FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
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/ / 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 X No
--- ---
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 X No
--- ---
The number of shares of Common Stock issued and outstanding as of May 31, 2007
was 10,000,498.
1
PART I. ITEM 1: FINANCIAL STATEMENTS
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
2007 2006
----------- -----------
(in thousands except per share)
Net sales $ 117,837 $ 112,761
Cost of goods sold 98,355 91,352
--------- ---------
Gross profit 19,482 21,409
Selling, general and administrative expenses 18,775 14,983
Environmental remediation expense -- 2,909
Loss on disposal of assets 130 44
--------- ---------
Income from operations 577 3,473
--------- ---------
Other:
Interest expense 7,570 4,584
Realized and unrealized loss on derivatives 691 5,466
Other (income) expense 140 (49)
--------- ---------
Loss before taxes (7,824) (6,528)
Tax provision 709 538
--------- ---------
Net loss $ (8,533) $ (7,066)
========= =========
BASIC AND DILUTED PER SHARE OF COMMON STOCK
Net loss per share applicable to common stock $ (0.85) $ (0.71)
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2007 2006
------------- -------------
(Dollars and shares in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,540 $ 4,776
Trade receivables - net 71,321 58,697
Inventories 54,944 57,177
Deferred income taxes 339 339
Assets held for sale 185 3,967
Other current assets 5,503 5,611
--------- ---------
Total current assets 135,832 130,567
Property, plant and equipment at cost, less
accumulated depreciation and amortization 76,345 78,120
Goodwill and other intangibles, net 68,217 68,272
Other non-current assets 15,841 16,906
--------- ---------
$ 296,235 $ 293,865
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Trade payables $ 41,796 $ 39,194
Accrued environmental liability 6,109 9,421
Accrued liabilities 33,299 28,456
Accrued interest expense - related party 13,649 9,827
Current portion of long-term debt 4,666 4,778
Short-term debt 51,879 40,321
Deferred income taxes 123 123
--------- ---------
Total current liabilities 151,521 132,120
Long-term debt 67,627 70,901
Long-term debt - related party 89,627 89,627
Accrued pension liability 49,195 53,445
Other employee benefit liabilities 8,699 8,667
Deferred income taxes 2,933 2,868
--------- ---------
369,602 357,628
--------- ---------
Stockholders' (Deficit) Equity:
Preferred stock- $.10 par value; authorized 5,000
shares; issued and outstanding -0- shares -- --
Common stock - $.01 par value; authorized 40,000
shares; issued and outstanding 10,000 shares 100 100
Warrants 1,287 1,287
Accumulated other comprehensive loss (47,178) (47,335)
Additional paid-in capital 394,308 394,308
Accumulated deficit (421,884) (412,123)
--------- ---------
Total stockholders' deficit (73,367) (63,763)
--------- ---------
$ 296,235 $ 293,865
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2007 2006
----------- -----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,533) $ (7,066)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,124 3,064
Amortization of debt related costs 1,086 540
Other postretirement benefits 190 (393)
Loss on asset dispositions 130 44
Equity income in affiliated companies (18) (82)
Unrealized (gain) loss on derivatives (41) 1,103
Reclassification of net cash settlements on derivative instruments 732 4,363
Decrease (increase) in working capital elements,
net of effect of acquisitions:
Trade receivables (12,570) (10,508)
Inventories 2,261 (4,504)
Other current assets 151 1,240
Accrued interest expense-related party 3,822 --
Other current liabilities (505) (737)
Other items-net (216) (666)
Discontinued operations -- (241)
-------- --------
Net cash used in operating activities (10,387) (13,843)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant additions and improvements (1,003) (2,178)
Net cash settlements on derivative instruments (732) (4,363)
Proceeds from sales of assets 3,633 46
Discontinued operations -- 1,400
-------- --------
Net cash provided by (used in) investing activities 1,898 (5,095)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Term Loan B - related party -- 19,000
Proceeds from term loans - Domestic -- 7,000
Net revolver borrowings 11,558 4,989
Repayments of term loans - Foreign (120) (112)
Repayments of term loans - Domestic (3,339) (3,615)
Net change in overdrafts (876) (2,702)
-------- --------
Net cash provided by financing activities 7,223 24,560
-------- --------
NET CHANGE FOR THE PERIOD (1,266) 5,622
EFFECT OF EXCHANGE RATE CHANGES ON NET CASH 30 20
Cash and cash equivalents at beginning of period 4,776 4,076
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,540 $ 9,718
======== ========
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 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, are referred to herein as the "Company." In April 2007,
WHX acquired Bairnco Corporation ("Bairnco"). See Note 14-Subsequent Event.
NOTE 2 - LIQUIDITY
The Company has incurred significant losses and negative cash flows from
operations in recent years, and as of March 31, 2007 had an accumulated deficit
of $420.7 million. As of March 31, 2007, the Company's current assets totaled
$135.8 million and its current liabilities totaled $151.5 million; a working
capital deficit of $15.7 million. The Company's working capital deficit at
December 31, 2006 was $1.6 million. Additionally, the Company had not been in
compliance with certain of its bank covenants and had been required to obtain a
number of waivers from its lenders related to such covenants.
As of March 31, 2007, WHX and its unrestricted subsidiaries had cash of
approximately $0.1 million and current liabilities of approximately $7.5
million, including $5.1 million of mandatorily redeemable preferred shares
payable to a related party. WHX is a holding company and has as its sole source
of cash flow distributions from its operating subsidiaries, H&H and Bairnco, or
other discrete transactions. H&H's bank credit facilities and term loan
effectively do not permit it to transfer any cash or other assets to WHX (with
the exception of unsecured loans to be used to make required contributions to
the pension plan, and for other uses of an unsecured loan in the aggregate
principal amount not to exceed $3.5 million under certain conditions), and are
collateralized by substantially all of H&H's assets. Bairnco's revolving credit
facility permits distributions by Bairnco to WHX under certain conditions, as
described below. WHX has no bank credit facility of its own. WHX's ongoing
operating cash flow requirements consist of funding the minimum requirements of
the WHX Pension Plan and paying other administrative costs.
H&H's availability under its revolving credit facility and other
facilities as of March 31, 2007, was approximately $15.5 million. On March 29,
2007, all such facilities, including the term loans, were amended to (i)
redefine EBITDA, (ii) reset the levels and amend certain of the financial
covenants, (iii) extend the termination date of the credit facilities from March
31, 2007 to June 30, 2008, (iv) permit the extension by H&H to WHX of an
unsecured loan for required payments to the pension plan, under certain
conditions, and (v) permit the extension by H&H to WHX of an unsecured loan for
other uses in the aggregate principal amount not to exceed $3.5 million under
certain conditions. The amendments also provided for the pledge of 65% of all
outstanding securities of Indiana Tube Danmark A/S, a Danish corporation and a
wholly-owned indirect subsidiary of H&H., and Protechno, S.A., a French
corporation and a wholly-owned subsidiary of Indiana Tube Danmark A/S. Finally,
the amendments also provided for waivers of certain events of default existing
as of March 29, 2007. As of December 31, 2006, such debt has been classified as
long-term since the Company is no longer in default on the debt, and the
maturity date of the debt is June 30, 2008.
On June 15, 2007, the lenders under H&H's revolving credit facility and
other facilities granted a waiver to the events of default arising as a result
of the Order of Prejudgment Attachment entered by the Superior Court of
Fairfield County, Connecticut (the "Superior Court") on December 18, 2006 in
connection with the litigation known as HH East Parcel v. Handy & Harman
currently pending in the Superior Court in the amount of $3,520,200 and the
Notice of Bank Attachment/Garnishment dated May 21, 2007 by the State Marshal of
Fairfield County, Connecticut to JPMorgan Chase Bank in the amount of
$3,520,200, and related matters (see Note 13- Contingencies).
On March 4, 2007, the Company sold certain assets, including the land and
building, certain machinery and equipment, and inventory of its Handy & Harman
Electronic Materials Corporation subsidiary, located in East Providence, Rhode
Island, as well as certain of its assets and inventory located in Malaysia
(collectively referred to as "HHEM") for net proceeds of approximately $3.8
million. Under the terms of the sale agreement, the Company has retained
responsibility for any pre-existing environmental conditions requiring
remediation at the Rhode Island site.
In connection with the closing of the Bairnco Offer and the subsequent
Merger on April 24, 2007 (see Note 14-Subsequent Event), Bairnco became a
wholly-owned subsidiary of WHX. Initial financing was provided by Steel Partners
II, L.P. ("Steel") through two credit facilities, in the approximate aggregate
amount of $101.5 million. In addition, the Bairnco Revolving Credit Facility was
amended to permit the closing of the Merger and related financing transactions.
The availability under the Bairnco Revolving Credit Facility on March 31, 2007
was approximately $12.0 million. The Bairnco Revolving Credit Facility permits
distributions by Bairnco to WHX under certain conditions. Such amount available
for distribution to WHX as of May 31, 2007 was approximately $1.0 million.
5
In addition to the obligations under the current credit facilities, the
Company also has significant cash flow obligations, including without limitation
the amounts due to the WHX Pension Plan (as amended by the IRS Waiver and PBGC
Settlement Agreement entered into December 28, 2006). There can be no assurance
that the funds available from operations and under the Company's credit
facilities will be sufficient to fund debt service costs, working capital
demands, pension plan contributions, and environmental remediation costs, or
that the Company will be able to obtain replacement financing at commercially
reasonable terms upon the expiration of the H&H and Bairnco credit facilities in
June 2008.
The Company believes that recent developments, as described herein as well
as in the Company's Annual Report on Form 10-K for the year ended December 31,
2006, its operating plans and its existing capital resources and sources of
credit, including the H&H facilities and the Bairnco facilities, should permit
the Company to generate sufficient working capital to meet its obligations as
they mature over the next twelve months. The Company also continues to examine
all of its options and strategies, including acquisitions, divestitures, and
other corporate transactions, to increase cash flow and stockholder value, as
well as considering the reduction of certain discretionary expenses and sale of
certain non-core assets. The ability of the Company to meet its cash
requirements over this time period is dependent, in part, on the Company's
ability to meet its business plan and cash flow projections. However, if the
Company's cash needs are greater than anticipated or the Company does not
materially satisfy its business plan or meet its cash flow projections, the
Company may be required to seek additional or alternative financing sources.
There can be no assurance that such financing will be available or available on
terms acceptable to the Company.
NOTE 3 - BASIS OF PRESENTATION
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, 2006. Certain amounts for the prior year period have been
reclassified to conform to the current year presentation.
In the opinion of management, the interim financial statements reflect all
normal and recurring adjustments necessary to present fairly the consolidated
financial position and the results of operations and changes in cash flows for
the interim periods. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The results
of operations for the three months ended March 31, 2007 are not necessarily
indicative of the operating results for the full year.
NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
Interpretation of SFAS Statement 109" (FIN No. 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation provides that
the tax effects from an uncertain tax position can be recognized in the
financial statements, only if the position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN No. 48 are effective as of the beginning of fiscal 2007, with
the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings.
The Company adopted the provisions of FIN No. 48 on January 1, 2007. As a
result of the implementation of FIN No. 48, an increase in the liability for
unrecognized income tax benefits of $1.2 million was recognized, and
accordingly, an adjustment to opening retained earnings was recorded. At the
adoption date of January 1, 2007, the Company had $2.7 million of unrecognized
tax benefits, all of which would affect its effective tax rate if recognized. At
March 31, 2007, the Company has $2.8 million of unrecognized tax benefits. The
increase in the amount of unrecognized tax benefits in the three month period
ended March 31, 2007 related to interest.
