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, 2005
|_| TRANSITION REPORT PURSUANT 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 of Incorporation) (IRS Employer
Identification No.)
555 THEODORE FREMD AVENUE
RYE, NEW YORK 10580
------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 914-925-4413
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 |_| No |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |_| No |X|
The number of shares of Common Stock issued and outstanding as of December 31,
2006 was 10,000,485.
1
PART I. ITEM 1: FINANCIAL STATEMENTS
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
2005 2004
--------- ---------
(as Restated)
(in thousands except per share)
Net sales $ 105,859 $ 97,494
Cost of goods sold 89,302 79,218
--------- ---------
Gross profit 16,557 18,276
Selling, general and administrative expenses 16,088 13,883
(Gain) loss on disposal of assets (677) 42
--------- ---------
Income from operations 1,146 4,351
--------- ---------
Other:
Interest expense 5,495 4,709
Loss on early retirement of debt -- (1,161)
Chapter 11 and related reorganization expenses 1,501 --
Other income (loss) (271) (335)
--------- ---------
Loss before taxes (6,121) (1,854)
Tax provision 375 542
--------- ---------
Net loss (6,496) (2,396)
Less: Dividend requirement for preferred stock 3,561 4,856
--------- ---------
Loss applicable to common stock $ (10,057) $ (7,252)
========= =========
BASIC AND DILUTED PER SHARE OF COMMON STOCK
Loss per share applicable to common shares $ (1.84) $ (1.34)
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2005 2004
--------- ------------
(Dollars and shares in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 14,490 $ 20,826
Trade receivables - net 59,398 53,812
Inventories 65,075 68,041
Insurance receivable 2,000 --
Deferred income taxes 726 726
Other current assets 10,783 9,180
--------- ---------
Total current assets 152,472 152,585
Property, plant and equipment at cost, less
accumulated depreciation and amortization 89,821 88,054
Goodwill and other intangibles 50,046 49,982
Intangibles - pension asset 1,760 1,760
Other non-current assets 16,980 19,535
--------- ---------
$ 311,079 $ 311,916
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities Not Subject to Compromise:
Trade payables $ 39,694 $ 35,800
Accrued environmental liability 29,924 31,424
Accrued liabilities 27,186 33,376
Current portion of long-term debt 89,392 183,629
Short-term debt 48,206 40,398
Deferred income taxes - current 702 702
--------- ---------
Total current liabilities 235,104 325,329
Non-Current Liabilities Not Subject to Compromise:
Long-term debt 5,613 6,027
Accrued pension liability 18,021 18,786
Other employee benefit liabilities 9,859 9,617
Deferred income taxes 2,084 2,084
Additional minimum pension liability 47,002 47,002
Liabilities Subject to Compromise 97,222 --
--------- ---------
414,905 408,845
Stockholders' (Deficit) 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 (37,045) (36,611)
Additional paid-in capital 556,206 556,206
Unearned compensation - restricted stock awards -- (33)
Accumulated deficit (623,594) (617,098)
--------- ---------
Total stockholders' deficit (103,826) (96,929)
--------- ---------
$ 311,079 $ 311,916
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2005 2004
--------- ---------
(as Restated)
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,496) $ (2,396)
Items not affecting cash from operating activities:
Depreciation and amortization 3,009 3,726
Amortization of debt related costs 598 515
Other postretirement benefits 280 113
Chapter 11 and related reorganization expenses 1,501 --
Payments of Chapter 11 and related reorganization expenses (978) --
Loss on early retirement of debt -- 1,161
(Gain) loss on asset dispositions (677) 42
Equity in losses of affiliated companies 24 5
Loss on derivatives - (unrealized) 339 592
Reclassification of net cash settlements on derivative instruments (15) (2)
Other -- 65
Decrease (increase) in working capital elements,
net of effect of acquisitions:
Trade receivables (5,789) (15,705)
Inventories 2,052 (15,786)
Other current assets (1,103) 1,396
Other current liabilities (1,863) 8,403
Other items-net 172 550
--------- ---------
Net cash used by operating activities (8,946) (17,321)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of aircraft -- 19,301
Plant additions and improvements (5,638) (2,432)
Net cash settlements on derivative instruments 15 2
Proceeds from sales of assets 1,946 9
--------- ---------
Net cash provided by (used in) investing activities (3,677) 16,880
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) - Handy & Harman term loans (1,578) 99,329
Net borrowings from revolving credit facilities 7,865 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
Repayment of H&H Industrial Revenue Bond -- (5,000)
Debt issuance fees -- (3,922)
--------- ---------
Net cash provided by (used in) financing activities 6,287 (18,562)
--------- ---------
NET CHANGE FOR THE PERIOD (6,336) (19,003)
Cash and cash equivalents at beginning of period 20,826 41,990
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,490 $ 22,987
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - THE COMPANY AND NATURE OF OPERATIONS
WHX Corporation, the parent company ("WHX") is a holding company that
invests in and manages a diverse group of businesses that are managed on a
decentralized basis. WHX's primary business is Handy & Harman ("H&H"), a
diversified manufacturing company whose strategic business units encompass three
reportable segments: precious metals, wire and tubing, and engineered
materials.. WHX, together with all of its subsidiaries, shall be referred to
herein as the "Company."
NOTE 2 - LIQUIDITY AND RECENT DEVELOPMENTS
On December 27, 2006, WHX Corporation filed its Annual Report on Form 10-K
for the year ended December 31, 2005 (the "2005 10-K"). Prior to this filing,
the Company had not filed any financial statements with the Securities and
Exchange Commission ("SEC") since it filed its Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004. The 2005 10-K includes a restatement of
the financial statements for the year ended December 31, 2003 and prior years,
as well as restated financial information for each of the quarters in the year
ended December 31, 2004. Concurrent with this filing, WHX Corporation is filing
its Annual Report on Form 10-K for the year ended December 31, 2004 (the "2004
10-K").
On March 7, 2005, WHX filed a voluntary petition to reorganize under
Chapter 11 of the United States Bankruptcy Code. WHX continued to operate its
businesses and own and manage its properties as a debtor-in-possession under the
jurisdiction of the bankruptcy court until it emerged from protection under
Chapter 11 of the Bankruptcy Code on July 29, 2005. WHX's Bankruptcy Filing was
primarily intended to reduce WHX's debt, simplify its capital structure, reduce
its overall cost of capital and provide it with better access to capital
markets.
Throughout 2005 and 2006, the Company has been experiencing liquidity
issues, which are more fully described in Notes 1a and 2 to the consolidated
financial statements included in the 2005 10-K and 2004 10-K, which raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern and do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty. The Company incurred consolidated net losses of
$34.7 million, $140.4 million and $159.9 million for the years ended December
31, 2005, 2004 and 2003, respectively, and had negative cash flows from
operations of $5.0 million and $39.6 million for the years ended December 31,
2005 and 2004, respectively. As of December 31, 2005, the Company had an
accumulated deficit of $394.0 million and a working capital deficit of $122.1
million. Additionally, the Company has not been in compliance with certain of
its bank covenants.
WHX is a holding company and has as its sole source of cash flow
distributions from its operating subsidiary, H&H, or other discrete
transactions. H&H's bank credit facilities and term loans effectively do not
permit it to transfer any cash or other assets to WHX and are collateralized by
substantially all of H&H's assets. WHX has no bank credit facility of its own.
