form10k04197_12312011.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For The Fiscal Year Ended December 31, 2011
 
OR
 
¨
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 000-5465
_______________
STEEL PARTNERS HOLDINGS L.P.
(Exact name of registrant as specified in its charter)
 
Delaware
13-3727655
(State of or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
590 Madison Avenue, 32nd Floor
 
New York, New York
10022
(Address of principal executive offices)
(Zip code)

Registrant's telephone number, including area code:  212-520-2300
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Name of each exchange on
Title of each class
which registered
 
NONE

Securities registered pursuant to Section 12(g) of the Act:
 
Common Units, no par value
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ¨   No ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes ¨   No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ¨   No ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨  No ý
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer
¨
 
Non-accelerated filer
ý
Accelerated filer
¨
 
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨   No ý
The aggregate market value of our common units held by non-affiliates of registrant as of June 30, 2011 was approximately $341.3 million.

On March 16, 2012, there were 25,183,039 common units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None
 
 
 

 

Steel Partners Holdings L.P.

Table of Contents
 
PART I
Item 1.
     
3
 
Item 1A.
     
16
 
Item 1B.
     
29
 
Item 2.
     
29
 
Item 3.
     
30
 
Item 4.
     
30
 
 
PART II
Item 5.
     
30
 
Item 6.
     
32
 
Item 7.
     
34
 
Item 7A.
     
72
 
Item 8.
     
75
 
Item 9.
     
179
 
Item 9A.
     
179
 
Item 9B.
     
179
 
 
PART III
Item 10.
     
179
 
Item 11.
     
183
 
Item 12.
     
189
 
Item 13.
     
190
 
Item 14.
     
195
 
 
PART IV
Item 15.
     
196
 
   
198
 
EXHIBIT INDEX
       
 
 
As used in this Form 10-K, unless the context otherwise requires the terms “we,” “us,” “our,” “SPH” and the “Company” refer to Steel Partners Holdings L.P., a Delaware limited partnership.
 
PART I
 
FORWARD-LOOKING STATEMENTS
 
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, in particular, forward-looking statements under the headings “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8 - Financial Statements and Supplementary Data.”  These statements appear in a number of places in this report and include statements regarding the Company’s intent, belief or current expectations with respect to (i) its financing plans, (ii) trends affecting its financial condition or results of operations, and (iii) the impact of competition.  The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking statements; however, this report also contains other forward-looking statements in addition to historical information.
 
Item 1. Business
 
All monetary amounts used in this discussion are in thousands unless otherwise indicated.
 
Who We Are
 
Steel Partners Holdings L.P. is a global diversified holding company that engages in multiple businesses through consolidated subsidiaries, associated companies and other interests.  We own and operate businesses and have significant interests in leading companies in various industries, including diversified industrial products, energy, defense, banking, insurance, food products and services, oilfield services, sports, training, education, and the entertainment and lifestyle industries.
 
Each of our companies has its own management team with significant experience and proven success in their industries.  Our subsidiary, SPH Services, Inc., through its subsidiary, SP Corporate Services LLC (“SP Corporate”), provides certain executive and corporate management services to us and some of our companies.  We seek to work with our companies to increase corporate value over the long term for our unitholders and all stakeholders by implementing our unique strategy discussed in more detail below.
 
As of December 31, 2011, our total equity attributable to our common unitholders is $415,797.  Our capital structure enables us to manage our businesses with a long-term time horizon.
 
Our Strategy
 
We continuously evaluate the retention and disposition of existing operations and investigate possible acquisitions of new businesses, often focusing on businesses that are selling substantially below intrinsic value.  We consider possible synergies and economies of scale in operating and/or making determinations to acquire or dispose of companies.  We seek additional means to reduce costs and to encourage integration of operations and the building of business relationships among our companies consistent with our desire that our unitholders benefit from the diversified holding company structure.
 
 
We strive to enhance the business operations of our companies and increase long-term value for unitholders and stakeholders through balance sheet improvements, strategic allocation of capital and operational and growth initiatives.  Our operational initiatives include creating efficiencies through consolidated purchasing and materials sourcing provided by the Steel Partners Purchasing Council, which arranges shared purchasing programs and is reducing costs for, and providing other benefits to, a number of our companies.  We are reducing our companies’ operational costs, and enhancing growth and profitability, through the implementation of Steel Partners Operational Excellence Programs, which include the deployment of Lean Manufacturing, Design for Six Sigma, Six Sigma and Strategy Deployment. We are focused on reducing corporate overhead of our companies by centralizing certain administrative and corporate services through Steel Partners Corporate Services that provides management, consulting and advisory services.
 
Generally, we seek to actively acquire and maintain control over our companies through our ability to influence their policies.  Depending on the size of our ownership interests in any given company, this may be achieved by obtaining board representation and overseeing and providing assistance to the existing management team.  We generally view our companies as long-term holdings and we expect to realize value by operating them with a view towards fostering growth and maximizing their value rather than through the sale of ownership interests.  The securities of some of the companies in which we have interests are traded on national securities exchanges, while others are privately held or not actively traded.
 
Our Business Segments
 
We categorize our companies as follows:
 
Diversified Industrial
Financial Services
Corporate
Handy & Harman Ltd. (1)
WebBank (1)
SPH Services, Inc. (1)
BNS Holding, Inc. (1)
 
Steel Excel Inc. (2)
DGT Holdings Corp. (1)
 
CoSine Communications, Inc. (2)
SL Industries, Inc. (2)
 
Barbican Group Holdings Limited (3)
API Group PLC (3)
 
Fox & Hound Restaurant Group (3)
JPS Industries, Inc. (3)
 
GenCorp Inc. (3)
_______________
(1)
Consolidated subsidiary
(2)
Associated company
(3)
Other core company

Our Businesses
 
Handy & Harman Ltd.
 
Our Ownership Interest
 
We have an ownership interest of approximately 55.6% as of March 16, 2012 in Handy & Harman Ltd. (NASDAQ (CM): HNH), formerly known as WHX Corporation prior to January 3, 2011, a Delaware corporation (“HNH”).  On May 7, 2010, our ownership interest in HNH exceeded 50%, and as a result, HNH became a controlled subsidiary of SPH and is consolidated from that date.  We hold as of March 16, 2012, $20,715 principal amount of 10% subordinated secured notes issued by a subsidiary of HNH that mature on October 15, 2017 (the “Subordinated Notes”), which are eliminated in consolidation, and warrants (the “Warrants”) to purchase 406,324 shares of HNH common stock.  The Subordinated Notes bear interest at a rate of 10% per annum, 6% of which is payable in cash and 4% of which is payable in-kind.  The Warrants have an exercise price of $11.00 per share and are exercisable beginning October 14, 2013.
 
Four of our representatives serve on HNH’s eight-member board of directors, one of whom serves as Chairman.  Our representatives also serve as the Chief Executive Officer, Chief Financial Officer, Chief Legal Officer and as a Vice President of HNH.
 
Description of Business
 
HNH is a diversified manufacturer of engineered niche industrial products with leading market positions in many of the markets it serves.  Through its operating subsidiaries, HNH focuses on high margin products and innovative technology and serves customers across a wide range of end markets.  HNH’s diverse product offerings are marketed throughout the United States and internationally.  For the years ended December 31, 2011 and 2010, HNH generated net sales of $664,017and $568,212, respectively.
 
 
HNH Products and Product Mix
 
Precious Metal
 
HNH’s Precious Metal segment primarily fabricates precious metals and their alloys into brazing alloys. Brazing alloys are used to join similar and dissimilar metals as well as specialty metals and some ceramics with strong, hermetic joints. Precious Metal segment offers these metal joining products in a wide variety of alloys including gold, silver, palladium, copper, nickel, aluminum and tin. These brazing alloys are fabricated into a variety of engineered forms and are used in many industries including electrical, appliance, transportation, construction and general industrial, where dissimilar material and metal-joining applications are required. Operating income from precious metal products is principally derived from the ‘‘value added’’ of processing and fabricating and not from the purchase and resale of precious metal. Precious Metal segment has limited exposure to the prices of precious metals due to HNH’s hedging and pricing models.  HNH believes that the business unit that comprises its Precious Metal segment is the North American market leader in many of the markets that it serves.
 
Tubing
 
HNH’s Tubing segment manufactures a wide variety of steel tubing products. HNH believes that its Stainless Steel Tubing Group manufactures the world’s longest continuous seamless stainless steel tubing coils in excess of 5,000 feet serving the petrochemical infrastructure and shipbuilding markets. HNH also believes it is the number one supplier of small diameter (<3mm) coil tubing to industry leading specifications serving the aerospace, defense and semiconductor fabrication markets. HNH’s Specialty Tubing unit manufactures welded carbon steel tubing in coiled and straight lengths with a primary focus on products for the consumer and commercial refrigeration, automotive, heating, ventilation and cooling (HVAC) and oil and gas industries. In addition to producing bulk tubing, it produces value added fabrications for several of these industries.
 