6
The Company recognizes interest and penalties related to uncertain tax
positions in income tax expense. As of March 31, 2007, approximately $0.5
million of interest related to uncertain tax positions is accrued. It is
reasonably possible that the total amount of unrecognized tax benefits will
decrease by as much as $0.4 million during the next twelve months as a result of
the lapse of the applicable statutes of limitations in certain taxing
jurisdictions. The tax years 2003-2006 remain open to examination by the major
taxing jurisdictions to which the Company is subject.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities" (SFAS No. 159). SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. SFAS No. 159
is effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of adopting
SFAS No. 159 on its consolidated financial position and results of operations.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" (SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair value in
accordance with accounting principles generally accepted in the United States,
and expands disclosures about fair value measurements. This statement does not
require any new fair value measurements; rather, it applies under other
accounting pronouncements that require or permit fair value measurements. The
provisions of SFAS No. 157 are effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of adopting
SFAS No. 157 on its consolidated financial position and results of operations.
NOTE 5 - LOSS PER SHARE
The computation of basic earnings or loss per common share is based upon
the weighted average number of shares of Common Stock outstanding. Diluted
earnings per share gives effect to dilutive potential common shares outstanding
during the period. The Company had no dilutive common share equivalents in
either period.
RECONCILIATION OF LOSS AND SHARES IN EPS CALCULATION
(in thousands except per share amounts)
For the Three Months Ended March 31, 2007
Shares of
Net Loss Common Stock Per-Share
(Numerator) (Denominator) Amount
---------------- -------------------- ------------------
BASIC AND DILUTED EPS
Net loss per share applicable to common stock $(8,533) 10,000 $ (0.85)
================ ==================== ==================
For the Three Months Ended March 31, 2006
Shares of
Net Loss Common Stock Per-Share
(Numerator) (Denominator) Amount
---------------- -------------------- ------------------
BASIC AND DILUTED EPS
Net loss per share applicable to common stock $(7,066) 10,000 $ (0.71)
================ ==================== ==================
NOTE 6 - STOCK-BASED COMPENSATION
The Company has agreed to grant stock options upon adoption of a stock
option plan by the Board of Directors and registration thereof with the SEC, or
in lieu thereof, phantom stock options or equivalent other consideration (at the
sole discretion of the Company), to various officers and employees of the
Company, on or as of the following effective dates (in the case of December 31,
2006, on or before) and in the following respective amounts, with strike prices
or equivalent values as if granted on the dates set forth:
7
June 30, 2006 25,000 shares
September 30, 2006 130,000 shares
December 31, 2006 205,000 shares
September 30, 2007 60,000 shares
The trading price per share of the Company's common stock as of June 30,
2006 and September 30, 2006 was $9.20 and $9.00, respectively and as of December
31, 2006 the trading price was $8.45 per share. Under SFAS 123R, the Company is
required to adjust its obligation to the fair value of such stock options or
phantom stock options from the effective date of grant up to the date of actual
grant. The Company has not adopted a stock option plan as of March 31, 2007.
Stock-based compensation expense is recorded based on the grant-date fair
value estimated in accordance with the provisions of SFAS No.123(R). The Company
measures stock-based compensation cost at the grant date, based on the fair
value of the award, and recognizes the expense on a straight-line basis over the
employee's requisite service (vesting) period. The Company has recorded $0.2
million of stock-based compensation expense related to these phantom stock
options. As of March 31, 2007, total unrecognized stock-based compensation
related to phantom stock options was $1.5 million and is expected to be
recognized over a weighted-average period of approximately three years.
The Company estimates the fair value of stock options in accordance with
SFAS No.123(R) using a Black-Scholes option-pricing model. The expected average
risk-free rate is based on U.S. treasury yield curve. The expected average life
represents the period of time that options granted are expected to be
outstanding giving consideration to vesting schedules, historical exercise and
forfeiture patterns. Expected volatility is based on historical volatilities of
WHX's post-bankruptcy common stock. The expected dividend yield is based on
historical information and management's plan.
Three Months
Ended
Assumptions March 31, 2007
----------------------- -------------------
Risk-free interest rate 4.54%
Vesting period 3 years
Expected dividend yield 0.0%
Expected life (in years) 4.25 years
Volatility 55.7%
NOTE 7 - STOCKHOLDERS' DEFICIT
The changes in the Company's accumulated deficit for the three months ended
March 31, 2007 were as follows:
Three Months Ended
March 31, 2007
------------------
(in thousands)
Accumulated deficit, January 1, 2007 $(412,123)
Net loss (8,533)
Cumulative effect of adoption of
FIN 48 (Note 4) (1,228)
---------
Accumulated deficit, March 31, 2007 $(421,884)
==========
Comprehensive loss for the three-months ended March 31, 2007 and 2006 was as
follows:
(in thousands) Three Months Ended March 31,
2007 2006
----------- -----------
Net loss $(8,533) $(7,066)
Other comprehensive loss:
Foreign currency translation adjustments 157 (49)
------- -------
Comprehensive loss $(8,376) $(7,115)
======= =======
Accumulated other comprehensive income (loss) balances as of March 31, 2007 and
December 31, 2006 were comprised as follows:
8
(in thousands) March 31, December 31,
2007 2006
----------- -----------
Net actuarial losses and prior service costs and
and credits (net of tax of $5,262) $(50,525) $(50,525)
Foreign currency translation adjustment 3,347 3,190
-------- --------
$(47,178) $(47,335)
======== ========
NOTE 8 - INVENTORIES
Inventories at March 31, 2007 and December 31, 2006 are comprised as
follows:
(in thousands) March 31, December 31,
2007 2006
------------ ------------
Finished products $ 16,112 $ 16,162
In - process 6,992 5,743
Raw materials 25,146 25,423
Fine and fabricated precious metal in
various stages of completion 12,360 17,702
-------- --------
60,610 65,030
LIFO reserve (5,666) (7,853)
-------- --------
$ 54,944 $ 57,177
======== ========
In order to produce certain of its products, the Company purchases,
maintains and utilizes precious metals inventory. H&H enters into commodity
futures and forwards contracts on precious metals that are subject to market
fluctuations in order to economically hedge its precious metals inventory
against price fluctuations. As these derivatives are not designated as
accounting hedges under Statement of Financial Accounting Standards ("SFAS") No.
133, they are accounted for as derivatives with no hedge designation.
Accordingly, the Company marks to market the derivative instruments related to
precious metals. Such mark to market adjustments are recorded in current period
earnings as other income or expense in the Company's consolidated statement of
operations. The quarters ending March 31, 2007 and 2006 include losses of $0.7
million and $5.5 million, respectively, relating to these adjustments. In
addition, the Company records its precious metal inventory at LIFO cost, subject
to lower of cost or market with any adjustments recorded through cost of goods
sold. The quarter ended March 31, 2006 included a reduction of cost of goods
sold of $0.7 million resulting from reduction in quantities of precious metal
inventories valued at LIFO cost. The market value of the precious metal
inventory exceeded LIFO value cost by $5.7 million and $7.9 million at March 31,
2007 and December 31, 2006, respectively.
Certain customers and suppliers of H&H choose to do business on a "toll"
basis, and furnish precious metal to H&H for return in fabricated form (customer
metal) or for purchase from or return to the supplier. When the customer metal
is returned in fabricated form, the customer is charged a fabrication charge.
The value of this customer metal is not included in the Company's balance sheet.
In the first quarter of 2007, the Company received 400,000 troy ounces of silver
from a customer under an unallocated pool account agreement. Such agreement is
cancelable by the customer upon six months notice. Because of a reduction in its
operating needs as well as a result of this agreement, the quantity of silver
owned by the Company declined by 466,333 troy ounces as of March 31, 2007. The
Company deferred $3.0 million of profit arising from this liquidation of LIFO
inventory, which is currently being treated as temporary, and such deferral is
included in accrued liabilities on the March 31, 2007 balance sheet.
9
March 31 December 31
2007 2006
--------------- -------------
Silver ounces:
Customer metal 579,348 137,711
H&H owned metal 591,567 1,057,900
Gold ounces:
Customer metal 915 907
H&H owned metal 6,058 5,800
Palladium ounces:
Customer metal 1,338 1,338
H&H owned metal 1,535 1,535
Supplemental inventory information:
March 31 December 31
2007 2006
--------------- -------------
(in thousands, except per ounce)
Precious metals stated at LIFO cost $ 6,694 $ 9,849
Market value per ounce:
Silver $ 13.41 $ 12.85
Gold $ 663.30 $ 635.99
Palladium $ 351.75 $ 323.50
NOTE 9 - PENSIONS, OTHER POSTRETIREMENT AND POST-EMPLOYMENT BENEFITS
The following table presents the components of net periodic pension cost
(credit) for the WHX Pension Plan for the three months ended March 31, 2007 and
2006:
Three Months Ended
March 31,
-------------------------
2007 2006
-------------------------
(In thousands)
Service cost $ 75 $ 84
Interest cost 5,925 5,604
Expected return on plan assets (7,500) (6,984)
Amortization of prior service cost 25 21
Recognized actuarial (gain)/loss 225 227
------- -------
$(1,250) $(1,048)
======= =======
The Company maintains several other retirement and postretirement benefit
plans covering substantially all of its employees. The aggregate expense for
these plans was $0.2 million for the three months ended March 31, 2007 and
aggregate income of $0.4 million for the three months ended March 31, 2006. The
reason for the aggregate income for these benefit plans in 2006 was that
effective January 1, 2006, the H&H non-qualified pension plan adopted an
amendment under the plan to freeze benefits for all participants. This resulted
in a curtailment credit of $0.5 million, which was recorded in the first quarter
of 2006.
10
NOTE 10 - DEBT
Long-term debt consists of the following:
March 31, December 31,
2007 2006
------------ ------------
(in thousands)
H&H Term Loan - related party $ 89,627 $ 89,627
H&H Credit Facility - Term Loan A 11,746 14,453
H&H Term Loan - Term B 42,000 42,000
H&H Supplemental Term Loan 6,288 6,883
Other H&H debt-domestic 6,832 6,868
Other H&H debt-foreign 5,427 5,475
-------- --------
161,920 165,306
Less portion due within one year 4,666 4,778
-------- --------
Total long-term debt $157,254 $160,528
======== ========
On March 29, 2007, H&H and certain of H&H's subsidiaries amended the
respective Loan and Security Agreements' revolving credit facilities with
Wachovia Bank, N.A. ("Wachovia") and Steel to, among other things, (i) amend the
definition of EBITDA, (ii) reset the levels and amend certain of the financial
covenants, (iii) extend the termination date of the credit facilities from March
31, 2007 to June 30, 2008, (iv) permit the extension by H&H to WHX of an
unsecured loan for required payments to the pension plan, under certain
conditions, and (v) permit the extension by H&H to WHX of an unsecured loan for
other uses in the aggregate principal amount not to exceed $3.5 million under
certain conditions. The amendments also provided for the pledge of 65% of all
outstanding securities of Indiana Tube Danmark A/S, a Danish corporation and a
wholly-owned indirect subsidiary of H&H, and Protechno, S.A., a French
corporation and a wholly-owned subsidiary of Indiana Tube Danmark A/S. Finally,
the amendments also provided for waivers of certain events of default existing
as of March 29, 2007.
On June 15, 2007, the lenders under H&H's revolving credit facility and
other facilities granted a waiver to the events of default arising as a result
of the Order of Prejudgment Attachment entered by the Superior Court of
Fairfield County, Connecticut (the "Superior Court") on December 18, 2006 in
connection with the litigation known as HH East Parcel v. Handy & Harman
currently pending in the Superior Court in the amount of $3,520,200 and the
Notice of Bank Attachment/Garnishment dated May 21, 2007 by the State Marshal of
Fairfield County, Connecticut to JPMorgan Chase Bank in the amount of
$3,520,200, and related matters (see Note 13- Contingencies).