WHX's ongoing operating cash flow requirements consist of funding the minimum
requirements for the WHX Pension Plan and paying other administrative costs.
Since emerging from bankruptcy, due to covenant restrictions in H&H's
credit facilities, there have been no dividends from H&H to WHX and WHX's
sources of cash flow have consisted of:
o the issuance of $5.1 million in preferred stock by a newly created
subsidiary, which was invested in the equity of a small public
company; and
o partial payment of the H&H subordinated debt to WHX of $9.0 million,
which required the approval of the banks participating in the H&H
bank facility. Subsequent to this transaction in 2006, the remaining
intercompany loan balance of the subordinated debt of $44.2 million
was converted to equity.
5
Since the filing of its 2005 10-K, the following events have occurred:
PENSION PLAN
On December 20, 2006, the Internal Revenue Service granted a conditional
waiver (the "IRS waiver") of the minimum funding requirements for the WHX
Pension Plan for the 2005 plan year in accordance with section 412 (d) of the
Internal Revenue Code and section 303 of the Employee Retirement Income and
Security Act of 1974, as amended ("ERISA"), and on December 28, 2006, WHX, H&H,
and the Pension Benefit Guaranty Corporation (the "PBGC") entered into a
settlement agreement (the "PBGC Settlement Agreement") in connection with the
IRS waiver and certain other matters. The IRS waiver is subject to certain
conditions, including a requirement that the Company meet the minimum funding
requirements for the WHX Pension Plan for the plan years ending December 31,
2006 through 2010, without applying for a waiver of such requirements. The PBGC
Settlement Agreement and related agreements include the following: (i) the
amortization of the waived amount of $15.5 million (the "Waiver Amount") over a
period of five years, (ii) the PBGC's consent to increase borrowings under H&H's
senior credit facility to $125 million in connection with the closing of an
acquisition described below, (iii) the resolution of any potential issues under
Section 4062(e) of ERISA, in connection with the cessation of operations at
certain facilities owned by WHX, H&H or their subsidiaries, and (iv) the
granting to the PBGC of subordinate liens on the assets of H&H and its
subsidiaries, and specified assets of WHX, to collateralize WHX's obligation to
pay the Waiver Amount to the WHX Pension Plan and to make certain payments to
the WHX Pension Plan in the event of its termination. As a result of the PBGC
Settlement Agreement and the IRS waiver, based on estimates from WHX's actuary,
the Company expects its minimum funding requirement for the specific plan year
and the amortization of the 2005 requirement to be $13.1 million (paid in full
in 2006), $6.7 million, $7.9 million, and $18.3 million (which amounts reflect
the recent passage of the Pension Protection Act of 2006) in 2006, 2007, 2008
and through 2011, respectively.
AMENDMENTS TO CREDIT AGREEMENTS
On December 27, 2006, Wachovia Bank, National Association
("Wachovia") provided H&H with an additional $7.0 million loan. This was
pursuant to an amendment signed on October 30, 2006 which made the additional
funds conditional upon the filing of the Company's 2005 Annual Report on Form
10-K.
On December 28, 2006, H&H and certain of H&H's subsidiaries amended
their Loan and Security Agreement with Wachovia and their Loan and Security
Agreement with Steel Partners II, L.P. ("Steel") (the beneficial holder of
5,029,793 shares of the Company's common stock, representing approximately 50.3%
of the outstanding shares) to provide, in part, for: (i) the consummation of the
transactions contemplated by the PBGC Settlement Agreement and the waiver of
possible events of default that may have occurred relating to the matters
covered by the PBGC Settlement Agreement; and (ii) a $42 million term loan
funded by Ableco Finance LLC. A portion of the loan ($26 million) was used to
fund an acquisition by H&H, $3.2 million was paid as a contribution to the WHX
Pension Plan, and approximately $12 million of the loan was used to reduce H&H's
outstanding balance under its revolving credit facility.
ACQUISITION
Pursuant to an Asset Purchase Agreement (the "Asset Purchase Agreement")
dated as of December 28, 2006, a subsidiary of H&H acquired a mechanical roofing
fastener business from Illinois Tool Works Inc. The purchase price was
approximately $26 million, including a working capital adjustment. The assets
acquired included, among other things, machinery, equipment, inventories of raw
materials, work-in-process and finished products, certain contracts, accounts
receivable and intellectual property rights, all as related to the acquired
business and as provided in the Asset Purchase Agreement. This acquired business
develops and manufactures fastening systems for the commercial roofing industry.
WHX believes this acquisition solidifies its position as a leading manufacturer
and supplier of mechanical fasteners, accessories and components, and building
products for the commercial and residential construction industry. Funds for
payment of the purchase price by H&H were obtained pursuant to the
aforementioned term loan.
LIQUIDITY
As of December 31, 2006, WHX had cash of approximately $0.8 million and
current liabilities of approximately $7.5 million, including $5.1 million of
mandatorily redeemable preferred shares payable to a related party. H&H's
availability under its revolving credit facility and other facilities as of
December 31, 2006 was $19.1 million. All such facilities, including the term
loans, expire in March 2007. The Company has significant cash flow obligations,
including without limitation the amounts due for the WHX Pension Plan (as
amended by the PBGC Settlement Agreement described above). Based on the
Company's forecasted borrowings, the funds available under its credit facilities
may not be sufficient to fund debt service costs, working capital demands and
environmental remediation costs. WHX is attempting to refinance the H&H bank
credit facilities and to restructure the Term B Loan, which is held by a related
party, and is contemplating other longer term financing options. As part of such
refinancing, it is possible that additional liquidity may be provided and that
the restriction on distributions from H&H to WHX may be modified. However, there
can be no assurance of this, or that the Company will be able to obtain such
replacement financing at commercially reasonable terms upon the expiration of
its credit facilities in March 2007. Consequently, there continues to be
substantial doubt about the Company's ability to continue as a going concern.
6
The following Quarterly Report on Form 10-Q for the three months ended
March 31, 2005 has been prepared to comply with the Company's filing
requirements under SEC rules and regulations as part of the Company's efforts to
be considered a current filer under such rules and regulations. This report
should be read in conjunction with the previously filed 2005 10-K, the 2004
10-K, and the updated information included above.
NOTE 3 - BASIS OF PRESENTATION
Commencing March 7, 2005, WHX was operating its businesses as a
debtor-in-possession under the jurisdiction of the bankruptcy court. Thus, these
interim unaudited Condensed Consolidated Financial Statements as of and for the
three month period ended March 31, 2005 have been prepared in accordance with
the American Institute of Certified Public Accountants Statement of Position
90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code." Accordingly, all pre-petition liabilities subject to
compromise have been segregated in the Condensed Consolidated Balance Sheet and
classified as Liabilities Subject to Compromise, at the estimated amount of
allowable claims.
The following table details the Liabilities Subject to Compromise (in
thousands):
March 31, 2005
--------------
Debt - 10 1/2% Senior Notes $92,820
Accrued interest on debt subject to compromise 3,844
Other 558
-------
Total liabilities subject to compromise $97,222
=======
Subsequent to WHX's voluntary petition for reorganization on March 7,
2005, WHX stopped recognizing interest on its 10-1/2% Senior Notes
(approximately $0.7 million of interest for the period March 7, 2005 through
March 31, 2005). In addition, on March 7, 2005, WHX wrote off to Chapter 11 and
Related Reorganization expenses approximately $62,000 of deferred financing fees
related to its 10-1/2% Senior Notes. WHX also stopped recognizing the cumulative
dividends on its preferred stock as of the date of its bankruptcy filing
(approximately $1.3 million of dividends would have been accrued for the period
March 7, 2005 through March 31, 2005).