Engineered Materials
 
HNH’s Engineered Materials segment manufactures and supplies products primarily to the commercial construction and building industries. It manufactures fasteners and fastening systems for the U.S. commercial low slope roofing industry which are sold to building and roofing material wholesalers, roofing contractors and private label roofing system manufacturers; a line of engineered specialty fasteners for the building products industry for fastening applications in the remodeling and construction of homes, decking and landscaping;  plastic and steel fittings and connectors for natural gas, propane and water distribution service lines along with exothermic welding products for electrical grounding, cathodic protection and lightning protection; and electro-galvanized and painted cold rolled sheet steel products primarily for the construction, entry door, container and appliance industries. HNH believes that its primary business unit in the Engineered Materials segment is the market leader in fasteners and accessories for commercial low-slope roofing applications, and that the majority of the net sales for the segment are for the commercial construction repair and replacement market.
 
Arlon Electronic Materials
 
HNH’s Arlon Electronic Materials segment (“Arlon”) provides high performance materials for the printed circuit board (‘‘PCB’’) industry and silicone rubber-based insulation materials used in a broad range of industrial, military/aerospace, consumer and commercial markets. It also supplies high technology circuit substrate laminate materials to the PCB industry. Products are marketed principally to Original Equipment Manufacturers (‘‘OEMs’’), distributors and PCB manufacturers globally. Arlon also manufactures a line of market-leading silicone rubber materials used in a broad range of military, consumer, industrial and commercial products.
 
 
Kasco Blades and Route Repair Services
 
HNH’s Kasco Blades and Route Repair Services (“Kasco”) segment provides meat-room blade products, repair services and resale products for the meat and deli departments of supermarkets, restaurants, meat and fish processing plants and for distributors of electrical saws and cutting equipment principally in North America and Europe. Kasco also provides wood cutting blade products for the pallet manufacturing, pallet recycler and portable saw mill industries in North America.
 
Business Strategy
 
HNH’s business strategy is to enhance the growth and profitability of the business units of HNH and to build upon their strengths through internal growth and strategic acquisitions. HNH expects to continue to focus on high margin products and innovative technology.
 
HNH also will continue to evaluate, from time to time, the sale of certain businesses and assets, as well as strategic and opportunistic acquisitions.
 
HNH uses a set of tools and processes called the HNH Business System to drive operational and sales efficiencies across each of its business units. The HNH Business System is designed to drive strategy deployment and sales and marketing based on lean principles. HNH pursues a number of ongoing strategic initiatives intended to improve its performance, including objectives relating to manufacturing improvement, idea generation, product development and global sourcing of materials and services. HNH utilizes lean tools and philosophies in operations and commercialization activities to increase sales, improve business processes, and reduce and eliminate waste coupled with the tools targeted at variation reduction.
 
Customers
 
HNH is diversified across industrial markets and customers.  HNH sells to customers in the construction, electronics, telecommunications, home appliance OEM, transportation, utility, medical, semiconductor, aerospace, military electronics, medical, telecommunications, automotive, railroad, and the food industry.
 
No customer accounted for more than 5% of consolidated sales in 2011 or 2010.  However, HNH’s 15 largest customers accounted for approximately 27% of consolidated HNH net sales.
 
Foreign Revenue
 
The following table presents HNH revenue for the periods indicated; however, HNH revenue is only included in SPH’s consolidation since May 7, 2010:
 
   
Revenue
 
   
Year Ended December 31,
 
   
2011
   
2010
   
2009
 
                   
U.S.
  $ 589,836     $ 514,992     $ 424,048  
Foreign (a)
    74,181       53,220       36,655  
    $ 664,017     $ 568,212     $ 460,703  

(a)
Foreign revenue is based on the country in which the legal subsidiary is domiciled.
 

 
Raw Materials
 
Besides precious metals, the raw materials used in the operations of the Precious Metal, Tubing, Engineered Materials, and Kasco segments consist principally of stainless, galvanized, and carbon steel, nickel alloys, a variety of high-performance alloys, and various plastic compositions.  HNH purchases all such raw materials at open market prices from domestic and foreign suppliers.  HNH has not experienced any significant problem in obtaining the necessary quantities of raw materials.  Prices and availability, particularly of raw materials purchased from foreign suppliers, are affected by world market conditions and government policies.  The raw materials used by HNH in its non-precious metal segments are generally readily available from more than one source.
 
The essential raw materials used in the Arlon segment are silicone rubber, fiberglass cloths, non-woven glass mats, pigments, copper foils, various plastic films, special release liners, various solvents, Teflon™ or PTFE dispersion, skive PTFE film,  polyimide resin, epoxy resins, other thermoset resins, ceramic fillers, as well as various chemicals.  Generally, these materials are each available from several qualified suppliers.  There are, however, several raw materials used in products that are purchased from chemical companies that are proprietary in nature.  Other raw materials are purchased from a single approved vendor on a “sole source” basis, although alternative sources could be developed in the future if necessary.  However, the qualification procedure for new suppliers can take several months or longer and could therefore interrupt production if the primary raw material source became unexpectedly unavailable.  Current suppliers are located in the United States, Asia, and Europe.
 
Capital Investments
 
HNH believes that in order to be and remain competitive, its businesses must continuously strive to improve productivity and product quality, and control and/or reduce manufacturing costs.  Accordingly, HNH’s segments expect to continue to incur capital investments that reduce overall manufacturing costs, improve the quality of products produced, and broaden the array of products offered to the industries HNH serves, as well as replace equipment as necessary to maintain compliance with environmental, health and safety laws and regulations.  HNH’s capital expenditures for 2011 and 2010 for continuing operations were $13.4 million and $10.6 million, respectively.  HNH anticipates funding its capital expenditures in 2012 from funds generated by operations and borrowed funds.  HNH anticipates its capital expenditures to be in the range between $18 and $26 million per year for the next several years.
 
Energy Requirements
 
HNH requires significant amounts of electricity and natural gas to operate its facilities and is subject to price changes in these commodities.  A shortage of electricity or natural gas, or a government allocation of supplies resulting in a general reduction in supplies, could increase costs of production and could cause some curtailment of production.
 
Competition
 
There are many companies, both domestic and foreign, which manufacture products of the type HNH manufactures.  Some of these competitors are larger than HNH and have financial resources greater than it does.  Some of these competitors enjoy certain other competitive advantages, including greater name recognition, greater financial, technical, marketing and other resources, a larger installed base of customers, and well-established relationships with current and potential customers.  Competition is based on quality, technology, service, and price and in some industries, new product introduction, each of which is of equal importance.  HNH may not be able to compete successfully and competition may have a negative impact on its business, operating results or financial condition by reducing volume of products sold and/or selling prices, and accordingly reducing revenues and profits.
 
In its served markets, HNH competes against large as well as smaller-sized private and public companies.  This results in intense competition in a number of markets in which it operates.  Significant competition could in turn lead to lower prices, lower levels of shipments and/or higher costs in some markets that could have a negative effect on results of operations.
 
 
Sales Channels
 
HNH distributes products to customers through Company sales personnel, outside sales representatives and distributors in North and South America, Europe, Australia, and the Far East and several other international markets.
 
Patents and Trademarks
 
HNH owns patents and registered trademarks under which certain of its products are sold.  In addition, HNH owns a number of US and foreign mechanical patents related to certain of its products, as well as a number of design patents.  HNH does not believe that the loss of any or all of these trademarks would have a material adverse effect on its businesses.  HNH’s patents have remaining durations ranging from less-than-one year to 17 years, with expiration dates occurring in 2012 through 2028.
 
Environmental Regulation
 
HNH is subject to laws and regulations relating to the protection of the environment. HNH does not presently anticipate that compliance with currently applicable environmental regulations and controls will significantly change its competitive position, capital spending or earnings during 2012. HNH believes it is in compliance with all orders and decrees consented to by HNH with environmental regulatory agencies.
 
Employment
 
As of December 31, 2011, HNH employed 1,621 employees worldwide.  Of these employees, 326 were sales employees, 478 were office employees, 155 were covered by collective bargaining agreements, and 662 were non-union operating employees.
 
BNS Holding, Inc.
 
Our Ownership Interest
 
We have an ownership interest of approximately 84.9% as of March 16, 2012 in BNS Holding, Inc. (OTC: BNSSA.PK), a Delaware corporation (“BNS”).  Two of our representatives serve on BNS’ three-member board of directors.  Our representatives also serve as the Chief Executive Officer and Chief Financial Officer of BNS and as the Chief Executive Officer of its wholly-owned subsidiary, Sun Well Services, Inc. (“Sun Well”).
 
Description of Business
 
BNS operates through Sun Well, a provider of premium well services to exploration and production (“E&P”) companies operating primarily in the Williston Basin in North Dakota and eastern Montana.  Sun Well provides critical services needed by E&P operators, including well completion, well maintenance and workover, well recompletion, hydrostatic tubular testing and plug and abandonment services.
 
On February 2, 2011, BNS acquired all of the capital stock of SWH, Inc. (“SWH”) for an aggregate purchase price of approximately $50,463.  SWH owns all of the capital stock of Sun Well, its sole asset.  Prior to the acquisition of Sun Well and during the past five years, BNS operated primarily through its 80% ownership of Collins Industries, Inc. (“Collins”), a North American manufacturer of small school, activity and shuttle buses, ambulances, and terminal trucks/road construction equipment, until its disposition of Collins in February 2010.
 
On February 13, 2012, BNS and Steel Excel Inc., in which SPH holds approximately a 40% interest, announced that they are engaged in preliminary discussions regarding a possible acquisition by Steel Excel Inc. of BNS.  BNS has appointed a special committee of its independent directors to consider the transaction on behalf of its unaffiliated stockholders.  Steel Excel Inc. has appointed a special committee of independent directors to consider and negotiate the transaction.  No assurances can be given that an agreement between the parties can be reached or, if an agreement is reached, that any such transaction will be completed.
 