NOTE 11 -FACILITY CLOSURES AND ASSET SALES
NORRISTOWN FACILITY
On May 9, 2006, the Company announced the closing of the Handy & Harman
Tube Co. ("HHT") facility located in Norristown, Pennsylvania, which is included
in the Company's Tubing segment. The decision to close the Norristown facility
was principally based on the economics of operating HHT's business at the
facility. HHT manufactured stainless steel tubing that was supplied in various
lengths and forms in both coil and straight lengths. HHT's short coil business
was relocated to H&H's Camdel Metals Corporation ("Camdel") facility located in
Camden, Delaware. Most of HHT's machinery and equipment at the site has been
sold. The real estate has been offered for sale.
In conjunction with the decision to close the Norristown facility, the
Company reviewed the recoverability of the Norristown long-lived assets in
accordance with Statement of Financial Accounting Standards No. 144, "Accounting
for Impairment or Disposal of Long-Lived Assets". A review of future cash flows
indicated that cash flows would be insufficient to support the carrying value of
certain machinery and equipment at Norristown. As a result, the Company recorded
an asset impairment charge of $1.8 million in its statement of operations for
the second quarter of 2006. Certain of the Norristown long-lived assets,
principally consisting of machinery and equipment, were reclassified to current
assets held for sale in the balance sheet as of December 31, 2006. The real
estate is included in non-current assets (other assets) as it is not probable
that it will be sold within one year. No impairment loss was incurred on the
real estate assets based on the Company's analysis.
Restructuring charges related to the closing of the Norristown facility
totaling $2.4 million in 2006 ($1.9 million and $0.5 million in the second and
third quarters, respectively) were recorded in the statement of operations.
11
These charges included termination benefits of $2.0 million, $0.1 million
resulting from a pension curtailment, and $0.3 million of other charges. The
activity in the restructuring reserve was as follows for the quarter ended March
31, 2007:
Reserve Reserve
Balance Balance
December 31, March 31,
2006 Expense Paid 2007
------------------ ------------ ------------ ---------------
(in thousands)
Termination benefits $320 $ -- $212 $108
==== ==== ==== ====
The Company completed an environmental study at the Norristown facility
which indicated that environmental remediation activities with an estimated cost
of $0.8 million are required, which the Company accrued as of the first quarter
of 2006.
The Norristown facility operated through the third quarter of 2006. The
closing of Norristown and the sale of certain of its assets was completed by the
end of 2006, and most of the remaining machinery and equipment were sold in the
first quarter of 2007 for proceeds of $0.7 million.
HANDY & HARMAN ELECTRONIC MATERIALS ("HHEM")
On March 4, 2007, the Company sold certain assets, including the land and
building, certain machinery and equipment, and inventory of its Handy & Harman
Electronic Materials Corporation subsidiary, located in East Providence, Rhode
Island, as well as certain of its assets and inventory located in Malaysia
(collectively referred to as "HHEM") for net proceeds of approximately $3.8
million. HHEM was part of the Company's Precious Metals segment. In December
2006, the Company recorded an asset impairment charge of $3.4 million relating
to the long-lived assets offered for sale, in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". The amount of
the impairment loss was based upon the actual selling price of the long-lived
assets in March 2007. In the Company's balance sheet as of December 31, 2006,
the long-lived assets were classified as current assets held for sale. Upon
sale, the Company recognized a loss of $0.4 million relating to the sale of
inventory. Under the terms of the sale agreement, the Company has retained
responsibility for any pre-existing environmental conditions requiring
remediation at the Rhode Island site.
NOTE 12 - 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 tubing products and
fabrications primarily from stainless steel, carbon steel and
specialty alloys, for use in a wide variety of industrial
applications; and
(3) Engineered Materials. This segment manufactures specialty roofing
and construction fasteners, products for gas, electricity and water
distribution using steel and plastic which are sold to the
construction, and natural gas and water distribution industries, and
electrogalvanized products used in the construction and appliance
industries.
Management has determined that certain reporting units should be
aggregated and presented within a single reporting segment on the basis that
such operating segments have similar economic characteristics and share other
qualitative characteristics. 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.
12
The following table presents information about reportable segments for the
three month periods ending March 31, 2007 and 2006:
Three Months Ended March 31,
2007 2006
----------- -----------
(in thousands)
Net sales
Precious Metal $ 37,762 $ 36,712
Tubing 29,337 30,402
Engineered Materials 50,738 45,647
--------- ---------
Net sales $ 117,837 $ 112,761
========= =========
Segment operating income
Precious Metal $ (271) $ 2,415
Tubing (900) 433
Engineered Materials 2,073 3,411
--------- ---------
902 6,259
--------- ---------
Unallocated corporate expenses 1,445 881
Pension income (1,250) (1,048)
Environmental remediation expense (a) -- 2,909
Loss on disposal of assets 130 44
--------- ---------
Income from operations 577 3,473
Interest expense 7,570 4,584
Realized and unrealized loss on derivatives 691 5,466
Other expense (income) 140 (49)
--------- ---------
Loss before taxes $ (7,824) $ (6,528)
========= =========
(a) Certain environmental remediation expenses have not been allocated to the
reporting segments since the related facilities have been closed for several
years and are not indicative of current operating results.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS:
SUMCO INC. V. UNDERWRITERS AT LLOYD'S, LONDON, LEXINGTON INSURANCE COMPANY,
HARTFORD FIRE INSURANCE COMPANY, AND WURTTEMBERGISCHE VERSICHERUNG AG
On July 7, 2004, Sumco Inc. ("Sumco"), a wholly-owned subsidiary of H&H,
filed suit in the Marion County Superior Court of Indiana against certain
underwriters affiliated with Lloyd's, London, Lexington Insurance Company,
Hartford Fire Insurance Company, and Wurttembergische Versicherung AG (the
defendants). Sumco seeks to recover monies from these insurance carriers for
losses incurred as a result of a January 20, 2002 fire at its metal plating
facility in Indianapolis, Indiana. At the time of the fire, Sumco's parent
corporation, WHX, had in place layered fire insurance policies with combined
limits of $25 million and a deductible of $100,000. The defendants represent
carriers who provided $15 million in insurance coverage in excess of two
underlying policies of $5 million each. Defendants have previously paid $5
million in claims. Sumco contends that its losses are in excess of the policy
limits, defendants have acted in bad faith, and that it is entitled to the
payment of the remaining approximate $10 million in insurance coverage provided
by the defendants. In December 2006, the Court ruled on the Motion for Summary
Judgment. It denied the insurers' motion for summary judgment on the bad faith
claims and limited the compensatory damages that Sumco could recover. The
defendants have denied the allegations of the complaint and asserted certain
defenses. The parties settled their claims in May 2007 for an aggregate payment
13
to WHX of $5,689,276 from the defendants (which proceeds were paid to Steel in
partial satisfaction of its loan), and an assignment of their interest to WHX in
up to another $1.7 million in proceeds resulting from the settlement of
subrogation claims against various third parties (the recovery of which, in
whole or part, is not assured). Steel will have a first lien, and the Pension
Benefit Guaranty Corporation a second lien, on any additional proceeds
recovered.
HH EAST PARCEL, LLC. V. HANDY & HARMAN
This action arises out of a purchase and sale agreement entered into in
2003 whereby H&H agreed to sell the eastern parcel of a commercial site in
Fairfield, Connecticut to HH East Parcel, LLC ("HH East"). On or about April 5,
2005, HH East filed a Demand for Arbitration with the American Arbitration
Association seeking legal and equitable relief including completion of the
remediation of environmental conditions at the site in accordance with the terms
of the agreement. An arbitration hearing was held in November 2005 in
Connecticut, pursuant to which HH East was awarded an amount equal to $5,000 per
day from January 1, 2005 through the date on which remediation is completed.
This award amounts to approximately $4.0 million through the completion date of
April 6, 2007. H&H applied to the Superior Court of Connecticut, Fairfield
County, to have the arbitration award vacated and a decision was issued on June
26, 2006, denying H&H's application. H&H is appealing this decision.
On May 22, 2007, HH East served an Order for a Prejudgment Attachment in
the amount of $3,520,200, issued by the Superior Court, Stamford, Connecticut in
December 2006, against certain Connecticut property of H&H and against certain
bank accounts maintained by Handy & Harman at banks in New York. Handy & Harman
has brought proceedings in the Superior Court, Stamford, Connecticut, and in the
Supreme Court, State of New York, to oppose the attachment of such bank accounts
and to have it lifted. Both proceedings are pending and, with respect to the New
York proceeding, a Temporary Restraining Order ("TRO") was issued on June 11.
The parties are currently actively engaged in settlement discussions to resolve
all open issues and proceedings between them. On June 14, 2007, HH East
temporarily withdrew its attachment/garnishment against certain bank accounts of
H&H after the posting of other satisfactory collateral by H&H and while
settlement discussions are continuing. This also served to vacate the TRO.
H&H has been working cooperatively with the Connecticut Department of
Environmental Protection ("CTDEP") with respect to its obligations under a
consent order entered into in 1989 that applies to both the eastern and western
parcels of the property. H&H has been conducting an investigation of the western
parcel, and is continuing the process of evaluating various options for its
remediation. The sale of the eastern parcel that is the subject of this
litigation triggered statutory obligations under Connecticut law to investigate
and remediate pollution at or emanating from the eastern parcel. H&H completed
the investigation and has been actively conducting remediation of all soil
conditions on the eastern parcel for more than three years. Although no
groundwater remediation is required, there will be monitoring of same for
several years. The total remediation is expected to exceed $28.0 million, of
which approximately $27.2 million had been expended through March 31, 2007. H&H
received reimbursement of $2.0 million of these costs from its carrier under a
cost-cap insurance policy and is pursuing its potential entitlement to
additional coverage. Remediation of all soil conditions on site was completed on
April 6, 2007. HH East informed H&H in June that it believes that additional
work remains to be done by H&H on the site. The parties are currently in
discussion about this matter.
PAUL E. DIXON & DENNIS C. KELLY V. HANDY & HARMAN
Two former officers of H&H filed a Statement of Claim with the American
Arbitration Association ("Arbitration") on or about January 3, 2006, alleging
four claims against H&H. The Claimants were employees of H&H until September
2005 when their employment was terminated by H&H. Their claims include seeking
payments allegedly due under employment contracts and allegedly arising from the
terminations, and seeking recovery of benefits under what they allege was the
Handy & Harman Supplemental Executive Retirement Plan.
The Statement of Claim recites that the employment agreements of each of
the Claimants provides that H&H may terminate their employment at any time,
without prior notice, for any of the following reasons: "(i) [the officer's]
engaging in conduct which is materially injurious to [H&H] or [WHX], their
subsidiaries or affiliates, or any of their respective customer or supplier
relationships, monetarily or otherwise; (ii) [the officer's] engaging in any act
of fraud, misappropriation or embezzlement or any act which would constitute a
felony (other than minor traffic violations); or (iii) [the officer's] material
breach of the agreement." The Statement of Claim further alleges, and H&H has
not disputed, that each Claimant's employment was terminated in September 2005
pursuant to a letter, which stated in part, that each Claimant had violated
provisions of such officer's employment agreement, contained in the previous
sentence, "by, INTER ALIA, attempting to amend and put in place various benefit
plans to personally benefit yourself, without notice to, or approval of the
14
Board of Directors; for further failing to disclose the existence of the
relevant plan documents and other information to the Board; for failing to
cooperate in the Company's investigation of these important issues; for material
losses to the Company in connection with these actions....".
