
for income tax purposes. The modified units of production method adjusts the
straight line method based on an activity factor for operating assets. Adjusted
annual depreciation is not less than 60% nor more than 110% of straight line
depreciation. Accumulated depreciation after adjustment is not less than 75% nor
more than 110% of straight line depreciation. Interest cost is capitalized for
qualifying assets during the assets' acquisition period. Capitalized interest
cost is amortized over the life of the asset.
Maintenance and repairs are charged to income. Renewals and
betterments made through replacements are capitalized. Profit or loss on
property dispositions is credited or charged to income.
SOFTWARE CAPITALIZATION
Costs incurred for the development or purchase of internal use
software are capitalized and are amortized over the useful lives of such
software, which is generally five years or less.
PENSIONS
The Company maintains both tax qualified defined benefit and defined
contribution pension plans. The defined benefit pension obligations are
accounted for by WHX as a multi-employer plan. As such, the Company records
pension expense based on allocations from WHX. Costs for the defined
contribution plans are being funded currently, with expense being recorded at
the time of funding.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Recognition is given in the accounts for the income tax effect of temporary
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities using the liability method. A valuation
allowance is provided against deferred tax assets where it is considered more
likely than not that the Company will not realize the benefit of such assets.
106
As a member of the WHX affiliated group, the Company is joined with
WHX in the filing of consolidated federal income tax returns. Prior to 2001, tax
provisions and the related tax payments or refunds were reflected in the
Company's financial statements in accordance with a tax sharing agreement
between WHX and the Company. The tax sharing agreement generally provided that
the Company would be paid for any reduction in the combined consolidated federal
income tax liability resulting from the utilization or deemed utilization of
deductions, losses and credits from current or prior years which are
attributable to WPC or its subsidiaries. The tax sharing agreement was
terminated in 2001 effective as of January 1, 2001. As a result, the tax
provision for 2001 and later years is intended to reflect the Company's tax
position as if it filed its own federal income tax return.
ENVIRONMENTAL MATTERS
The Company accrues for losses associated with environmental
remediation obligations when such losses are probable and reasonably estimable.
Accruals for estimated losses from environmental remediation obligations
generally are recognized no later than completion of the remedial feasibility
study.
Such accruals are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental remediation
obligations are not discounted to their present value. Recoveries of
environmental remediation costs from other parties are recorded as assets when
their receipt is deemed probable.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. ("SFAS") 142 "Goodwill
and Other Intangible Assets" which addresses the accounting for goodwill and
other intangible assets after an acquisition. The most significant changes made
by SFAS 142 are: 1) goodwill and intangible assets with indefinite lives will no
longer be amortized; 2) goodwill and intangible assets with indefinite lives
must be tested for impairment at least annually; and 3) the amortization period
for intangible assets with finite lives will no longer be limited to forty
years. The Company adopted SFAS 142 effective January 1, 2002, as required. The
adoption of SFAS 142 did not have a material impact on the Company.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." SFAS 143 establishes a new accounting model for the
recognition and measurement of retirement obligations associated with tangible
long-lived assets. SFAS 143 requires that an asset retirement cost be
capitalized as part of the cost of the related long-lived asset and subsequently
allocated to expense using a systematic and rational method. The Company will
adopt this Statement effective January 1, 2003, as required. The transition
adjustment resulting from the adoption of SFAS 143 will be reported as a
cumulative effect of a change in accounting principle. At this time, the Company
cannot reasonably estimate the effect of the adoption of this Statement on
either its financial position or results of operations. Management believes at
this time that the adoption of this standard will not have a significant impact
on either its financial position or results of operations.
In August 2001, the FASB issued SFAS 144, "Accounting for Impairment
or Disposal of Long-Lived Assets." This Statement establishes a single
accounting model for long-lived assets to be disposed of by sale and provides
additional implementation guidance for assets to be held and used and assets to
be disposed of other than by sale. The Company adopted the Statement
prospectively effective January 1, 2002. The adoption of SFAS 144 did not have a
material effect on the Company.
In June 2002, the FASB issued SFAS 146 "Accounting for Costs
Associated with Exit or Disposal of Activities." This statement supercedes
Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 requires the recognition
of a liability for costs associated with an exit or disposal activity when
incurred. SFAS 146 also establishes that the liability should initially be
measured and recorded at fair value. The provisions of SFAS 146 will be
effective for any exit and disposal activities initiated after December 31,
2002.
107
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirement for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The disclosure requirements are
effective as of December 31, 2002. The provisions of FIN 45 are not expected to
have a material impact on our results of operations or financial position.
