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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2004
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _________________
FOR QUARTER ENDED MARCH 31, 2004 COMMISSION FILE NUMBER 1-2394
WHX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3768097
(State of Incorporation) (IRS Employer
Identification No.)
110 EAST 59TH STREET
NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 212-355-5200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes / / No /X/
The number of shares of Common Stock issued and outstanding as of May 7, 2004
was 5,485,856.
1
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2004 2003
- -----------------------------------------------------------------------------------
(IN THOUSANDS)
Net sales $ 97,494 $ 81,000
Cost of goods sold 79,463 66,949
-------- --------
Gross profit 18,031 14,051
Selling, general and administrative expenses 13,847 21,973
Loss on disposal of fixed assets 42 13
-------- --------
Income (loss) from operations 4,142 (7,935)
-------- --------
Other:
Interest expense 4,709 5,017
(Loss) gain on early retirement of debt (1,161) 1,033
Other income (expense) 255 (1,508)
-------- --------
Loss before taxes (1,473) (13,427)
Tax expense (benefit) 512 (4,579)
-------- --------
Net loss $ (1,985) $ (8,848)
======== ========
Dividend requirement for preferred stock $ 4,856 $ 4,856
======== ========
Net loss applicable to common stockholders $ (6,841) $(13,704)
======== ========
BASIC AND DILUTED PER SHARE OF COMMON STOCK
Net loss per share $ (1.26) $ (2.57)
======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
MARCH 31, DECEMBER 31,
2004 2003
- --------------------------------------------------------------------------------------
(Dollars and shares in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 22,987 $ 41,990
Restricted cash 12,668 --
Trade receivables - net 57,759 42,054
Inventories 57,693 41,782
Other current assets 9,478 30,174
--------- ---------
Total current assets 160,585 156,000
Property, plant and equipment at cost, less
accumulated depreciation and amortization 102,618 104,223
Goodwill and other intangibles 125,994 126,089
Intangibles - pension asset 758 758
Assets held for sale 2,000 2,000
Other non-current assets 18,432 17,076
--------- ---------
$ 410,387 $ 406,146
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 37,591 $ 27,300
Accrued liabilities 28,367 29,395
Current portion of long-term debt 6,549 40,056
Short-term debt 32,779 --
--------- ---------
Total current liabilities 105,286 96,751
Long-term debt 188,100 189,344
Accrued pension liability 26,692 27,367
Other employee benefit liabilities 7,639 7,840
Additional minimum pension liability 24,912 24,912
Other liabilities 1,176 1,047
--------- ---------
353,805 347,261
Stockholders' Equity:
Preferred stock - $.10 par value; authorized 10,000
shares; issued and outstanding: 5,523 shares 552 552
Common stock - $.01 par value; authorized 60,000
shares; issued and outstanding: 5,486 shares 55 55
Accumulated other comprehensive loss (21,976) (21,642)
Additional paid-in capital 556,206 556,206
Unearned compensation - restricted stock awards (83) (99)
Accumulated deficit (478,172) (476,187)
--------- ---------
Total stockholders' equity 56,582 58,885
--------- ---------
$ 410,387 $ 406,146
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
2004 2003
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,985) $ (8,848)
Items not affecting cash from operating activities:
Depreciation and amortization 3,726 3,723
Amortization of debt related costs 515 495
Other postretirement benefits 113 63
Loss (gain) on early retirement of debt 1,161 (1,033)
Deferred income taxes -- (4,855)
Loss on asset dispositions 42 13
Pension (income) expense (675) 4,030
Equity loss in affiliated companies 5 16
Other 65 --
Decrease (increase) in working capital elements,
net of effect of acquisitions:
Trade receivables (15,705) (6,119)
Inventories (15,911) (249)
Short term investments-trading -- 201,615
Investment account borrowings -- (107,857)
Other current assets 1,396 6,248
Other current liabilities 9,384 (4,123)
Other items-net 550 991
--------- ---------
Net cash (used) provided by operating activities (17,319) 84,110
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Receipts from WPC -- 500
Purchase of aircraft -- (19,106)
Proceeds from sale of aircraft 19,301 --
Plant additions and improvements (2,432) (3,439)
Proceeds from sales of assets 9 457
--------- ---------
Net cash provided by (used in) investing activities 16,878 (21,588)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds from Handy & Harman term loans 99,329 --
Net borrowings from revolving credit facilities 32,779 --
Restricted cash placed on deposit (12,668) --
Repayment of H&H Senior Secured Credit Facility (149,684) --
Net borrowings from H&H Senior Secured Credit Facility 20,604 23,475
Repayment of H&H Industrial Revenue Bond (5,000) --
Debt issuance fees (3,922) --
Cash paid on early extinguishment of debt -- (4,542)
--------- ---------
Net cash (used in)provided by financing activities (18,562) 18,933
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATIONS (19,003) 81,455
Cash and cash equivalents at beginning of period 41,990 18,396
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,987 $ 99,851
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GENERAL
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company. In the opinion of management, the
interim financial statements reflect all normal and recurring adjustments
necessary to present fairly the consolidated financial position and the results
of operations and changes in cash flows for the interim periods.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. This quarterly report on Form 10-Q
should be read in conjunction with the Company's audited consolidated financial
statements contained in Form 10-K for the year ended December 31, 2003. The
results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the operating results for the full year.
The unaudited condensed consolidated financial statements include
the accounts of all subsidiary companies. Wheeling-Pittsburgh Corporation
("WPC") and its subsidiaries, which had been subsidiaries of the Company, ceased
to be subsidiaries on August 1, 2003. On November 16, 2000, WPC, a wholly-owned
subsidiary of WHX Corporation ("WHX"), and six of its subsidiaries including
Wheeling-Pittsburgh Steel Corporation ("WPSC" and together with WPC and its
other subsidiaries, the "WPC Group") filed a petition seeking reorganization
under Chapter 11 of Title 11 of the United States Bankruptcy Code ("Bankruptcy
Filing"). As a result of the Bankruptcy Filing, the Company had, as of November
16, 2000, deconsolidated the balance sheet of its wholly-owned subsidiary WPC.
Accordingly, the accompanying condensed consolidated statements of operations
and the condensed consolidated statements of cash flows for the three-months
ended March 31, 2003 exclude WPC. As discussed in Note 1, a Chapter 11 Plan of
Reorganization (the "POR") for the WPC Group was consummated on August 1, 2003.
Among other things, as a result of the consummation of the POR, each member of
the WPC Group is no longer a subsidiary of WHX Corporation.
