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 SEPTEMBER 30, 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
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(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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
--------- --------- --------- ---------
(as Restated) (as Restated)
(in thousands - except per share)
Net sales $ 103,142 $ 101,598 $ 304,627 $ 287,807
Cost of goods sold 84,090 79,561 246,771 229,875
--------- --------- --------- ---------
Gross profit 19,052 22,037 57,856 57,932
Selling, general and administrative expenses 21,418 13,320 52,083 38,528
Gain (loss) on disposal of fixed assets (5) (43) (4) 1,622
--------- --------- --------- ---------
Income (loss) from operations (2,371) 8,674 5,769 21,026
--------- --------- --------- ---------
Other:
Interest expense 3,924 6,866 13,190 17,616
Loss on early retirement of debt -- -- -- (1,161)
Chapter 11 and related reorganization expenses 4,856 -- 9,480 --
Other income (loss) (749) (2,097) (1,072) 7,250
--------- --------- --------- ---------
Income (loss) from continuing operations before taxes (11,900) (289) (17,973) 9,499
Tax provision 451 627 1,315 1,919
--------- --------- --------- ---------
Income (loss) from continuing operations, net (12,351) (916) (19,288) 7,580
Discontinued operations:
Loss from discontinued operations, net 320 6,517 3,804 12,950
--------- --------- --------- ---------
Net loss (12,671) (7,433) (23,092) (5,370)
Add: Extinguishment of preferred stock 257,782 -- 257,782 --
Less: Dividend requirement for preferred stock -- 4,856 3,561 14,568
--------- --------- --------- ---------
Income (loss) applicable to common stock $ 245,111 $ (12,289) $ 231,129 $ (19,938)
========= ========= ========= =========
BASIC AND DILUTED PER SHARE OF COMMON STOCK
Income (loss) from continuing operations
net of preferred dividends $ 31.40 $ (1.06) $ 36.70 $ (1.29)
Discontinued operations (0.04) (1.20) (0.60) (2.38)
--------- --------- --------- ---------
Net income (loss) per share applicable to common shares $ 31.36 $ (2.26) $ 36.10 $ (3.67)
========= ========= ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2005 2004
------------- ------------
(Dollars and shares in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 9,012 $ 20,826
Trade receivables - net 59,240 48,004
Inventories 62,395 58,304
Current assets of discontinued operations 483 15,595
Insurance receivable 2,000 --
Deferred income taxes 726 726
Other current assets 7,021 9,130
--------- ---------
Total current assets 140,877 152,585
Property, plant and equipment, at cost less
accumulated depreciation and amortization 91,565 84,465
Goodwill and other intangibles 50,053 49,982
Intangibles pension asset 1,450 1,760
Long term assets of discontinued operations 3,084 3,589
Other non-current assets 15,381 19,535
--------- ---------
$ 302,410 $ 311,916
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Trade payables $ 43,587 $ 33,499
Accrued environmental liability 28,086 31,424
Accrued liabilities 34,220 30,822
Current portion of long-term debt 94,592 183,629
Short-term debt 45,276 40,398
Deferred income taxes 702 702
Current liabilities of discontinued operations 602 4,855
--------- ---------
Total current liabilities 247,065 325,329
Long-term debt 5,011 6,027
Accrued pension liability 16,531 18,786
Other employee benefit liabilities 9,279 9,617
Additional minimum pension liability 46,692 47,002
Deferred income taxes 2,084 2,084
--------- ---------
Total liabilities 326,662 408,845
Stockholders' (deficit) equity:
Preferred stock - $.10 par value; authorized 5,000 and 10,000
shares; issued and outstanding: -0- and 5,523 shares -- 552
Common stock - $.01 par value; authorized 40,000 and
60,000 shares; issued and outstanding: 10,000 and 5,486 shares 100 55
Warrants 1,287 --
Accumulated other comprehensive loss (37,539) (36,611)
Additional paid-in capital 394,308 556,206
Unearned compensation - restricted stock awards -- (33)
Accumulated deficit (382,408) (617,098)
--------- ---------
Total stockholders' deficit (24,252) (96,929)
--------- ---------
$ 302,410 $ 311,916
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2005 2004
--------- ---------
(as Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (23,092) $ (5,370)
Items not affecting cash from operating activities:
Depreciation and amortization 8,951 9,467
Amortization of debt related costs 1,152 1,816
Other postretirement benefits 563 338
Loss on early retirement of debt -- 1,161
Gain on WPSC note recovery -- (5,596)
(Gain) loss on asset dispositions 4 (1,622)
Equity in after-tax income of affiliated companies (89) (112)
Chapter 11 and related reorganization expenses 9,480 --
Payments of Chapter 11 and related reorganization expenses (5,477) --
Loss on derivatives - (unrealized) 853 823
Reclassification of net cash settlements on derivative instruments 587 (1,709)
Discontinued operations (681) 9,241
Decrease (increase) in working capital elements,
net of effect of acquisitions:
Trade receivables (11,662) (19,076)
Inventories (4,703) (25,953)
Other current assets 2,046 924
Other current liabilities 6,588 568
Other items-net (41) (3,969)
Discontinued operations 10,859 (3,644)
--------- ---------
Net cash used by operating activities (4,662) (42,713)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of aircraft -- 19,301
Plant additions and improvements (16,692) (6,556)
Proceeds from sales of assets 45 7,057
Net cash settlements on derivative instruments (587) 1,709
Dividend from affiliates -- 77
Cash received on WPSC note recovery -- 5,596
Receipt of escrow deposit -- 1,250
Discontinued operations 1,666 (419)
--------- ---------
Net cash provided by (used in) investing activities (15,568) 28,015
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds from Handy & Harman term loans 6,139 99,250
Net borrowings from revolving credit facilities 5,866 42,710
Repayment of Handy & Harman term loans (3,589) (1,796)
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 Bonds -- (7,500)
Debt issuance fees -- (5,392)
--------- ---------
Net cash provided by (used in) financing activities 8,416 (1,808)
--------- ---------
NET CHANGE FOR THE PERIOD (11,814) (16,506)
Cash and cash equivalents at beginning of period 20,826 41,990
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,012 $ 25,484
========= =========
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, 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 (the "Effective Date"). 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.