In the Arbitration, Claimants sought an award in excess of $4 million
each, plus interest, costs and attorneys' fees. Claimants also sought
indemnification for certain matters and an injunction against H&H with regard to
life insurance policies. H&H brought a special proceeding on February 15, 2006
in the Supreme Court of the State of New York, County of Westchester, for a
judgment staying the arbitration of three of the four claims. On March 10, 2006,
all of the parties filed a stipulation with the court, discontinuing the court
proceeding and agreeing therein, among other things, that all claims asserted by
the Claimants in the Arbitration (which was also discontinued at that time)
would be asserted in Supreme Court, Westchester County.
In April 2006, Claimants served a request for benefits, severance and
other amounts, similar to those described above, on H&H and various plan
administrators and fiduciaries thereof. The request was reviewed in accordance
with the procedures of the plans at issue and by letter dated September 27,
2006, claimants were notified that their request was largely denied. They filed
an appeal on December 11, 2006 with the Plan Administrator, which appeal was
denied on February 9, 2007. While no action is pending in any court, H&H does
not believe that it is liable to Claimants under the claims that have been
asserted to date, and it intends to defend itself vigorously against any claims
that may be asserted by Claimants. There can be no assurance that H&H will be
successful in defending against any such claims, or that H&H will not have any
liability on account of claims that may be asserted by Claimants. Such
liability, if any, cannot be reasonably estimated at this time, and.
accordingly, there can be no assurance that the resolution of this matter will
not be material to the financial position, results of operations and cash flow
of the Company.
ARISTA DEVELOPMENT LLC V. HANDY & HARMAN ELECTRONIC MATERIALS CORPORATION
In 2004, a subsidiary of H&H entered into an agreement to sell a
commercial/industrial property in North Attleboro, Massachusetts. Disputes
between the parties led to suit being brought in Bristol Superior Court in
Massachusetts. The plaintiff alleges that H&H is liable for breach of contract
and certain consequential damages as a result of H&H's termination of the
agreement in 2005, although H&H subsequently revoked its notice of termination.
H&H has denied liability and has been vigorously defending the case. The court
entered a preliminary injunction enjoining H&H from conveying the property to
anyone other than the plaintiff during the pendency of the case. Discovery on
liability and damages has been stayed while the parties are actively engaged in
settlement discussions, on which they have reached agreement in principle,
subject to certain conditions. Concurrently with these settlement efforts, H&H
is continuing to comply with a 1987 consent order from the Massachusetts
Department of Environmental Protection ("MADEP") to investigate and remediate
the soil and groundwater conditions. H&H is in discussions with the EPA, the
MADEP and the plaintiff in connection with the remedial activities. Since
discovery is not completed, it cannot be known at this time whether it is
foreseeable or probable that plaintiff would prevail in the litigation or
whether H&H would have any liability to the plaintiff.
ENVIRONMENTAL ACTIONS
In connection with the sale of its Fairfield, Connecticut facility in
2003, the Company was responsible for demolition and environmental remediation
of the site, the estimated cost of which was included in the loss on sale
recorded in 2003. H&H determined that an increase in the reserve for
environmental remediation was needed in the amount of $28.3 million, which was
recorded in the fourth quarter of 2004. This change in reserve was caused by the
discovery of underground debris and soil contaminants that had not been
anticipated. These additional costs are included in environmental remediation
expense. An additional $4.0 million has been recorded in selling, general and
administrative expenses as a penalty related to Fairfield East. The Company
retains title to a parcel of land adjacent to the property sold in 2003. This
parcel is classified as other non-current assets, in the amount of $2.0 million,
on the consolidated balance sheets at March 31, 2007 and December 31, 2006.
H&H entered into an administrative consent order (the "ACO") in 1986 with
the New Jersey Department of Environmental Protection ("NJDEP") with regard to
certain property that it purchased in 1984 in New Jersey. The ACO involves
remediation to be performed with regard to soil and groundwater contamination
allegedly from TCE. H&H settled a case brought by the local municipality in
regard to this site in 1998 and also settled with certain of its insurance
carriers. H&H is actively remediating the property and continuing to investigate
the most effective methods for achieving compliance with the ACO. A remedial
investigation report was filed with the NJDEP in May of 2006. Once the
investigation has been completed, it will be followed by a feasibility study and
a remedial action work plan that will be submitted to NJDEP. H&H anticipates
entering into discussions in the near future with NJDEP to address that agency's
natural resource damage claims, the ultimate scope and cost of which cannot be
estimated at this time. The ongoing cost of remediation is presently estimated
at approximately $450,000 per year, plus anticipated additional costs in 2007 of
15
approximately $700,000. Pursuant to a settlement agreement with the former
operator of this facility, the responsibility for site investigation and
remediation costs have been allocated, 75% to the former operator and 25% to
H&H. To date, total investigation and remediation costs of $237,000 and $79,000
have been settled by the former operator and H&H, respectively, in accordance
with this agreement. Additionally, H&H is currently being reimbursed through
insurance coverage for a portion of those costs for which the company is
responsible. There is additional excess insurance coverage which H&H intends to
pursue as necessary.
H&H has been identified as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") or similar state statutes at several sites and is a party to ACO's in
connection with certain properties. H&H may be subject to joint and several
liabilities imposed by CERCLA on potentially responsible parties. Due to the
technical and regulatory complexity of remedial activities and the difficulties
attendant in identifying potentially responsible parties and allocating or
determining liability among them, H&H is unable to reasonably estimate the
ultimate cost of compliance with such laws.
In a case entitled Agere Systems, Inc., et al. v. Advanced Environmental
Technology Corp., et al. (U.S. District Court, EDPA), five companies, all of
which are PRPs for the Boarhead Farm site in Bucks County, Pennsylvania, brought
CERCLA contribution and similar claims under Pennsylvania's environmental laws
against a number of companies in 2002, including a subsidiary of H&H, which the
plaintiffs claim contributed to the contamination of the Boarhead Farm site. A
number of the plaintiffs entered into settlements with several of the named
defendants and consent decrees with the Environmental Protection Agency ("EPA")
regarding the remediation of groundwater and soil contamination at the Boarhead
Farm site. There are currently nine non-settling defendants, including H&H,
against which the plaintiffs are pursuing their claims. Fact discovery has been
concluded and the parties are engaged in expert discovery. The plaintiffs have
already made substantial payments to the EPA in past response costs and have
themselves incurred costs for groundwater and soil remediation, which
remediation is continuing. Plaintiffs are seeking reimbursement of a portion of
amounts incurred and an allocation of future amounts from H&H and the other
non-settling defendants. H&H has been advised by counsel that its responsibility
for this site, if any, should be minimal and has demanded coverage from its
insurance carrier for any claims for which it could be held liable. It is not
possible to reasonably estimate the cost of remediation or H&H's share, if any,
of the liability at this time.
H&H received a notice letter from the EPA in August 2006 formally naming
H&H as a PRP at the Shpack landfill superfund site in Attleboro, Massachusetts.
H&H then voluntarily joined a group of ten (10) other PRPs (which group has
since increased to thirteen (13)) to work cooperatively regarding remediation of
this site. Investigative work is ongoing to determine whether there are other
parties that sent hazardous substances to the Shpack site but that have not
received notice letters nor been named as PRPs to date. No allocation as to
percentages of responsibility for any of the PRPs has been assigned or accepted;
proposed allocations are expected to be determined during the second quarter of
2007 (although that could be extended), at which point H&H could still withdraw
from the group. The PRP group submitted its good faith offer to the EPA in late
October 2006. It is not anticipated that the EPA will accept or reject the PRP's
offer until some time in 2007. If accepted, it is not anticipated that PRP
remedial activities at the site will begin before 2008. The remediation of a
significant amount of the contamination at the site is the responsibility of the
U.S. Army Corps of Engineers. That portion of the work has begun but is not
expected to be completed before 2008, at which time the remaining work will be
more clearly defined. The Company has recorded a reserve of $1.5 million in the
first quarter of 2006 in connection with this matter.
As discussed above, H&H has existing and contingent liabilities relating
to environmental matters, including capital expenditures, costs of remediation
and potential fines and penalties relating to possible violations of national
and state environmental laws. H&H has substantial remediation expenses on an
ongoing basis, although such costs are continually being readjusted based upon
the emergence of new techniques and alternative methods. In addition, the
Company has insurance coverage available for several of these matters. Based
upon information currently available, including H&H's prior capital
expenditures, anticipated capital expenditures, and information available to H&H
on pending judicial and administrative proceedings, H&H does not expect its
environmental compliance costs, including the incurrence of additional fines and
penalties, if any, relating to the operation of its facilities to have a
material adverse effect on the financial position, but there can be no such
assurances. Such costs could be material to H&H's results of operations and cash
flows. We anticipate that H&H will pay such amounts out of its working capital,
although there is no assurance that H&H will have sufficient funds to pay such
amounts. In the event that H&H is unable to fund these liabilities, claims could
be made against WHX for payment of such liabilities. As further information
comes into the Company's possession, it will continue to reassess such
evaluations.
OTHER LITIGATION
H&H or its subsidiaries are a defendant in numerous cases pending in a
variety of jurisdictions relating to welding emissions. Generally, the factual
underpinning of the plaintiffs' claims is that the use of welding products for
their ordinary and intended purposes in the welding process causes emissions of
16
fumes that contain manganese, which is toxic to the human central nervous
system. The plaintiffs assert that they were over-exposed to welding fumes
emitted by welding products manufactured and supplied by H&H and other
co-defendants. H&H denies liability and is defending these actions. It is not
possible to reasonably estimate H&H's exposure or share, if any, of the
liability at this time.
In addition to the foregoing cases, there are a number of other product
liability, exposure, accident, casualty and other claims against H&H or its
subsidiaries in connection with a variety of products sold by its subsidiaries
over several years, as well as litigation related to employment matters,
contract matters, sales and purchase transactions and general liability claims,
many of which arise in the ordinary course of business. It is not possible to
reasonably estimate H&H's exposure or share, if any, of the liability at this
time.
There is insurance coverage available for many of these actions, which
are being litigated in a variety of jurisdictions. To date, H&H has not incurred
and does not believe it will incur any significant liability with respect to
these claims, which it contests vigorously in most cases. However, it is
possible that the ultimate resolution of such litigation and claims could have a
material adverse effect on quarterly or annual results of operations, financial
position and cash flows when they are resolved in future periods.
PENSION PLAN CONTINGENCY ARISING FROM THE WPC GROUP BANKRUPTCY:
Wheeling-Pittsburgh Corporation ("WPC") and six of its subsidiaries
(collectively referred to as the "WPC Group"), including Wheeling-Pittsburgh
Steel Corporation ("WPSC"), a vertically integrated manufacturer of value-added
and flat rolled steel products, was a wholly owned subsidiary of WHX. On
November 16, 2000, the WPC Group filed a petition seeking reorganization under
Chapter 11 of Title 11 of the United States Bankruptcy Code. A Chapter 11 Plan
of Reorganization for the WPC Group (the "WPC POR") was consummated on August 1,
2003, pursuant to which, among other things, the WPC Group ceased to be a
subsidiary of WHX effective August 1, 2003, and from that date forward has been
an independent company.
As part of the WPC POR, the Company agreed to make certain contributions
(the "WHX Contributions") to the reorganized company. Under the WHX
Contributions, the Company forgave the repayment of its claims against the WPC
Group of approximately $39.0 million and, additionally, contributed to the
reorganized company $20.0 million of cash, for which the Company received a note
in the amount of $10.0 million. The note was fully reserved upon receipt.