In accordance with SOP 90-7, liabilities that are not subject to
compromise are separately classified as current and non-current in their
respective account classification. Revenues, expenses, realized gains and
losses, and provisions for losses resulting from the reorganization are reported
separately as Chapter 11 and Related Reorganization expenses, net in the
Condensed Consolidated Statements of Operations. Cash used for Chapter 11 and
related reorganization expenses is disclosed separately in the Condensed
Consolidated Statements of Cash Flows.
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company in accordance with the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted in
accordance with those rules and regulations, although the Company believes that
the disclosures made are adequate to make the information not misleading. 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, 2004.
In the opinion of management, the interim financial statements reflect all
normal and recurring adjustments (and the accounting required under SOP 90-7
related to the Bankruptcy Filing) 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. The results
of operations for the three months ended March 31, 2005 are not necessarily
indicative of the operating results for the full year.
7
NOTE-4-DEBTOR IN POSSESSION FINANCIAL STATEMENTS
The financial statements contained within this note represent the
condensed financial statements for WHX Corporation ("the Debtor") only. Neither
WHX's primary business, H&H, nor any of WHX's other subsidiaries or affiliates
were included in WHX's Bankruptcy Filing. The Debtor's financial statements
contained herein have been prepared in accordance with the guidance in SOP 90-7.
WHX's non-debtor subsidiaries are not consolidated, but rather are accounted for
using the equity method of accounting in these financial statements. As such,
non-Debtor subsidiaries' net income is included as "Equity in after-tax income
of non-Debtor subsidiaries" in the statement of operations, and their net assets
are included as "Investments in and Advances to non-Debtor subsidiaries" in the
balance sheet. Intercompany transactions between the Debtor and non-Debtor
subsidiaries have not been eliminated in the Debtor's financial statements. The
Debtor financial statements include the short-term investment account of one of
its non-Debtor subsidiaries, Wheeling-Pittsburgh Capital Corporation, since the
Debtor was given unrestricted access to this account during the bankruptcy
period in order to operate without a Debtor in Possession credit facility. The
unaudited condensed financial statements of the Debtor are presented as follows:
WHX CORPORATION
DEBTOR IN POSSESSION STATEMENT OF OPERATIONS
(IN THOUSANDS)
Period from
March 7, 2005
to March 31, 2005
----------
COST AND EXPENSES:
Pension expense (income) $ (194)
Administrative and general expenses 702
----------
Subtotal - expenses 508
----------
Interest income - H&H Subordinated Note (290)
Chapter 11 and related reorganization expenses 584
Equity in after-tax income of non-Debtor subsidiaries 267
Other (income) expense - net (46)
----------
LOSS BEFORE TAXES (489)
----------
Tax provision (benefit) --
----------
NET LOSS $ (489)
==========
8
WHX CORPORATION
DEBTOR IN POSSESSION BALANCE SHEET
(IN THOUSANDS)
March 31,
ASSETS 2005
---------
Current assets:
Cash and cash equivalents $ 12,777
Other current assets 3,348
---------
Total current assets 16,125
Intangible pension asset 1,760
Prepaid pension asset --
Subordinated Note - Handy & Harman 50,050
Deferred charges and other assets 197
---------
$ 68,132
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued expenses $ 1,112
Short-term debt --
---------
Total current liabilities 1,112
Investment in and advances to non-Debtor subsidiaries 8,355
Accrued pension liability 18,021
Other post-employment benefits 246
Additional minimum pension liability 47,002
Liabilities subject to compromise 97,222
---------
171,958
---------
Commitments and contingencies
Stockholders' Deficit (103,826)
---------
$ 68,132
=========
9
WHX CORPORATION
DEBTOR IN POSSESSION STATEMENT OF CASH FLOWS
(in thousands)
Period March 7
to March 31,
2005
--------
Cash Flows From Operating Activities
Net loss $ (489)
Non cash income and expenses
Equity in after-tax income of non-Debtor subsidiaries (267)
Chapter 11 and related reorganization expenses 584
Payments of Chapter 11 and related reorganization expenses --
Decrease/(increase) in working capital elements
Receivables - including affiliated companies (1,536)
Other current assets and liabilities (60)
--------
Net cash used by operating activities (1,768)
Net cash provided/(used) by investing activities --
Net cash used by financing activities --
--------
Net change for the period (1,768)
Cash and cash equivalents at beginning of period 14,545
--------
Cash and cash equivalents at end of period $ 12,777
========
NOTE - 5 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company is restating its previously issued unaudited condensed
consolidated financial statements for the quarters ended March 31, 2004, June
30, 2004 and September 30, 2004 (the "Quarter Restatement"). The restatement
corrects its accounting for goodwill impairment, certain tax matters and other
corrections, including the accounting for derivative instruments (specifically
future contracts on precious metals) and the related impact on inventory (see
Note 8 -Inventories), and its accounting for an executive life insurance
program. The Quarter Restatement is given full effect in the financial
statements included herein and in the financial statements included in the
Company's Quarterly Reports on Form 10-Q for the quarters ended June 30, 2005
and September 30, 2005. The following table presents the restatements to the 1st
Quarter of 2004, ended March 31, 2004 (see Note 8-Inventories-for a description
of the hedge accounting/inventory and precious metals inventory adjustments
recorded in the table below):
10
(in thousands except per share)
Basic
Income (Loss)
Operating Net Per Share
Net Gross Income Income Applicable to
Sales Profit (Loss) (Loss) Common Shares
------- ------- --------- ------- -------------
2004:
1st Quarter
As reported $ 97,494 $ 18,031 $ 4,142 $ (1,985) $ (1.26)
Restatement Adjustments
Hedge accounting/inventory (a) (590)
Precious Metals inventory 245 245 245
Executive life insurance (b) (36) (36)
Tax Matters (30)
------- ------- ------- -------
As restated $ 97,494 $ 18,276 $ 4,351 $ (2,396) $ (1.34)
(a) The Hedge accounting/inventory adjustment was recorded within the Other
income (loss) line on the Statement of Operations.
(b) The Executive life insurance adjustment was recorded within the Selling
general & administrative expense line on the Statement of Operations.
The above restatements increase cash used by operating activities by $2
thousand on the Condensed Consolidated Statement of Cash flows for the three
months ending March 31, 2004, and increase cash flows provided by investing
activities by the same amount, to reflect the correction related to the
accounting for the Company's precious metal futures and forwards contracts. The
remaining corrections are all within operating activities on the Statement of
Cash Flows.
NOTE 6 - LOSS PER SHARE
The computation of basic loss per common share is based upon the weighted
average number of shares of Common Stock outstanding. Diluted earnings per share
gives effect to dilutive potential common shares outstanding during the period.