The following is a summary of certain material features of WHX's
Chapter 11 Plan of Reorganization (the "Plan") as confirmed by the bankruptcy
court. On the Effective Date of the Plan:
o All of WHX's outstanding securities, including WHX's pre-bankruptcy
filing common stock, Series A preferred stock, Series B preferred
stock and 10 1/2% Senior Notes were deemed cancelled and annulled
without further act or action.
o In full and complete satisfaction of all such claims, holders of
WHX's 10 1/2% Senior Notes received 9,200,000 shares of common stock
representing their prorated share of the reorganized company. These
shares represent 92% of the equity in the reorganized company.
o In full and complete satisfaction of all such interests, Series A
preferred stockholders received 366,322 shares of common stock
representing their prorated share of the reorganized company and
344,658 warrants to purchase common stock of the reorganized
company, exercisable at $11.20 per share and expiring on February
28, 2008.
o In full and complete satisfaction of all such interests, Series B
preferred stockholders received 433,678 shares of common stock
representing their prorated share of the reorganized company and
408,030 warrants to purchase common stock of the reorganized
company, exercisable at $11.20 per share and expiring on February
28, 2008.
o Holders of WHX's pre-bankruptcy filing common stock received no
distribution under the Plan.
The common stock received by the Series A and Series B preferred
stockholders, collectively, represents 8% of the equity in the reorganized
company. The warrants issued to the Series A and Series B preferred
stockholders, collectively, represent the right to purchase an additional 7% of
the equity of the reorganized company after giving effect to the exercise of the
warrants.
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
5
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.
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.
6
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.
The following Quarterly Report on Form 10-Q for the nine months ended
September 30, 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
During the period March 7, 2005 through July 28, 2005, WHX was operating
its businesses as a debtor-in-possession under the jurisdiction of the
bankruptcy court. Thus, certain financial information of the Company covering
this period which is included herein has been presented 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." In accordance with SOP 90-7, 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 unaudited condensed consolidated statements of operations. Cash used for
Chapter 11 and related reorganization expenses is disclosed separately in the
unaudited condensed consolidated statement of cash flows. The reorganization
value of the assets of WHX immediately before the date of confirmation of the
Plan was greater than the total of all post-petition liabilities and allowed
claims. As a result, the Company did not qualify for Fresh-Start reporting in
accordance with SOP 90-7. Accordingly, the assets and liabilities of the
reorganized company upon emergence from bankruptcy continued to be reported at
their historical values.
During the period March 7, 2005 through July 28, 2005, while it was
reorganizing, WHX stopped recognizing interest on its 10-1/2% Senior Notes
(approximately $3.9 million of interest) and also stopped recognizing the
cumulative dividends on its preferred stock (approximately $7.8 million of
dividends would have accrued). As of the Effective Date, the Senior Notes and
Preferred Stock were deemed cancelled and annulled; consequently, no further
interest or dividends were recognized after March 7, 2005.
7
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 period) 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 and nine months ended September 30, 2005 are not
necessarily indicative of the operating results for the full year.
NOTE 4 - 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 and long-lived asset 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, and its accounting for an executive life insurance program.
In addition, for the quarter ended September 30, 2004, the Company has restated
its financial statements to correct for an error in the timing of and amount
recognized with respect to certain long-lived asset impairments under SFAS 144,
`Accounting for the Impairment or Disposal of Long-Lived Assets'. In the quarter
ended June 30, 2004, the Company decreased the carrying value of certain
impaired fixed assets of the wire & cable business by $3.9 million, to state
them at their fair value as determined by a contemporaneous third-party
appraiser. Based on negotiations to sell this asset group which occurred in the
quarter ended September 30, 2004, the Company determined that the carrying value
of the assets was further impaired, and has restated the financial statements
for the quarter ended September 30, 2004 to record an additional $4.2 million
impairment charge. See Note 8 for a further discussion of this impairment.