The accompanying unaudited condensed consolidated financial
statements have been prepared assuming the Company will continue as a going
concern, which indicates that the Company will be able to realize its assets and
satisfy its liabilities in the normal course of business. The WHX 10 1/2% Senior
Notes in the amount of $92.8 million are due on April 15, 2005. It is the
Company's intention to refinance this obligation prior to its scheduled
maturity; however there can be no assurance that such refinancing will be
obtained. The Company's access to capital markets in the future to refinance
such indebtedness may be limited. If the Company were unable to refinance this
obligation, it would have a material adverse impact on the liquidity, financial
position and capital resources of WHX and would impact the Company's ability to
continue as a going concern. The unaudited condensed consolidated financial
statements do not include any adjustments that might result from the occurrence
of this contingency.
NATURE OF OPERATIONS
WHX is a holding company that has been structured to invest in
and/or acquire a diverse group of businesses that are managed on a decentralized
basis. WHX's primary business is H&H, a diversified manufacturing company whose
strategic business units encompass three segments: precious metal, wire &
tubing, and engineered materials. WHX's other business (up through August 1,
2003) consisted of WPC and six of its subsidiaries, including WPSC; a vertically
integrated manufacturer of value-added and flat rolled steel products. 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."
STOCK BASED COMPENSATION
The following table illustrates the effect on net income and
earnings per share if WHX had applied the fair-value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS123"), to stock-based compensation:
5
THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
----------------------------------
(IN THOUSANDS - EXCEPT PER SHARE)
Net income (loss) as reported applicable to common stockholders $(1,985) $(8,848)
Add: compensation expense 16 --
Deduct: total stock-based compensation expense determined under
fair-value based method for all awards (113) (127)
------- -------
Pro forma basic and diluted earnings (loss) per share $(2,082) $(8,975)
======= =======
Loss per share:
Basic and diluted - as reported $ (1.26) $ (2.57)
Basic and diluted - pro forma $ (1.28) $ (2.59)
NOTE 1 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," which addresses consolidation by
a business of variable interest entities in which it is the primary beneficiary.
In December 2003, the FASB issued a revised Interpretation, FIN 46R, which
addresses a partial deferral of and certain proposed modifications to FIN 46, to
address certain implementation issues. The adoption of FIN 46R on January 1,
2004 did not have a material impact on the Company's financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits, an
amendment of FASB Statements No. 87,88, and 106, and a revision of FASB
Statement No. 132" ("SFAS 132 (revised 2003)"). This statement revises
employers' disclosures about pension plans and other postretirement benefit
plans. SFAS 132 is effective for fiscal years ending after December 15, 2003 and
the Company has adopted the applicable disclosures during fiscal year 2003.
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (FSP 106-1). The FSP permits
employers that sponsor postretirement benefit plans (plan sponsors) that provide
prescription drug benefits to retirees to make a one-time election to defer
accounting for any effects of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (the "Act"). Without the FSP, plan sponsors would be
required under Statement of Financial Accounting Standards No. 106, EMPLOYERS'
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (FAS 106), to account
for the effects of the Act in the fiscal period that includes December 8, 2003,
the date the President signed the Act into law. The Company has elected to defer
the accounting for any effects of the Act in their fiscal 2003 financial
statements.
Proposed FASB Staff Position No. 106b (FSP 106-b) includes guidance
on recognizing the effects of the new legislation under various conditions
surrounding the assessment of "actuarial equivalence" of subsidies under the
Act. The proposed FSP 106-b, if passed would be effective for the first interim
or annual period beginning after June 15, 2004 with earlier application
permitted. The Company's accumulated plan benefit obligations and net periodic
benefit cost do not reflect any amount associated with the subsidy because the
Company is unable to conclude whether the plan's prescription drug benefit is
actuarially equivalent to Medicare "Part D" benefits under the Act.
NOTE 2 - EARNINGS PER SHARE
The computation of basic earnings per common share is based upon the
average number of shares of Common Stock outstanding. In the computation of
diluted earnings per common share in the three-month period ended March 31, 2004
and 2003, the conversion of preferred stock and the exercise of options would
have had an anti-dilutive effect. At March 31, 2004 and 2003 the assumed
conversion of preferred stock would increase outstanding shares of common stock
by 5,127,914 shares. At March 31, 2004 the exercise of stock options would
increase outstanding shares of common stock by 94,171 shares. At March 31, 2004
there were 60,000 shares of non-vested common stock associated with restricted
stock awards. A reconciliation of the income and shares used in the computation
follows:
6
RECONCILIATION OF INCOME AND SHARES IN EPS CALCULATION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
For the Three Months Ended March 31, 2004
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Net loss $ (1,985)
Less: Preferred stock dividends 4,856
---------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $ (6,841) 5,427 $ (1.26)
========= ========== =======
For the Three Months Ended March 31, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Net loss $ (8,848)
Less: Preferred stock dividends 4,856
---------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $(13,704) 5,339 $ (2.57)
========= ========== =======
Outstanding stock options for common stock granted to officers,
directors, key employees and others totaled 1.2 million at March 31, 2004.
PREFERRED STOCK DIVIDENDS
At March 31, 2004, dividends in arrears to Series A and Series B
Convertible Preferred Shareholders were $29.3 million and $38.7 million,
respectively. Presently management believes that it is not likely that the
Company will be able to pay these dividends in the foreseeable future.
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three-months ended March 31, 2004 and 2003
is as follows:
(IN THOUSANDS) THREE MONTHS ENDED
MARCH 31,
2004 2003
---- ----
Net loss $(1,985) $(8,848)
Other comprehensive income (loss):
Foreign currency translation adjustments (334) 761
------- -------
Comprehensive income (loss) $(2,319) $(8,087)
======= =======
Accumulated other comprehensive income (loss) balances as of March 31, 2004 and
December 31, 2003 were comprised as follows:
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2004 2003
-------------------------
Minimum pension liability adjustment $(23,996) $(23,996)
Foreign currency translation adjustment 2,020 2,354
----------------------
(21,976) (21,642)
======================
7
NOTE 4 - SHORT TERM INVESTMENTS
Net realized and unrealized losses on trading securities included in
other income (expense) for the first quarter of 2004 and 2003 were income of
$0.3 million and losses of $0.9 million, respectively.