Outstanding stock options for common stock granted to officers, directors,
and key employees totaled 1.3 million and 1.2 million at March 31, 2005 and
2004, respectively. In the computation of diluted loss per common share in the
three-month periods ended March 31, 2005 and 2004, the conversion of preferred
stock, the exercise of options to purchase common stock, and the inclusion of
non-vested restricted stock awards would have had an anti-dilutive effect. At
March 31, 2005 and 2004 the assumed conversion of preferred stock would increase
outstanding shares of common stock by 5,127,914 shares. At March 31, 2005 and
2004, the assumed conversion of non-vested restricted stock awards would
increase outstanding shares by 26,667 and 60,000, respectively. At March 31,
2005 and 2004, the exercise of stock options would increase outstanding shares
of common stock by 94,171 shares. A reconciliation of the income and shares used
in the computation follows:
11
RECONCILIATION OF INCOME/LOSS AND SHARES IN EPS CALCULATION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
For the Three Months Ended March 31, 2005
Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net loss $ (6,496)
Less: Preferred stock dividends 3,561
---------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $ (10,057) 5,459 $ (1.84)
========= ======= =======
For the Three Months Ended March 31, 2004
(as Restated)
Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net loss $ (2,396)
Less: Preferred stock dividends 4,856
----------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $ (7,252) 5,427 $ (1.34)
========= ======= =======
STOCK BASED COMPENSATION
The effect on net loss and loss per share if WHX had applied the
fair-value recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation", to stock-based
compensation for the three months ended March 31, 2005 and 2004 was not
material.
PREFERRED STOCK DIVIDENDS
At March 31, 2005, dividends in arrears to Series A and Series B
Convertible Preferred Stockholders were $37.1 million and $49.0 million,
respectively. Upon emergence from bankruptcy, all shares of preferred stock and
accrued dividends were deemed cancelled and annulled.
NOTE 7 - COMPREHENSIVE INCOME (LOSS)
Comprehensive loss for the three-months ended March 31, 2005 and 2004 is as
follows:
(in thousands) Three Months Ended
March 31,
2005 2004
-------- ------------
(as Restated)
Net loss $(6,496) $(2,396)
Other comprehensive income (loss):
Foreign currency translation adjustments (434) (334)
------- -------
Comprehensive loss $(6,930) $(2,730)
======= =======
12
Accumulated other comprehensive income (loss) balances as of March 31, 2005 and
December 31, 2004 were comprised as follows:
(in thousands) March 31, December 31,
2005 2004
-------- ------------
Minimum pension liability adjustment $(39,980) $(39,980)
Foreign currency translation adjustment 2,935 3,369
-------- --------
$(37,045) $(36,611)
======== ========
NOTE 8 - INVENTORIES
Inventories at March 31, 2005 and December 31, 2004 are comprised as
follows:
(in thousands) March 31, December 31,
2005 2004
--------- ------------
Finished products $ 15,666 $ 19,101
In - process 8,212 8,135
Raw materials 24,533 23,997
Fine and fabricated precious metal in various
stages of completion 17,428 17,092
-------- --------
65,839 68,325
LIFO reserve (764) (284)
-------- --------
$ 65,075 $ 68,041
======== ========
In order to produce certain of its products, the Company purchases,
maintains and utilizes precious metals inventory. The Company maintains policies
consistent with economically hedging its precious metals inventory against price
fluctuations. Hedge accounting under SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", requires contemporaneous documentation at
the inception of the applicable hedging relationship, including the method for
assessing the hedging instrument's effectiveness as well as the method that will
be used to measure hedge ineffectiveness. The Company did not meet the
documentation criteria necessary to apply hedge accounting. Accordingly the
Company has restated its financial statements to mark to market the derivative
instruments related to precious metals. Such mark to market adjustments are
recorded in current period earnings as other income or expense in the Company's
consolidated statement of operations. The quarters ending March 31, 2005 and
2004 include losses of $0.3 million and $0.6 million, respectively, relating to
these adjustments. In addition, the Company has restated its financial
statements to record its precious metal inventory at LIFO cost, subject to lower
of cost or market with any adjustments recorded through cost of goods sold.
Operating income for the quarter ending March 31, 2005 includes a non-cash
charge to cost of goods sold of $15,000 resulting from the lower of cost or
market adjustment to precious metal inventories. Such adjustment for the quarter
ending March 31, 2004 was a reduction to cost of goods sold of $0.2 million. The
market value of the precious metal inventory exceeded LIFO value cost by $0.8
million and $0.3 million at March 31, 2005 and December 31, 2004, respectively.
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.
13
The following table summarizes customer-owned and H&H-owned precious metal
quantities:
March 31, 2005 December 31, 2004
-------------- -----------------
Silver ounces:
Customer metal 90,587 124,000
H&H owned metal 1,317,545 1,347,900
--------- ---------
Total 1,408,132 1,471,900
========= =========
Gold ounces:
Customer metal 797 1,347
H&H owned metal 14,786 14,617
--------- ---------
Total 15,583 15,964
========= =========
Palladium ounces:
----------------------------
Customer metal 1,097 1,296
============================
Market value per ounce:
Silver $ 7.21 $ 6.845
Gold $ 427.50 $ 435.60
Palladium $ 198.50 $ 184.00
NOTE 9 - PENSIONS, OTHER POSTRETIREMENT AND POST-EMPLOYMENT BENEFITS
The following table presents the components of net periodic pension cost
(credit) for the WHX Pension Plan for the three months ended March 31, 2005 and
2004:
Three Months Ended
March 31,
-------------------------
2005 2004
-------------------------
(In thousands)
Service cost $ 296 $ 375
Interest cost 7,372 5,800
Expected return on plan assets (8,469) (6,875)
Amortization of prior service cost 26 25
Recognized actuarial (gain)/loss -- --
-------------------------
$ (775) $ (675)
=========================
The Company maintains several other retirement and postretirement benefit
plans covering substantially all of its employees. The approximate aggregate
expense for these plans is $0.7 million and $0.5 million (as restated) for the
three months ended March 31, 2005 and 2004, respectively.
14
NOTE 10 - DEBT
Debt consists of the following:
March 31, December 31,
2005 2004
--------- ------------
(in thousands)
WHX Senior Notes due 2005, 10 1/2% (A) $ 92,820 $ 92,820
H&H Credit Facility - Term Loan A 17,906 19,301
H&H Term Loan - Term Loan B 71,000 71,000
Other H&H debt 6,099 6,535
-------- --------
187,825 189,656
Less portion due within one year 89,392 183,629
Less Senior Notes classified as a component of
Liabilities Subject to Compromise (A) 92,820 --
-------- --------
Total long-term debt $ 5,613 $ 6,027
======== ========
(A) This obligation is classified as a component of Liabilities Subject to
Compromise at March 31,2005.
The Bankruptcy Filing created an event of default under the Indenture
governing WHX's 10 1/2% Senior Notes (the "Senior Notes") due April 15, 2005.
Under the terms of the Senior Notes, as a result of the Bankruptcy Filing, the
entire unpaid principal and accrued interest (and any other additional amounts)
became immediately due and payable without any action on the part of the trustee
or the note holders. The principal amount outstanding under the Senior Notes at
March 7, 2005 was approximately $92.8 million. Accrued interest to March 7, 2005
was approximately $3.8 million.
With the exception of Other H&H debt, all debt has been classified as
current due to noncompliance with certain debt covenants.
NOTE 11 - REPORTABLE 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; and (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 electrogalvanized products used in the construction
and appliance industries.
Management reviews gross profit and 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.