The Quarter Restatement is reflected in the financial statements included
in the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31,
2005 and June 30, 2005, and in the financial statements included herein. The
following table presents the restatements to the three months and the nine
months ended September 30, 2004. (see Note 7-Inventories- for a description of
the hedge accounting/inventory and precious metals inventory adjustments
recorded in the table below, and Note 8-Discontinued Operations-for a
description of the correction to long-lived asset impairments):
8
(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:
3rd Quarter
As reported $ 111,483 $ 19,601 $ 5,119 $ (2,073) $ (1.28)
Restatement Adjustments
Long - lived asset impairment (4,235) (4,235)
Hedge accounting/inventory (a) (2,189)
Precious Metals inventory 1,343 1,343 1,343
Executive life insurance (b) (36) (36)
Tax Matters (243)
--------- --------- --------- --------
As restated 111,483 20,944 2,191 (7,433)
Discontinued operations (9,885) 1,093 6,483 --
--------- --------- --------- --------
As presented 101,598 22,037 8,674 (7,433) (2.26)
Nine Months Ended September 30, 2004
As reported 316,817 57,961 8,773 (5,012) (3.61)
Restatement Adjustments
Long - lived asset impairment -- -- 825 825
Hedge accounting/inventory (a) -- -- -- 887
Precious Metals inventory -- (1,314) (1,314) (1,314)
Executive life insurance (b) -- -- (108) (108)
Tax Matters -- -- -- (648)
--------- --------- --------- --------
As restated 316,817 56,647 8,176 (5,370)
Discontinued operations (29,010) 1,285 12,850 --
--------- --------- --------- --------
As presented $ 287,807 $ 57,932 $ 21,026 $ (5,370) $ (3.67)
(a) The hedge accounting/inventory adjustment was recorded within Other income
(loss) on the Statement of Operations.
(b) The executive life insurance adjustment was recorded within Selling
general & administrative expense on the Statement of Operations.
The above restatements increase cash used by operating activities by $1.7
million on the Condensed Consolidated Statement of Cash Flows for the nine
months ended September 30, 2004, from $41.0 million to $42.7 million, and
increase cash flows from investing activities by the same amount, from $26.3
million to $28.0 million, to reflect the correction related to the accounting
for the Company's precious metal futures and forward contracts. The remaining
corrections are all within operating activities on the Statement of Cash Flows.
NOTE 5 - EARNINGS (LOSS) PER SHARE
The computation of basic earnings (loss) per common share is based upon
the average number of shares of Common Stock outstanding. Diluted earnings per
share gives effect to dilutive potential common shares outstanding during the
period.
As a result of the Company's emergence from bankruptcy in 2005, there were
changes to the authorized and outstanding common stock of WHX. Prior to
emergence, the Company had 5,522,926 preferred and 5,485,856 common shares
outstanding. Upon emergence from bankruptcy, holders of the Company's 10 1/2%
Senior Notes with a carrying value of $96.6 million (including accrued interest
through the date of filing for bankruptcy) received 9,200,000 shares of common
stock in full and complete satisfaction of all claims, in exchange for the
extinguishment of this debt. The preferred stock, with a carrying value of $267
million, was extinguished upon emergence from bankruptcy in exchange for the
residual shares of common stock outstanding, (800,485 shares), plus warrants to
purchase an additional 752,688 common shares. Holders of the pre-bankruptcy
common stock received no distribution under the Plan, and all stock option plans
previously in effect were cancelled and annulled.
9
For purposes of calculating the 2005 Earnings Per Share, the Company has
included the gain on the extinguishment of the preferred stock of $258 million
(representing the difference between the fair value of the common stock and
warrants issued upon emergence from bankruptcy to the preferred stockholders and
the carrying value of the preferred stock) as an increase in net income
available to common shareholders in accordance with EITF Topic D-42, "The Effect
on the Calculation of Earnings Per Share for the Redemption or Induced
Conversion of Preferred Stock." As to the weighted average number of common
shares outstanding for 2005, the Company has accounted for the common shares
cancelled, in connection with the emergence from Chapter 11 as a retirement, and
the issuance of common shares to the preferred stockholders and Senior Note
holders as an issuance.
Since the Company did not qualify for fresh-start reporting under the
guidance in SOP 90-7, the pre-emergence common shares of 5,485,856 and
post-bankruptcy shares of 10,000,485 are combined, on a weighted average basis,
in the denominator used for earnings per share calculations in 2005 on the basis
that such common shares are of the same class of stock.
As of September 30, 2004, the Company had 1.4 million outstanding stock
options to purchase common stock granted to officers, directors, and key
employees. In 2005 prior to the emergence from bankruptcy, and in the three and
nine month periods ending September 30, 2004, the conversion of preferred stock,
the exercise of options to purchase common stock, and the inclusion of
non-vested restricted common stock awards would have had an anti-dilutive
effect. At September 30, 2004, the assumed conversion of preferred stock would
increase outstanding shares of common stock by 5,127,914 shares; the inclusion
of non-vested restricted stock awards would increase outstanding shares by
26,667; and the exercise of stock options would increase outstanding shares of
common stock by 31,834 shares.
A reconciliation of the income and shares used in the computation of
earnings (loss) per share follows:
10
RECONCILIATION OF INCOME (LOSS) AND SHARES IN EPS
CALCULATION
(in thousands except per share amounts) For the Three Months Ended September 30, 2005
Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
Net loss $ (12,671)
Add: Gain on extinguishment of preferred stock 257,782
---------
Basic and Diluted EPS
Income applicable to common stockholders $ 245,111 7,816 $ 31.36
========= ========= =======
For the Three Months Ended September 30, 2004
(as Restated)
Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
Net loss $ (7,433)
Less: Preferred stock dividends 4,856
---------
Basic and Diluted EPS
Loss applicable to common stockholders $ (12,289) 5,426 $ (2.26)
========= ========= =======
For the Nine Months Ended September 30, 2005
Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
Net loss $ (23,092)
Add: Gain on extinguishment of preferred stock 257,782
Less: Preferred stock dividends 3,561
---------
Basic and Diluted EPS
Income applicable to common stockholders $ 231,129 6,402 $ 36.10
========= ========= =======
For the Nine Months Ended September 30, 2004
(as Restated)
Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
Net loss $ (5,370)
Less: Preferred stock dividends 14,568
---------
Basic and Diluted EPS
Loss applicable to common stockholders $ (19,938) 5,426 $ (3.67)
========= ========= =======
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 and nine months ended September 30, 2005 and 2004 was
not material.