NOTE 5 - INVENTORIES
Inventories at March 31, 2004 and December 31, 2003 are comprised as
follows:
(IN THOUSANDS) MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Finished products $ 14,826 $ 14,938
In-process 9,691 7,992
Raw materials 16,292 17,290
Precious metal - hedged 15,322 --
Fine and fabricated precious metal in various stages of completion - at market 2,530 1,575
-------- --------
58,661 41,795
LIFO reserve (968) (13)
-------- --------
$ 57,693 $ 41,782
======== ========
The Company holds unhedged precious metal positions that are subject
to market fluctuations. The portion of the precious metal inventory that has not
been hedged and, therefore, is subject to price risk is included in inventory
using the last-in, first-out (LIFO) method of inventory valuation.
Hedged precious metal reflects the fair value of precious metal
purchased (other than LIFO inventory) and held by the Company plus the fair
value of contracts that are in a gain position undertaken to economically hedge
price exposures. The price exposure is hedged through a forward or future sale.
To the extent metal prices increase subsequent to a spot purchase
that has been hedged, the Company will recognize a gain as a result of marking
the spot metal to market while at the same time recognizing a loss related to
the fair value of the derivative instrument (forwards and futures). The
aggregate fair value of derivatives in a loss position is classified as part of
hedged metal obligations at the balance sheet date because the Company has
incurred a liability to a third party. Should the reverse occur and metal prices
decrease, the resultant gain on the derivative will be offset against the loss
within the hedged metal position.
Both hedged precious metal and derivative instruments used in
hedging are stated at fair value. Any change in value, whether realized or
unrealized, is recognized as an adjustment to cost of sales in the period of the
change.
The market value of the unhedged precious metal inventory recorded
at LIFO exceeded cost by $1.0 million and $0 million at March 31, 2004 and
December 31, 2003, respectively. The operating loss for the three-months ended
March 31, 2003, includes a non-cash charge resulting from the lower of cost or
market adjustment on precious metal inventories in the amount of $1.3 million.
In the normal course of business, certain customers and suppliers
deposit quantities of precious metals with the Company under a variety of
arrangements. Equivalent quantities of precious metals are returnable as product
or in other forms. Metals held for the accounts of customers and suppliers are
not reflected in the Company's financial statements.
At December 31, 2003, 1,605,000 ounces of silver and 14,617 ounces
of gold were leased to the Company under a consignment facility. This
consignment facility was terminated on March 30, 2004 and H&H purchased
approximately $15.0 million of precious metal. The price exposure on this metal
purchase was hedged through a forward sale.
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.
8
The following table presents the components of net periodic pension cost
(credit) for the three months ended March 31, 2004 and 2003:
Domestic Plan
------------------------
2004 2003
------------------------
(IN THOUSANDS)
Service cost $ 375 $ 2,125
Interest cost 5,800 $ 6,200
Expected return on plan assets (6,875) (6,175)
Amortization of prior service cost 25 1,450
Recognized actuarial (gain)/loss -- 430
------- -------
$ (675) $ 4,030
======= =======
NOTE 7 - GOODWILL AND OTHER INTANGIBLES
The components of goodwill by segment at December 31, 2003 and March
31, 2004 were as follows:
(IN THOUSANDS)
Precious Wire & Engineered
Metals Tubing Materials Total
-------- -------- ----------- ----------
Balance as of December 31, 2003 $ 56,471 $ 21,751 $ 47,150 $ 125,372
======== ======== ======== =========
Balance at March 31, 2004 $ 56,471 $ 21,681 $ 47,150 $ 125,302
======== ======== ======== =========
As of December 31, 2003 and March 31, 2004, the Company had
approximately $0.6 million of other intangible assets, which will continue to be
amortized over their remaining useful lives ranging from 3 to 17 years.
NOTE 8 - DEBT
The Company's long-term debt consists of the following debt
instruments:
(IN THOUSANDS) MARCH 31, DECEMBER 31,
2004 2003
--------- ---------
Senior Notes due 2005, 10 1/2% $ 92,820 $ 92,820
Handy & Harman Credit Facility - Congress 22,150 --
Handy & Harman Credit Facility - Ableco 71,000 --
Handy & Harman Senior Secured Credit Facility -- 129,080
Other 8,679 7,500
-------- --------
194,649 229,400
Less portion due within one year 6,549 40,056
-------- --------
Total long-term debt $188,100 $189,344
======== ========
On March 31, 2004, H&H obtained new financing agreements to replace
its existing Senior Secured Credit Facilities, including the revolving credit
facility. The new financing agreements include a revolving credit facility and a
$22.2 million Term A Loan with Congress Financial Corporation ("Congress
Facilities") and a $71.0 million Term B Loan with Ableco Finance LLP ("Ableco").
Concurrently with the new financing agreements, WHX loaned $43.5 million to H&H
to repay, in part, the Senior Secured Credit Facilities. Such loan is
subordinated to the loans from Congress and Ableco. In addition, WHX deposited
$5.0 million of cash with Ableco as collateral security for the H&H obligation.
Portions of the cash collateral may be returned to WHX prior to maturity of the
Term B Loan if H&H meets and maintains certain defined leverage ratios.
The new revolving credit facility provides for up to $70.0 million
of borrowings dependent on the levels of and collateralized by eligible accounts
receivable and inventory. The new revolving credit facility provides for
9
interest at LIBOR plus 2.75% or the U.S. Base rate plus 1.00%. Borrowings under
the new revolving credit facility amounted to $32.8 million at March 31, 2004.
The Congress Facilities mature on March 31, 2007. On March 31, 2004 H&H had
approximately $4.0 million of funds available under the new revolving credit
facility after deducting $10.0 million excess availability required at closing
($5.0 million required thereafter). The Term Loan A is secured by eligible
equipment and real estate, and provides for interest at LIBOR plus 3.25% or U.S.
Base rate plus 1.5%. Borrowings under the Congress Facilities are collateralized
by first priority security interests in and liens upon all present and future
stock and assets of H&H and its subsidiaries including all contract rights,
deposit accounts, investment property, inventory, equipment, real property, and
all products and proceeds thereof. The $22.2 million of principal of the Term
Loan A is payable in monthly installments of $299,000. The Congress Facilities
contain affirmative, negative, and financial covenants (including minimum
EBITDA, maximum leverage, and fixed charge coverage), and restrictions on cash
distributions that can be made to WHX.
The Ableco $71.0 million Term B Loan matures on March 31, 2007 and
provides for annual payments based on 40% of excess cash flow as defined in the
agreement. Interest is payable monthly at the Prime Rate plus 8%. At no time
shall the Prime Rate of interest be below 4%. The Term B Facility has a second
priority security interest in and lien on all assets of H&H, subject only to the
prior lien of the Congress Facilities. The Term B facility contains affirmative,
negative, and financial covenants (including minimum EBITDA, maximum leverage,
and fixed charge coverage), and restrictions on cash distributions that can be
made to WHX.