 
Sales
 
For the period February 2, 2011 through December 31, 2011, Sun Well generated $32,984 of revenue from approximately 62 different customers.  Sun Well’s top customers are among the largest E&P operators in the Bakken shale formation.  Sun Well’s three largest customers accounted for approximately 59% of Sun Well’s revenue for 2011.
 
Government Regulation
 
Sun Well operates under the jurisdiction of a number of regulatory bodies that regulate worker safety standards, the handling of hazardous materials and the protection of the environment.  Regulations concerning equipment certification create an ongoing need for regular maintenance which is incorporated into Sun Well’s daily operating procedures.  The oil and gas industry is subject to environmental regulation pursuant to local, state and federal legislation.
 
Competition
 
Sun Well’s competitors include some of the largest energy service companies in the United States.  In addition, Sun Well competes with smaller, independent service providers.
 
Employees
 
As of December 31, 2011, Sun Well had 129 employees.
 
DGT Holdings Corp.
 
Our Ownership Interest
 
We have an ownership interest of approximately 51.5% as of March 16, 2012 in DGT Holdings Corp. (OTC: DGTC.OB), a New York corporation (“DGT”).  Prior to July 5, 2011, we had an ownership interest of approximately 46.1% in DGT.  On July 5, 2011, our ownership interest in DGT increased to 51.1%, and as a result, DGT became a controlled subsidiary of SPH and is consolidated from that date.  Two of our representatives serve on DGT’s five-member board of directors, one of which serves as DGT’s President and Chief Executive Officer.  Another of our representatives serves as DGT’s Chief Financial Officer.
 
Description of Business
 
DGT operates through its subsidiary, RFI Corporation (“RFI”), which comprises DGT’s Power Conversion Group.  For its fiscal year ended July 30, 2011, RFI generated revenue of $10,783.  In November 2011, DGT sold its subsidiary, Villa Sistemi Medicali S.p.A. (“Villa”), which comprised its Medical Systems Group division, which accounted for approximately 84% of DGT’s total consolidated revenues for the year ended July 30, 2011.  As a result, the operations of Villa are reflected as discontinued operations in our consolidated financial statements for the period from July 5, 2011.
 
RFI designs, manufactures, markets and sells high voltage precision components and sub-assemblies and electronic noise suppression components for a variety of applications.  These products are utilized by OEMs who build systems that are used in a broad range of markets.  RFI’s products are sold under the following industry brands: RFI, Filtron, Sprague and Stanley.
 
Noise suppression filters and components are used to help isolate and reduce the electromagnetic interference (commonly referred to as “noise”) among the different components in a system sharing the same power source.  Examples of systems that use RFI’s noise suppression products include aviation electronics, mobile and land-based telecommunication systems and missile guidance systems.
 
 
RFI also provides subsystems and components which are used in the manufacture of medical electronics, military and industrial applications in the following markets:  aerospace; defense and homeland security; telecommunications; industrial/commercial and medical.
 
Marketing and Distribution
 
DGT markets its Power Conversion Group products through in-house sales personnel, independent sales representatives in the U.S., and international agents in Europe, Asia, the Middle East, Canada and Australia.  DGT’s sales representatives are compensated primarily on a commission basis and the international agents are compensated either on a commission basis or act as independent distributors.  DGT’s marketing efforts emphasize its ability to custom engineer products to optimal performance specifications.  DGT emphasizes team selling where its sales representatives, engineers and management personnel all work together to market its products.  DGT also markets its products through catalogs and trade journals and participation in industry shows.
 
Raw Materials and Principal Suppliers
 
DGT in most cases uses two or more alternative sources of supply for each of its raw materials, which consist primarily of electronic components and subassemblies, metal enclosures for its products and certain other materials.  In certain instances, however, DGT will use a single source of supply when directed by a customer or by need.  In order to ensure the consistent quality of its products, DGT follows strict supplier evaluation and qualification procedures, and where possible, enters into strategic relationships with its suppliers to assure a continuing supply of high quality critical components.
 
Trademarks and Patents
 
The majority of DGT’s products are based on technology that is not protected by patent or other rights.  Certain of DGT’s products and brand names are protected by trademarks, both in the U.S. and internationally.  Because DGT does not have patent rights in its products, its technology may not preclude or inhibit competitors from producing products that have identical performance as DGT’s products.  DGT’s future success is dependent primarily on the technological expertise and management abilities of its employees and the strength of its relationship with its worldwide dealer network.
 
Government Regulation
 
DGT is subject to various U.S. government guidelines and regulations relating to the qualification of its products for inclusion in government qualified product lists in order to be eligible to receive purchase orders from a government agency or for inclusion of a product in a system which will ultimately be used by a governmental agency.  DGT has had many years of experience in designing, testing and qualifying its products for sale to governmental agencies.  Certain government contracts are subject to cancellation rights at the government’s election.  DGT has experienced no material termination of any government contract and is not aware of any pending terminations of government contracts.
 
Product Development
 
DGT has a well developed engineering and technical staff in its Power Conversion Group.  DGT’s technical and scientific employees are generally employed in the engineering departments at its RFI business unit, and split their time, depending on business mix and their own technical background, between supporting existing production and development and research efforts for new product variations or new customer specifications.
 
Competition
 
DGT’s Power Conversion Group competes with several small, privately owned suppliers of electronic systems and components.  From DGT’s perspective, competition is primarily based on each company’s design, service and technical capabilities, and secondarily on price.
 
 
The markets for DGT’s Power Conversion Group’s products are subject to limited technological changes and gradually evolving industry requirements and standards.  DGT believes that these trends will continue into the foreseeable future.
 
Some of DGT’s current and potential competitors may have substantially greater financial, marketing and other resources than DGT.  As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than DGT can.  Competition could increase if new companies enter the market or if existing competitors expand their product lines or intensify efforts within existing product lines.  In addition, certain competing products may have other advantages which may limit DGT’s market.  There can be no assurance that continuing improvements in current or new competing products will not make them technically equivalent or superior to DGT’s products in addition to providing cost or other advantages.  There can be no assurance that DGT’s current products, products under development or ability to introduce new products will enable DGT to compete effectively.
 
Employees
 
As of December 31, 2011, DGT had 89 employees.
 
SPH Services, Inc.
 
Our Ownership Interest
 
SPH Services, Inc. (“SPH Services”) is our wholly-owned subsidiary.  Three of our representatives serve as members, including as the Chairman, of the board of directors of SPH Services.  These representatives also serve as SPH Services’ Chief Executive Officer, President, Secretary, Chief Financial Officer and Treasurer.
 
Description of Business
 
SPH Services is a newly-formed subsidiary of SPH, which commenced operations on January 1, 2012, that was created to consolidate the executive and corporate functions of SPH and certain of our affiliates, including SP Corporate and Steel Partners LLC, to provide such services, including, without limitation, legal, tax, accounting, treasury, consulting, auditing, administration, compliance, environmental health and safety, human resources, marketing, investor relations and other similar services, to other companies.  In connection with the formation of SPH Services, we acquired SP Corporate and Steel Partners LLC, as well as certain assets from HNH, on January 1, 2012.  Prior to our acquisition of Steel Partners LLC, our former manager, Steel Partners LLC transferred certain assets, including its interest in our management agreement, to SP General Services LLC.
 
SPH Services operates through its wholly owned subsidiaries, SP Corporate and Steel Partners LLC.  SP Corporate has management services agreements with HNH, BNS, CoSine (as defined below), DGT, NOVT Corporation (“NOVT”), Ore Holdings, Inc., Steel Excel (as defined below) and WebBank.
 
By consolidating corporate overhead and back office functions, SPH believes it will achieve cost savings over time for its affiliated companies while delivering more efficient and effective services.  As a result of the synergies associated with SP Corporate's specialization and capabilities across a broad range of corporate and executive functions that are provided to SPH and other companies, SP Corporate believes that it will be able to create high value business partnerships by delivering higher quality services and more efficient professional transaction processing which will result in significant cost savings that can be achieved through standardization, clear processes and procedures, the elimination of non-value adding activities and economies of scale.
 
 
Employees
 
As of March 7, 2012, SPH Services had 60 employees.
 
WebBank
 
Our Ownership Interest
 
SPH’s wholly owned subsidiary, WebFinancial Holding Corporation conducts financial operations through its wholly-owned subsidiary, WebBank (“WebBank”). One of our representatives serves as the Chairman of the board of directors of WebBank.
 
Description of Business
 
WebBank is a Utah chartered industrial bank subject to the regulation, examination, and supervision of the Federal Deposit Insurance Corporation (“FDIC”) and the State of Utah Department of Financial Institutions (“UDFI”).  WebBank is not considered a “bank” for Bank Holding Company Act purposes and, as such, SPH is not regulated as a bank holding company.  WebBank, whose deposits are insured by the FDIC, generates commercial, real estate, government guaranteed and consumer loans.
 
WebBank continues to evaluate its different business lines and consider various alternatives to maximize the aggregate value of its businesses and increase value, including seeking acquisitions and/or merger transactions, as well as product line extensions, additions and/or divestitures.
 