11
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three and nine-months ended September
30, 2005 and 2004 is as follows:
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-------- -------- -------- --------
(as Restated) (as Restated)
Net loss $(12,671) $ (7,433) $(23,092) $ (5,370)
Foreign currency translation adjustments 239 340 (928) 101
-------- -------- -------- --------
Comprehensive loss $(12,432) $ (7,093) $(24,020) $ (5,269)
======== ======== ======== ========
Accumulated other comprehensive income (loss) balances as of September 30, 2005
and December 31, 2004 were comprised as follows:
(IN THOUSANDS)
September 30, December 31,
2005 2004
------------- ------------
Minimum pension liability adjustment $(39,980) $(39,980)
Foreign currency translation adjustment 2,441 3,369
-------- --------
$(37,539) $(36,611)
======== ========
NOTE 7 - INVENTORIES
Inventories at September 30, 2005 and December 31, 2004 are comprised as
follows:
(in thousands) September 30, December 31,
2005 2004
------------- -----------
Finished products $ 16,690 $ 16,366
In - process 8,803 6,199
Raw materials 15,816 18,931
Fine and fabricated precious metal in various states of completion 23,213 17,093
-------- --------
64,522 58,589
LIFO reserve (2,127) (285)
-------- --------
$ 62,395 $ 58,304
======== ========
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 quarter and nine month periods ended
September 30, 2005 include losses of $1.0 million and $1.4 million,
respectively, relating to these adjustments. The quarter and nine month periods
ended September 30, 2004 included a loss of $2.2 million and a gain of $0.9
million, respectively. 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 and nine month periods endedSeptember 30, 2005
include a non-cash charge to cost of goods sold of $0.4 million and $0.3
million, respectively, resulting from the lower of cost or market adjustment to
precious metal inventories. Such adjustments for the quarter and nine month
periods ended September 30, 2004 were reductions to cost of goods sold of $1.3
million and charges to cost of goods sold of $1.3 million, respectively. The
market value of the precious metal inventory exceeded LIFO value cost by $2.1
million and $0.3 million at September 30, 2005 and December 31, 2004,
respectively.
12
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.
The following table summarizes customer-owned and H&H-owned precious metal
quantities:
September 30, 2005 December 31, 2004
------------------ -----------------
Silver ounces:
Customer metal 69,979 124,000
H&H owned metal 1,534,307 1,347,900
--------- ---------
Total 1,604,286 1,471,900
========= =========
Gold ounces:
Customer metal 391 1,347
H&H owned metal 21,666 14,617
--------- ---------
Total 22,057 15,964
========= =========
Palladium ounces:
------------------------------
Customer metal 1,301 1,296
==============================
Market value per ounce:
Silver $ 7.505 $ 6.845
Gold $ 473.25 $ 435.60
Palladium $ 194.00 $ 184.00
NOTE 8 - DISCONTINUED OPERATIONS
In 2004 the Company evaluated the current operating plans and current and
forecasted operating results of its wire & cable business. In accordance with
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", the
Company determined that there were indicators of impairment as of June 30, 2004
based on continued operating losses, deteriorating margins, and rising raw
material costs. An estimate of future cash flows indicated that as of June 30,
2004, 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 a non-cash asset impairment charge of
$3.9 million in the second quarter. In November 2004, the Company announced that
it had signed a non-binding letter of intent to sell its wire business and that
it was negotiating the sale of its steel cable business. The decision to sell
was based on continued operating losses, deteriorating margins and rising raw
material costs experienced by these businesses. Based on the proposed terms of
these transactions, the Company recorded an additional asset impairment charge
of $4.3 million. At that time the Company stated that if it were unable to
complete these sales it would consider the closure of these operations. On
January 13, 2005, the Company determined that a sale of these operations could
not be completed on terms satisfactory to the Company. Accordingly, 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
for 146 union employees. These termination benefits were paid in 2005.
Additionally, $0.4 million was recorded as a restructuring charge for clean up
costs related to the Cockeysville, Maryland facility. The Company operated these
facilities on a limited basis in the first quarter of 2005 in order to fulfill
customer commitments. Operating losses and closure costs incurred in 2005
amounted to $4.2 million including a $0.7 million gain on the sale of fixed
assets and $0.9 million in termination benefits. Accordingly, the estimated
total cost including termination benefits, operating losses (excluding fixed
asset gains) and closure costs was approximately $6.5 million. These costs were
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 concluded. Accordingly, these businesses are reported as
discontinued operations in the accompanying financial statements. In 2006, the
Company sold land, buildings, and certain machinery and equipment relating to
these businesses for $7.3 million and recognized a gain on these sales
(principally the land and buildings) of $4.5 million.