At March 31, 2004 restricted cash of $7.7 million collateralized
letters of credit totaling $7.3 million.
In March 2004, H&H's wholly owned Danish subsidiary obtained new
financing agreements to replace and repay its existing debt which had been
issued under a multi-currency facility within the existing H&H Senior Secured
Credit Facilities. The new Danish facilities are with a Danish Bank and include
a revolving credit facility and term loans. At March 31, 2004 there was
approximately $6.4 million outstanding under the term loans.
In connection with the refinancing of the H&H Senior Secured Credit
Facility in March 2004, the Company wrote off deferred financing fees of $1.2
million. In the three months ended March 31, 2003, the Company purchased and
retired $5.7 million aggregate principal amount of 10 1/2% Senior Notes in the
open market for $4.5 million. After the write off of $0.2 million of deferred
debt related costs, the Company recognized a pre-tax gain of $1.0 million.
NOTE 9- CONTINGENCIES
SEC ENFORCEMENT ACTION
On June 25, 1998, the Securities and Exchange Commission ("SEC")
instituted an administrative proceeding against the Company alleging that it had
violated certain SEC rules in connection with the tender offer for Dynamics
Corporation of America ("DCA") commenced on March 31, 1997 through the Company's
wholly-owned subsidiary, SB Acquisition Corp. ("Offer"). Specifically, the Order
Instituting Proceedings ("Order") alleges that, in its initial form, the Offer
violated the "All Holders Rule," Rule 14d-10(a)(1) under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and that the Company violated Rules
14d-4(c) and 14d-6(d) under the Exchange Act upon expiration of the Offer. The
SEC does not claim that the Offer was intended to or in fact defrauded any
investor. On October 6, 2000, the initial decision of the Administrative Law
Judge who heard the case dismissed all charges against the Company, with the
finding that the Company had not violated the law.
The Division of Enforcement filed a petition and brief for the SEC
to review the decision, but only as to the All Holders Rule Claim. On June 4,
2003, the SEC issued an Opinion of the Commission that found that the Company
had violated the "All Holders Rule" and ordered that the Company cease and
desist from further violations of Section 14(d)(4) of the Exchange Act or the
"All Holders Rule." The Company filed a petition for review of the SEC's
decision with the United States Court of Appeals for the District of Columbia.
On April 9, 2004, the Court of Appeals vacated the SEC's cease and desist order
and the portion of the SEC's Opinion that found the order justified, on the
grounds that both were arbitrary and capricious. The Court's Opinion also
expressly explained that the Court did not need to reach (and did not reach) the
Company's other claims, which, among other things, challenged the merits of the
SEC's finding that the Company violated the "All Holders Rule." The Company does
not know at this time whether the SEC will seek further appellate review of the
Court's Opinion.
PBGC ACTION
On March 6, 2003, the Pension Benefit Guaranty Corporation ("PBGC")
published its Notice of Determination ("Notice") and on March 7, 2003 filed a
Summons and Complaint ("Complaint") in United States District Court for the
10
Southern District of New York seeking the involuntary termination of the WHX
Plan. WHX filed an answer to this complaint on March 27, 2003, contesting the
PBGC's action. On July 24, 2003, the Company entered into an agreement among the
PBGC, Wheeling-Pittsburgh Corporation ("WPC"), Wheeling-Pittsburgh Steel
Corporation ("WPSC"), and the United Steelworkers of America, AFL-CIO-CLC
("USWA") in settlement of matters relating to the PBGC v. WHX Corporation, Civil
Action No. 03-CV-1553, in the United States District Court for the Southern
District of New York ("Termination Litigation"), in which the PBGC was seeking
to terminate the WHX Plan. Under the settlement, among other things, WHX agreed
(a) that the WHX Plan, as it is currently constituted, is a single employer
pension plan, (b) to contribute funds to the WHX Plan equal to moneys spent (if
any) by WHX or its affiliates to purchase WHX 10.5% Senior Notes ("Senior
Notes") in future open market transactions, and (c) to grant to the PBGC a pari
passu security interest of up to $50.0 million in the event WHX obtains any
future financing on a secured basis or provides any security or collateral for
the Senior Notes. Also, under the settlement, the PBGC agreed (a) that, after
the effective date of the POR, if it terminates the WHX Plan at least one day
prior to a Steel facility shutdown, WHX shall be released from any additional
liability to PBGC resulting from the shutdown, (b) to withdraw its claims in the
WPC Bankruptcy Proceedings; and (c) to dismiss the Termination Litigation.
THE WHX GROUP GENERAL LITIGATION
The WHX Group is a party to various litigation matters including
general liability claims covered by insurance. In the opinion of management,
such claims are not expected to have a material adverse effect on the financial
condition or results of operations of the Company. However, it is possible that
the ultimate resolution of such litigation matters and claims could have a
material adverse effect on quarterly or annual operating results when they are
resolved in future periods.
ENVIRONMENTAL MATTERS
Prior to the consummation of the POR, WHX was the sole stockholder
of WPC, the parent company of the WPC Group. The WPC Group has been identified
as a potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund") or similar state statutes
at several waste sites. The WPC Group is subject to joint and several liability
imposed by Superfund on potentially responsible parties. The WPC Group entered
into a Settlement Agreement with the US EPA that resolves all of the US EPA's
pre-petition unsecured claims under the Superfund law and releases the WPC Group
from any future liability for such claims. The Bankruptcy Court approved the
Settlement Agreement by order entered June 13, 2003.
In the event the WPC Group is responsible for any environmental
liabilities relating to the period prior to the consummation of the POR, and is
unable to fund these liabilities, claims may be made against WHX for payment of
such liabilities.
NOTE 10 - REPORTED SEGMENTS
The Company has three reportable segments: (1) Precious Metal. This
segment manufactures and sells precious metal products and electroplated
material, containing silver, gold, and palladium in combination with base metals
for use in a wide variety of industrial applications; (2) Wire & Tubing. This
segment manufactures and sells metal wire, cable and tubing products and
fabrications primarily from stainless steel, carbon steel and specialty alloys,
for use in a wide variety of industrial applications; (3) Engineered Materials.
This segment manufactures specialty roofing and construction fasteners, products
for gas, electricity and water distribution using steel and plastic which are
sold to the construction, and natural gas and water distribution industries, and
electrogalvinized products used in the construction and appliance industries.
Management reviews operating income to evaluate segment performance.
Operating income for the reportable segments excludes unallocated general
corporate expenses. Other income and expense, interest expense, and income taxes
are not presented by segment since they are excluded from the measure of segment
profitability reviewed by the Company's management.