Sales
 
WebBank generates revenue through a combination of interest income and non-interest income.  Interest income is primarily derived from interest and origination fees earned on loans, factored receivables and investments.  Non-interest income is primarily derived from strategic partner fee income and loan servicing fees.  For the years ended December 31, 2011 and 2010, WebBank generated approximately $14,842 and $10,803 in revenue, respectively.  For the years ended December 31, 2011 and 2010, two contractual lending programs accounted for 58% and 54%, respectively, of WebBank’s total revenue.
 
Government Regulation
 
WebBank is subject to various regulatory capital requirements administered by the FDIC.  Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material adverse effect on WebBank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, WebBank must meet specific capital guidelines that involve quantitative measures of WebBank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  WebBank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
 
Competition
 
WebBank competes with a broad range of local and regional banks and finance companies across its various lines of business.
 
Employees
 
As of December 31, 2011, WebBank had 30 employees.
 
 
Associated Companies
 
SL Industries, Inc.
 
We have an ownership interest of approximately 21.7% as of March 16, 2012 in SL Industries, Inc. (AMEX:SLI), a New Jersey corporation (“SLI”).  Two of our representatives serve on SLI’s six-member board of directors, one of whom serves as Chairman.  SLI designs, manufactures and markets power electronics, motion control, power protection, power quality electromagnetic and specialized communication equipment.  SLI’s products are used in a variety of medical, commercial and military aerospace, computer, datacom, industrial, telecom, transportation, utility, rail and highway equipment applications.
 
Steel Excel Inc.
 
We have an ownership interest of approximately 40.3% as of March 16, 2012 in Steel Excel Inc., a Delaware corporation formerly known as ADPT Corporation (“Steel Excel”) (OTC: SXCL.PK).  Three of our representatives serve on Steel Excel’s six-member board of directors, one of whom serves as Chairman and another of whom serves as the Chief Executive Officer.  One of our representatives also serves as Chief Financial Officer.  Steel Excel is primarily focused on capital redeployment and identification of new business operations in which it can utilize its existing working capital and maximize the use of its net tax operating losses (“NOLs”) in the future.  The identification of new business operations includes, but is not limited to, the oilfield servicing, sports, training, education, entertainment, and lifestyle businesses. On December 8, 2011, Steel Excel acquired the business and assets of Rogue Pressure Services, LLC, a Wyoming limited liability company (“Rogue”).  The purchase price for Rogue was approximately $29 million, which was paid in cash, with the sellers receiving the opportunity to earn additional consideration based upon Rogue’s achievement of certain performance levels pursuant to an earn-out. This acquisition marked the launch of Steel Excel’s new strategy to focus a portion of its acquisition efforts on new opportunities in the United States oilfield service industry presented by technological advances in horizontal drilling and hydraulic fracturing. On February 9, 2012, Steel Excel acquired the business and assets of Eagle Well Services, Inc., a leader in the oilfield service industry serving customers in the Bakken based in North Dakota and Montana.  The purchase price of this acquisition was $48.1 million in cash.
 
CoSine Communications, Inc.
 
We have an ownership interest of approximately 46.8% as of March 16, 2012 in CoSine Communications, Inc. (OTC: COSN.PK), a Delaware corporation (“CoSine”).  Two of our representatives serve on CoSine’s four-member board of directors, one of whom serves as the Chief Executive Officer and Chief Financial Officer.  CoSine is currently in the business of seeking to acquire one or more business operations.
 
Other Core Companies
 
API Group PLC
 
We have an ownership interest of approximately 32.4% as of March 16, 2012 in API Group PLC (API.  LN), an English corporation (“API”).  One of our representatives serves on API’s six-member board of directors.  API is a leading manufacturer of specialized materials for packaging premium branded goods.  The main end use markets for API’s products are in premium, fast-moving consumer goods such as alcoholic drinks, perfumery, cosmetics, healthcare, specialty food and tobacco.  These sectors use high impact finishes and effects on labeling and packaging to reinforce and authenticate brand image. Effective December 31, 2011, we reclassified our investment in API to Investments at fair value on our Consolidated Balance Sheet. Previously we classified it as an associated company. For additional information, see Note 5- “Associated Companies” to the SPH financial statements included elsewhere in this Form 10-K. On February 8, 2012, the Company sent a letter to API expressing its belief that the market price of API does not reflect its intrinsic value and that this value will only be realized through a sale of API.
 
 
JPS Industries, Inc.
 
We have an ownership interest of approximately 39.3% as of March 16, 2012 in JPS Industries, Inc. (OTC: JPST.PK), a Delaware corporation (“JPS”).  JPS Industries, Inc. is a major U.S. manufacturer of extruded urethanes, ethylene vinyl acetates and mechanically formed glass and aramid substrate materials for specialty applications in a wide expanse of markets requiring highly engineered components.  JPS’s products are used in a wide range of applications including: printed electronic circuit boards; advanced composite materials; civilian and military aerospace components; filtration and insulation products; specialty commercial construction substrates; high performance glass laminates for security and transportation applications; photovoltaic solar modules; paint protection films; plasma display screens; medical, automotive and industrial components; and soft body armor for civilian and military applications.  Headquartered in Greenville, South Carolina, JPS operates four manufacturing locations in Anderson and Slater, South Carolina; Statesville, North Carolina; and Easthampton, Massachusetts. Effective December 31, 2011, we reclassified our investment in JPS to an available for sale security. Previously we classified it as an associated company. For additional information, see Note 5- “Associated Companies” to the SPH financial statements included elsewhere in this Form 10-K.
 
 GenCorp Inc.
 
We have an ownership interest of approximately 6.9% as of March 16, 2012 in GenCorp Inc. (NYSE: GY), an Ohio corporation (“GenCorp”).  One of our representatives serves on GenCorp’s eight-member board of directors.  GenCorp’s continuing operations are comprised of two segments, Aerospace and Defense and Real Estate.  GenCorp’s Aerospace and Defense segment includes the operations of Aerojet-General Corporation, which develops and manufactures propulsion systems for defense and space applications, armament systems for precision tactical weapon systems and munitions applications.  GenCorp’s Real Estate segment includes the entitlement, sale and leasing of its excess real estate.
 
Barbican Group Holdings Limited
 
We have an economic interest, direct and indirect, of approximately 19.6% as of March 16, 2012 in Barbican Group Holdings Limited and its subsidiaries (“Barbican”).  In addition, one of our affiliates shares 50/50 control over Barbican with another investor.  Two of our representatives serve on Barbican’s seven-member board of directors.  Barbican is a privately-held company incorporated in Guernsey, which underwrites property and casualty insurance and reinsurance through its subsidiaries and its Lloyds of London syndicate.
 
Fox & Hound Restaurant Group
 
We had an indirect ownership interest of approximately 21.3% as of December 31, 2011 in Fox & Hound Restaurant Group, a Delaware corporation (“Fox & Hound”).  Two of our representatives serve on Fox & Hound’s four-member board of directors.  Fox & Hound is a privately held owner and operator of a chain of approximately 130 company-owned and 14 franchised social destination casual dining and entertainment based restaurants in 32 states. On March 19, 2012, we invested $10,923 as part of a recapitalization of Fox & Hound which involved the issuance by Fox & Hound of new common equity in conjunction with a long-term refinancing of Fox & Hounds debt. As a result of the transaction, as of March 19, 2012 we have an indirect ownership interest of 43.6% in Fox & Hound.
 
Our History
 
SPH, formerly known as WebFinancial L.P., is a limited partnership formed in the State of Delaware on December 16, 2008.  SPH is the successor through a merger on December 31, 2008 with WebFinancial Corporation (formerly Rose’s Holdings, Inc.), a Delaware corporation that was incorporated in 1997 to act as a holding company for Rose’s Stores, Inc., an operator of general merchandise discount stores founded in 1927.  WebFinancial Corporation (“Webfinancial”) completed the sale of its store operations in 1997 and acquired WebBank in 1998.
 
 
Effective as of July 15, 2009, we completed an exchange transaction in which we acquired the limited partnership interest of Steel Partners II, L.P. (“SPII”) pursuant to which we acquired net assets of $454.3 million that were held by SPII, consisting of holdings in a variety of companies, in exchange for our common units which were distributed to certain former indirect investors in SPII (the “Exchange Transaction”).  As a result, we became a global diversified holding company, with partners’ capital of $367.1 million as of July 15, 2009, which has increased to $415.8 million as of December 31, 2011.  Since July 15, 2009, we have concentrated our holdings into a select number of businesses.  Certain of our privately held ownership interests, such as our indirect interest in Barbican and all of our indirect interest in Fox & Hound, are directly held by SPII Liquidating Series Trust (“SPII Liquidating Trust”), a Delaware statutory trust that SPII formed prior to the completion of the Exchange Transaction to hold certain assets previously held by SPII.
 
In connection with the Exchange Transaction, we agreed to distribute to the holders of our common units a total of up to $87.5 million (the “Target Distribution”), subject to certain limitations, during the period from July 16, 2009 to April 30, 2011, or the “Final Distribution Date.”  On April 1, 2010, we distributed to our unitholders of record as of March 26, 2010 approximately $54.4 million or $1.95 per common unit.  On April 6, 2011, we distributed to our unitholders of record as of March 25, 2011 approximately $33.1 million, or $1.18 per common unit, representing the final required distribution in full satisfaction of the Target Distribution.  We may, at our option, make further distributions to the unitholders although we currently have no plan to make any distributions in excess of the Target Distribution.
 