On March 6, 2003, the PBGC published its Notice of Determination
("Notice") and on March 7, 2003 filed a Summons and Complaint ("Complaint") in
United States District Court for the Southern District of New York seeking the
involuntary termination of the WHX Pension Plan (the "WHX Plan"), a defined
benefit pension plan sponsored by the Company that provides pension benefits to
active and retired employees of WHX and H&H and certain benefits to active and
retired employees of members of the WPC Group. WHX filed an answer to this
complaint on March 27, 2003, contesting the PBGC's action. On July 24, 2003, the
Company entered into an agreement among the PBGC, WPC, WPSC, and the United
Steelworkers of America, AFL-CIO-CLC ("USWA") in settlement of matters relating
to the PBGC v. WHX Corporation, Civil Action No. 03-CV-1553, in the United
States District Court for the Southern District of New York ("Termination
Litigation"), in which the PBGC was seeking to terminate the WHX Plan. Under the
settlement, among other things, WHX agreed (a) that the WHX Plan, as it is
currently constituted, is a single employer pension plan, (b) to contribute
funds to the WHX Plan equal to moneys spent (if any) by WHX or its affiliates to
purchase WHX 10.5% Senior Notes ("Senior Notes") in future open market
transactions, and (c) to grant to the PBGC a pari passu security interest of up
to $50.0 million in the event WHX obtains any future financing on a secured
basis or provides any security or collateral for the Senior Notes.
Also under the settlement, all parties agreed that as of the effective
date of the WPC POR, (a) no shutdowns had occurred at any WPC Group facility,
(b) no member of the WPC Group is a participating employer under the WHX Plan,
(c) continuous service for WPC Group employees was broken, (d) no WPC Group
employees will become entitled to "Rule of 65" or "70/80" Retirement Benefits
(collectively, "Shutdown Benefits") by reason of events occurring after the
effective date of the WPC POR, and (e) the WHX Plan would provide for a limited
early retirement option to allow up to 650 WPSC USWA-represented employees the
right to receive retirement benefits based on the employee's years of service as
of July 31, 2003 with a monthly benefit equal to $40 multiplied by the
employee's years of service.
Finally, under the settlement, the PBGC agreed (a) that, after the
effective date of the WPC POR, if it terminates the WHX Plan at least one day
prior to a WPC Group facility shutdown, WHX shall be released from any
additional liability to PBGC resulting from the shutdown, (b) to withdraw its
claims in the WPC Bankruptcy Proceedings, and (c) to dismiss the Termination
Litigation.
17
The agreement with the PBGC also contains the provision that WHX will not
contest a future action by the PBGC to terminate the WHX Plan in connection with
a future WPC Group facility shutdown. In the event that such a plan termination
occurs, the PBGC has agreed to release WHX from any claims relating to the
shutdown. However, there may be PBGC claims related to unfunded liabilities that
may exist as a result of a termination of the WHX Plan.
NOTE 14 - SUBSEQUENT EVENT
On April 12, 2007, Steel and WHX entered into a Stock Purchase Agreement
whereby WHX acquired Steel's entire interest in BZ Acquisition Corp. ("BZA"), a
Delaware corporation and wholly owned subsidiary of Steel (the "BZA Transfer")
for $10.00. In addition, WHX agreed to reimburse all reasonable fees and
expenses incurred by Steel in connection with the Offer and the Merger (each as
defined below). BZA is the acquisition subsidiary in a tender offer to acquire
up to all of the outstanding stock of Bairnco for $13.50 per share in cash.
Steel beneficially owns approximately 50.3% of WHX's outstanding common stock.
Steel, BZA, and Bairnco entered into an Agreement and Plan of Merger dated
as of February 23, 2007 (the "Merger Agreement"), pursuant to which BZA amended
its tender offer to acquire all of the outstanding common shares of Bairnco at a
price of $13.50 per share in cash (the "Offer"). In addition, all Bairnco
shareholders of record on March 5, 2007 continued to be entitled to receive the
declared first quarter dividend of $0.10 per share, for total cash proceeds of
$13.60 per share. On April 13, 2007, upon the expiration of the Offer pursuant
to the Merger Agreement, BZA acquired approximately 88.9% of the outstanding
common stock of Bairnco.
Pursuant to the Merger Agreement, on April 24, 2007, BZA was merged with
and into Bairnco with Bairnco continuing as the surviving corporation as a
wholly owned subsidiary of WHX (the "Merger"). At the effective time of the
Merger, each Bairnco common share then outstanding (other than shares owned by
BZA or its direct parent entity, shares owned by Bairnco as treasury stock and
shares held by stockholders who properly exercise their appraisal rights) was
automatically converted into the right to receive $13.50 per share in cash
without interest and subject to applicable withholding taxes. Immediately prior
to the Merger, BZA held approximately 90.1% of the outstanding shares of
Bairnco. The proceeds required to fund the closing of the Offer and the
resulting Merger and to pay related fees and expenses were approximately $101.5
million.
In connection with the closing of the Offer, initial financing was
provided by Steel through two credit facilities. Steel extended to BZA bridge
loans in the principal amount of approximately $75.1 million, $1.4 million, and
$10.0 million (and may extend additional loans of approximately $3.6 million, up
to an aggregate total amount of borrowings of $90.0 million) pursuant to a loan
and security agreement (the "Bridge Loan Agreement"), between BZA and Bairnco,
as borrowers, and Steel, as lender. In addition, Steel extended to WHX a $15.0
million subordinated loan, which is unsecured at the WHX level, pursuant to a
Subordinated Loan and Security Agreement (the "Subordinated Loan Agreement" and,
together with the Bridge Loan Agreement, the "Loan Agreements"), between WHX, as
borrower, and Steel, as lender. WHX contributed the $15.0 million proceeds of
the subordinated loan to BZA as a capital contribution.
The Bridge Loan Agreement provides for bridge term loans of up to $90
million from Steel to BZA, which were assumed by Bairnco as a result of the
Merger. Borrowings under the Bridge Loan Agreement bear (i) cash interest at a
rate per annum equal to the prime rate of JP Morgan Chase plus 1.75% and (ii)
pay-in-kind interest at a rate per annum equal to 4.5% for the first 90 days the
initial loan is outstanding and 5% (instead of 4.5%) for the balance of the
term, each as adjusted from time to time. The minimum aggregate interest rate on
borrowings under the Bridge Loan Agreement is 14.5% per annum for the first 90
days the initial loan is outstanding, and 15% (instead of 14.5%) per annum for
the balance of the term, and the maximum aggregate interest rate on borrowings
under the Bridge Loan Agreement is 18% per annum. The cash interest rate and the
pay-in-kind interest rate may be adjusted from time to time, by agreement of
Steel and Bairnco, so long as the aggregate interest rate remains the same.
Interest is payable monthly in arrears. Obligations under the Bridge Loan
Agreement are guaranteed by certain of Bairnco's subsidiaries and collateralized
by a junior lien on the assets of Bairnco and certain of its subsidiaries and
capital stock of certain of Bairnco's subsidiaries. Obligations under the Bridge
Loan Agreement are also guaranteed by the Company on an unsecured basis. The
scheduled maturity date of the indebtedness under the Bridge Loan Agreement is
the earlier to occur of (i) June 30, 2008 and (ii) such time as Bairnco obtains
any replacement financing. Indebtedness under the Bridge Loan Agreement may be
prepaid without penalty or premium.
The Subordinated Loan Agreement provides for a subordinated term loan of
$15 million from Steel to WHX, which is unsecured at the WHX level. Borrowings
under the Subordinated Loan Agreement bear pay-in-kind interest at a rate per
annum equal to the prime rate of JP Morgan Chase plus 7.75%, adjusted from time
to time, with a minimum interest rate of 16% per annum and a maximum interest
rate of 19% per annum. Interest is payable monthly in arrears. Obligations under
the Subordinated Loan Agreement are guaranteed by Bairnco and certain of its
18
subsidiaries and collateralized by a junior lien on the assets of Bairnco and
certain of its subsidiaries and capital stock of certain of Bairnco's
subsidiaries. The indebtedness under the Subordinated Loan Agreement will mature
on the second anniversary of the issuance of the subordinated loan and may be
prepaid without penalty or premium.
The Loan Agreements contain customary representations, warranties,
covenants, events of default and indemnification provisions. The indebtedness
under the Bridge Loan Agreement and the related security interests is
subordinated to the indebtedness and related security interests granted under
Bairnco's existing senior credit facility. The guarantees of the indebtedness
under the Subordinated Loan Agreement and the related security interests is
subordinated to all indebtedness and security interests described in the
preceding sentence.
Bairnco's Revolving Credit facility permits distributions by Bairnco to
WHX under certain conditions, as described below. In connection with the closing
of the Offer and the subsequent Merger on April 24, 2007, Bairnco became a
wholly-owned subsidiary of WHX. The availability under the Bairnco Revolving
Credit Facility on March 31, 2007 was approximately $12.0 million.
On November 9, 2006, Bairnco entered into a five year, $42.0 million
Senior Secured Credit Facility. The $42.0 million facility is apportioned as
follows: a five-year $15.0 million term loan and up to a $27.0 million revolving
credit facility, including a $13.0 million sub-limit for letters of credit and a
$3.0 million sub-limit for foreign currency loans. The Bairnco Revolving Credit
Facility is collateralized by a first lien on substantially all of the domestic
assets of Bairnco, the capital stock of domestic subsidiaries and 65% of the
capital stock of foreign subsidiaries. The Bairnco Revolving Credit Facility
matures on November 8, 2011. This Bairnco Revolving Credit Facility was amended
on March 23, 2007 to permit the change of control in connection with the closing
of the Offer, among other things, and was further amended on April 24, 2007 to
amend certain covenants and to permit the financing under the Loan Agreements,
among other things.
The term loan under the Bairnco Revolving Credit Facility has scheduled
principal payments of $1.1 million in 2007, 2008, 2009 and 2010, and $1.0
million in 2011, with the balance due at maturity. Interest rates vary on the
term loan and are set from time to time in relationship to one of several
reference rates, as selected by Bairnco. Interest rates vary on the revolving
credit notes and are set at the time of borrowing in relationship to one of
several reference rates as selected by Bairnco. A commitment fee is paid on the
unused portion of the total credit facility. The amount Bairnco can borrow at
any given time is based upon a formula that takes into account, among other
things, eligible inventory and accounts receivable, which can result in
borrowing availability of less than the full amount of the Bairnco Revolving
Credit Facility. The Bairnco Revolving Credit Facility contains customary
representations, warranties, covenants (including a covenant that permits
Bairnco to make distributions to WHX provided that specified conditions are
met), events of default and indemnification provisions. The Bairnco Revolving
Credit Facility also contains a financial covenant which requires Bairnco to
meet a minimum fixed charge coverage ratio, including upon the payment of any
distribution from Bairnco to WHX. The amount available for distribution to WHX
by Bairnco as of May 31, 2007 was approximately $1.0 million.
In addition, Bairnco has a China foreign loan facility that reflects
borrowing by its Chinese facilities, which is secured by four U.S. dollar
denominated letters of credit totaling $5.2 million issued under the Secured
Credit Facility.
Bairnco operates two core businesses - Arlon and Kasco. Arlon designs,
manufactures, and sells engineered materials and components for the electronic,
industrial and commercial markets. Kasco is a leading provider of meat-room
products and maintenance services for the meat and deli departments of
supermarkets; restaurants; meat, poultry and fish processing plants; and
manufacturers and distributors of electrical saws and cutting equipment
throughout North America, Europe, Asia and South America. WHX believes that the
acquisition of Bairnco will be beneficial because of Bairnco's strong positions
in niche engineered materials markets, and that Bairnco's plant level
operations, profit margins and working capital will improve. The results of
operations and assets of Bairnco will be included in the financial statements of
WHX beginning in the second quarter of 2007.
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 group of
businesses. WHX's primary business currently is Handy & Harman, a diversified
manufacturing company whose strategic business units encompass three reportable
segments: precious metals, tubing, and engineered materials. In April 2007, WHX
acquired Bairnco Corporation ("Bairnco"). See Note 14-Subsequent Event.