The following table presents information about reported segments for
the three-month period ending March 31, 2004 and 2003:
11
(IN THOUSANDS) THREE MONTHS ENDED
March 31,
2004 2003
---- ----
Revenue
Precious Metal $ 28,622 $ 22,354
Wire & Tubing 34,562 32,148
Engineered Materials 34,310 26,498
-------- --------
Consolidated revenue $ 97,494 $ 81,000
======== ========
Segment operating income
Precious Metal $ 2,477 $ (1,199)
Wire & Tubing (203) (725)
Engineered Materials 3,151 613
-------- --------
5,425 (1,311)
-------- --------
Loss on disposal of fixed assets 42 13
Unallocated corporate expenses 1,241 6,611
-------- --------
Operating income (loss) 4,142 (7,935)
Interest expense 4,709 5,017
Gain on early retirement of debt (1,161) 1,033
Other income (expense) 255 (1,508)
-------- --------
Income (loss) before taxes (1,473) (13,427)
Income tax benefit 512 (4,579)
-------- --------
Net loss $ (1,985) $ (8,848)
======== ========
NOTE 11 - SUPPLEMENTAL WPC GROUP INCOME STATEMENT DATA
During the three months ended March 31, 2003 the WPC Group incurred
a net loss of $45.6 million. These results are not reflected in WHX's March 31,
2003 consolidated results of operations. The WPC Group's summarized income
statement data for the three months ended March 31, 2003 is as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
2003
--------
Net sales $ 238,672
Cost of goods sold, excluding depreciation 247,253
Depreciation 17,445
Selling, general and administrative expenses 13,864
Reorganzation expenses 3,300
---------
Operating profit/(loss) (43,190)
Interest expense 3,651
Reorganization income (expense) (9)
Other income (expense) 1,234
---------
Pre-tax profit/(loss) (45,616)
Tax provision 9
---------
Net income/(loss) $ (45,625)
=========
12
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Risk Factors and Cautionary Statements
This Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the 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, and (iii) the impact of
competition. The words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate," and similar expressions are intended to identify such
forward-looking statements; however, this Report also contains other
forward-looking statements in addition to historical information.
Any forward-looking statements made by WHX are not guarantees of
future performance and there are various important factors that could cause
actual results to differ materially from those indicated in the forward-looking
statements. This means that indicated results may not be realized.
Factors that could cause the actual results of the WHX Group in
future periods to differ materially include, but are not limited to, the
following:
o The WHX 10 1/2% Senior Notes in the amount of $92.8 million are
due on April 15, 2005. It is the Company's intention to
refinance this obligation prior to its scheduled maturity;
however there can be no assurance that such refinancing will be
obtained. The Company's access to capital markets in the future
to refinance such indebtedness may be limited. If the Company
were unable to refinance this obligation, it would have a
material adverse impact on the liquidity, financial position and
capital resources of WHX and would impact the Company's ability
to continue as a going concern. The financial statements do not
reflect any adjustments related to this matter;
o The new H&H financing agreements discussed below restrict cash
payments to WHX. The ability of WHX to liquidate liabilities
arising in the ordinary course of business through December 31,
2004 contemplates the sale of assets held at the parent company
level, which management intends to do as necessary;
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 SEC could continue to
adversely affect the Company's results of operations;
o The WPC Group has a large net operating tax loss carryforward.
WPC was part of the Company's consolidated tax group. In
accordance with federal tax laws and regulations, WPC's tax
attributes have been utilized by the Company's consolidated
group to reduce its consolidated federal tax obligations. The
WPC Group's tax attributes were available to the WHX Group
through December 31, 2003, and are no longer available; and
o Prior to the consummation of the POR, WHX was the sole
stockholder of WPC, the parent company of the WPC Group. The WPC
Group has been identified as a potentially responsible party
under the Superfund law or similar state statutes at several
waste sites. The WPC Group is subject to joint and several
liability imposed by Superfund on potentially responsible
parties. The WPC Group entered into a Settlement Agreement with
the US EPA that resolves all of the US EPA's pre-petition
unsecured claims under the Superfund law and releases the WPC
Group from any future liability for such claims. The Bankruptcy
Court approved the Settlement Agreement by order entered June
13
13, 2003. In the event the WPC Group is responsible for any
environmental liabilities relating to the period prior to the
consummation of the POR, and is unable to fund these
liabilities, claims may be made against WHX for payment of such
liabilities.
OVERVIEW
WHX is a holding company that has been structured to invest in and
manage a diverse group of businesses. 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 continues to pursue strategic alternatives to maximize the value
of its portfolio of businesses. Some of these alternatives have included, and
will continue to include, selective acquisitions, divestitures and sales of
certain assets. WHX has provided, and may from time to time in the future,
provide information to interested parties regarding portions of its businesses
for such purposes.
RESULTS OF OPERATIONS
COMPARISON OF THE FIRST QUARTER OF 2004 WITH THE FIRST QUARTER OF 2003
Net sales for the first quarter of 2004 were $97.5 million compared
to $81.0 million in the first quarter of 2003. Sales increased by $6.3 million
at the Precious Metal Segment, $2.4 million at the Wire & Tubing Segment and
$7.8 million at the Engineered Materials Segment. Gross profit percentage
increased in the first quarter of 2004 to 18.5% from 17.3% in the first quarter
of 2003. This increase resulted from a $1.3 million lower of cost or market
adjustment for precious metal inventory in the 2003 period.
Selling, general and administrative expenses decreased $8.2 million
to $13.8 million in the first quarter of 2004 from $22.0 million in the
comparable 2003 period. This resulted from a decrease in net pension expense of
$4.7 million, a $3.5 million charge for employee separation and related expenses
in the first quarter of 2003, lower executive and administrative expenses at H&H
resulting from personnel reductions, and the termination of the WPN management
agreement. This was partially offset by increased selling expense related to the
20.4% increase in sales. The $3.5 million charge in 2003 related to a reduction
in executive, administrative and information technology personnel at H&H.
Operating income for the first quarter of 2004 was $4.1 million
compared to an operating loss of $7.9 million for the first quarter of 2003.
Operating income at the segment level was $5.4 million compared to an operating
loss of $1.3 million in 2003. The improvement relates to increased sales at all
business segments and reduced SG&A expenses. The 2003 operating loss at the
segment level includes the $3.5 million charge for employee separation and
related expenses discussed above. These charges have been allocated to the three
business segments.