Our Structure
 
SPH is managed by SP General Services LLC (the “Manager”), pursuant to the terms of an amended and restated management agreement, or the “Management Agreement” discussed in further detail in the section entitled “Executive Compensation - The Management Agreement.”  From its founding in 1990, the Manager and its affiliates have created significant increases in value for investors in the entities it has managed, including SPH and SPII.  Since our day-to-day business affairs are managed by our Manager, we do not have any employees.
 
Our wholly-owned subsidiary, Steel Partners Holdings GP Inc., formerly known as Web LLC and Steel Partners Holdings GP LLC, or the “General Partner”, is our general partner.  The General Partner converted from a limited liability company to a corporation on September 21, 2010.  The General Partner has a board of directors, or the “Board of Directors.”  The Board of Directors is currently comprised of seven members, five of whom are elected annually by our unitholders and two of whom are appointed by the Manager.  Warren G. Lichtenstein, the Chairman and Chief Executive Officer of our Manager, serves as the Chairman of the Board of Directors.
 
Our Common Units
 
Our common units are quoted on the over-the-counter market on the Pink Sheets under the symbol SPNHU.PK.  We intend to have our common units listed on a national securities exchange, depending on market conditions and meeting any applicable listing requirements.
 
Other Information
 
Our business address is 590 Madison Avenue, 32nd Floor, New York, New York 10022, and our telephone number is (212) 520-2300.  Our website is www.steelpartners.com.  The information contained in, or that can be accessed through, the website is not part of this Form 10-K. This Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available to you free of charge through our website as soon as reasonably practicable after those materials have been electronically filed with, or furnished to, the SEC.
 
 
Item 1A. Risk Factors
 
Our business is subject to a number of risks.  You should carefully consider the following risk factors, together with all of the other information included or incorporated by reference in this report, before you decide whether to purchase our common units. The factors listed below represent certain important factors which we believe could cause such results to differ.  These factors are not intended to represent a complete list of the general or specific risks that may affect us.  It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected.  In such case, the trading price of our common units could decline, and you may lose all or part of your investment.
 
Risks Related to Our Structure
 
Our consolidated financial statements will not include meaningful comparisons to prior years.
 
The Exchange Transaction, pursuant to which SPII became a wholly-owned subsidiary of SPH on July 15, 2009, is accounted for as a transaction between entities under common control and as such SPII’s accounts are consolidated with SPH for all periods presented.  SPH’s operations prior to July 16, 2009 and operations related to the assets acquired as a result of the acquisition of SPII as of July 15, 2009 are presented in the consolidated financial statements as “Diversified Industrial, Financial Services and Other”.  The Company accounts for the consolidation of SPII in the consolidated financial statements as “Investment Operations” for all periods presented through July 15, 2009.  Due to differences between the operating company accounting policies of Diversified Industrial, Financial Services and Other operations and the accounting policies of Investment Operations, our consolidated financial statements will not include meaningful comparisons to prior years.
 
Being classified as an “investment company” would subject us to numerous restrictions and requirements that would be inconsistent with the manner in which we operate our business, and could have a material adverse effect on our business and operations.
 
We plan to continue to conduct our business and operations in such a manner as not to be deemed an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”).  An entity will generally be deemed to be an “investment company” for purposes of the Investment Company Act if: (a) it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or (b) absent an applicable exemption, it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the “40% Test”).  Since we operate as a diversified holding company engaged in a variety of operating businesses through our subsidiaries and controlled companies, we do not believe that we are primarily engaged in an investment company type business, nor do we propose to primarily engage in such a business.  Our intent to operate in this manner may have a material adverse effect on us, as it may limit our ability to make certain investments or take certain actions or compel us to divest certain holdings or to take or forego certain actions that could otherwise be beneficial to us.
 
As a result of the Exchange Transaction, on July 14, 2009, we could no longer definitively conclude that we passed the 40% Test or were able to rely on any exception from the definition of an investment company.  Since then, we have taken reasonable actions to alter our holdings so that we can comply with the 40% Test or a relevant exception as soon as reasonably practicable.  These actions have included liquidating certain of our assets and acquiring additional interests in existing or new subsidiaries or controlled companies.  Due to market conditions and other factors beyond our reasonable control, we were unable to complete all actions necessary to comply with the 40% Test or a relevant exception within the one-year grace period permitted under the Investment Company Act.  As a result, on July 8, 2010, prior to the conclusion of the grace period, we filed an application with the SEC for an extended temporary exemption from the Investment Company Act, which application is still pending.
 
If we were deemed to be an investment company under the Investment Company Act, we could suffer adverse consequences, including a need to further adjust our business strategy and assets, including by divesting certain desirable assets immediately to fall outside of the definition or within an exemption, to register as an investment company or to cease operations.
 
 
Investment companies are subject to extensive, restrictive and potentially adverse regulations relating to, among other things, operating methods, management, capital structure, dividends and transactions with affiliates.  If we were required to register as an investment company under the Investment Company Act, we would be subject to numerous restrictions and requirements that would be inconsistent with the manner in which we operate our business and which may have a material adverse effect on our operations, financial conditions and prospects, including restrictions on our capital structure and restrictions on our ability to transact business with affiliates, including our operating subsidiaries and controlled companies.
 
Our revenue, net income and cash flow are highly variable, which may prevent us from achieving steady earnings growth on a quarterly basis and may cause the price of the common units to be volatile.
 
Our revenue, net income and cash flow are highly variable.  We may experience fluctuations in our results from quarter to quarter due to a number of factors, including changes in the values of our various operations, changes in our operating expenses, changes in asset values, changes in the competitive environment, and general economic and market conditions.  Such fluctuations may lead to volatility in the trading price of the common units and cause our results for a particular period not to be indicative of our future performance.  It may be difficult for us to achieve steady growth in net income and cash flow on a quarterly basis, which could lead to volatility in the price of the common units.
 
As our revenue, net income and cash flow are highly variable from period to period, we do not expect to provide any guidance.  The lack of guidance may affect the expectations of analysts and could cause increased volatility in the price of the common units.  Many of our operating companies are small cap and micro cap companies that are thinly traded and may trade at prices that do not reflect their intrinsic value.  Such prices may affect the price at which the common units trade.  In addition, some of our holdings are private companies for which there is no trading market.
 
The requirements of being a public entity and sustaining our growth may result in increased costs over prior years.
 
Effective as of February 13, 2012, we became subject to the reporting requirements of the Exchange Act. Consequently, we are required to file annual, quarterly and current reports with respect to our business and financial condition.  In addition, sustained growth may require us to commit additional management, operational and financial resources to identifying new professionals to join us and to maintain adequate operational and financial systems to support expansion.  These requirements may divert management’s attention.  We may incur significant additional annual expenses related to these steps, including additional directors’ and officers’ liability insurance, Exchange Act reporting costs, transfer agent fees, salaries and expenses for additional accounting, legal and administrative personnel.
 
Once we are required to comply with the evaluations of controls under Section 404 of the Sarbanes-Oxley Act, failure to comply with these requirements may have a material adverse effect on our results of operations.
 
We are required to comply with the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), and we will be required to furnish a report by our management on internal control over financial reporting.  This report must contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting and disclosure of any material weaknesses.  In addition, the report must contain a statement that our auditors have issued an attestation report on management’s assessment of such internal control over financial reporting.  We expect that management will be required to provide a report on our internal control over financial reporting beginning with our annual report for the fiscal year ending December 31, 2012 and that we will be required to provide an auditor’s attestation on management’s assessment of internal controls beginning with our annual report for the fiscal year ending December 31, 2013.
 
 
If we fail to maintain an effective system of internal controls over financial reporting, we might be subject to sanctions or investigation by regulatory authorities such as the SEC.  A material weakness in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information and may cause investors to lose confidence in our financial statements and our common unit price may be adversely affected.  If we fail to remedy any material weakness, our financial statements may be inaccurate, we may not have access to the capital markets, and our common unit price may be adversely affected.  Further, if our auditors fail to issue an opinion that our internal controls over financial reporting are effective, this may trigger a negative reaction in the financial markets.  We may also be required to incur costs to improve our internal control system and hire additional personnel.
 
The unitholders have limited recourse to maintain actions against the General Partner, the Board of Directors, our officers and the Manager.
 
The Limited Partnership Agreement of SPH, or the “Partnership Agreement,” contains broad indemnification and exculpation provisions that limit the right of a unitholder to maintain an action against the General Partner, the Board of Directors, our officers and the Manager, or to recover losses or costs incurred by us as a result of their actions or failures to act.
 
If we are dissolved, unitholders may not realize the value that may otherwise be realized over time.
 
We may be dissolved at the election of the Board of Directors by a majority of the directors.  If we are dissolved, unitholders may not realize the value that may otherwise be realized over time.
 
Our ability to timely file financial results will require the cooperation of certain of the companies in which we have interests.  Our failure to timely file financial statements may have an adverse effect on our business and operations.
 
We require the financial results of certain of the companies in which we have interests in order to report our own financial results.  As such, our ability to timely file financial statements will depend on the cooperation of those companies.  There can be no assurance that those companies will produce financial results in a timely manner.  Our failure to timely file financial statements may have an adverse effect on our business and operations.
 