19
RESULTS OF OPERATIONS
COMPARISON OF THE FIRST QUARTER OF 2007 WITH THE FIRST QUARTER OF 2006
Net sales for the first quarter of 2007 increased by $5.1 million, or
4.5%, to $117.8 million, as compared to $112.8 million in the first quarter of
2006. Sales increased by $1.1 million at the Precious Metal Segment, declined by
$1.1 million at the Tubing Segment and increased by $5.1 million at the
Engineered Materials Segment. Net sales in ongoing businesses increased by over
$15 million, including approximately $6.6 million of sales from the roofing
fastener business acquired by the Company in December 2006, but was offset by a
decrease in sales from businesses that had been sold or exited after the first
quarter of 2006. These businesses consisted of the Handy & Harman Electronic
Materials Corp. ("HHEM") business within the Precious Metal segment and the
Norristown Pennsylvania location of the Handy & Harman Tube Co. within the
Tubing segment. In the ongoing businesses, there was an increase in volume
across all segments. Price increases also resulted in higher sales principally
in the Precious Metals and Engineered Materials segments.
Gross profit percentage was 16.5% in the first quarter of 2007 and 19.0%
in the first quarter of 2006. The 2006 quarter included a positive impact of
$0.7 million from the liquidation of precious metal inventories valued at LIFO.
The 2007 quarter was negatively affected by a $0.4 million loss on the sale of
the HHEM inventory (related to the sale of the business) as compared to positive
gross profit for this business in the 2006 quarter. In addition, there were
continued production inefficiencies in the Company's Mexican and domestic tubing
facilities.
Selling, general and administrative ("SG&A") expenses increased $3.8
million to $18.8 million in the first quarter of 2007 from $15.0 million in the
comparable 2006 period. A significant factor that increased SG&A expenses in the
first quarter of 2007 was the acquisition of OMG Midwest, a roofing fastener
business acquired by the Company in late 2006. Its costs include operating costs
as well as amortization of certain acquired intangible assets. In addition,
costs also rose in the 2007 period due to additional audit, legal, and
professional fees, partially offset by reduced costs resulting from the closure
of the HHEM and Norristown facilities.
There were no environmental remediation costs in the first quarter of
2007; however, environmental remediation expenses of $2.9 million were recorded
in the first quarter of 2006. These expenses include $1.5 million related to the
Company's estimated exposure at the Shpack landfill site, and $0.8 million in
connection with the Company's former Norristown facility. H&H received a notice
letter from the Environmental Protection Agency ("EPA") in August 2006 formally
naming H&H as a potentially responsible party ("PRP") at the Shpack landfill
superfund site in North Attleboro, Massachusetts. H&H then voluntarily joined a
group of ten (10) other PRPs (which group has since increased to thirteen (13))
to work cooperatively regarding remediation of this site. Investigative work is
ongoing to determine whether there are other parties that sent hazardous
substances to the Shpack site but that have not received notice letters nor been
named as PRPs to date. No allocation as to percentages of responsibility for any
of the PRPs has been assigned or accepted; proposed allocations are expected to
be determined during the second quarter of 2007 (although that could be
extended), at which point H&H could still withdraw from the group. The PRP group
submitted its good faith offer to the EPA in late October 2006. It is not
anticipated that the EPA will accept or reject the PRPs' offer until some time
in 2007. If accepted, it is not anticipated that PRP remedial activities at the
site will begin before 2008. The remediation of a significant amount of the
contamination at the site is the responsibility of the U.S. Army Corps of
Engineers. That portion of the work has begun but is not expected to be
completed before 2008, at which time the remaining work will be more clearly
defined. At the Company's former Norristown facility, the Company recently
completed a study which indicated that environmental remediation activities with
an estimated cost of $0.8 million are required, which the Company accrued as of
the first quarter of 2006.
Operating income for the first quarter of 2007 was $0.6 million compared
to $3.5 million for the first quarter of 2006, and at the segment level, was
$0.9 million compared to $6.3 million in 2006. The closure of two operating
facilities had a negative impact on the operating income in 2007. These two
facilities incurred operating losses in the first quarter of 2007, whereas these
businesses contributed modestly to operating income in the first quarter of
2006. In the ongoing businesses, the sales improvement in the first quarter of
2007 was offset by a reduced gross margin percentage, as well as higher SG&A
expenses. Operating income for the first quarter of 2006 at the segment level is
higher than at the consolidated level principally because environmental
remediation expenses of $2.9 million was not allocated to the segments.
Interest expense for the first quarter of 2007 increased $3.0 million to
$7.6 million from $4.6 million in the first quarter of 2006. Approximately half
of the increase was due to additional borrowings after the first quarter of
20
2006. Proceeds from the additional borrowings were used principally to fund the
acquisition of OMG Midwest in December 2006, and to pay substantial
environmental remediation costs and pension-related payments in excess of the
Company's operating cash flow. The balance of the increase was attributable to
higher interest rates and amortization of deferred financing costs in 2007
compared to the same period of 2006. Pursuant to the terms of a Subordination
Agreement between Steel and Wachovia, interest payable to Steel is accrued but
not paid.
Realized and unrealized losses on derivatives were $0.7 million in the
first quarter of 2007, compared to $5.5 million the first quarter of 2006. The
derivative financial instruments utilized by the Company are precious metal
forward contracts, which are used to economically hedge the Company's precious
metal inventory against price fluctuations. Losses are incurred as precious
metal market prices increase over the contract term, and gains are recognized as
precious metal prices decrease over the contract term. While precious metal
market prices increased in the first quarter of both 2007 and 2006, the rate of
increase was lower during the first quarter of 2007 compared to the first
quarter of 2006. In addition, there was a significantly lower quantity of
precious metal ounces under contract in the first quarter of 2007. Both these
factors resulted in a reduced loss on derivative instruments in the first
quarter of 2007 compared to the same period of 2006.
In the first quarter of 2007 and 2006, tax provisions of $0.7 million and
$0.5 million, respectively, were recorded for state and foreign taxes. The
Company has not recorded an income tax benefit associated with its operating
losses in each quarter since in the opinion of management, it is more likely
than not that such benefits will not be realized in the future. The Company
records a valuation allowance against deferred tax assets resulting from net
operating loss carryforwards. On January 1, 2007, the Company adopted the
provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes, an Interpretation of SFAS Statement 109" (FIN No. 48). As a result of the
implementation of FIN No. 48, an increase in the liability for unrecognized
income tax benefits of $1.2 million was recognized, and an adjustment to opening
retained earnings was recorded.
Net loss applicable to common stock for the first quarter of 2007 was $8.5
million, or ($0.85) per share, compared to $7.1 million or ($0.71) per share for
the first quarter of 2006.
The comments that follow compare revenues and operating income by segment
for the first quarter 2007 and 2006.
PRECIOUS METAL
Sales for the Precious Metal segment increased $1.1 million, or 2.9%, from
$36.7 million in 2006 to $37.8 million in 2007. Within the precious metal
plating group, the sale of the HHEM business resulted in a $5.2 million
reduction in sales for the first quarter of 2007 compared to the same period of
2006, partially offset by a transfer of business to another entity within the
precious metal plating group. Aside from the reduction caused by the sale of the
HHEM business, the segment, particularly the precious metal fabrication group,
experienced higher sales from both increased volume and higher precious metal
market prices.
Operating income for the Precious Metal segment was a loss of $0.3 million
in the first quarter of 2007, compared to income of $2.4 million in the first
quarter of 2006. This decrease in operating income was principally driven by our
precious metal plating group. Operating income in the 2007 quarter was
negatively affected by continued weakness and a less profitable mix of products
sold by our precious metal plating group to the automotive market. This compares
to unusually high demand from the automotive market in the first quarter of 2006
as our customers built inventory. In addition, operating income was reduced by a
$0.4 million loss upon sale of certain inventory and by $0.2 million of
employee-related termination costs when the HHEM business was sold in March
2007. Furthermore, the 2006 quarter had been positively impacted by a gain of
$0.7 million from the liquidation of precious metal inventories valued at LIFO
cost.
TUBING
In the first quarter of 2007, sales for the Tubing segment decreased $1.1
million, or 3.5%, from $30.4 million in 2006 to $29.3 million in the first
quarter of 2007. The decrease in sales was principally caused by the closure of
the Norristown Pennsylvania facility, which had experienced strong demand in the
first quarter of 2006, prior to its shutdown. The reduction in sales from the
closure of the Norristown facility was partially offset by a transfer of a
portion of Norristown's business and strong demand at the other stainless steel
tubing facilities, principally from the petrochemical markets. The refrigeration
tubing group experienced reduced sales volume resulting from weak demand from
the North American refrigeration market, partially offset by an increase in
sales from the European refrigeration market. Operating income decreased by $1.3
million to a loss of $0.9 million in the first quarter of 2007 as compared to
operating income of $0.4 million in the same period of 2006. The decrease in
operating income is principally the result of the reduction in sales in the
refrigeration market and continued production inefficiencies at the Mexican
tubing facility, as well as the impact of closing
21
the Norristown facility, which contributed to operating income in the first
quarter of 2006. These factors were partially offset by improved operating
income at the Company's remaining stainless steel tubing facilities.
ENGINEERED MATERIALS
Sales for the Engineered Materials segment increased $5.1 million from
$45.6 million in the first quarter of 2006 to $50.7 million in the first quarter
of 2007 due to increased volume in the roofing fastener business (principally
due to the sales of OMG Midwest, which was acquired in late December 2006). This
increase was partially offset by weaker sales of products used in the domestic
housing market, which is experiencing a continued slowdown.
Operating income decreased by $1.3 million from $3.4 million in the first
quarter of 2006 to $2.1 million in the same period of 2007. Factors resulting in
lower operating income included soft demand from the housing construction and
commercial roofing markets, reduced gross margin caused by higher cost of sales
on the acquired inventory that had been valued under purchase accounting, as
well as higher SG&A expenses including amortization of certain intangibles
acquired in December 2006.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses increased from $0.9 million in the first
quarter of 2006 to $1.4 million in the first quarter of 2007. There were
increases in the costs for audit and legal fees, and expenses associated with
share-based compensation for certain executives, partially offset by reduced
costs of insurance. The Company's pension credit rose by $0.2 million in the
first quarter of 2007 compared to the same period in 2006.
DISCUSSION OF CONSOLIDATED STATEMENT OF CASH FLOWS
As of March 31, 2007, the Company's current assets totaled $135.8 million
and its current liabilities totaled $151.7 million; a working capital deficit of
$15.7 million. The Company's working capital deficit at December 31, 2006 was
$1.6 million.
Net cash used by operating activities for the three months ended March 31,
2007 totaled $10.4 million. Loss from operations adjusted for non-cash income
and expense items used $3.3 million of cash. Working capital accounts used $6.8
million of cash, as follows: Accounts receivable used $12.6 million, inventories
provided $2.3 million, interest accrued but not paid to a related party provided
$3.8 million, and net other current assets and liabilities used $0.4 million.
Other non-working capital items included in operations used $0.2 million. Cash
used by operating activities in the first quarter of 2006 totaled $13.8 million,
and principally was caused by the net loss of the period, as well as seasonal
working capital needs for inventory and accounts receivable.