NOTE D--PENSIONS, OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
PENSION PROGRAMS
The Company provides defined contribution pension programs for both
hourly and salaried employees, and prior to August 12, 1997, also provided a
defined contribution pension program for USWA-represented employees. These tax
qualified defined contribution plans provide, in the case of hourly employees,
an increasing Company contribution per hour worked based on the age of its
employees. A similar tax qualified plan for salaried employees provides defined
Company contributions based on a percentage of compensation dependent upon age
and in certain cases age and service of its employees. The Company also
established a supplemental defined benefit pension plan for its salaried
employees.
As of December 31, 2002, $135.5 million of fully vested funds are
held in trust for benefits earned under the hourly defined contribution pension
plans and $38.1 million of fully vested funds are held in trust for benefits
earned under the salaried employees defined contribution plan. Approximately 74%
of the assets are invested in equities and 23% are in fixed income investments.
The balance is in cash and cash equivalents. All plan assets are invested by
professional investment managers.
All pension provisions charged against income totaled $3.8 million,
$4.8 million and $7.4 million in 2002, 2001 and 2000, respectively.
DEFINED BENEFIT PLANS
The Company established a defined benefit pension plan for
USWA-represented employees pursuant to a new labor agreement. The plan includes
individual participant accounts of USWA-represented employees from the
hourly-defined contribution plan and merges the assets of those accounts into
the defined benefit plan.
The plan was established pursuant to a collective bargaining
agreement ratified on August 12, 1997. Prior to that date, benefits were
provided through a defined contribution plan, the WPSC Retirement Security Plan
("Retirement Security Plan").
The defined benefit pension plan covers employees represented by the
USWA. The plan also includes individual participant accounts from the Retirement
Security Plan. The assets of the Retirement Security Plan were merged into the
Defined Benefit Pension Plan.
Since the plan includes the account balances from the Retirement
Security Plan, the plan includes both defined benefit and defined contribution
features. The gross benefit, before offsets, is calculated based on years of
service and the current benefit multiplier under the plan. This gross amount is
then offset for benefits payable from the Retirement Security Plan and benefits
payable by the Pension Benefit Guaranty Corporation ("PBGC") from previously
terminated plans. Individual employee accounts established under the Retirement
Security Plan are maintained until retirement. Upon retirement, the account
balances are converted into monthly benefits that serve as an offset to the
gross benefit, as described above. Aggregate account balances held in trust in
individual employee accounts which will be available upon retirement to offset
the gross benefit at December 31, 2002 totaled $134.5 million.
In 1998 the Company established a supplemental defined benefit plan
covering its salaried employees employed as of January 31, 1998, which provides
a guaranteed minimum benefit based on years of service and compensation. The
108
gross benefit from this plan is offset by the annuitized value of the defined
contribution plan account balance and any benefits payable from the Pension
Benefit Guaranty Corporation from the previously terminated defined benefit
pension plan.
In 1998, WHX merged WPC's defined benefit pension plan with those of
its wholly-owned Handy & Harman subsidiary. The merger eliminated WPC cash
funding obligations estimated in excess of $135.0 million. WPC pension expense
is allocated by the common parent and totaled zero, $0.9 million and $2.6
million in 2002, 2001 and 2000, respectively. Effective May 29, 2001, the
Company entered into an agreement with WHX, whereby WHX agreed not to charge the
Company for any pension expense through and including the earlier of the
effective date of a Plan of Reorganization and December 31, 2002. See Note A -
Bankruptcy and Reorganization.
OTHER POSTRETIREMENT BENEFITS
The Company sponsors postretirement benefit plans that cover both
management and hourly retirees and dependents. The plans provide medical
benefits including hospital, physicians' services and major medical expense
benefits and a life insurance benefit. The hourly employees' plans provide
non-contributory basic medical and a supplement to Medicare benefits, and pre-65
major medical coverage to which the Company contributes 50% of the insurance
premium cost. As a result of the MLA, major medical benefits are no longer
available to post-65 retirees living in an area where an HMO medicare plan is
available. The management plan provides basic medical and major medical benefits
on a non-contributory basis through age 65.
The cost of postretirement medical and life benefits for eligible
employees are accrued during the employee's service period through the date the
employee reaches full benefit eligibility. The Company defers and amortizes
recognition of changes to the unfunded obligation that arise from the effects of
current actuarial gains and losses and the effects of changes in assumptions.
The Company funds the plans as current benefit obligations are paid. In 1994 the
Company began funding a qualified trust in accordance with its collective
bargaining agreement. The 1997 collective bargaining agreement provided for the
use of those funds to pay current benefit obligations and suspended additional
funding until 2002. The MLA suspends additional funding until March 31, 2005.
109
The amounts accrued at December 31, included the following components.