13
Operating results of discontinued operations were as follows:
(IN THOUSANDS)
Three Months Ended September 30, Nine Months Ended September 30,
2005 2004 2005 2004
------------------------------------------------------------------
(as Restated) (as Restated)
Net sales $ -- $ 9,885 $ 10,672 $ 29,010
Asset impairment charge -- 4,235 -- 8,175
Gain on sale of fixed assets -- -- 681 --
Operating loss (283) (6,483) (3,699) (12,849)
Interest/other income (expense) (37) (34) (105) (101)
Tax provision -- -- -- --
Loss from discontinued operations, net (320) (6,517) (3,804) (12,950)
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 and nine months ended September
30, 2005 and 2004:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
----------------------- -----------------------
Service cost $ 311 $ 244 $ 933 $ 733
Interest cost 5,752 6,082 17,255 18,245
Expected return on plan assets (6,944) (6,987) (20,830) (20,960)
Amortization of prior service cost 39 21 116 64
Recognized actuarial (gain)/loss 317 -- 951 --
----------------------- -----------------------
(525) (640) (1,575) (1,918)
======================= =======================
A curtailment loss related to the shutdown of the wire and cable operations of
$0.2 million is not included above. This curtailment loss is included in the net
loss from discontinued operations.
The Company maintains several other retirement and postretirement benefit plans
covering substantially all of its employees. The approximate aggregate expense
for these plans is $0.0 million (due to a favorable adjustment in the quarter
related to a legal settlement) and $0.5 million (as restated) for the three
months ended September 30, 2005 and 2004, respectively, and $1.2 million and
$1.5 million (as restated) for the nine months ended September 30, 2005 and
2004, respectively.
14
NOTE 10 - DEBT
Debt consists of the following:
(in thousands) September 30, December 31,
2005 2004
------------- ------------
WHX Senior Notes due 2005, 10 1/2% (A) $ -- $ 92,820
H&H Term Loan - related party 70,627 --
H&H Credit Facility - Term Loan A 23,438 19,301
H&H Term Loan - Term Loan B -- 71,000
Other H&H debt 5,538 6,535
-------- --------
99,603 189,656
Less portion due within one year 94,592 183,629
-------- --------
Total long-term debt $ 5,011 $ 6,027
======== ========
(A) Upon emergence from bankruptcy, in full and complete satisfaction of all
such claims, holders of WHX's 10 1/2% Senior Notes received 9,200,000 shares of
common stock representing their prorated share of the reorganized company, and
the Senior Notes were cancelled and annulled. These shares represent 92% of the
equity in the reorganized company.
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) Tubing. This segment
manufactures and sells metal 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 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.
The following table presents information about reportable segments for the
three and nine month periods ended September 30, 2005 and 2004:
15
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Net Sales (as Restated) (as Restated)
Precious Metal $ 28,071 $ 25,568 $ 87,656 $ 82,146
Tubing 29,405 27,567 86,393 78,672
Engineered Materials 45,666 48,463 130,578 126,989
--------- --------- --------- ---------
Net Sales $ 103,142 $ 101,598 $ 304,627 $ 287,807
========= ========= ========= =========
Segment operating income
Precious Metal $ (1,015) $ 1,853 $ 410 $ 2,781
Tubing (9) 1,758 1,674 4,163
Engineered Materials 4,360 6,177 11,602 15,196
--------- --------- --------- ---------
3,336 9,788 13,686 22,140
--------- --------- --------- ---------
Gain/(loss) on disposal of fixed assets (5) (43) (4) 1,622
Unallocated corporate expenses 5,702 1,071 7,913 2,736
--------- --------- --------- ---------
Income/(loss) from operations (2,371) 8,674 5,769 21,026
Interest expense 3,924 6,866 13,190 17,616
Chapter 11 and related reorganization expenses 4,856 -- 9,480 --
Loss on early retirement of debt -- -- -- (1,161)
Other income (loss) (749) (2,097) (1,072) 7,250
--------- --------- --------- ---------
Income(loss) from continuing operations before taxes (11,900) (289) (17,973) 9,499
Tax provision 451 627 1,315 1,919
--------- --------- --------- ---------
Income(loss) from continuing operations, net (12,351) (916) (19,288) 7,580
Loss from discontinued operations, net 320 6,517 3,804 12,950
--------- --------- --------- ---------
Net loss $ (12,671) $ (7,433) $ (23,092) $ (5,370)
========= ========= ========= =========
As described in Note 8-Discontinued Operations, the Company discontinued
its operation of the wire and cable business during the quarter ended June 30,
2005. The wire and cable business had been reported within the Wire and Tubing
reportable segment (now the Tubing reportable segment).
16
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, 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 THIRD QUARTER OF 2005 WITH THE THIRD QUARTER OF 2004
Net sales for the third quarter of 2005 increased $1.5 million to $103.1
million, compared to $101.6 million in the third quarter of 2004. Sales
increased by $2.5 million at the Precious Metal Segment, $1.8 million at the
Tubing Segment and decreased $2.8 million at the Engineered Materials Segment.
Gross profit percentage decreased in the third quarter of 2005 to 18.5% from
21.7% in the third quarter of 2004. The decline from 2004 was partly because
gross profit for the third quarter of 2004 was impacted by a favorable
adjustment ($1.3 million) in the lower of cost or market valuation of inventory.
The decrease in gross profit percentage was also due to higher material costs,
primarily steel, which cannot be fully passed along to customers, and start up
costs for a Mexican tubing facility.