Our Partnership Agreement contains certain limitations on the voting rights of unitholders.
 
Our Partnership Agreement contains specific provisions that are intended to comply with regulatory limitations on the ownership of our securities as a result of our ownership of WebBank.  Under the Partnership Agreement, a person or group that acquires beneficial ownership of 10% or more of the common units without the prior approval of the Board of Directors may lose voting rights with respect to all of its common units in excess of 9.9%.  Please see “Material Provisions of Steel Partners Holdings L.P. Partnership Agreement -- Limitations on Voting Rights.”
 
We may have conflicts of interest with the minority shareholders of our businesses and decisions may need to be made by disinterested directors, without the participation of directors or officers associated with the Manager and SPH Services, which may be different from the decisions we would make.  Companies in which we have interests but we do not control may make decisions that do not serve our interests and those of our unitholders.
 
The boards of directors and officers of our respective businesses, including directors and officers associated with our Manager and SPH Services, have fiduciary duties to their shareholders.  As a result, they may make decisions that are in the best interests of their shareholders generally but which are not necessarily in our best interest or that of our unitholders.  In dealings with us, the directors and officers of our businesses may have conflicts of interest and decisions may have to be made without their participation.  Such decisions may be different from the decisions we would make and may not be in the best interests of our common unitholders, which may have an adverse effect on our business and results of operations.
 
Our assets include interests in companies that we do not control.  The majority stakeholders or the management of such companies may make decisions we do not agree with or which do not serve our interests.  If any of the foregoing were to occur, the values of interests held by us may decrease and our financial condition, results of operations and cash flow may suffer as a result.
 
 
There are certain interlocking relationships among us and certain affiliates of Warren G. Lichtenstein, our Chairman and Chief Executive Officer, which may present potential conflicts of interest.
 
Warren G. Lichtenstein, our Chairman and Chief Executive Officer and a substantial unitholder, is the Chief Executive Officer of our Manager.  As of March 16, 2012, Mr. Lichtenstein beneficially owned approximately 7.1% of our outstanding common units.  Mr. Lichtenstein also controls the Manager, and WGL Capital Corp. (“WGL”), an affiliate of the Manager to which certain deferred fees are owed, and is the managing member of Steel Partners II GP LLC (“SPIIGP”), which serves as the liquidating trustee of SPII Liquidating Trust.  We have entered into transactions and/or agreements with each of these entities.  In addition, through WGL, Mr. Lichtenstein can increase his beneficial ownership if WGL elects to receive its payment of certain deferred fees owed to it in the form of our common units, which payment may become immediately due and payable upon certain termination events as specified in the deferred fee agreement.  There can be no assurance that such entities will not have interests in conflict with our own.  For more information regarding these relationships and other relationships between us and related parties, see “Certain Relationships and Related Transactions.”
 
We have engaged, and in the future may engage, in transactions with our affiliates and may choose to purchase additional securities of entities that we control, and we could have to expend substantial resources in resolving any challenges to those transactions.
 
Generally, Delaware law, under which we are governed, requires that any transactions between us and any of our affiliates be on terms that, when taken as a whole, are substantially as favorable to us as those then reasonably obtainable from a person who is not an affiliate in an arms-length transaction.  We believe that the terms of the agreements we have entered into with our affiliates satisfy the requirements of Delaware law, but in the event that one or more parties challenges the fairness of such terms we could have to expend substantial resources in resolving the challenge and we can make no guarantees as to the result. Similarly, we currently own significant equity positions in a number of companies.  We may choose in the future to purchase additional securities of such companies.  We intend to engage in any such transactions on terms that are fair to all shareholders and are the result of arms-length negotiations.  However, one or more minority shareholders may choose to challenge the fairness of such purchases by a controlling shareholder.  Defending against such potential challenges may cause us to expend substantial resources in resolving the challenge and we can make no guarantees as to the result.
 
Certain members of our management team may be involved in other business activities that may involve conflicts of interest.
 
Certain individual members of our management team may, from time to time, be involved in the management of other businesses, including those owned or controlled by our Manager and its affiliates.  Accordingly, these individuals may focus a portion of their time and attention on managing these other businesses.  Conflicts may arise in the future between our interests and the interests of the other entities and business activities in which such individuals are involved.
 
We, as a diversified holding company, may have substantial limitations on our ability to sell interests in the underlying operating companies.
 
We accumulate significant positions in underlying operating companies and have a significant role in the management of various underlying operating companies.  As a result, we may face significant legal and market restrictions on selling our interests in the underlying operating companies.  For example, employees of the Manager and SPH Services may also serve as managers or members of the board of directors of the underlying operating companies, and, thus, may receive material and confidential information concerning the operating companies that would preclude us, under federal securities laws, from trading securities of the relevant operating company.  Some privately held businesses may be subject to shareholders agreements which may limit our ability to sell our interests in such companies.  In addition, we may be limited in our ability to sell securities in an underlying operating company in light of the size of our ownership interest and the absence of liquidity in the market to absorb our ownership interest, or, alternatively, may be required to sell our ownership interest at a discounted and unfavorable price.
 
 
We hold and expect to continue to hold illiquid assets with a limited market for resale and, therefore, may be unable to dispose of such assets at a time and at a price that we deem desirable.
 
We may hold assets that have a limited market for resale.  We may be unable to dispose of such assets at a time and at a price that we deem desirable.  In the event that we desire to sell such assets on an expedited basis, we may not be able to obtain a price for such assets that is equal to or greater than what we could receive if there was a public market for such assets.
 
Risks Related to Our Business
 
We may not be able to fund future acquisitions of new businesses or raise funds for operating expenses due to the lack of availability of debt or equity financing on acceptable terms, which could materially adversely impact our financial condition, business and results of operations.
 
In order to make future acquisitions and fund operations, we may need to raise capital primarily through debt or equity financings.  Since the timing and size of acquisitions or the need for additional capital cannot be readily predicted, we may need to obtain funding on short notice to benefit fully from attractive acquisition opportunities or to address business needs.  Such funding may not be available on acceptable terms, or at all.  In addition, the level of our indebtedness may impact our ability to borrow.  Also, depending on market conditions and investor demand for the common units, we may not be able to raise capital by selling additional common units at prices that we consider to be in our interest.  These risks may materially adversely affect our ability to pursue our acquisition strategy successfully and materially adversely affect our financial condition, business and results of operations.
 
We conduct operations or own interests in companies with operations outside of the U.S., which may expose us to additional risks not typically associated with companies that operate solely in the U.S.
 
We have operations or own interests in securities of companies with operations located outside the U.S. and they present certain risks not typically associated with U.S. operations, including risks relating to currency exchange matters, less developed or efficient financial markets than in the U.S., absence of uniform accounting, auditing and financial reporting standards, differences in the legal and regulatory environment, different publicly available information in respect of companies in non-U.S. markets, economic and political risks, and possible imposition of non-U.S. taxes.  There can be no assurance that adverse developments with respect to such risks will not adversely affect our assets that are held in certain countries or the returns from these assets.
 
If certain of our operating subsidiaries are unable to access funds generated by their respective subsidiaries, such operating subsidiaries may not be able to meet their financial obligations.
 
Because certain of our operating subsidiaries are holding companies that conduct operations through their subsidiaries, such operating subsidiaries depend on those entities for dividends, distributions and other payments to generate the funds necessary to meet their financial obligations.  Certain of such operating subsidiaries may face restrictions on their ability to transfer cash to their parent company pursuant to the terms of any credit agreement to which they are a party.  Failure by one of those subsidiaries to generate sufficient cash flow and meet the requirements of their respective credit facilities could have a material adverse effect on our business, financial condition and results of operations.
 
Our businesses are subject to unplanned business interruptions which may adversely affect our performance.
 
Operational interruptions and unplanned events at one or more of our businesses’ production facilities could cause substantial losses in production capacity and may expose our businesses to liability from claims by customers who have in turn had to delay their deliveries or reschedule their operations.  Such interruptions may also harm our reputation or the reputation of our businesses, potentially resulting in a loss of business.  To the extent these losses are not covered by insurance, our financial position, results of operations and cash flows may be adversely affected by such events.
 
 
Our businesses rely, and may rely, on their intellectual property and licenses to use others’ intellectual property, for competitive advantage.  If our businesses are unable to protect their intellectual property, are unable to obtain or retain licenses to use others’ intellectual property, or if they infringe upon or are alleged to have infringed upon others’ intellectual property, it could have a material adverse effect on their financial condition, business and results of operations.
 
The success of each of our businesses depends in part on its, or licenses to use others’ brand names, proprietary technology and manufacturing techniques.  These businesses rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and contractual provisions to protect their intellectual property rights.  The steps they have taken to protect their intellectual property rights may not prevent third parties from using their intellectual property without their authorization or independently developing intellectual property that is similar.  In addition, the laws of foreign countries may not protect our businesses’ intellectual property rights effectively.  Stopping unauthorized use of proprietary information and intellectual property, and defending claims of unauthorized use of others’ proprietary information or intellectual property, may be difficult, time-consuming and costly and could subject our businesses to significant liability for damages and invalidate their property rights.  Such unauthorized use could reduce or eliminate any competitive advantage our businesses have developed, cause them to lose sales or otherwise harm their business.
 