Cash flow provided by inventory, with precious metal inventory measured
using LIFO cost, totaled $2.3 million in the quarter ended March 31, 2007. In
the normal course of business, H&H accepts precious metals from suppliers and
customers, which quantities are returnable in fabricated or commercial bar form
under agreed-upon terms. To the extent such metals are used by the Company to
meet its operating requirements, the amount of inventory which H&H must own is
reduced. In the first quarter of 2007, the Company received 400,000 ounces of
silver from a customer under an unallocated pool agreement. As a result of this
agreement, along with a reduction in operating needs, the Company was able to
reduce its owned quantity of silver by over 400,000 troy ounces, providing over
$5.0 million in cash. The Company deferred $3.0 million in profit arising from
this temporary liquidation of the LIFO inventory, which is included in accrued
liabilities on the March 31, 2007 balance sheet. The deferred gain reflects the
excess of the current market value of the precious metal over the LIFO value of
the inventory decrement. In the comparable quarter of the prior year, the
Company used $4.5 million of cash flow for inventories. Inventories totaled
$54.9 million at March 31, 2007, as compared to $57.2 million as of December 31,
2006.
The use of funds due to accounts receivable in both the first quarter of
2007 and 2006 ($12.6 million and $10.5 million, respectively) was caused by a
seasonal increase in accounts receivable which resulted from higher sales levels
for that respective quarter (and particularly the last month of the quarter)
compared to the preceding quarter. Net sales in the first quarter of 2007 were
$117.8 million, as compared to $101.4 million in the fourth quarter of 2006, an
increase of $16.4 million. Net sales in the first quarter of 2006 were $112.8
million, as compared to $99.2 million in the fourth quarter of 2005; an increase
of $13.6 million.
Net other current assets and liabilities provided $3.5 million of cash
flow in the first quarter of 2007 and $0.5 million in the first quarter of 2006.
The 2007 quarter included the accrual of $3.8 million of interest payable to a
related party, and the current liability related to the deferral of the
temporary LIFO gain of $3.0 million discussed above, plus a seasonal increase in
22
trade accounts payable, but was reduced by $3.3 million of payments for
environmental remediation costs and $3.0 million paid to the WHX Pension Plan.
The 2006 quarter included the recording of a $2.9 million environmental
remediation accrual.
Other non-working capital items included in operating activities used $0.2
million in the first quarter of 2007, as compared to $0.7 million in the first
quarter of 2006.
Investing activities provided $1.9 million in the first quarter of 2007,
driven by $3.6 million received principally from the sale of the HHEM and
certain Norristown assets. Investing activities used $5.1 million in the same
period of 2006. Cash used for investing activities in the first quarter of 2006
was higher than in 2007 because of net cash paid out for precious metal
derivative contracts in 2006 of $4.4 million, compared to $0.7 million in 2007.
In addition, capital spending in 2006 was $2.2 million, as compared to $1.0
million spent on capital improvements in the same quarter of 2007.
Financing activities provided $7.2 million in the first quarter of 2007,
principally from additional net drawdowns on H&H's revolving credit facility,
partially offset by $3.3 million of principal repaid on term loans. Financing
activities provided $24.6 million of net cash in the first quarter of 2006,
principally from new term loan borrowings, which totaled $26.0 million during
the quarter. The increase in debt between December 31, 2005 and March 31, 2006
consisted of the following: On December 29, 2005, H&H entered into an amendment
to its Term B Loan with Steel. This amendment provided for, among other things,
an increase of the Term B Loan in January 2006 by $10 million. On January 24,
2006, H&H's wholly-owned subsidiary, OMG, Inc. entered into a loan agreement
with Sovereign Bank for $8.0 million, collateralized by a mortgage on OMG,
Inc.'s real property. On March 31, 2006, H&H and Steel agreed to an increase in
the Term B Loan in the amount of $9.0 million and the prepayment in the same
amount of a portion of H&H's subordinated intercompany promissory note issued to
WHX.
LIQUIDITY
The Company has incurred significant losses and negative cash flows from
operations in recent years, and as of March 31, 2007 had an accumulated deficit
of $420.7 million. As of March 31, 2007, the Company's current assets totaled
$135.8 million and its current liabilities totaled $151.5 million; a working
capital deficit of $15.7 million. The Company's working capital deficit at
December 31, 2006 was $1.6 million. Additionally, the Company had not been in
compliance with certain of its bank covenants and had been required to obtain a
number of waivers from its lenders related to such covenants. For 2005 and 2004,
the Company's financial statements described a number of conditions concerning
the Company's liquidity difficulties, and stated that these conditions raised
substantial doubt about the Company's ability to continue as a going concern. On
March 7, 2005, WHX (the parent company) filed a voluntary petition to reorganize
under Chapter 11 of the United States Bankruptcy Code, continued to operate its
business 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.
As of March 31, 2007, WHX and its unrestricted subsidiaries had cash of
approximately $0.1 million and current liabilities of approximately $7.5
million, including $5.1 million of mandatorily redeemable preferred shares
payable to a related party. WHX is a holding company and has as its sole source
of cash flow distributions from its operating subsidiaries, H&H and Bairnco (see
Note 14-Subsequent Event), or other discrete transactions. H&H's bank credit
facilities and term loan effectively do not permit it to transfer any cash or
other assets to WHX (with the exception of unsecured loans to be used to make
required contributions to the pension plan, and for other uses of an unsecured
loan in the aggregate principal amount not to exceed $3.5 million under certain
conditions), and are collateralized by substantially all of H&H's assets.
Bairnco's revolving credit facility permits distributions by Bairnco to WHX
under certain conditions, as described below. WHX has no bank credit facility of
its own. WHX's ongoing operating cash flow requirements consist of funding the
minimum requirements of the WHX Pension Plan and paying other administrative
costs.
H&H's availability under its revolving credit facility and other
facilities as of March 31, 2007, was approximately $15.5 million. On March 29,
2007, all such facilities, including the term loans, were amended to (i)
redefine EBITDA, (ii) reset the levels and amend certain of the financial
covenants, (iii) extend the termination date of the credit facilities from March
31, 2007 to June 30, 2008, (iv) permit the extension by H&H to WHX of an
unsecured loan for required payments to the pension plan, under certain
conditions, and (v) permit the extension by H&H to WHX of an unsecured loan for
other uses in the aggregate principal amount not to exceed $3.5 million under
certain conditions. The amendments also provided for the pledge of 65% of all
outstanding securities of Indiana Tube Danmark A/S, a Danish corporation and a
wholly-owned indirect subsidiary of H&H., and Protechno, S.A., a French
corporation and a wholly-owned subsidiary of Indiana Tube Danmark A/S. Finally,
the amendments also provided for waivers of certain events of default existing
23
as of March 29, 2007. As of December 31, 2006, such debt has been classified as
long-term since the Company is no longer in default on the debt, and the
maturity date of the debt is June 30, 2008.
On June 15, 2007, the lenders under H&H's revolving credit facility and
other facilities granted a waiver to the events of default arising as a result
of the Order of Prejudgment Attachment entered by the Superior Court of
Fairfield County, Connecticut (the "Superior Court") on December 18, 2006 in
connection with the litigation known as HH East Parcel v. Handy & Harman
currently pending in the Superior Court in the amount of $3,520,200 and the
Notice of Bank Attachment/Garnishment dated May 21, 2007 by the State Marshal of
Fairfield County, Connecticut to JPMorgan Chase Bank in the amount of
$3,520,200, and related matters (see Note 13- Contingencies).
On March 4, 2007, the Company sold certain assets, including the land and
building, certain machinery and equipment, and inventory of its Handy & Harman
Electronic Materials Corporation subsidiary, located in East Providence, Rhode
Island, as well as certain of its assets and inventory located in Malaysia
(collectively referred to as "HHEM") for net proceeds of approximately $3.8
million. Under the terms of the sale agreement, the Company has retained
responsibility for any pre-existing environmental conditions requiring
remediation at the Rhode Island site.
In connection with the closing of the Bairnco Offer and the subsequent
Merger on April 24, 2007 (see Subsequent Event-below), Bairnco became a
wholly-owned subsidiary of WHX. Initial financing was provided by Steel through
two credit facilities, in the approximate aggregate amount of $101.5 million. In
addition, the Bairnco Revolving Credit Facility was amended to permit the
closing of the Merger and related financing transactions. The availability under
the Bairnco Revolving Credit Facility on March 31, 2007 was approximately $12.0
million. The Bairnco Revolving Credit Facility permits distributions by Bairnco
to WHX under certain conditions. Such amount available for distribution to WHX
as of May 31, 2007 was approximately $1.0 million.
In addition to the obligations under the current credit facilities, the
Company also has significant cash flow obligations, including without limitation
the amounts due to the WHX Pension Plan (as amended by the IRS Waiver and PBGC
Settlement Agreement entered into December 28, 2006). There can be no assurance
that the funds available from operations and under the Company's credit
facilities will be sufficient to fund debt service costs, working capital
demands, pension plan contributions, and environmental remediation costs, or
that the Company will be able to obtain replacement financing at commercially
reasonable terms upon the expiration of the H&H and Bairnco credit facilities in
June 2008.
The Company believes that recent developments, as described herein as well
as in the Company's Annual Report on Form 10-K for the year ended December 31,
2006, its operating plans and its existing capital resources and sources of
credit, including the H&H facilities and the Bairnco facilities, should permit
the Company to generate sufficient working capital to meet its obligations as
they mature over the next twelve months. The Company also continues to examine
all of its options and strategies, including acquisitions, divestitures, and
other corporate transactions, to increase cash flow and stockholder value, as
well as considering the reduction of certain discretionary expenses and sale of
certain non-core assets. The ability of the Company to meet its cash
requirements over this time period is dependent, in part, on the Company's
ability to meet its business plan and cash flow projections. However, if the
Company's cash needs are greater than anticipated or the Company does not
materially satisfy its business plan or meet its cash flow projections, the
Company may be required to seek additional or alternative financing sources.
There can be no assurance that such financing will be available or available on
terms acceptable to the Company.
SUBSEQUENT EVENT- ACQUISITION OF BAIRNCO CORPORATION
On April 12, 2007, Steel and WHX entered into a Stock Purchase Agreement
whereby WHX acquired Steel's entire interest in BZ Acquisition Corp. ("BZA"), a
Delaware corporation and wholly owned subsidiary of Steel (the "BZA Transfer")
for $10.00. In addition, WHX agreed to reimburse all reasonable fees and
expenses incurred by Steel in connection with the Offer and the Merger (each as
defined below). BZA is the acquisition subsidiary in a tender offer to acquire
up to all of the outstanding stock of Bairnco Corporation, a Delaware
corporation ("Bairnco") for $13.50 per share in cash. Steel beneficially owns
approximately 50.3% of WHX's outstanding common stock.
Steel, BZA, and Bairnco entered into an Agreement and Plan of Merger dated
as of February 23, 2007 (the "Merger Agreement"), pursuant to which BZA amended
its tender offer to acquire all of the outstanding common shares of Bairnco at a
price of $13.50 per share in cash (the "Offer"). In addition, all Bairnco
shareholders of record on March 5, 2007 continued to be entitled to receive the
declared first quarter dividend of $0.10 per share, for total cash proceeds of
$13.60 per share. On April 13, 2007, upon the expiration of the Offer pursuant
to the Merger Agreement, BZA acquired approximately 88.9% of the outstanding
common stock of Bairnco.
24
Pursuant to the Merger Agreement, on April 24, 2007, BZA was merged with
and into Bairnco with Bairnco continuing as the surviving corporation as a
wholly owned subsidiary of WHX (the "Merger"). At the effective time of the
Merger, each Bairnco common share then outstanding (other than shares owned by
BZA or its direct parent entity, shares owned by Bairnco as treasury stock and
shares held by stockholders who properly exercise their appraisal rights) was
automatically converted into the right to receive $13.50 per share in cash
without interest and subject to applicable withholding taxes. Immediately prior
to the Merger, BZA held approximately 90.1% of the outstanding shares of
Bairnco. The proceeds required to fund the closing of the Offer and the
resulting Merger and to pay related fees and expenses were approximately $101.5
million.