Selling, general and administrative ("SG&A") expenses increased $8.1
million to $21.4 million in the third quarter of 2005 from $13.3 million in the
comparable 2004 period. The 2005 period includes an increase of $3.9 million in
unallocated corporate expenses related to change in control and termination of
three WHX executives. The 2005 period includes $0.6 million of expenses related
to Protechno, a wholly owned subsidiary that was acquired in the fourth quarter
of 2004. The balance of the increase is due to expenses associated with the
higher sales noted above, increased legal fees, increased medical costs, and
start-up SG&A expenses of the Mexican tubing facility.
Operating income for the third quarter of 2005 was a loss of $2.4 million
compared to income of $8.7 million for the third quarter of 2004. The 2005
operating income at the segment level was $3.3 million compared to $9.8 million
in 2004. The primary driver behind the lower operating income was the higher
SG&A costs discussed above, as well as the factors that reduced gross margin
percentage, as discussed above.
Interest expense for the third quarter of 2005 decreased $3.0 million to
$3.9 million from $6.9 million in the third quarter of 2004. As a result of the
Bankruptcy filing, the Company no longer accrued interest on its 10 1/2% Senior
Notes after the bankruptcy filing date of March 7, 2005. This resulted in
reduced interest expense of approximately $2.4 million in the third quarter of
2005 compared to 2004.
Chapter 11 and related reorganization expenses are presented separately in
the consolidated statement of operations and represent expenses incurred by WHX
because of its reorganization under Chapter 11 of the U.S. Bankruptcy Code. Such
expenses principally consist of professional fees for services provided by
debtor and creditor professionals directly related to WHX's reorganization
proceedings. The third quarter of 2005 includes $4.9 million of Chapter 11 and
related reorganization expenses.
17
Other income (loss) was a loss of $0.7 million for the third quarter of
2005, compared to a loss of $2.1 million for the third quarter of 2004.. The
reduction in other loss in 2005 resulted primarily from lower derivative-related
losses on precious metal forward contracts.
In the third quarter of 2005 and 2004 a tax provision of $0.5 million and
$0.6 million, respectively, was recorded for foreign and state taxes. The
Company has recorded a valuation allowance related to the Federal tax benefit
associated with the current period operating loss due to the uncertainty of
realizing these benefits in the future.
The loss from discontinued operations relates to the Wire and Cable
business, which concluded operations in the second quarter of 2005. For
comparative purposes, 2004 has been presented with this business accounted for
as a discontinued operation. The higher loss in 2004 was primarily the result of
a $4.3 million charge recorded for the impairment of long-lived assets of this
business.
The comments that follow compare revenues and operating income by segment
for the third quarter 2005 and 2004:
PRECIOUS METAL
Sales for the Precious Metal Segment increased $2.5 million from $25.6
million in 2004 to $28.1 million in 2005. This increase in sales is primarily
due to the acquisition of Protechno in the fourth quarter of 2004 and increased
precious metal prices. Protechno sales were $1.6 million in the third quarter of
2005. Partially offsetting this increase were lower sales at the precious metal
plating units due to decreased volume to its automotive customers combined with
lower selling prices to its automotive customers.
Operating income decreased by $2.8 million from $1.8 million in 2004 to a
loss of $1.0 million in 2005. This decrease is primarily due to reduced sales at
the precious metal plating units as noted above, and lower gross margin in 2005.
The decrease in 2005 was partly because gross margin for the third quarter of
2004 was favorably impacted by an adjustment of $1.3 million in the lower of
cost or market valuation of inventory.
TUBING
Sales for the Tubing Segment increased $1.8 million from $27.6 million in
2004 to $29.4 million in 2005; the result of market share gains, but also price
increases.
Operating income decreased by $1.8 million from $1.8 million in 2004 to
breakeven in 2005. This decrease in operating income is partly due to increased
steel prices at our appliance related units, plus start-up costs at a new
Mexican tubing facility.
ENGINEERED MATERIALS
Sales for the Engineered Materials Segment decreased $2.8 million from
$48.5 million in 2004 to $45.7 million in 2005 primarily due to reduced volume
at our electrogalvanizing facility, partially offset by stronger commercial
construction market, market share gains, and increased sales prices at our
fastener facility.
Operating income decreased by $1.8 million from $6.2 million in 2004 to
$4.4 million in 2005. This decrease in operating income is primarily due to the
decreased volume and increased steel costs at our electro-galvanizing facility,
as well as an increase in SG&A expenses at the fastener facility.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses increased from $1.1 million in 2004 to $5.7
million in 2005. This increase is primarily due to $3.9 million of change of
control and termination expenses for three terminated executives of WHX.
18
COMPARISON OF THE FIRST NINE MONTHS OF 2005 WITH THE FIRST NINE MONTHS OF 2004
Net sales for the first nine months of 2005 were $304.6 million compared
to $287.8 million in the first nine months of 2004. Sales increased by $5.5
million at the Precious Metal Segment, by $7.7 million at the Tubing Segment,
and by $3.6 million at the Engineered Materials Segment. Gross profit percentage
decreased in the nine month period of 2005 to 19.0% from 20.1% in the comparable
2004 period. The decrease in gross profit was primarily attributable to higher
material costs, primarily steel, and lower sales for our precious metal plating
units.