Postretirement Benefits
Other Than Pensions
-------------------------
(Dollars in Thousands)
2002 2001
---- ----
Change in benefit obligation:
Benefit Obligation at beginning of year $ 307,080 $ 276,192
Service cost 2,431 2,180
Interest cost 19,080 20,561
Actuarial (gain) loss 9,404 19,690
Benefits paid (23,942) (20,989)
Increase due to Collective Bargaining Agreement -- 10,849
Transfer of PCC obligation to WHX plan -- (1,403)
--------- ---------
Benefit Obligation at December 31 314,053 307,080
--------- ---------
--------- ---------
Fair value of plan assets at December 31 -- --
--------- ---------
Benefit obligation in excess of plan assets (314,053) (307,080)
Unrecognized prior service credit (11,252) (13,963)
Unrecognized net actuarial (gain) loss (38,298) (53,469)
--------- ---------
Net amount recognized at December 31 (363,603) (374,512)
--------- ---------
Amounts recognized in the statement of financial position consist of:
Liabilities subject to compromise (360,518) (372,071)
Accrued benefit liability (3,085) (2,441)
--------- ---------
Net amount recognized $(363,603) $(374,512)
========= =========
110
Net periodic costs for postretirement benefits other than pensions
(principally health care and life insurance) for employees and covered
dependents.
Postretirement Benefits
Other Than Pensions
--------------------------------
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Components of net periodic cost:
Service cost $ 2,431 $ 2,180 $ 2,088
Interest cost 19,080 20,561 19,640
Amortization of prior service credit (2,712) (3,918) (3,918)
Recognized actuarial (gain)/loss (5,767) (4,885) (7,168)
-------- -------- --------
Total $ 13,032 $ 13,938 $ 10,642
======== ======== ========
The discount rate and rate of medical cost increases used in
determining the benefit obligations were as follows.
Postretirement Benefits
Other Than Pensions
------------------------
2002 2001
---- ----
(Dollars in Thousands)
Discount rate 6.5% 7.25%
Medical care cost trend rate 9.0% 9.5%
For measurement purposes, medical costs are assumed to increase at
annual rates as stated above and decline gradually to 4.75% in 2008 and beyond.
The health care cost trend rate assumption has a significant effect on the costs
and obligation reported. A 1% increase in the health care cost trend rate would
result in approximate increases in the accumulated postretirement benefit
obligation of $26.1 million and net periodic benefit cost of $2.6 million. A 1%
decrease in the health care cost trend rate would result in approximate
decreases in the accumulated postretirement benefit obligation of $23.5 million
and net periodic benefit cost of $4.2 million.
401(K) PLAN
Effective January 1, 1994, the Company began matching salaried
employee contributions to the 401(k) plan with shares of WHX's Common Stock.
Until November 30, 2000, the Company matched 50% of the employee's
contributions. The employer contribution was limited to a maximum of 3% of an
employee's salary. As of November 30, 2000, the Company terminated the employer
matching contribution benefit. At December 31, 2002, 2001 and 2000, the 401(k)
plan held 165,645 shares, 542,695 shares and 638,902 shares of WHX Common Stock,
respectively. Costs incurred for matching contributions amounted to
approximately $1 million in 2000.
POSTEMPLOYMENT BENEFITS
The Company provides benefits to former or inactive employees after
employment but before retirement. Those benefits include, among others,
disability, severance and workers' compensation. The assumed discount rate used
to measure the benefit liability was 6.5% at December 31, 2002 and 7.0% at
December 31, 2001. At December 31, 2002, liabilities of $1.1 million and $16.7
million were included in Other Employee Benefit Liabilities and Liabilities
Subject to Compromise - Other Liabilities, respectively. At December 31, 2001
these liabilities totaled $0.4 million and $14.4 million, respectively.
111
COAL INDUSTRY RETIREE HEALTH BENEFIT ACT
The Coal Industry Retiree Health Benefit Act of 1992 ("the Act")
created a new United Mine Workers of America postretirement medical and death
benefit plan to replace two existing plans which had developed significant
deficits. The Act assigns companies the remaining benefit obligations for former
employees and beneficiaries, and a pro rata allocation of benefits related to
unassigned beneficiaries (orphans). The Company's obligation under the Act
relates to its previous ownership of coal mining operations.
At December 31, 2002, the actuarially determined liability
discounted at 6.5%, covering 348 assigned retirees and dependents and 157
orphans, totaled $10.4 million. Such liabilities are included in Liabilities
Subject to Compromise. In conjunction with the Chapter 11 filing, the Company is
involved in disputes over the extent of its liabilities under the Act. At
December 31, 2001, the actuarially determined liability discounted at 7.25%,
covering 386 assigned retirees and dependents and 174 orphans, totaled $9.8
million.
NOTE E--INCOME TAXES
The provision for income taxes for the years ended December 31, consisted of the
following:
Year ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Current
Federal tax provision (benefit) $ -- $ -- $ --
State tax provision 11 17 82
------- ------- -------
Total income taxes current 11 17 82
Deferred
Federal tax provision (benefit) -- -- 90,010
------- ------- -------
Income tax provision (benefit) $ 11 $ 17 $90,092
======= ======= =======
Total federal and state income taxes paid in 2002, 2001 and 2000
were $0.0 million, $0.1 million and $0.2 million, respectively.