15
The following table presents information about reportable segments for the
three month periods ended March 31, 2005 and 2004:
(in thousands) Three Months Ended
March 31,
2005 2004
--------- ---------
(as Restated)
Net sales
Precious Metal $ 29,885 $ 28,622
Wire & Tubing 38,381 34,562
Engineered Materials 37,593 34,310
--------- ---------
Net sales $ 105,859 $ 97,494
========= =========
Segment operating income (loss)
Precious Metal $ 562 $ 2,709
Wire & Tubing (1,674) (217)
Engineered Materials 2,456 3,142
--------- ---------
1,344 5,634
--------- ---------
Unallocated corporate expenses 875 1,241
(Gain) loss on disposal of fixed assets (677) 42
--------- ---------
Income from operations 1,146 4,351
Interest expense 5,495 4,709
Chapter 11 and related reorganization expenses 1,501 --
Loss on early retirement of debt -- (1,161)
Other income (loss) (271) (335)
--------- ---------
Loss before taxes (6,121) (1,854)
Tax provision 375 542
--------- ---------
Net loss $ (6,496) $ (2,396)
========= =========
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
WHX is a holding company that invests in and manages 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, specialty wire and tubing, and engineered materials.
VOLUNTARY PETITION UNDER CHAPTER 11 OF U.S. BANKRUPTCY CODE
On March 7, 2005, WHX filed a voluntary petition to reorganize under
Chapter 11 of the United States Bankruptcy Code. WHX continued to operate its
businesses and own and manage its properties as a debtor-in-possession under the
jurisdiction of the bankruptcy court until it emerged from protection under
Chapter 11 of the Bankruptcy Code on July 29, 2005. WHX's Bankruptcy Filing was
primarily intended to reduce WHX's debt, simplify its capital structure, reduce
its overall cost of capital and provide it with better access to capital
markets.
RESULTS OF OPERATIONS
COMPARISON OF THE FIRST QUARTER OF 2005 WITH THE FIRST QUARTER OF 2004
Net sales for the first quarter of 2005 increased by $8.4 million to
$105.9 million, as compared to $97.5 million in the first quarter of 2004. Sales
increased by $1.3 million at the Precious Metal Segment, $3.8 million at the
Wire & Tubing Segment and $3.3 million at the Engineered Materials Segment.
Gross profit percentage decreased in the first quarter of 2005 to 15.6% from
18.7% in the first quarter of 2004. This decrease is primarily the result of
increased raw material costs.
16
Selling, general and administrative expenses increased $2.2 million to
$16.1 million in the first quarter of 2005 from $13.9 million in the comparable
2004 period. This is primarily due to $2.2 million of shut down-related costs
associated with the specialty wire group.
Operating income for the first quarter of 2005 was $1.1 million compared
to $4.4 million for the first quarter of 2004. Operating income at the segment
level before gains or losses on the sale of equipment was $1.3 million compared
to $5.6 million in 2004. The decline at the segment level is primarily related
to increased operating losses experienced by the wire group of $1.7 million and
reduced operating income at the precious metal plating companies of $1.8
million. Unallocated corporate expenses for the first quarter of 2005 decreased
to $0.9 million from $1.2 million in 2004.
Interest expense for the first quarter of 2005 increased $0.8 million to
$5.5 million from $4.7 million in the first quarter of 2004. This increase was
primarily due to increased interest rates partially offset by a decrease of $0.7
related to the Company's 10 1/2% Senior Notes. Interest on the Senior Notes was
no longer accrued after March 7, 2005, the date of the Bankruptcy Filing.
In the first quarter of 2004, the company wrote- off 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.
Chapter 11 and related reorganization expenses are presented separately in
the Condensed Consolidated Statement of Operations and represent expenses
incurred by WHX because of its reorganization under Chapter 11 of the U.S.
Bankruptcy Code. Chapter 11 and related reorganization expenses of $1.5 million
incurred in the first quarter of 2005 principally consisted of professional fees
for services provided by debtor and creditor professionals directly related to
WHX's reorganization proceedings.
Other losses, net, were $0.3 million in the first quarter of 2005,
comparable to the first quarter of 2004. Other losses in both periods resulted
principally from derivative-related losses on precious metal forward contracts,
partially offset by investment income.
In 2005 and 2004, a tax provision of $0.4 million and $0.5 million,
respectively, was recorded for foreign and state taxes. The Company has recorded
a valuation allowance related to the tax benefits associated with its operating
losses due to the uncertainty of realizing these benefits in the future.
The comments that follow compare revenues and operating income by segment
for the first quarter 2005 and 2004:
PRECIOUS METAL
Sales for the Precious Metal segment increased $1.3 million from $28.6
million in 2004 to $29.9 million in 2005 primarily due to the acquisition of
Protechno in the fourth quarter of 2004. Protechno sales included in the results
for March 31, 2005 are $1.5 million. Increased sales of the Precious Metals
fabrication units, excluding Protechno, of $1.5 million were offset by reduced
sales of $1.7 million at the Precious Metals plating units.
Operating income for the Precious Metal segment decreased $2.1 million to
$0.6 million in 2005 from $2.7 million in 2004. This decrease is primarily
associated with the decreased sales at the Plating units along with some
operating inefficiencies.
WIRE & TUBING
In 2004, the Company evaluated the current operating plans and current and
forecasted operating results of its wire & cable business, which is part of the
Wire and Tubing segment. In accordance with SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets", the Company determined that there
were indicators of impairment based upon continued operating losses,
deteriorating margins, and rising raw material costs. An estimate of future cash
flows indicated that cash flows would be insufficient to support the carrying
value of the long-term assets of the business. Accordingly, these assets were
written down to their estimated fair value by recording non-cash asset
impairment charges of $3.9 million in the second quarter and $4.3 million in the
third quarter of 2004. On January 13, 2005, the Company decided to permanently
close the wire & cable businesses. The decision to close these operations
resulted in a fourth quarter 2004 restructuring charge of $1.2 million for
termination benefits and related costs. Additionally, $0.4 million was recorded
as a restructuring charge for clean up costs related to one of its facilities.
The Company operated these facilities on a limited basis in the first quarter of
2005 in order to fulfill customer commitments.
17
The estimated total cost including termination benefits, operating losses
(excluding fixed asset gains) and closure costs will be approximately $6.5
million. These costs will be funded from realization of working capital and
proceeds from the sale of fixed assets of these businesses. In the second
quarter of 2005 all operations of the wire & cable business were concluded.
Accordingly, these businesses are reported as discontinued operations beginning
in the second quarter of 2005 (subsequent to the date of the financial
statements included herein). In 2006, the Company sold land, buildings, and
certain machinery & equipment relating to these businesses for $7.3 million and
recognized a gain on these sales of $4.5 million.
In the first quarter of 2005, sales for the Wire & Tubing Segment
increased $3.8 million ($0.2 million for Wire and $3.6 million for Tubing) from
$34.6 million ($9.8 million for Wire and $24.8 million for Tubing) in 2004 to
$38.4 million ($9.9 million for Wire and $28.5 million for Tubing) in 2005.
Sales at the Wire Group were basically flat as shut down at the facilities was
being conducted while fulfilling final customer requirements. The sales increase
in the quarter was primarily driven by the Tubing business, and was related to
strong demand from the semi-conductor industry at the seamless and welded long
coil unit.