Selling, general and administrative expenses ("SG&A") increased $13.6
million to $52.1 million in the first nine months of 2005 from $38.5 million in
the comparable 2004 period. The 2005 period includes an increase of $3.9 million
in unallocated corporate expenses related to change in control and termination
of three WHX executives and the reversal of a $1.3 million reserve in 2004 for a
legal proceeding that was settled in the Company's favor. The 2005 period
includes $1.8 million of expenses related to Protechno, a wholly owned
subsidiary that was acquired in the fourth quarter of 2004. Pension credit in
2005 is $0.3 million lower than in the comparable 2004 period. The balance of
the increase is due to expenses associated with the higher sales noted above,
increased insurance and medical costs, as well as legal and other professional
fees.
Gain on disposal of fixed assets for the first nine months of 2004 was
$1.6 million, and principally resulted from the sale of two aircraft. There were
no significant sales of fixed assets in the first nine months of 2005.
Operating income for the first nine months of 2005 was $5.8 million
compared to $21.0 million for the first nine months of 2004. This decrease was
driven by higher SG&A expenses in 2005 and the non-recurring gain on the sale of
fixed assets in 2004, as discussed above. Operating income at the segment level
was $13.7 million compared to $22.1 million in 2004. The primary reason for the
decrease in operating income at the segment level is the increase in SG&A
expenses. Other trends affecting operating income are increased raw material
costs at the refrigeration tubing units and certain engineered materials units,
as well as decreased volume at the precious metal plating units, partially
offset by increased sales volume at certain stainless steel tubing and
engineered materials units.
Interest expense for the first nine months of 2005 decreased $4.4 million
to $13.2 million from $17.6 million in the first nine months of 2004. As a
result of the Bankruptcy filing, the Company no longer accrued interest on its
10 1/2% Senior Notes after the filing date of March 7, 2005. This resulted in
reduced interest expense of approximately $5.6 million in the 9 month period
ended September 30, 2005 compared to the comparable 2004 period. This decrease
in interest expense was partially offset by increased borrowings at H&H.
Loss on early retirement of debt of $1.2 million in 2004 relates to the
write-off of deferred financing fees from the Company's previous credit
facility, which was refinanced on March 31, 2004.
Chapter 11 and related reorganization expenses are presented separately in
the consolidated statement of operations and represent expenses incurred by WHX
because of its reorganization under Chapter 11 of the U.S. Bankruptcy Code. Such
expenses ($9.5 million for the nine months ended September 30, 2005) principally
consist of professional fees for services provided by debtor and creditor
professionals directly related to WHX's reorganization proceedings.
Other income (loss) was a loss of $1.1 million in the first nine months of
2005 compared to income of $7.3 million in the comparable period of 2004. In
2003, the Company received a $10.0 million subordinated note from
Wheeling-Pittsburgh Steel Corporation ("WPSC"), a former subsidiary of WHX,
which had been fully reserved. In July 2004, the Company realized $5.6 million
upon the sale of the note to a third party and, accordingly, the reserve was
reversed and $5.6 million was recorded in other income. The balance of the
decrease in other income in 2005 is due to lower derivative-related gains on
precious metal forward contracts than in 2004.
In the first nine months of 2005 and 2004, tax provisions of $1.3 million
and $1.9 million, respectively, were recorded for foreign and state taxes. The
Company has recorded a valuation allowance related to the tax benefit associated
with the current period operating losses due to the uncertainty of realizing
these benefits in the future.
The loss from discontinued operations relates to the Wire and Cable
business, which concluded operations in the second quarter of 2005. For
comparative purposes, 2004 has been presented with this business accounted for
as a discontinued operation. The higher loss in 2004 was primarily the result of
an $8.2 million charge recorded for the impairment of long-lived assets of this
business.
19
The comments that follow compare revenues and operating income from
continuing operations by segment for the nine month periods 2005 and 2004:
PRECIOUS METAL
Sales for the Precious Metal Segment increased $5.5 million from $82.1
million in 2004 to $87.6 million in 2005. This increase in sales was primarily
due to the acquisition of Protechno in the fourth quarter of 2004 and increased
precious metal prices. Protechno`s sales in the first nine months of 2005 were
$4.7 million. In addition to incremental sales from the acquisition of
Protechno, sales rose at the Company's other precious metal fabrication units,
offset by lower sales at the precious metal plating units due to decreased sales
to its automotive customers.
Operating income was $0.4 million in 2005 compared to $2.8 million in
2004. This decrease is primarily due to reduced sales and lower gross margins at
the precious metal plating units as noted above.
TUBING
Sales for the Tubing Segment increased $7.7 million from $78.7 million in
2004 to $86.4 million in 2005. This increase is primarily related to stronger
demand in petrochemical, military and aircraft and medical markets as they
relate to certain of the Company's tubing businesses. This increase is partially
offset by reduced sales to the semi-conductor industry. Increased prices at the
refrigeration units due to increased steel prices were partially offset by
reduced volume.
Operating income decreased by $2.5 million from $4.2 million in 2004 to
$1.7 million in 2005. This decrease in operating income is primarily due to
increased steel prices at the refrigeration units and start-up costs in a new
Mexican production facility.
ENGINEERED MATERIALS
Sales for the Engineered Materials Segment increased $3.6 million from
$127.0 in 2004 to $130.6 million in 2005 primarily due to stronger commercial
roofing and home center markets, market share gains, and increased sales prices.
These increases were partially offset by reduced volume at our
electrogalvanizing facility.
Operating income decreased $3.6 million from $15.2 million in 2004 to
$11.6 million in 2005. This decrease in operating income is primarily due to the
decreased volume and increased steel costs at our electro-galvanizing facility.