112
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate of
35% to pretax income as follows:
Year ended December 31,
------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Loss before taxes $ (57,556) $(172,197) $(128,095)
========= ========= =========
Tax provision (benefit) at statutory rate $ (20,145) $ (60,269) $ (44,833)
Increase (reduction) in tax due to:
Percentage depletion -- -- (242)
Equity earnings (1,086) (388) (447)
State income tax net of federal effect 7 11 53
Change in valuation allowance 21,158 60,588 149,681
Settlement of prior years taxes -- -- (23,895)
Other miscellaneous 77 75 9,775
--------- --------- ---------
Tax provision (benefit) $ 11 $ 17 $ 90,092
========= ========= =========
The composition of deferred income tax assets and liabilities are
shown in the following table:
December 31,
----------------------
2002 2001
---- ----
(Dolllars in millions)
Assets
Postretirement and postemployment employee benefits $ 130.0 $ 133.6
Operating loss carryforward (expiring in 2005 to 2021) 220.2 212.8
Minimum tax credit carryforwards (indefinite carryforward) 18.2 18.2
Provision for expenses and losses 24.8 17.5
Leasing activities 12.4 15.5
State income taxes 1.1 1.2
Miscellaneous other 0.5 2.3
-------- --------
Deferred tax assets $ 407.2 $ 401.1
======== ========
Liabilities
Property, plant and equipment $ (112.7) $ (125.7)
Inventory (31.2) (32.0)
State income taxes (0.7) (0.9)
Miscellaneous other (0.4) (0.9)
-------- --------
Deferred tax liability (145.0) (159.5)
Valuation allowance (262.2) (241.6)
-------- --------
Deferred income tax asset--net $ -- $ --
======== ========
On November 16, 2000, the Company filed for relief under Chapter 11
of the United States Bankruptcy Code. In general, the Internal Revenue Code
permits debt forgiveness in such cases to be excluded from income. However, to
the extent that income is not recognized, certain future tax attributes must be
reduced by the amount of the excluded income. Accordingly, a full valuation
allowance was recorded against the Company's net deferred tax assets in 2000 due
to uncertainties surrounding future realization and the expectation that certain
113
tax attributes previously recorded - namely net operating losses and tax credits
- - will not be utilized. In 2002, the valuation allowance reflected a net
increase in the amount of $20.6 million largely due to the increase in net
operating losses for which uncertainty exists as to their realizability.
During 2000, certain transactions between WPC and WHX were entered
into by the parties with the understanding that the tax sharing agreement would
be terminated effective January 1, 2001 and would not apply prospectively as
long as WPC remained a member of the WHX affiliated group. This had the effect
of using $94.2 million and $24.9 million of WPC operating losses for 2001 and
2000, respectively for which the Company derived no benefit.
During 1994, the Company experienced an ownership change as defined
by Section 382 of the Internal Revenue Code. As a result of this event,
pre-change of control net operating losses that can be used to offset
post-change of control pre-tax income will be limited to approximately $32.0
million. Post-change of control net operating losses do not have an annual
offset limitation.
The statute of limitations has expired for years through 1994.
Federal tax returns have been examined by the Internal Revenue Service ("IRS")
through 1997. Management believes it has adequately provided for all taxes on
income.
Note F--INVENTORIES
December 31,
-----------------------
2002 2001
---- ----
(Dollars in thousands)
Finished products $ 31,705 $ 40,295
In-process 112,319 89,762
Raw materials 22,544 19,303
Other materials and supplies 17,054 18,515
-------- --------
183,622 167,875
LIFO reserve 469 5,242
-------- --------
$184,091 $173,117
======== ========
During 2002, 2001 and 2000, certain inventory quantities were
reduced, resulting in liquidations of LIFO inventories, the effect of which
decreased income by approximately $0.8 million in 2002, and increased income by
$4.8 million in 2001 and $3.4 million in 2000.
Note G--PROPERTY, PLANT AND EQUIPMENT
December 31,
-------------------------
2002 2001
---- ----
(Dollars in thousands)
Land and mineral properties $ 19,734 $ 19,751
Buildings, machinery and equipment 1,194,799 1,178,707
Construction in progress 32,390 44,355
---------- ----------
1,246,923 1,242,813
Less accumulated depreciation and amortization 716,355 648,925
---------- ----------
$ 530,568 $ 593,888
========== ==========
The Company utilizes the modified units of production method of
depreciation which recognizes that the depreciation of steelmaking machinery is
related to the physical wear of the equipment as well as a time factor. The
modified units of production method provides for straight line depreciation
charges modified (adjusted) by the level of raw steel production. In 2002, 2001
and 2000 depreciation adjustments under the modified units of production method
114
were $0.9 million or 1.3% less, $1.8 million or 2.4% less and $0.2 million or
0.3% less, respectively, than straight line depreciation.