In connection with the closing of the Offer, initial financing was
provided by Steel through two credit facilities. Steel extended to BZA bridge
loans in the principal amount of approximately $75.1 million, $1.4 million, and
$10.0 million (and may extend additional loans of approximately $3.6 million, up
to an aggregate total amount of borrowings of $90.0 million) pursuant to a Loan
and Security Agreement (the "Bridge Loan Agreement"), between BZA and Bairnco,
as borrowers, and Steel, as lender. In addition, Steel extended to WHX a $15.0
million subordinated loan, which is unsecured at the WHX level, pursuant to a
Subordinated Loan and Security Agreement (the "Subordinated Loan Agreement" and,
together with the Bridge Loan Agreement, the "Loan Agreements"), between WHX, as
borrower, and Steel, as lender. WHX contributed the $15.0 million proceeds of
the subordinated loan to BZA as a capital contribution.
The Bridge Loan Agreement provides for bridge term loans of up to $90
million from Steel to BZA, which were assumed by Bairnco as a result of the
Merger. Borrowings under the Bridge Loan Agreement bear (i) cash interest at a
rate per annum equal to the prime rate of JP Morgan Chase plus 1.75% and (ii)
pay-in-kind interest at a rate per annum equal to 4.5% for the first 90 days the
initial loan is outstanding and 5% (instead of 4.5%) for the balance of the
term, each as adjusted from time to time. The minimum aggregate interest rate on
borrowings under the Bridge Loan Agreement is 14.5% per annum for the first 90
days the initial loan is outstanding, and 15% (instead of 14.5%) per annum for
the balance of the term, and the maximum aggregate interest rate on borrowings
under the Bridge Loan Agreement is 18% per annum. The cash interest rate and the
pay-in-kind interest rate may be adjusted from time to time, by agreement of
Steel and Bairnco, so long as the aggregate interest rate remains the same.
Interest is payable monthly in arrears. Obligations under the Bridge Loan
Agreement are guaranteed by certain of Bairnco's subsidiaries and collateralized
by a junior lien on the assets of Bairnco and certain of its subsidiaries and
capital stock of certain of Bairnco's subsidiaries. Obligations under the Bridge
Loan Agreement are also guaranteed by the Company on an unsecured basis. The
scheduled maturity date of the indebtedness under the Bridge Loan Agreement is
the earlier to occur of (i) June 30, 2008 and (ii) such time as Bairnco obtains
any replacement financing. Indebtedness under the Bridge Loan Agreement may be
prepaid without penalty or premium.
The Subordinated Loan Agreement provides for a subordinated term loan of
$15 million from Steel to WHX, which is unsecured at the WHX level. Borrowings
under the Subordinated Loan Agreement bear pay-in-kind interest at a rate per
annum equal to the prime rate of JP Morgan Chase plus 7.75%, adjusted from time
to time, with a minimum interest rate of 16% per annum and a maximum interest
rate of 19% per annum. Interest is payable monthly in arrears. Obligations under
the Subordinated Loan Agreement are guaranteed by Bairnco and certain of its
subsidiaries and collateralized by a junior lien on the assets of Bairnco and
certain of its subsidiaries and capital stock of certain of Bairnco's
subsidiaries. The indebtedness under the Subordinated Loan Agreement will mature
on the second anniversary of the issuance of the subordinated loan and may be
prepaid without penalty or premium.
The Loan Agreements contain customary representations, warranties,
covenants, events of default and indemnification provisions. The indebtedness
under the Bridge Loan Agreement and the related security interests is
subordinated to the indebtedness and related security interests granted under
Bairnco's existing senior credit facility. The guarantees of the indebtedness
under the Subordinated Loan Agreement and the related security interests is
subordinated to all indebtedness and security interests described in the
preceding sentence.
Bairnco operates two core businesses - Arlon and Kasco. Arlon designs,
manufactures, and sells engineered materials and components for the electronic,
industrial and commercial markets. Kasco is a leading provider of meat-room
products and maintenance services for the meat and deli departments of
supermarkets; restaurants; meat, poultry and fish processing plants; and
manufacturers and distributors of electrical saws and cutting equipment
throughout North America, Europe, Asia and South America. WHX believes that the
acquisition of Bairnco will be beneficial because of Bairnco's strong positions
in niche engineered materials markets, and that Bairnco's plant level
operations, profit margins and working capital will improve. The results of
operations and assets of Bairnco will be included in the financial statements of
WHX beginning in the second quarter of 2007.
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*******
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,
2006.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As required by Rule
13a-15(b) under the Securities Exchange Act of 1934, as amended, (the "Exchange
Act") we conducted an evaluation under the supervision and with the
participation of our management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation we identified certain material weaknesses in our disclosure controls
and procedures (discussed below), and the Chief Executive Officer and the Chief
Financial Officer concluded that as of March 31, 2007 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.
Notwithstanding the existence of the material weaknesses discussed below,
the Company's management has concluded that the 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 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 March 31, 2007 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 active supervision over the accounting
functions at certain of our operating subsidiaries.
(b) 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.
26
These weaknesses could result in conditions that would cause material
adjustments to the financial statements for the quarter ended March 31, 2007
including: the application of SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets", the completeness of the Company's environmental
remediation reserves, treatment of the Rabbi trust, capitalization of leases,
revenue recognition, and differences between foreign and US GAAP as it applies
to certain international subsidiaries.
PLANS FOR REMEDIATION
The Company has taken the following actions to address the material weaknesses
noted above:
o Increased the Company's accounting and financial resources by hiring a
Senior Vice President, an Assistant Controller, a Treasurer, and a
Director of Budgeting and Financial Analysis, 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 complex and judgmental
accounting matters;
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 Initiating processes and procedures to better document employee
responsibilities including transaction review and monitoring activities;
o The engagement of a third party resource to support our review,
documentation and testing of the effectiveness of our internal control
over financial reporting under the Section 404 provisions of the
Sarbanes-Oxley Act ; 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SUMCO INC. V. UNDERWRITERS AT LLOYD'S, LONDON, LEXINGTON INSURANCE COMPANY,
HARTFORD FIRE INSURANCE COMPANY, AND WURTTEMBERGISCHE VERSICHERUNG AG
On July 7, 2004, Sumco Inc. ("Sumco"), a wholly-owned subsidiary of H&H,
filed suit in the Marion County Superior Court of Indiana against certain
underwriters affiliated with Lloyd's, London, Lexington Insurance Company,
Hartford Fire Insurance Company, and Wurttembergische Versicherung AG (the
defendants). Sumco seeks to recover monies from these insurance carriers for
losses incurred as a result of a January 20, 2002 fire at its metal plating
facility in Indianapolis, Indiana. At the time of the fire, Sumco's parent
corporation, WHX, had in place layered fire insurance policies with combined
limits of $25 million and a deductible of $100,000. The defendants represent
carriers who provided $15 million in insurance coverage in excess of two
underlying policies of $5 million each. Defendants have previously paid $5
million in claims. Sumco contends that its losses are in excess of the policy
limits, defendants have acted in bad faith, and that it is entitled to the
27
payment of the remaining approximate $10 million in insurance coverage provided
by the defendants. In December 2006, the Court ruled on the Motion for Summary
Judgment. It denied the insurers' motion for summary judgment on the bad faith
claims and limited the compensatory damages that Sumco could recover. The
defendants have denied the allegations of the complaint and asserted certain
defenses. The parties settled their claims in May 2007 for an aggregate payment
to WHX of $5,689,276 from the defendants (which proceeds were paid to Steel in
partial satisfaction of its loan), and an assignment of their interest to WHX in
up to another $1.7 million in proceeds resulting from the settlement of
subrogation claims against various third parties (the recovery of which, in
whole or part, is not assured). Steel will have a first lien, and the Pension
Benefit Guaranty Corporation a second lien, on any additional proceeds
recovered.
HH EAST PARCEL, LLC. V. HANDY & HARMAN
This action arises out of a purchase and sale agreement entered into in
2003 whereby H&H agreed to sell the eastern parcel of a commercial site in
Fairfield, Connecticut to HH East Parcel, LLC ("HH East"). On or about April 5,
2005, HH East filed a Demand for Arbitration with the American Arbitration
Association seeking legal and equitable relief including completion of the
remediation of environmental conditions at the site in accordance with the terms
of the agreement. An arbitration hearing was held in November 2005 in
Connecticut, pursuant to which HH East was awarded an amount equal to $5,000 per
day from January 1, 2005 through the date on which remediation is completed.
This award amounts to approximately $4.0 million through the completion date of
April 6, 2007. H&H applied to the Superior Court of Connecticut, Fairfield
County, to have the arbitration award vacated and a decision was issued on June
26, 2006, denying H&H's application. H&H is appealing this decision.
On May 22, 2007, HH East served an Order for a Prejudgment Attachment in
the amount of $3,520,200, issued by the Superior Court, Stamford, Connecticut in
December 2006, against certain Connecticut property of H&H and against certain
bank accounts maintained by Handy & Harman at banks in New York. Handy & Harman
has brought proceedings in the Superior Court, Stamford, Connecticut, and in the
Supreme Court, State of New York, to oppose the attachment of such bank accounts
and to have it lifted. Both proceedings are pending and, with respect to the New
York proceeding, a Temporary Restraining Order ("TRO") was issued on June 11.
The parties are currently actively engaged in settlement discussions to resolve
all open issues and proceedings between them. On June 14, 2007, HH East
temporarily withdrew its attachment/garnishment against certain bank accounts of
H&H after the posting of other satisfactory collateral by H&H and while
settlement discussions are continuing. This also served to vacate the TRO.
H&H has been working cooperatively with the Connecticut Department of
Environmental Protection ("CTDEP") with respect to its obligations under a
consent order entered into in 1989 that applies to both the eastern and western
parcels of the property. H&H has been conducting an investigation of the western
parcel, and is continuing the process of evaluating various options for its
remediation. The sale of the eastern parcel that is the subject of this
litigation triggered statutory obligations under Connecticut law to investigate
and remediate pollution at or emanating from the eastern parcel. H&H completed
the investigation and has been actively conducting remediation of all soil
conditions on the eastern parcel for more than three years. Although no
groundwater remediation is required, there will be monitoring of same for
several years. The total remediation is expected to exceed $28.0 million, of
which approximately $27.2 million had been expended through March 31, 2007. H&H
received reimbursement of $2.0 million of these costs from its carrier under a
cost-cap insurance policy and is pursuing its potential entitlement to
additional coverage. Remediation of all soil conditions on site was completed on
April 6, 2007. HH East informed H&H in June that it believes that additional
work remains to be done by H&H on the site. The parties are currently in
discussion about this matter.
Please see "Legal Proceedings" from the Company's Annual Report on Form
10-K for the year ended December 31, 2006 and Note 13 to this Quarterly Report
on Form 10-Q.
ITEM 1A. RISK FACTORS
Please see "Risk Factors" from the Company's Annual Report on Form 10-K
for the year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On June 15, 2007, the lenders under H&H's revolving credit facility and
other facilities granted a waiver to the events of default arising as a result
of the Order of Prejudgment Attachment entered by the Superior Court of
Fairfield County, Connecticut (the "Superior Court") on December 18, 2006 in
connection with the litigation known as HH East Parcel v. Handy & Harman
currently pending in the Superior Court in the amount of $3,520,200 and the
Notice of Bank Attachment/Garnishment dated May 21, 2007 by the State Marshal of
Fairfield County, Connecticut to JPMorgan Chase Bank in the amount of
$3,520,200, and related matters (see Note 13- Contingencies).
ITEM 6. EXHIBITS
* Exhibit 31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* Exhibit 31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* Exhibit 32 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the
Securities Act of 1934, as amended, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHX CORPORATION
/s/ Robert K. Hynes
--------------------------------------------
Robert K. Hynes
Chief Financial Officer
(Principal Accounting Officer)
June 19, 2007
30