This was partially offset by increased operating income resulting from the sales
increases in the fastener business mentioned above, net of higher selling and
distribution costs related to this higher sales volume.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses increased $5.2 million from $2.7 million in
2004 to $7.9 million in 2005. This increase is primarily due to $3.9 million in
change of control and termination expenses related to three executives of WHX.
This increase also reflects the reversal of a $1.3 million reserve for a legal
proceeding recorded in the 2004 period.
FINANCIAL POSITION
As of September 30, 2005, the Company's current assets totaled $140.9
million and its current liabilities totaled $247.1 million; a working capital
deficit of $106.2 million. The improvement in the working capital deficit from
December 31, 2004 is due to the effect of the Bankruptcy Plan, whereby the
Company's 10 1/2% Senior Notes of approximately $92.8 million were recapitalized
from the current portion of long-term debt (classified as such due to debt
covenant violations) to equity. With the exception of $5.0 million of Other H&H
debt, all debt has been reclassified as current due to noncompliance with
certain debt covenants.
Net cash used by operating activities for the nine months ended September
30, 2005 totaled $4.7 million. Loss from operations adjusted for non-cash income
and expense items used $7.7 million of cash. Working capital accounts used $7.7
million of cash, as follows: Accounts receivable used $11.7 million, inventories
used $4.7 million, and net other current items provided $8.6 million. This
compared to $42.7 million used by operating activities in the nine months ended
September 30, 2004, which was driven by large increases in inventories and
accounts receivable.
20
Inventories totaled $62.4 million at September 30, 2005, and used $4.7
million of cash flow in the nine months ended September 30, 2005. The increase
in the inventory balance as of September 30, 2005 is comparable to the growth in
sales in 2005 compared to 2004. In the nine months ended September 30, 2004,
inventory increased substantially, resulting in a large use of cash ($26.0
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. As of September 30,
2004, the purchased precious metal inventory totaled $20.4 million; the increase
due to higher precious metal prices and increased quantities of gold needed to
support operations. Furthermore, inventory increased due to higher raw material
prices (primarily steel) in the Tubing and Engineered Materials segments, and
increased volume to support sales customer commitments for the fourth quarter of
2004 and to maximize our position in steel, primarily in the Engineered
Materials segment.
The use of funds due to accounts receivable in both the nine months ended
September 30, 2005 and 2004 ($11.7 million and $19.1 million, respectively) was
caused by an increase in accounts receivable which principally resulted from
higher sales levels for the third quarter of that respective year compared to
the fourth quarter of the prior year. Accounts receivable at year-end are
normally at their lowest level of the year as a result of the normal slow down
in manufacturing activity in the later part of the fourth quarter. This is the
result of scheduled plant shut downs and holidays in November and December and
the slow down in construction markets in December.
Net other current assets and liabilities provided $8.6 million of cash
flow in the nine months ended September 30, 2005, and provided $1.5 million in
the comparable period of 2004. The $8.6 million positive cash flow in the 2005
period related principally to amounts accrued but yet unpaid for Chapter 11 and
related reorganization expenses as well as higher trade accounts payable. This
was partially offset by $3.3 million of payments made for environmental
remediation during the 2005 period.
Other non-working capital items included in operating activities used $41
thousand in the nine months ended September 30, 2005, compared to $4.0 million
in the comparable period of 2004. principally because of significant.
non-recurring uses of cash in 2004 as follow. In the 2004 period, in connection
with the H&H refinancing, WHX deposited $5.0 million of cash with H&H's lender
as collateral for the H&H obligation. In the third quarter of 2004, $1.1 million
of these funds were returned to WHX. Furthermore, the Company made a $5.8
million contribution to the WHX Pension Plan in the nine months ending September
30, 2004, compared to $0.9 million for the comparable period of 2005.
Discontinued operations provided $10.9 million in the first nine months of
2005 primarily due to the liquidation of the Wire and Cable business's inventory
and accounts receivable as part of its shutdown. In the first nine months of
2004, however, discontinued operations used $3.6 million due largely to the
operating losses of the Wire and Cable business.
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. Additionally, the Company sold an aircraft
in the second quarter of 2004. The sale of this aircraft provided $7.0 million
and resulted in a pre-tax gain of $1.7 million.
In the nine months ended September 30, 2005, $16.7 million was spent on
capital improvements, as compared to $6.6 million in the comparable period of
2004. The increase was principally related to a plant expansion in 2005 at H&H's
fastener facility in Agawam, MA.
In 2003, the Company received a $10.0 million subordinated note from WPSC,
a former subsidiary of WHX, which had been fully reserved. During the third
quarter of 2004, the Company collected $5.6 million upon the sale of the note to
a third party.
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 Company's statement of cash flows shows the effect of this
refinancing in the nine months ended September 30, 2004. In the same period of
2005, the Company's financing activities provided $8.4 million, principally from
increasing the balance outstanding under the Company's revolving credit facility
and term loans.
21
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.
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
22
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 IRS 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.
*******
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.
23
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 September 30, 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.
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 September 30, 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 September 30, 2005, we did not
maintain effective controls over:
24
(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.
(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.
25
(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.
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.
26
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 previously discussed, after emerging from bankruptcy, the
Company's 10 1/2% Senior Notes were deemed cancelled and annulled.
At March 7, 2005, 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.
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
27
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