As of December 31, 2002 and 2001, the Company had two capital leases
in the amount of $7.1 million which were classified as Debt in Liabilities
Subject to Compromise.
NOTE H--LIABILITIES SUBJECT TO COMPROMISE AND PRE-PETITION LONG TERM DEBT
The principal categories of claims classified as liabilities subject
to compromise under reorganization proceedings are identified below. These
liabilities include substantially all the current and non-current liabilities of
the Company as of November 16, 2000, the date the Chapter 11 petition was filed.
As discussed further in Note A, these liabilities including the maturity of debt
obligations are stayed during the Chapter 11 cases. Certain of the pre-petition
liabilities are secured by liens on the Company's property. Parties holding
secured claims may request maintenance payments during the reorganization period
should the value of liened property decline. Additional bankruptcy claims and
pre-petition liabilities may arise by reason of termination of various
contractual obligations and as certain contingent and/or disputed bankruptcy
claims are settled which may materially exceed the amounts shown below. All
amounts below may be subject to future adjustment depending on Bankruptcy Court
action, further developments with respect to disputed claims, or other events.
Liabilities subject to compromise are summarized as follows.
December 31,
2002 2001
---- ----
(Dollars in thousands)
Other federal, state and local taxes $ 1,717 $ 3,573
Debt, see table below 356,384 356,384
Interest accrued through November 16, 2000 13,738 13,738
Unfunded provisions related to retiree medical benefits (see Note D) 360,518 372,071
Trade payables 117,020 131,391
Other liabilities 40,924 37,961
-------- --------
Total liabilities subject to compromise recorded at December 31: $890,301 $915,118
======== ========
Debt included in liabilities subject to compromise at December 31,
2002 and 2001 is summarized below:
December 31,
2002 2001
---- ----
(Dollars in thousands)
Senior Unsecured Notes due 2007, 9 1/4% $274,266 $274,266
Term Loan Agreement due 2006, floating rate 75,000 75,000
Other 7,118 7,118
-------- --------
Total Long-Term Debt(1) $356,384 $356,384
======== ========
(1) No estimate of fair value is available for December 31, 2002 and 2001.
As a result of the bankruptcy filing, principal and interest
payments may not be made on pre-petition debt without Bankruptcy Court approval
or until a reorganization plan defining the repayment terms has been confirmed.
The total interest on pre-petition debt that was not paid or charged to earnings
for the period from November 17, 2000 to December 31, 2000 was $4.1 million. For
the year ended December 31, 2002 and 2001, interest not paid or charged to
earnings totaled $30.8 million and $31.6 million, respectively. Such interest is
not being accrued since it is not probable that it will be treated as an allowed
claim. The Bankruptcy Code generally disallows the payment of post-petition
interest with respect to unsecured pre-petition claims.
115
9% SENIOR NOTES DUE 2007 AND TERM LOAN:
On November 26, 1997 the Company issued $275 million principal
amount of 9"% Senior Notes. Interest on the 9"% Senior Notes is payable
semi-annually on May 15 and November 15 of each year. The Senior Notes mature on
November 15, 2007. The 9"% Senior Notes were exchanged for identical notes which
were issued pursuant to an exchange offer registered under the Securities Act of
1933, as amended. The 9"% Senior Notes are unsecured obligations of the Company,
ranking senior in right of payment to all existing and future subordinated
indebtedness of the Company, and pari passu with all existing and future senior
unsecured indebtedness of the Company, including borrowings under the Term Loan
Agreement. The 9"% Senior Notes are fully and unconditionally guaranteed on a
joint and several and senior basis by the guarantors, which consist of the
Company's present and future operating subsidiaries.
On November 26, 1997 the Company entered into the Term Loan
Agreement with DLJ Capital Funding Inc., as syndication agent pursuant to which
it borrowed $75 million. The Company's obligations under the Term Loan Agreement
are guaranteed by its present and future operating subsidiaries.
The Company is in default of its obligations with respect to the 9
1/4% Senior Notes and the Term Loan Agreement by virtue of the Chapter 11
filings and failures to pay interest when due.
NOTE I--LONG TERM DEBT
December 31,
----------------------
2002 2001
---- ----
(Dollars in thousands)
Term Loan - DIP Credit Facility (See Note A) $35,222 $34,401
State Loans 11,985 --
WHX Loan 5,000 5,000
Other 4,545 943
------- -------
56,752 40,344
Less portion due within one year 43,575 40,344
------- -------
Long-Term Debt $13,177 $ --
======= =======
Pursuant to a Memorandum of Understanding ("MOU"), WHX provided $5.0
million in secured loans to the Company during the fourth quarter of 2001 to
increase liquidity and sustain continued operations. The loans bear interest at
the rate of 6% per annum and will mature on the earlier of the (a) substantial
consummation of a Plan of Reorganization, (b) termination of the MOU, or (c)
December 31, 2002. Payment was not made on December 31, 2002. Furthermore, no
determination has been made as to the timing of the payment of the debt.