Unallocated corporate expenses declined from $6.6 million to $1.2
million. This improvement is related to a decrease in pension expense of $4.7
million, lower professional fees, and the termination of the WPN management
agreement in January of 2004, partially offset by an increase in salary expense
and insurance costs. Full year pension expense under SFAS 87 accounting is
estimated to be a credit of $2.7 million in 2004. Accordingly, a pension credit
of $0.7 million was recognized in the first quarter of 2004.
Interest expense for the first quarter of 2004 decreased $0.3
million to $4.7 million from $5.0 million in the first quarter of 2003. This
decrease was due to lower borrowings and lower interest rates.
Other income of $0.3 million in the first quarter of 2004 was
primarily investment income.
For the three months ended March 31,2004 the company recorded the
write off of deferred financing fees of $1.2 million related to H&H's previous
credit facility, which was refinanced on March 31, 2004. This $1.2 million is
classified as a loss on the early retirement of debt in the condensed
consolidated statement of operations at March 31, 2004. In the three months
ended March 31, 2003, the Company purchased and retired $5.7 million aggregate
principal amount of 10 1/2% Senior Notes in the open market for $4.5 million.
After the write off of $0.2 million of deferred debt related costs, the Company
recognized a pre-tax gain of $1.0 million.
In 2004 a tax provision of $0.5 million was recorded for foreign and
state taxes. The Company has recorded a valuation allowance related to the
Federal tax benefit associated with the current year loss due to the uncertainty
14
of realizing these benefits in the future. The 2003 first quarter tax benefit is
based on a Federal benefit of 35%, offset by permanent differences and state and
foreign tax expense.
The comments that follow compare revenues and operating income by
segment for the first quarter 2004 and 2003:
PRECIOUS METAL
Sales for the Precious Metal Segment increased $6.3 million from
$22.4 million in 2003 to $28.6 million in 2004 primarily due to the stronger
U.S. manufacturing economy, including the automotive, electronic and
construction sectors, and increased precious metal prices.
Operating income increased $3.7 million to $2.5 million in 2004 from
a loss of $1.2 million in 2003. Included in 2003 is a non-cash lower of cost or
market charge of $1.3 million related to precious metals inventory and an
additional $1.1 million of severance and related expenses allocated to this
group from the reduction in salaried staff at Handy & Harman. The remaining
operating income increase of $1.3 million is related to the abovementioned
increase in sales.
WIRE & Tubing
Sales for the Wire & Tubing Segment increased $2.4 million from
$32.1 million in 2003 to $34.6 million in 2003. This increase is primarily
related to a strong appliance market for our domestic and foreign refrigeration
tubing businesses.
Operating loss decreased by $0.5 million from a loss of $0.7 million
in 2003 to an operating loss of $0.2 million in 2004. Included in 2003 is an
additional $1.5 million of severance and related expenses allocated to this
group from the reduction in salaried staff at Handy & Harman. The remaining
operating income decline of $1.0 million in 2004 was due to a shift to lower
margin products in the wire group when compared to the first quarter of 2003 and
production inefficiencies related to new products at a stainless tubing group
facility. These declines were partially offset by the improved operating
performance at our refrigeration tubing facilities.
ENGINEERED MATERIALS
Sales for the Engineered Materials Segment increased $7.8 million
from $26.5 million in 2003 to $34.3 million in 2004 due to a stronger commercial
construction market, increased home center sales, new products in this segment's
fastener business, and increased sales prices.
Operating income increased by $2.5 million from $0.6 million in 2003
to $3.2 million in 2004. Included in 2003 is an additional $0.9 million of
severance and related expenses allocated to this group from the reduction in
salaried staff at Handy & Harman. The remaining operating income increase is
primarily due to the sales gains discussed above, partially offset by increased
steel costs.
FINANCIAL POSITION
Net cash used by operating activities for the three months ended
March 31, 2004 totaled $17.3 million. Income from operations adjusted for
non-cash income and expense items provided $3.0 million of cash. Working capital
accounts used $20.8 million of funds, as follows: Accounts receivable used $15.7
million, trade payables provided $10.3 million, and net other current items
provided $0.5 million. Inventories totaled $57.7 million at March 31, 2004, and
used $15.9 million. The increase in accounts receivable, which was partially
offset by an increase in trade payables, reflects the strong sales levels for
the quarter compared to the preceding quarter. The increase in inventory is
related to the termination of the Company's precious metal consignment facility.
At December 31, 2003, 1,605,000 ounces of silver and 14,617 ounces of gold were
leased to the Company under the consignment facility. Upon termination of this
facility on March 30, 2004 H&H purchased approximately $15.0 million of precious
metal. The price exposure on this metal purchase was hedged through a forward
sale.
Other non-working capital items included in operating activities
provided $0.6 million.
In the first three months of 2004, $2.4 million was spent on capital
improvements.
15
In 2003 the Company purchased an aircraft, which it sold in the
first quarter of 2004 for $19.3 million. The sale resulted in a gain of $30,000.
The aircraft was included in other current assets on the Company's consolidated
balance sheet at December 31, 2003.
The Company's major subsidiary, H&H, maintains separate and distinct
credit facilities with various financial institutions. These facilities contain
affirmative, negative, and financial covenants (including minimum EBITDA,
maximum leverage, and fixed charge coverage), and restrictions on cash
distributions that can be made to WHX.
Borrowings outstanding under Handy & Harman's new credit facilities
at March 31, 2004 amounted to $125.9 million. Restricted cash of $7.7 million
collateralized letters of credit totaling $7.3 million.
LIQUIDITY
As previously discussed the WHX 10 1/2% Senior Notes in the amount
of $92.8 million are due on April 15, 2005. It is the Company's intention to
refinance this obligation prior to its scheduled maturity; however there can be
no assurance that such refinancing will be obtained. The Company's access to
capital markets in the future to refinance such indebtedness may be limited. If
the Company were unable to refinance this obligation, it would have a material
adverse impact on the liquidity, financial position and capital resources of WHX
and would impact the Company's ability to continue as a going concern. The
financial statements do not reflect any adjustments related to this matter.
WHX's liquidity is dependent on its ability to refinance the 10 1/2%
Senior Notes, cash on hand, investments, and general economic conditions and
their effect on market demand. In addition, it 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
satisfied its working capital requirements through cash on hand, investments,
borrowing availability under the H&H Facilities and funds generated from
operations. The WHX Group believes that, cash on hand, investments, sales of
selected assets, and funds available under the new H&H credit facilities, will
provide the WHX Group with the funds required to satisfy working capital and
capital expenditure requirements. However, factors, such as economic conditions,
could materially affect the WHX Group's results of operations, financial
condition and liquidity.