The success of our businesses, including the operations and research and development of some of our services and technology, depends on the collective experience of our technical, management and sales employees.  If these employees were to leave our businesses, our operations and our ability to compete effectively could be materially adversely impacted.
 
Our future success depends upon the continued service of our technical, management and sales personnel who have developed and continue to develop our services, technology and products.  We compete with many other entities for skilled management and employees.  If any of these employees leave our businesses, the loss of their knowledge and experience may materially adversely affect our operations and research and development.  If we are not able to replace our technical, management and sales personnel with new employees with comparable experience or attract additional individuals, we may not keep up with innovations in the industries in which we operate.  As a result, our ability to continue to compete effectively and our operations may be materially adversely affected.
 
If our businesses are unable to continue the technological innovation and successful commercial introduction of new products and services, their financial condition, business and results of operations could be materially adversely affected.
 
The industries in which our businesses operate experience periodic technological changes and ongoing product improvements.  Their results of operations depend significantly on the development of commercially viable new products, product upgrades and their ability to integrate new technologies.  Our future growth will depend on their ability to gauge the direction of, and effectively respond to, the technological progress in key end-use markets and upon their ability to successfully develop new generations of products.  Our businesses must make ongoing capital investments and may need to seek better educated and trained workers, who may not be available in sufficient numbers.  Failure to effectively respond to technological developments may result in reduced sales and sunk developmental costs.
 
Potential supply constraints and significant price fluctuations of electricity, natural gas and other petroleum based products could adversely affect our businesses.
 
In our production and distribution processes, we consume significant amounts of electricity, natural gas, fuel and other petroleum-based commodities.  The availability and pricing of these commodities are subject to market forces beyond our control.  Variability in the supply and prices of these commodities could materially affect our operating results from period to period and rising costs could erode our profitability.
 
 
We do not have long-term contracts with all of our customers and clients, the loss of which could materially adversely affect our financial condition, business and results of operations.
 
Our businesses are based primarily upon individual orders and sales with our customers and clients and not long-term supply contracts.  As such, our customers and clients could cease using services or buying products at any time and for any reason and we will have no recourse in the event a customer or client no longer wants to use our businesses’ services or purchase products from us.  If a significant number of our customers or clients elect not to use such services or purchase products, it could materially adversely affect our financial condition, business and results of operations.
 
Our businesses are and may be subject to federal, state and foreign environmental laws and regulations that expose them to potential financial liability.  Complying with applicable environmental laws requires significant resources, and if our businesses fail to comply, they could be subject to substantial liability.
 
Some of the facilities and operations of our businesses are, and may be, subject to a variety of federal, state and foreign environmental laws and regulations, including laws and regulations pertaining to the handling, storage and transportation of raw materials, products and wastes, and hazardous materials and wastes, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations.  Any material violations of these laws can lead to substantial liability, revocations of discharge permits, fines or penalties, which could negatively impact our financial condition, business and results of operations.
 
Defects in the products provided by our businesses could result in financial or other damages to our customers, which could result in reduced demand for our businesses’ products and/or liability claims against our businesses.
 
Some of our businesses manufacture products to customer specifications that are highly complex and critical to customer operations.  Defects in products could result in product liability suits, compensation for damages, or a reduction or cancellation of future purchases due to customer dissatisfaction.  If these defects occur frequently, our reputation may be impaired.  Any of these outcomes could negatively impact our financial condition, business and results of operations.
 
Some of our businesses are subject to certain risks associated with the movement of businesses offshore.
 
Some of our businesses are potentially at risk of losing business to competitors operating in lower cost countries.  An additional risk is the movement offshore of some of our businesses’ customers, leading them to procure products or services from more closely located companies.  Either of these factors could negatively impact our financial condition, business and results of operations.
 
Loss of key customers of some of our businesses could negatively impact our financial condition.
 
Some of our businesses have significant exposure to certain key customers, the loss of which could negatively impact our financial condition, business and results of operations.
 
Our business strategy includes acquisitions which entail numerous risks.
 
Our business strategy and the strategy of our businesses includes acquisitions and entails several risks, including the diversion of management’s attention from other business concerns and the need to finance such acquisitions with additional equity and/or debt.  Any future acquisitions may also result in material changes in the composition of our assets and liabilities or the assets and liabilities of our businesses and if unsuccessful could reduce the value of our common units.  In addition, once found, acquisitions entail further risks, including unanticipated costs and liabilities of the acquired businesses that could materially adversely affect our results of operations; difficulties in assimilating acquired businesses; negative effects on existing business relationships with suppliers and customers and losing key employees of the acquired businesses.
 
 
HNH sponsors a defined benefit pension plan which could subject it to substantial cash funding requirements in the future.
 
HNH’s ongoing operating cash flow requirements include funding the minimum requirements of its defined benefit pension plan (the “WHX Pension Plan”).  HNH expects to have required minimum contributions to the WHX Pension Plan for 2012, 2013, 2014, 2015, 2016 and thereafter of $20.0 million, $19.4 million, $23.8 million, $19.5 million, $14.8 million, and $26.4 million, respectively. Such required future contributions are determined based upon assumptions regarding such matters as discount rates on future obligations, assumed rates of return on plan assets and legislative changes.  Actual future pension costs and required funding obligations will be affected by changes in the factors and assumptions described in the previous sentence, as well as other changes such as any plan termination.
 
Difficult economic and market conditions may adversely affect our operations, which could materially reduce our revenue, cash flow and asset value, and adversely affect our financial condition.
 
We operate in a variety of competitive industries and market sectors, which are susceptible to economic downturns.  Our operations and assets are materially affected by conditions in the financial markets and economic conditions throughout the world that are outside our control, such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws, trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances.  These factors may affect the level and volatility of securities prices and the liquidity and the value of our operations and assets, and we may not be able to or may choose not to manage our exposure to these market conditions.
 
Our operations’ revenues and assets could also be affected by a continued economic downturn.  Our operations may also have difficulty expanding and be unable to meet our debt service and pension obligations or other expenses as they become due.  In addition, during periods of adverse economic conditions, it may be more difficult and costly or impossible to obtain funding for our operations.  Furthermore, such conditions could also increase the risk of default with respect to our operations that have significant debt.
 
Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may significantly affect our liquidity or financial condition.
 
On July 21, 2010, President Barack Obama signed the Dodd-Frank Act into law.  The Dodd-Frank Act is intended primarily to overhaul the financial regulatory framework following the global financial crisis and will impact all financial institutions, including WebBank.  The Dodd-Frank Act contains provisions that will, among other things, establish a Bureau of Consumer Financial Protection, establish a systemic risk regulator, consolidate certain federal bank regulators and impose increased corporate governance and executive compensation requirements.  While many of the provisions in the Dodd-Frank Act are aimed at financial institutions significantly larger than ours, it will likely increase our regulatory compliance burden and may have a material adverse effect on us.
 
The Dodd-Frank Act also requires the Government Accountability Officer (“GAO”) to conduct a study, within 18 months of the enactment, of the various exemptions in the Bank Holding Company Act for certain types of depository institutions, including industrial banks such as WebBank.  SPH is not regulated as a bank holding company as a result of this exemption.  It is too early to say what impact, if any, the GAO study would have on the continued availability of this exemption.
 
In addition, the Dodd-Frank Act added a new Section 13 to the Bank Holding Company Act, the so-called “Volcker Rule,” which generally restricts certain banking entities, and their subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund.  The Volcker Rule becomes effective July 21, 2012.  The draft implementing regulations for the Volcker Rule were issued by various regulatory agencies on October 11 and 12, 2011.  Under the proposed regulations, we (or our affiliates) may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless we qualify for an exemption from the rule.  We will not know the full impact of the Volcker Rule on our operations or financial condition until the final implementing regulations are adopted sometime in 2012.
 
 
Furthermore, effective July 21, 2011, all companies that directly or indirectly control an FDIC-insured bank are required to serve as a source of financial strength for such institution.  As a result, SPH could be called upon by the FDIC to infuse additional capital into WebBank to the extent that WebBank fails to satisfy its capital requirements.  Currently, WebBank meets or exceeds all such requirements.
 
Further, the U.S. Congress and state legislatures and federal and state regulatory authorities continually review banking laws, regulations and policies for possible changes.  We cannot predict whether additional legislation will be enacted and, if enacted, the effect that it would have on our business, financial condition or results of operations.
 
Increased volatility in raw materials costs and availability may continue to reduce revenues and profitability in our diversified industrial businesses.
 
Certain of our Diversified Industrial operations are subject to risks associated with increased volatility in raw material prices and availability of key raw materials.  If the price for raw materials continues to increase and our operations are not able to pass these price increases to their customers, or are unable to obtain key raw materials, our results of operations may be negatively impacted.
 
We and our businesses operate in highly competitive markets.
 
Many of our competitors and the competitors of our businesses are substantially larger and have considerably greater financial, technical and marketing resources than we do.  Some competitors may have a lower cost of funds than we or our businesses do and access to financing sources that may not be available to us or our businesses.  In addition, some of our competitors and the competitors of our businesses may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of business opportunities than we or our businesses can.
 
Risks Related to Our Manager
 
We depend on Warren G. Lichtenstein, the Chairman and Chief Executive Officer of the Manager and Jack Howard, the President of the Manager, the loss of whose services could have a material adverse effect on our business, results and financial condition.
 