Operating loss increased by $1.5 million in 2005 ($1.7 million increase in
operating losses for Wire and $0.2 million increase in operating profit for
Tubing) from an operating loss of $0.2 million ($0.9 million operating loss for
Wire and $0.7 million operating income for Tubing) in 2004 to an operating loss
of $1.7 million ($2.6 million operating loss for Wire and $0.9 million operating
income for Tubing) in 2005. The increase in operating losses is principally due
to severance and other shut down related expenses associated with the wire and
cable business, and higher raw material costs, partially offset by increased
sales in the Tubing business as noted above and production inefficiencies
related to new products in 2004 at a stainless tubing facility that did not
recur in 2005.
ENGINEERED MATERIALS
Sales for the Engineered Materials Segment increased $3.3 million from
$34.3 million in 2004 to $37.6 million in 2005 due to increased home center
sales and new products in this segment's fastener business. Selling price
increases also contributed to the increase in sales. Partially offsetting these
increases was reduced volume in the segment's electrogalvanized steel unit.
Operating income decreased by $0.6 million from $3.1 million in 2004 to
$2.5 million in 2005 primarily due to the reduced volume at the segment's
electrogalvanized steel unit and increased raw material costs.
FINANCIAL POSITION
As of March 31, 2005, the Company's current assets totaled $152.5 million
and its current liabilities totaled $235.1 million; a working capital deficit of
$82.6 million. With the exception of $5.6 million of Other H&H debt, all debt
has been classified as either current due to noncompliance with certain debt
covenants, or as a non-current liability subject to compromise. The improvement
in the working capital deficit from December 31, 2004 is due to the
reclassification of the 10 1/2% Senior Notes of approximately $92.8 million from
current portion of long-term debt (classified as such due to debt covenant
violations) to a non-current liability subject to compromise.
Net cash used by operating activities for the three months ended March 31,
2005 totaled $8.9 million. Loss from operations adjusted for non-cash income and
expense items used $2.4 million of cash. Working capital accounts used $6.7
million of cash, as follows: Accounts receivable used $5.8 million, inventories
provided $2.1 million, and net other current items used $3.0 million. This
compared to $17.3 million used by operating activities in the first quarter of
2004, which was driven by large increases in inventories and accounts
receivable, partially offset by higher trade accounts payable.
Inventories totaled $65.1 million at March 31, 2005, and provided $2.1
million of cash flow in the quarter. In the comparable first quarter period of
2004, inventory increased substantially, resulting in a large use of cash ($15.8
million). The increase in inventory in 2004 was primarily related to the
termination of the Company's precious metal consignment facility and the
resultant purchase of precious metal inventory. At December 31, 2003, 1,605,000
ounces of silver and 14,617 ounces of gold were consigned 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.
18
The use of funds due to accounts receivable in both the first quarter of
2005 and 2004 ($5.8 million and $15.7 million, respectively) was caused by an
increase in accounts receivable which resulted from higher sales levels for that
respective quarter compared to the fourth quarter of the preceding year.
Net other current assets and liabilities used $3.0 million of cash flow in
the first quarter of 2005, principally for the payment of $1.5 million of
environmental remediation costs during the quarter, and provided $9.8 million in
the first quarter of 2004, related principally to an increase in trade accounts
payable.
Other non-working capital items included in operating activities provided
$0.2 million in the first quarter of 2005, as compared to $0.6 million in the
same period of 2004.
In the first quarter of 2005, $5.6 million was spent on capital
improvements, as compared to $2.4 million in the first quarter of 2004. The
increase was principally related to a plant expansion in 2005 at H&H's fastener
facility in Agawam, MA.
In the first quarter of 2004, the Company sold an aircraft which it had
purchased in 2003 for $19.3 million. The sale resulted in a gain of $30,000.
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. Cash flows from financing
activities on the statement of cash flows shows the effect of this refinancing
in the first quarter of 2004. In the same period of 2005, the Company's
financing activities provided $6.3 million, principally from increasing the
balance outstanding under the Company's revolving credit facility.
LIQUIDITY AND RECENT DEVELOPMENTS
Throughout 2005 and 2006, the Company has been experiencing liquidity
issues, which are more fully described in Notes 1a and 2 to the consolidated
financial statements included in the 2005 10-K and 2004 10-K, which raise
substantial doubt about the Company's ability to continue as a going concern.
The Company incurred consolidated net losses of $34.7 million, $140.4 million
and $159.9 million for the years ended December 31, 2005, 2004 and 2003,
respectively, and had negative cash flows from operations of $5.0 million and
$39.6 million for the years ended December 31, 2005 and 2004, respectively. As
of December 31, 2005, the Company had an accumulated deficit of $394.0 million
and a working capital deficit of $122.1 million. Additionally, the Company has
not been in compliance with certain of its bank covenants.
WHX is a holding company and has as its sole source of cash flow
distributions from its operating subsidiary, H&H, or other discrete
transactions. H&H's bank credit facilities and term loans effectively do not
permit it to transfer any cash or other assets to WHX and are collateralized by
substantially all of H&H's assets. WHX has no bank credit facility of its own.
WHX's ongoing operating cash flow requirements consist of funding the minimum
requirements for the WHX Pension Plan and paying other administrative costs.
Since emerging from bankruptcy, due to covenant restrictions in H&H's
credit facilities, there have been no dividends from H&H to WHX and WHX's
sources of cash flow have consisted of:
o the issuance of $5.1 million in preferred stock by a newly created
subsidiary, which was invested in the equity of a small public
company; and
o partial payment of the H&H subordinated debt to WHX of $9.0 million,
which required the approval of the banks participating in the H&H
bank facility. Subsequent to this transaction in 2006, the remaining
intercompany loan balance of the subordinated debt of $44.2 million
was converted to equity.
19
Since the filing of its 2005 10-K, the following events have occurred:
PENSION PLAN
On December 20, 2006, the Internal Revenue Service granted a conditional
waiver (the "IRS waiver") of the minimum funding requirements for the WHX
Pension Plan for the 2005 plan year in accordance with section 412 (d) of the
Internal Revenue Code and section 303 of the Employee Retirement Income and
Security Act of 1974, as amended ("ERISA"), and on December 28, 2006, WHX, H&H,
and the PBGC entered into the PBGC Settlement Agreement in connection with the
IRS waiver and certain other matters. The IRS waiver is subject to certain
conditions, including a requirement that the Company meet the minimum funding
requirements for the WHX Pension Plan for the plan years ending December 31,
2006 through 2010, without applying for a waiver of such requirements. The PBGC
Settlement Agreement and related agreements include the following: (i) the
amortization of the waived amount of $15.5 million (the "Waiver Amount") over a
period of five years, (ii) the PBGC's consent to increase borrowings under H&H's
senior credit facility to $125 million in connection with the closing of an
acquisition described below, (iii) the resolution of any potential issues under
Section 4062(e) of ERISA, in connection with the cessation of operations at
certain facilities owned by WHX, H&H or their subsidiaries, and (iv) the
granting to the PBGC of subordinate liens on the assets of H&H and its
subsidiaries, and specified assets of WHX, to collateralize WHX's obligation to
pay the Waiver Amount to the WHX Pension Plan and to make certain payments to
the WHX Pension Plan in the event of its termination. As a result of the PBGC
Settlement Agreement and the IRS waiver, based on estimates from WHX's actuary,
the Company expects its minimum funding requirement for the specific plan year
and the amortization of the 2005 requirement to be $13.1 million (paid in full
in 2006), $6.7 million, $7.9 million, and $18.3 million (which amounts reflect
the recent passage of the Pension Protection Act of 2006) in 2006, 2007, 2008
and through 2011, respectively.