Pursuant to a negotiated agreement among the USWA, WHX and the Company in
January 2002, the Company received loans in the amount of $7.0 million and $5.0
million from the states of Ohio and West Virginia, respectively.
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INTEREST COST
Aggregate interest costs on debt and amounts capitalized during the
three years ended December 31, 2002, are as follows:
Year Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Aggregate interest expense on long-term debt $17,761 $21,611 $42,467
Less: Capitalized interest 1,774 4,163 6,498
------- ------- -------
Interest expense $15,987 $17,448 $35,969
======= ======= =======
Interest Paid $11,618 $15,905 $29,049
======= ======= =======
NOTE J--STOCKHOLDER'S EQUITY
Accumulated Capital in
Common Stock Earnings Excess of Par
Shares Amount (Deficit) Value
---------- ------------ -------------- -------------
(Dollars in thousands)
Balance January 1, 2000 100 $ 0 $(198,341) $ 335,138
Net loss -- -- (218,187) --
--------- --------- --------- ---------
Balance December 31, 2000 100 0 (416,528) 335,138
Net loss -- -- (172,214) --
--------- --------- --------- ---------
Balance December 31, 2001 100 0 (588,742) 335,138
Net loss -- -- (57,567) --
--------- --------- --------- ---------
Balance December 31, 2002 100 $ 0 $(646,309) $ 335,138
========= ========= ========= =========
NOTE K--RELATED PARTY TRANSACTIONS
The Chairman of the Board of WHX is the President and sole
shareholder of WPN Corp. Pursuant to a management agreement effective as of
January 3, 1991, as amended, approved by a majority of the disinterested
directors of WHX, WPN Corp. provided certain financial, management advisory and
consulting services to WPC. Such services included, among others,
identification, evaluation and negotiation of acquisitions and divestitures,
responsibility for financing matters, review of annual and quarterly budgets,
supervision and administration, as appropriate, of all of WPC's accounting and
financial functions and review and supervision of reporting obligations under
Federal and state securities laws. In exchange for such services, WPN Corp.
received a fixed fee from the Company of $208,333 per month for nine months in
2000. On January 17, 2001 the Company notified WHX that the Company had not
received services under the agreement since September 30, 2000 and would no
longer participate under the management agreement.
The Company regularly sells steel product at prevailing market
prices to Unimast Incorporated ("Unimast") and PCC, wholly-owned subsidiaries of
WHX. During 2002, 2001 and 2000, the Company shipped $0.5 million, $2.2 million
and $13.2 million, respectively of steel product to Unimast. In August 2002, WHX
sold its interest in Unimast to an unrelated party. During 2002 and 2001, the
Company shipped $20.8 million and $7.0 million, respectively of steel product to
PCC. Amounts due the Company from Unimast at December 31, 2002 and 2001 were
$.01 million and $0.1 million, respectively. Amounts due the Company from PCC at
December 31, 2002 and 2001 were $2.0 million and $0.5 million, respectively. WHX
provided funds for the purchase of natural gas during 2001. At December 31, 2002
the Company owed WHX approximately $2.1 million for gas purchased.
117
NOTE L--COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company, 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
Company has incurred capital expenditures for environmental control projects
aggregating $1.7 million, $0.8 million and $3.4 million for 2002, 2001, and
2000, respectively. The Company has projected spending approximately $18.2
million in the aggregate on major environmental compliance projects through the
year 2005, estimated to be spent as follows: $3.7 million in 2003, $11.6 million
in 2004 and $2.9 million in 2005. However, due to the possibility of
unanticipated factual or regulatory developments and in light of limitations
imposed by the pending Chapter 11 cases, the amount and timing of future
expenditures may vary substantially from such estimates.
In addition, the treatment of environmental liabilities in the
pending Chapter 11 cases may differ depending on whether such liabilities are
determined to be pre-petition or post-petition liabilities of the Debtors. It is
not possible or appropriate to predict how environmental liabilities ultimately
may be classified in the Debtors' Chapter 11 cases, and the Debtors have not
attempted to distinguish between pre-petition and post-petition liabilities.
The Company 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 Company 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 Company is
unable to reasonably estimate the ultimate cost of compliance with Superfund
laws. The Company believes, based upon information currently available, that the
Company's liability for clean up and remediation costs in connection with the
Buckeye Reclamation Landfill will be between $1.5 million and $2.0 million. At
five other sites (MIDC Glassport, Tex-Tin, Breslube Penn, Four County Landfill
and Beazer) the Company estimates costs to aggregate approximately $500,000.