The new H&H financing agreements (see below) restrict cash payments
to WHX. The ability of WHX to liquidate liabilities arising in the ordinary
course of business prior to the maturity of the 10 1/2% Senior Notes on April
15, 2005 contemplates the sale of assets held at the parent company level, which
management intends to do as necessary.
H&H's revolving credit facility existing at December 31, 2003 was
scheduled to mature on July 31, 2004. On March 31, 2004, H&H obtained new
financing agreements to replace and repay its existing Senior Secured Credit
Facilities, including the revolving credit facility. The new financing
agreements include a $70.0 million revolving credit facility and a $22.2 million
Term A Loan with Congress Financial Corporation ("Congress Facilities") and a
$71.0 million Term B Loan with Ableco Finance LLP ("Ableco"). Concurrently with
the new financing agreements, WHX loaned $43.5 million to H&H to repay, in part,
the Senior Secured Credit Facilities. Such loan is subordinated to the loans
from Congress and Ableco. In addition, WHX deposited $5.0 million of cash with
Ableco as collateral security for the H&H obligation. Portions of the cash
collateral may be returned to WHX prior to maturity of the Term B Loan if H&H
meets and maintains certain defined leverage ratios.
The new revolving credit facility provides for up to $70.0 million
of borrowings dependent on the levels of and collateralized by eligible accounts
receivable and inventory. The new revolving credit facility provides for
interest at LIBOR plus 2.75% or the U.S. Base rate plus 1.00%. Borrowings under
the new revolving credit facility amounted to $32.8 million at March 31, 2004.
The Congress facilities mature on March 31, 2007. On March 31, 2004 H&H had
approximately $4.0 million of funds available under the new revolving credit
facility after deducting $10.0 million of excess availability required at
closing ($5.0 million required thereafter). The Term Loan A is collateralized by
eligible equipment and real estate, and provides for interest at LIBOR plus
3.25% or the prime rate plus 1.5%. Borrowings under the Congress Facilities are
collateralized by first priority security interests in and liens upon all
present and future stock and assets of H&H and its subsidiaries including all
contract rights, deposit accounts, investment property, inventory, equipment,
real property, and all products and proceeds thereof. The principal of the Term
Loan A is payable in monthly installments of $299,000. The Congress Facilities
16
contain affirmative, negative, and financial covenants (including minimum
EBITDA, maximum leverage, and fixed charge coverage), and restrictions on cash
distributions that can be made to WHX.
The Ableco $71.0 million Term B Loan matures on March 31, 2007 and
provides for annual payments based on 40% of excess cash flow as defined in the
agreement. Interest is payable monthly at the Prime Rate plus 8%. At no time
shall the Prime Rate of interest be below 4%. The Term B Facility has a second
priority security interest in and lien on all assets of H&H, subject only to the
prior lien of the Congress Facilities. The Term B facility contains affirmative,
negative, and financial covenants (including minimum EBITDA, maximum leverage,
and fixed charge coverage), and restrictions on cash distributions that can be
made to WHX.
In March 2004, H&H's wholly owned Danish subsidiary obtained new
financing agreements to replace and repay its existing debt which had been
issued under a multi-currency facility within the existing H&H Senior Secured
Credit Facilities. The new Danish facilities are with a Danish Bank and include
a revolving credit facility and term loans. At March 31, 2004 there was
approximately $6.2 million outstanding under the term loans.
As of March 31, 2004, the total of the WHX Group's future
contractual commitments, including the repayment of debt obligations is
summarized as follows:
Payments Due by Period
---------------------------------------------------------------------------
Contractual
Obligations Total 2004 2005 2006 2007 thereafter
- ------------------------------------------------------------------------------------------------
Debt $ 227,428 $ 38,317 $ 96,869 $ 4,051 $ 83,734 $ 4,457
Operating Leases $ 5,161 $ 1,262 $ 1,660 $ 1,326 $ 913 $ 7
At March 31, 2004 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 March 31, 2004. 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 March 31, 2004, preferred
dividends in arrears totaled $68.0 million.
NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," which addresses consolidation by
a business of variable interest entities in which it is the primary beneficiary.
In December 2003, the FASB issued a revised Interpretation, FIN 46R, which
addresses a partial deferral of and certain proposed modifications to FIN 46, to
address certain implementation issues. The adoption of FIN 46R on January 1,
2004 did not have a material impact on the Company's financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits, an
amendment of FASB Statements No. 87,88, and 106, and a revision of FASB
Statement No. 132" ("SFAS 132 (revised 2003)"). This statement revises
employers' disclosures about pension plans and other postretirement benefit
plans. SFAS 132 is effective for fiscal years ending after December 15, 2003 and
the Company has adopted the applicable disclosures during fiscal year 2003.
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (FSP 106-1). The FSP permits
employers that sponsor postretirement benefit plans (plan sponsors) that provide
prescription drug benefits to retirees to make a one-time election to defer
accounting for any effects of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (the "Act"). Without the FSP, plan sponsors would be
17
required under Statement of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions (FAS 106), to account
for the effects of the Act in the fiscal period that includes December 8, 2003,
the date the President signed the Act into law. The Company has elected to defer
the accounting for any effects of the Act in their fiscal 2003 financial
statements.
Proposed FASB Staff Position No. 106b (FSP 106-b) includes guidance
on recognizing the effects of the new legislation under various conditions
surrounding the assessment of "actuarial equivalence" of subsidies under the
Act. The proposed FSP 106-b, if passed would be effective for the first interim
or annual period beginning after June 15, 2004 with earlier application
permitted. The Company's accumulated plan benefit obligations and net periodic
benefit cost do not reflect any amount associated with the subsidy because the
Company is unable to conclude whether the plan's prescription drug benefit is
actuarially equivalent to Medicare "Part D" benefits under the Act.
*******
When used in the Management's Discussion and Analysis, the words
"anticipate", "estimate" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which are intended to be covered by the
safe harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, general
economic conditions and, the ability of the Company to develop markets and sell
its products and the effects of competition and pricing. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included herein will prove
to be accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. 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.
The Company holds unhedged precious metal positions that are subject
to market fluctuations. The portion of the precious metal inventory that has not
been hedged and, therefore, is subject to price risk is included in inventory
using the last-in, first-out (LIFO) method of inventory valuation. To the extent
that additional precious metal inventory is required to support operations,
precious metals are purchased and immediately sold using forward or future
contracts, to eliminate the economic risk of price fluctuations. To minimize the
risk of counter party non-performance, such contracts are made only through
major financial institutions. From time to time, senior management reviews the
appropriate precious metal inventory levels and may elect to make adjustments.