AMENDMENTS TO CREDIT AGREEMENTS
On December 27, 2006, Wachovia Bank, National Association ("Wachovia")
provided H&H with an additional $7.0 million loan. This was pursuant to an
amendment signed on October 30, 2006 which made the additional funds conditional
upon the filing of the Company's 2005 Annual Report on Form 10-K.
On December 28, 2006, H&H and certain of H&H's subsidiaries amended their
Loan and Security Agreement with Wachovia and their Loan and Security Agreement
with Steel Partners II, L.P. ("Steel") to provide, in part, for: (i) the
consummation of the transactions contemplated by the PBGC Settlement Agreement
and the waiver of possible events of default that may have occurred relating to
the matters covered by the PBGC Settlement Agreement; and (ii) a $42 million
term loan funded by Ableco Finance LLC. A portion of the loan ($26 million) was
used to fund an acquisition by H&H, $3.2 million was paid as a contribution to
the WHX Pension Plan, and approximately $12 million of the loan was used to
reduce H&H's outstanding balance under its revolving credit facility.
ACQUISITION
Pursuant to an Asset Purchase Agreement (the "Asset Purchase Agreement")
dated as of December 28, 2006, a subsidiary of H&H acquired a mechanical roofing
fastener business from Illinois Tool Works Inc. The purchase price was
approximately $26 million, including a working capital adjustment. The assets
acquired included, among other things, machinery, equipment, inventories of raw
materials, work-in-process and finished products, certain contracts, accounts
receivable and intellectual property rights, all as related to the acquired
business and as provided in the Asset Purchase Agreement. This acquired business
develops and manufactures fastening systems for the commercial roofing industry.
WHX believes this acquisition solidifies its position as a leading manufacturer
and supplier of mechanical fasteners, accessories and components, and building
products for the commercial and residential construction industry. Funds for
payment of the purchase price by H&H were obtained pursuant to the
aforementioned term loan.
LIQUIDITY
As of December 31, 2006, WHX had cash of approximately $0.8 million and
current liabilities of approximately $7.5 million, including $5.1 million of
mandatorily redeemable preferred shares payable to a related party. H&H's
availability under its revolving credit facility and other facilities as of
December 31, 2006 was $19.1 million. All such facilities, including the term
loans, expire in March 2007. The Company has significant cash flow obligations,
including without limitation the amounts due for the WHX Pension Plan (as
amended by the PBGC Settlement Agreement described above). Based on the
Company's forecasted borrowings, the funds available under its credit facilities
may not be sufficient to fund debt service costs, working capital demands and
environmental remediation costs. WHX is attempting to refinance the H&H bank
credit facilities and to restructure the Term B Loan, which is held by a related
party, and is contemplating other longer term financing options. As part of such
20
refinancing, it is possible that additional liquidity may be provided and that
the restriction on distributions from H&H to WHX may be modified. However, there
can be no assurance of this, or that the Company will be able to obtain such
replacement financing at commercially reasonable terms upon the expiration of
its credit facilities in March 2007. Consequently, there continues to be
substantial doubt about the Company's ability to continue as a going concern.
*******
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
Please see "Quantitative and Qualitative Disclosures About Market Risk"
from the Company's Annual Report on Form 10-K for the year ended December 31,
2004.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As required by Rule
13a-15(b) under the Securities Exchange Act of 1934, as amended, (the "Exchange
Act") we conducted an evaluation under the supervision and with the
participation of our management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation we identified certain material weaknesses in our disclosure controls
and procedures (discussed below), and the Chief Executive Officer and the Chief
Financial Officer concluded that as of March 31, 2005 and 2004, our disclosure
controls and procedures were not effective in ensuring that all information
required to be disclosed in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC rules and forms and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, in a manner that allows timely decisions regarding
required disclosure.
As more fully described in Management's Discussion and Analysis of
Financial Condition and Results of Operations and in Note 1b to the Consolidated
Financial Statements included in our 2004 Annual Report on Form 10-K, the
Company determined it was necessary to restate its 2003, 2002 and prior years'
audited consolidated financial statements, and its unaudited interim
consolidated financial statements for all quarters in 2004 and 2003.
Notwithstanding the existence of the material weaknesses discussed below,
the Company's management has concluded that the condensed consolidated financial
statements included in this Form 10-Q fairly present, in all material respects,
the Company's financial position, results of operations and cash flows for the
interim and annual periods presented in conformity with generally accepted
accounting principles.
Although we are not currently required to assess and report on the
effectiveness of our internal control over financial reporting under Rules
13a-15 and 15d-15 of the Exchange Act, management is required to evaluate the
effectiveness of our disclosure controls and procedures under Rule 13a-15(b).
Because of its inherent limitations, internal controls over disclosure controls
and procedures may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that such
controls may become inadequate because of changes in conditions, or that the
degree of compliance with such disclosure controls and procedures may
deteriorate.
21
A material weakness is a control deficiency, or combination of control
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of March 31, 2005, we have concluded that the Company did not
maintain effective disclosure controls and procedures due to the following
material weaknesses:
(a) We did not maintain a sufficient number of personnel with an
appropriate level of knowledge, experience and training in the
application of generally accepted accounting principles commensurate
with the Company's global financial reporting requirements and the
complexity of our operations and transactions.
(b) We did not maintain appropriately designed and documented
company-wide policies and procedures.
(c) We did not maintain an effective anti-fraud program designed to
detect and prevent fraud, including (i) an effective whistle-blower
program, and (ii) an ongoing program to manage identified fraud
risks.
These material weaknesses contributed to the material weaknesses discussed
in items 1 to 6 below and the resulting restatement of our annual consolidated
financial statements for 2003, 2002 and prior years, restatement of the
unaudited consolidated quarterly financial statements for 2004 and 2003 as well
as audit adjustments to the 2005 and 2004 annual consolidated financial
statements and the 2005 unaudited consolidated quarterly financial statements.
Additionally, these control deficiencies could result in a material misstatement
in any of the Company's accounts or disclosures that would result in a material
misstatement of the annual or interim consolidated financial statements that
would not be prevented or detected. As of March 31, 2005, we did not maintain
effective controls over:
(1) the accuracy, valuation and disclosure of our goodwill and intangible
asset accounts and the related impairment expense accounts. Specifically,
effective controls were not designed and in place to ensure that an adequate
periodic impairment analysis was conducted, reviewed, and approved in order to
identify and accurately record impairments as required under generally accepted
accounting principles. This control deficiency resulted in the restatement of
our annual consolidated financial statements for 2003 and 2002, and the
unaudited quarterly consolidated financial statements for the quarter ended
September 30, 2003, as well as audit adjustments to the annual and fourth
quarter of 2004 consolidated financial statements. Additionally, this control
deficiency could result in a material misstatement of goodwill, intangible
assets and related impairment expense accounts that would result in a material
misstatement of the annual or interim consolidated financial statements that
would not be prevented or detected. Accordingly, management has determined that
this control deficiency constitutes a material weakness.