Non-current accrued environmental liabilities totaled $18.0 million
at December 31, 2002 and $19.0 million at December 31, 2001. These accruals were
determined by the Company based on all available information. As new information
becomes available, including information provided by third parties, and changing
laws and regulations, the liabilities are reviewed and the accruals adjusted
quarterly. Management believes, based on its best estimate, that the Company has
adequately provided for its present environmental obligations.
Based upon information currently available, including the Company's
prior capital expenditures, anticipated capital expenditures, consent agreements
negotiated with Federal and state agencies and information available to the
Company on pending judicial and administrative proceedings, the Company does not
expect its environmental compliance costs, 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 Company or on its ability to reorganize. However, as further information
comes into the Company's possession, it will continue to reassess such
evaluations.
GUARANTEES
In December 1995, the Company entered into a "Capital Maintenance
Agreement" with a financial institution, which requires the Joint Venture owners
of OCC to provide funds to cure any defaults under the debt agreement. At
December 31, 2002 the amounts borrowed under the debt agreement totaled
approximately $12 million.
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NOTE M--OTHER INCOME
Year Ended December 31,
----------------------------------
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Interest and investment income $ 764 $ 973 $ 1,531
Equity income 3,882 1,274 1,810
Receivables securitization fees -- -- (6,887)
Other, net (79) (1,896) 531
------- ------- -------
------- ------- -------
$ 4,567 $ 351 $(3,015)
======= ======= =======
NOTE N--REORGANIZATION ITEMS
Reorganization expenses are comprised of items of income, expense
and loss that were realized or incurred by the Company as a result of its
decision to reorganize under Chapter 11 of the Bankruptcy Code. Reorganization
and professional fee expense and cash payments related to continuing operations
during 2002, 2001 and 2000 were $11.8 million and $10.6 million in 2002, $14.2
million and $13.9 million for 2001, and $4.1 million and $2.6 million for 2000,
respectively.
Other reorganization income (expense) items are summarized below:
Year Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Gain (loss) on sale or disposal of assets $ 1,258 $ (936) $ --
Gain from sale of PCC assets -- 9,818 --
Gain on settlement of intercompany accounts -- 367 --
Write-off of deferred financing costs related to
pre-petition credit and securitization agreements (2,592)
Other 4 -- --
------- ------- -------
$ 1,262 $ 9,249 $(2,592)
======= ======= =======
NOTE O--SALE OF RECEIVABLES
In 1994, a special purpose wholly-owned subsidiary of WPSC entered
into an agreement to sell an undivided percentage ownership in a designated pool
of accounts receivable generated by WPSC and two of the Company's subsidiaries:
Wheeling Construction Products, Inc. and PCC (the Receivables Facility). In 1995
WPSC entered into an agreement to include the receivables generated by Unimast,
in the pool of accounts receivable sold. In May 1999, the Receivables Facility
was extended through May 2003 and increased to $100 million on a revolving
basis. Effective June of 1999, Unimast withdrew from participation in the
facility. In June 2000, the Company amended the agreement to increase the
program limit to $115 million. On September 22, 2000, the Company amended its
agreement to reduce the program limit to $105 million, to waive an Early
Amortization Event through December 20, 2000 and to increase certain fees
associated with the agreement during the waiver period. The Early Amortization
Event was caused by a reduction in rating by Standard & Poors on the long-term
Senior Unsecured debt. On November 17, 2000, the Receivables Facility was
terminated and funds from the DIP Credit Facility were used to repurchase all
receivables held by the Receivables Facility. Fees paid by WPSC under this
Receivables Facility were based upon variable rates that ranged from 5.91% to
9.62%.
NOTE P--INFORMATION ON SIGNIFICANT JOINT VENTURES
The Company owns 35.7% of Wheeling-Nisshin. Wheeling-Nisshin had no
debt outstanding at December 31, 2002 and December 31, 2001. The Company derived
approximately 15.5% and 14.6% of its revenues from sale of steel to
Wheeling-Nisshin in 2002 and 2001, respectively. The Company received dividends
119
of $1.25 million from Wheeling-Nisshin in 2002 and $3.75 million in 2001.
Amounts due the Company at December 31, 2002 totaled $5.2 million.
The Company owns 50% of OCC. OCC had total debt outstanding at
December 31, 2002 and 2001 of approximately $44.3 million and $48.2 million,
respectively. Of the debt outstanding at December 31, 2002, the Company is
obligated to pay $12.1 million in the event of default by OCC. The Company
derived approximately 10.8% and 9.8% of its revenues from sale of steel to OCC
in 2002 and 2001, respectively. Amounts due the Company at December 31, 2002
totaled $29.4 million, including an advance of $12.4 million.