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.
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.
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 March 31, 2004, 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
18
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.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of March 31, 2004, the Company's
Principal Executive Officer and Principal Financial Officer have concluded the
Company's disclosure controls and procedures (as defined in Rule 13a-15 under
the Securities Exchange Act of 1934) are effective. There have been no
significant changes in internal controls over financial reporting subsequent to
December 31, 2003 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SEC ENFORCEMENT ACTION
On June 25, 1998, the Securities and Exchange Commission ("SEC")
instituted an administrative proceeding against the Company alleging that it had
violated certain SEC rules in connection with the tender offer for Dynamics
Corporation of America ("DCA") commenced on March 31, 1997 through the Company's
wholly-owned subsidiary, SB Acquisition Corp. ("Offer"). Specifically, the Order
Instituting Proceedings ("Order") alleges that, in its initial form, the Offer
violated the "All Holders Rule," Rule 14d-10(a)(1) under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and that the Company violated Rules
14d-4(c) and 14d-6(d) under the Exchange Act upon expiration of the Offer. The
SEC does not claim that the Offer was intended to or in fact defrauded any
investor. On October 6, 2000, the initial decision of the Administrative Law
Judge who heard the case dismissed all charges against the Company, with the
finding that the Company had not violated the law.
The Division of Enforcement filed a petition and brief for the SEC
to review the decision, but only as to the All Holders Rule Claim. On June 4,
2003, the SEC issued an Opinion of the Commission that found that the Company
had violated the "All Holders Rule" and ordered that the Company cease and
desist from further violations of Section 14(d)(4) of the Exchange Act or the
"All Holders Rule." The Company filed a petition for review of the SEC's
decision with the United States Court of Appeals for the District of Columbia.
On April 9, 2004, the Court of Appeals vacated the SEC's cease and desist order
and the portion of the SEC's Opinion that found the order justified, on the
grounds that both were arbitrary and capricious. The Court's Opinion also
expressly explained that the Court did not need to reach (and did not reach) the
Company's other claims, which, among other things, challenged the merits of the
SEC's finding that the Company violated the "All Holders Rule." The Company does
not know at this time whether the SEC will seek further appellate review of the
Court's Opinion.
PBGC ACTION
On March 6, 2003, the Pension Benefit Guaranty Corporation ("PBGC")
published its Notice of Determination ("Notice") and on March 7, 2003 filed a
Summons and Complaint ("Complaint") in United States District Court for the
Southern District of New York seeking the involuntary termination of the WHX
Plan. WHX filed an answer to this complaint on March 27, 2003, contesting the
PBGC's action. On July 24, 2003, the Company entered into an agreement among the
PBGC, Wheeling-Pittsburgh Corporation ("WPC"), Wheeling-Pittsburgh Steel
Corporation ("WPSC"), and the United Steelworkers of America, AFL-CIO-CLC
("USWA") in settlement of matters relating to the PBGC V. WHX CORPORATION, Civil
Action No. 03-CV-1553, in the United States District Court for the Southern
District of New York ("Termination Litigation"), in which the PBGC was seeking
to terminate the WHX Plan. Under the settlement, among other things, WHX agreed
(a) that the WHX Plan, as it is currently constituted, is a single employer
pension plan, (b) to contribute funds to the WHX Plan equal to moneys spent (if
any) by WHX or its affiliates to purchase WHX 10.5% Senior Notes ("Senior
Notes") in future open market transactions, and (c) to grant to the PBGC a pari
passu security interest of up to $50.0 million in the event WHX obtains any
future financing on a secured basis or provides any security or collateral for
the Senior Notes. Also, under the settlement, the PBGC agreed (a) that, after
the effective date of the POR, if it terminates the WHX Plan at least one day
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prior to a Steel facility shutdown, WHX shall be released from any additional
liability to PBGC resulting from the shutdown, (b) to withdraw its claims in the
WPC Bankruptcy Proceedings; and (c) to dismiss the Termination Litigation.
THE WHX GROUP GENERAL LITIGATION
The WHX Group is a party to various litigation matters including
general liability claims covered by insurance. In the opinion of management,
such claims are not expected to have a material adverse effect on the financial
condition or results of operations of the Company. However, it is possible that
the ultimate resolution of such litigation matters and claims could have a
material adverse effect on quarterly or annual operating results when they are
resolved in future periods.
ENVIRONMENTAL MATTERS
Prior to the consummation of the POR, WHX was the sole stockholder
of WPC, the parent company of the WPC Group. The WPC Group has been identified
as a potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund") or similar state statutes
at several waste sites. The WPC Group is subject to joint and several liability
imposed by Superfund on potentially responsible parties. The WPC Group entered
into a Settlement Agreement with the US EPA that resolves all of the US EPA's
pre-petition unsecured claims under the Superfund law and releases the WPC Group
from any future liability for such claims. The Bankruptcy Court approved the
Settlement Agreement by order entered June 13, 2003.
In the event the WPC Group is responsible for any environmental
liabilities relating to the period prior to the consummation of the POR, and is
unable to fund these liabilities, claims may be made against WHX for payment of
such liabilities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At March 31, 2004, there were 2.6 million shares of Series A
Convertible Preferred Stock and 2.9 million shares of Series B Convertible
Preferred Stock outstanding. Dividends on these shares are cumulative and are
payable quarterly in arrears, in an equal amount to $3.25 per annum per share of
Series A and $3.75 per annum per share of Series B. Pursuant to the terms of the
Supplemental Indenture to the Company's 10 1/2 % Senior Notes, the Company was
prohibited from paying dividends on this Preferred Stock until after October 31,
2002, at the earliest and thereafter only in the event that the Company
satisfies certain conditions set forth in the Indenture. Such conditions were
not satisfied as of March 31, 2004. Presently, management believes that it is
not likely that the Company will be able to pay these dividends in the
foreseeable future. At March 31, 2004 dividends in arrear amounted to $68.0
million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
* Exhibit 10.1 Agreement dated February 11, 2004 by and between the
Company and Daniel P. Murphy, Jr.
* Exhibit 31.1 Certification of Principal Executive Officer pursuant
to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
* Exhibit 31.2 Certificate of Principal Financial Officer pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
* Exhibit 32.1 Certification of Principal Executive Officer and
Principal Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b)
of the Securities Act of 1934, as amended, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Form 8-K filed on January 13, 2004
Form 8-K filed on March 25, 2004
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHX CORPORATION
/s/ Robert K. Hynes
-------------------
Robert K. Hynes
Chief Financial Officer
(Principal Accounting Officer)
May 14, 2004
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