(2) the accounting for income taxes, including the completeness and
accuracy of income taxes payable, deferred income tax assets, liabilities and
related valuation allowances and the income tax provision. Specifically, we did
not appropriately apply generally accepted accounting principles in the
estimation of tax reserves and the recording of valuation allowances against
deferred tax assets. Additionally, we did not have effective controls to monitor
the difference between the income tax basis and the financial reporting basis of
assets and liabilities and reconcile the difference to deferred income tax
assets and liabilities. This control deficiency resulted in the restatement of
the annual consolidated financial statements for 2003 and prior years and all
unaudited quarterly consolidated financial statements for 2004 and 2003 and
audit adjustments to the annual consolidated financial statements for 2005 and
2004 and the 2005 unaudited consolidated quarterly financial statements.
Additionally, this control deficiency could result in a material misstatement of
income taxes payable, deferred income tax assets and liabilities, income tax
provision and other comprehensive income that would result in a material
misstatement of the annual or interim consolidated financial statements that
would not be prevented or detected. Accordingly, management has determined that
this control deficiency constitutes a material weakness.
(3) the completeness and accuracy of our environmental remediation
liability reserves. Specifically, we did not have effective controls to
accurately estimate or monitor for completeness our environmental remediation
liabilities arising from contractual obligations or regulatory requirements.
This control deficiency resulted in audit adjustments to the 2005 and 2004
annual consolidated financial statements and the 2005 unaudited quarterly
consolidated financial statements. Additionally, this control deficiency could
result in a material misstatement of environmental remediation liability
reserves and environmental remediation expenses that would result in a material
misstatement to annual or interim consolidated financial statements that would
not be prevented or detected. Accordingly, management has determined that this
control deficiency constitutes a material weakness.
22
(4) the valuation of long-lived assets for impairment purposes.
Specifically, we did not have effective controls to ensure the accuracy and
valuation of an impairment charge taken in the second quarter of 2004. This
control deficiency resulted in a restatement of our unaudited quarterly
condensed consolidated financial statements for the second and third quarters of
2004 and audit adjustments in the annual consolidated financial statements for
2004. Additionally, this control deficiency could result in a material
misstatement of property, plant and equipment and asset impairment charges that
would result in a material misstatement of the annual or interim consolidated
financial statements that would not be prevented or detected. Accordingly,
management has determined that this control deficiency constitutes a material
weakness.
(5) the accounting for derivative instruments and hedging activities
related to precious metal inventory. Specifically, effective controls were not
designed and in place to ensure the appropriate documentation had been completed
in order to qualify for hedge accounting treatment with respect to futures and
forward contracts specifically purchased to mitigate the Company's exposure to
changes in the value of precious metal inventory, including appropriate
identification of the instruments, assessment of effectiveness and maintenance
of contemporaneous documentation in accordance with generally accepted
accounting principles. This control deficiency resulted in the restatement of
the annual consolidated financial statements for the year ended December 31,
2003 and prior years, the 2004 and 2003 unaudited quarterly consolidated
financial statements, as well as audit adjustments in the annual consolidated
financial statements for 2005 and 2004 and the 2005 unaudited quarterly
consolidated financial statements. Additionally, this control deficiency could
result in a material misstatement of inventory and cost of goods sold as well as
other current assets or accrued liabilities and other income (expense) that
would result in a material misstatement of the annual or interim consolidated
financial statements that would not be prevented or detected. Accordingly,
management has determined that this control deficiency constitutes a material
weakness.
(6) the preparation and review of the consolidated statement of cash
flows. Specifically, we did not maintain effective controls over the accuracy of
the classification of short-term borrowings used to fund purchases of short-term
investments as cash flows from financing activities, as required by generally
accepted accounting principles. This control deficiency resulted in the
restatement of the annual consolidated financial statements for the year ended
December 31, 2003 and prior years. Additionally, this control deficiency could
result in a material misstatement of operating and financing cash flows that
would result in a material misstatement of the annual or interim consolidated
financial statements that would not be prevented or detected. Accordingly,
management has determined that this control deficiency constitutes a material
weakness.
PLANS FOR REMEDIATION
The Company has taken the following actions to address the material weaknesses
noted above.
o Engaged an independent third-party valuation firm in the second
quarter of 2005 to assist management in evaluating the impairment of
goodwill and intangible asset accounts;
o Increased the Company's accounting and financial resources by hiring
an Assistant Controller and a Treasurer and retaining a regional
accounting firm of certified public accountants to assist financial
management in addressing various accounting matters;
o Increased the level of review and discussion on significant
accounting matters, including goodwill valuation, environmental
issues, tax matters, cash flow presentation and hedging and related
supporting documentation with senior finance management;
o Consolidated corporate office functions;
o Improved controls regarding timely communication of all significant
events to management and the Board of Directors; and
o Enhanced the monthly financial reporting to senior management and
the Board.
Additional actions planned by management include:
o Hiring additional experienced financial personnel;
o Updating the Company's accounting policies and procedures to ensure
such accounting policies and procedures are complete and current;
o Considering the engagement of an additional third party resource to
support the internal accounting and financial personnel; and
o Reviewing and modifying the nature and scope of internal audit
activities.
23
Management will consider the design and operating effectiveness of these
actions and will make additional changes it determines appropriate. We cannot
assure you that the measures we have taken, or will take, to remediate these
material weaknesses will be effective or that we will be successful in
implementing them before December 31, 2007 or December 31, 2008, the dates on
which the Company and its independent registered public accounting firm,
respectively, must first report on the effectiveness of our internal control
over financial reporting under the Section 404 provisions of the Sarbanes-Oxley
Act.
Internal control over disclosure controls and procedures, no matter how
well designed, has inherent limitations. Therefore, even those internal controls
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. We will continue to improve
the design and effectiveness of our disclosure controls and procedures to the
extent necessary in the future to provide our senior management with timely
access to such material information, and to correct any deficiencies that we may
discover in the future.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please see "Legal Proceedings" from the Company's Annual Report on Form
10-K for the year ended December 31, 2004.
ITEM 1A. RISK FACTORS
Please see "Risk Factors" from the Company's Annual Report on Form 10-K
for the year ended December 31, 2004.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
On March 7, 2005, WHX filed a voluntary petition ("Bankruptcy Filing") to
reorganize under Chapter 11 of the United States Bankruptcy Code with the United
States Bankruptcy Court for the Southern District of New York. The Bankruptcy
Filing created an event of default under the Indenture governing WHX's 10 1/2%
Senior Notes (the "Senior Notes") due April 15, 2005. Under the terms of the
Senior Notes, as a result of the Bankruptcy Filing, the entire unpaid principal
and accrued interest (and any other additional amounts) became immediately due
and payable without any action on the part of the trustee or the note holders.
The principal amount outstanding under the Senior Notes at March 7, 2005 was
approximately $92.8 million. Accrued interest to March 7, 2005 was approximately
$3.8 million. As a result of the Bankruptcy Filing, WHX stopped accruing
interest on the Senior Notes as of March 7, 2005.
At March 7, 2005, the date of the Bankruptcy Filing, 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 satisfied certain conditions set forth in the Indenture. Such
conditions were not satisfied as of March 7, 2005. At March 7, 2005 dividends in
arrears amounted to $86.1 million. As previously described, after emerging from
bankruptcy, all shares of preferred stock and accrued dividends were deemed
cancelled and annulled.
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ITEM 6. EXHIBITS
* 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 Certification 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 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.
* 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)
March 8, 2007