NOTE Q--SUMMARIZED COMBINED FINANCIAL INFORMATION OF THE SUBSIDIARY GUARANTORS
OF THE 9"% SENIOR NOTES
Year ended December 31,
----------------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Income Data
Net sales $ 979,993 $ 835,640 $ 1,119,031
Cost of products sold, excluding depreciation 893,829 865,613 1,053,185
Depreciation 74,194 72,551 78,859
Selling, administrative and general expense 46,836 46,977 67,891
Reorganization and professional fee expense 11,755 14,200 4,140
----------- ----------- -----------
Operating loss (46,621) (163,701) (85,044)
Reorganization income (expense) 417 7,979 (2,592)
Interest expense (20,963) (19,178) (31,090)
Other income (loss) 1,271 1,551 (6,006)
----------- ----------- -----------
Loss before tax (65,896) (173,349) (124,732)
Tax provision (benefit) (2,908) (1,603) 77,093
----------- ----------- -----------
Net loss $ (62,988) $ (171,746) $ (201,825)
=========== =========== ===========
Year ended December 31,
-----------------------------
2002 2001
---- ----
(Dollars in thousands)
Balance Sheet Data
Assets
Current assets $ 330,443 $ 295,775
Non-current assets 540,403 610,884
--------- ---------
Total assets $ 870,846 $ 906,659
========= =========
Liabilities and stockholder's equity (deficit)
Current liabilities $ 330,929 $ 296,225
Non-current liabilities 885,910 893,439
Stockholder's equity (deficit) (345,993) (283,005)
--------- ---------
Total liabilities and stockholder's equity (deficit) $ 870,846 $ 906,659
========= =========
NOTE R--SUBSEQUENT EVENTS
On February 28, 2003, the Company was notified that the Emergency
Steel Loan Guarantee Board did not approve the initial application for a $250
million loan guarantee. The Company submitted a revised application for the loan
guarantee on March 14, 2003. On March 26, 2003, the revised application was
approved. The loan guarantee is subject to certain conditions, which must be
achieved by June 30, 2003, including, among others, development of an acceptable
Plan of Reorganization favorable resolution of the PBGC discussions with WHX and
WPC relative to termination of the WHX pension plan, a definitive collective
bargaining agreement with the USWA, and the absence of any material adverse
change in condition (financial or otherwise), business,
120
property, operations, prospects, assets or liabilities of WPSC, or in its
ability to repay the loan, or in the value of the collateral between the date
hereof and the date the guarantee is to be issued.
On March 7, 2003, the PBGC announced that it had determined under
provisions of ERISA that the WHX pension plan must terminate as of March 7,
2003, and that PBGC should become statutory trustee of the pension plan. This
action was prompted by the February 28 rejection of the $250 million loan
guarantee. The PBGC has been notified of the loan guarantee approval on March
26, 2003. Obtaining an acceptable resolution of the treatment of the WHX Pension
Plan is a condition to the loan guarantee. If an acceptable resolution is not
obtained on or before June 30, 2003, then a condition to the loan guarantee
shall not have been satisfied. If the loan guarantee is not granted it is
unlikely that the present Plan of Reorganization, filed with the Bankruptcy
Court on December 29, 2002, or any amended Plan of Reorganization will be
confirmed. Furthermore, it is doubtful that an alternative plan could be
confirmed in a reasonable time frame, although the company has indicated that it
would pursue such an alternate plan). In either case, there can be no assurance
as to the future of the WPC Group.
NOTE S--QUARTERLY INFORMATION (UNAUDITED)
Financial results by quarter for the two fiscal years ended December 31, 2002
and 2001 are as follows:
Net Earnings
Gross Income (Loss)
Net Sales Profit (Loss) Per Share
--------- ------ ------ ---------
(Dollars in thousands)
2002
1st Quarter 206,081 (5,577) (41,026) *
2nd Quarter 241,642 25,185 (10,486)
3rd Quarter 277,868 42,178 7,086
4th Quarter 254,402 23,758 (13,141)
2001
1st Quarter 202,706 (17,115) (59,986) *
2nd Quarter 207,941 (14,099) (41,532)
3rd Quarter 224,301 (3,104) (41,180)
4th Quarter 200,692 3,893 (29,516)
Earnings per share are not meaningful because the Company is a
wholly-owned subsidiary of WHX.
121
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements listed below of WHX Corporation of our reports dated April 11, 2003,
relating to the Consolidated Financial Statements of WHX Corporation and the
condensed financial statements of WHX Corporation (Parent Only) respectively,
and our report dated February 28, 2003, except as to Note R which is dated as of
March 26, 2003, relating to the financial statements of Wheeling-Pittsburgh
Corporation, which appear in this Form 10-K.
On Form S-3:
File No. 33 - 54831
File No. 33 - 63845
On Form S-8:
File No. 33 - 54801
File No. 33 - 56281
File No. 333 - 64217
File No. 333 - 36985
File No. 333 - 64784
New York, New York
April 14, 2003
122