Our success depends on the efforts, skills, reputation and business contacts of Warren G. Lichtenstein, the Chairman and Chief Executive Officer of the Manager and Jack Howard, the President of the Manager.  While the key members of the Manager have worked for the Manager and its affiliates for many years, our Manager does not have any employment agreements with any of the key members of its management team and their continued service is not guaranteed.  The loss of the services of Mr. Lichtenstein or Mr. Howard could have a material adverse effect on our asset value, revenues, net income and cash flows and could harm our ability to maintain or grow our existing operations or pursue additional opportunities in the future.
 
Certain members of the Manager’s management team may be involved in other business activities that may involve conflicts of interest.
 
Certain individual members of the Manager’s management team are involved in the management of other businesses.  Accordingly, these individuals may focus a portion of their time and attention on managing these other businesses.  Conflicts may arise in the future between our interests and the interests of the other entities and business activities in which such individuals are involved.
 
The interests of our Manager may not be aligned with our interests or those of our unitholders.
 
Our Manager receives a quarterly Management Fee at a rate of 1.5% of total partner’s capital, payable on the first day of each quarter, subject to quarterly adjustment.  Our Manager is entitled to receive a Management Fee regardless of our net income.  In addition and as more fully described in “Management Agreement - Management Fees and Incentive Compensation”, our Manager was granted certain incentive units to receive Class B common units of SPH.  The Manager may consider entering into or recommending riskier transactions that represent a potential higher reward in order for the Manager’s units to be profitable.  Any such riskier investment decisions or recommendations, if unsuccessful, could result in losses to us and a decline in the value of the common units.
 
 
We cannot determine the amount of the Management Fee that will be paid over time with any certainty.
 
The Management Fee is calculated by reference in part to our total partner’s capital.  Our total partner’s capital will be impacted by the performance of our businesses and other businesses we may acquire in the future, as well as the issuance of additional common units.  Changes in our total partner’s capital and in the resulting Management Fee could be significant, resulting in a material adverse effect on our results of operations.  In addition, if our performance declines, assuming our total partner’s capital, remains the same, the Management Fee will increase as a percentage of our net income.
 
Our Manager’s liability is limited under the Management Agreement, and we have agreed to indemnify our Manager against certain liabilities.  Such indemnification may incentivize our Manager to take unnecessary risks with respect to actions for which it will be indemnified.
 
Under the Management Agreement, our Manager, its members, officers, employees, affiliates, agents and legal representatives are not liable for, and we have agreed to indemnify such persons from any loss or expense, including without limitations, any judgment, settlement, reasonable attorneys’ fees and other costs and expenses incurred in connection with the defense of any actual or threatened proceeding, other than losses resulting from willful misconduct or gross negligence in the performance of such indemnified person’s obligations and duties.  Such indemnification may incentivize our Manager to take unnecessary risks with respect to actions for which it will be indemnified.
 
Risks Related to our Common Units
 
Our common units lack a significant trading market, and the value of the common units may be adversely affected by market volatility.
 
Our common units are quoted on the over-the-counter market on the Pink Sheets.  However, there is a limited trading market for our common units at this time.  There is no assurance that an active trading market in our common units will develop, or if such a market develops, that it will be sustained.  The Pink Sheets market is highly illiquid.  As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of our common units or to obtain coverage for significant news events concerning us, and the common units could become substantially less attractive for margin loans, for investment by financial institutions, as consideration in future capital raising transactions or for other purposes. Even if we are listed on a national exchange and an active trading market develops, the market price and trading of the common units may be highly volatile and could be subject to wide fluctuations.  Some of the factors that could negatively affect the price or trading volume of the common units include additions or departures of key personnel, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, actions by unitholders, changes or proposed changes in laws or regulations, and general market and economic conditions.
 
We may issue additional common units in the future without the consent of unitholders and at a discount to the market price of such common units. In particular, sales of significant amounts of the common units may cause the price of the common units to decline.
 
Under the terms of the Partnership Agreement, additional common units may be issued without the consent of unitholders at a discount to the market price.  In addition, other classes of securities may be issued with rights that are senior to or which otherwise have preferential rights to the rights of the common units. Sales of significant amounts of the common units in the public market or the perception that such sales of significant amounts may occur could adversely affect its market price.  Moreover, the perceived risk of any potential dilution could cause common unit holders to attempt to sell their common units and investors to “short” the common units, a practice in which an investor sells common units that he or she does not own at prevailing market prices, hoping to purchase common units later at a lower price to cover the sale.  Any event that would cause the number of common units being offered for sale to increase would likely cause the common units’ market price to further decline.  These sales might also make it more difficult for us to sell additional common units in the future at a time and price that we deem appropriate.
 
 
We may not make future cash distributions to our unitholders.
 
In connection with the Exchange Transaction, we agreed to distribute to the holders of our common units the Target Distribution, subject to certain limitations, during the period from July 16, 2009 to April 30, 2011.   On April 1, 2010, we distributed to our unitholders of record as of March 26, 2010 approximately $54.4 million or $1.95 per common unit.  On April 6, 2011, we distributed to our unitholders of record as of March 25, 2011 approximately $33.1 million, or $1.18 per common unit, representing the final required distribution in full satisfaction of the Target Distribution.  We may, at our option, make further distributions to the unitholders although we currently have no plan to make any distributions in excess of the Target Distribution.
 
Risks Related to Taxation
 
All statutory references in this section are to the Internal Revenue Code of 1986, as amended, or the “Code.”
 
Our unitholders may be subject to U.S. federal and other income tax on their share of our taxable income, regardless of whether they receive any cash distributions from us.
 
It is anticipated that we will be treated, for U.S. federal income tax purposes, as a partnership and not a publicly traded partnership taxable as a corporation.  Our unitholders will be subject to U.S. federal, state, local and possibly, in some cases, foreign income tax on their allocable share of our taxable income, whether or not they receive cash distributions from us.  We do not anticipate making any additional cash distributions or paying any cash dividends.  Accordingly, our unitholders may be required to make tax payments in connection with their ownership of common units that significantly exceed their cash distributions in any given year.
 
Our tax treatment is not assured.  If we are taxed as a corporation, it could adversely impact our results of operations.
 
A partnership is not a taxable entity and distributions by a partnership to a partner are generally not taxable to the partnership or the partner unless the amount of cash distributed to such partner exceeds the partner’s adjusted basis in its partnership interest.  Section 7704 provides that generally publicly traded partnerships are taxed as corporations.  However, an exception, referred to as the “Qualifying Income Exception,” exists with respect to publicly traded partnerships of which 90 percent or more of the gross income for every taxable year consists of “qualifying income” as defined in the Code.  We expect that we will meet the Qualifying Income Exception.  However, the Qualifying Income Exception will not apply if we register, or are required to register, as an investment company under the Investment Company Act.
 
If the Qualifying Income Exception is not available to us, then we will be treated as a corporation instead of a partnership.  In that event, the deemed incorporation of SPH should be tax-free, unless the corporation is an investment company for tax purposes and the partners are treated as diversifying their interests.  If we were taxed as a corporation, (i) our net income would be taxed at corporate income tax rates, thereby substantially reducing our profitability, (ii) our unitholders would not be allowed to deduct their share of losses of SPH and (iii) distributions to our unitholders, other than liquidating distributions, would constitute dividends to the extent of our current or accumulated earnings and profits, and would be taxable as such.
 
 
The tax treatment of (i) publicly traded partnerships or (ii) an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
 
The current U.S. federal income tax treatment of (i) publicly traded partnerships, including us, or (ii) an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time, possibly on a retroactive basis.  The U.S. federal income tax rules are constantly under review by persons involved in the legislative process, the Internal Revenue Service (“IRS”), and the United States Treasury Department, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations.  Changes to the U.S. federal income tax laws and interpretations thereof could make it more difficult or impossible to meet the Qualifying Income Exception, affect or cause us to change our investments, affect the tax considerations of an investment in us, or change the character or treatment of portions of our income.  Any such changes could adversely impact the value of an investment in our common units.
 
Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available.
 
The U.S. federal income tax treatment of our unitholders depends in some instances on interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available.  Our Partnership Agreement permits our General Partner to modify it from time to time, including the allocation of items of income, gain, loss and deduction (including unrealized gain and unrealized loss to the extent allowable under U.S. federal income tax law), without the consent of our unitholders, to address certain changes in U.S. federal income tax regulations, legislation or interpretation or to preserve the uniformity of our common units.  In some circumstances, such revisions could have a material adverse impact on some or all unitholders.  In addition, we formed a subsidiary partnership, to which we contributed certain of our assets, or the “Subsidiary Partnership.”  To preserve the uniformity of common units, we (but not the Subsidiary Partnership) will make an election permitted under Section 754 and we will adopt the remedial allocation method under Section 704(c) with respect to items of income, gain, loss and deduction attributable to assets contributed to us (which we will contribute to the Subsidiary Partnership), to account for any difference between the tax basis and fair market value of such assets at the time of contribution, or attributable to the “book-up” or “book-down” of our assets prior to their contribution to the Subsidiary Partnership, or while they were held by the Subsidiary Partnership, to account for the difference between the tax basis and fair market value of such assets at the time of a mark-to-market event.  We intend generally to make allocations under Section 704(c) to our unitholders in accordance with their respective percentage interests.  However, built-in gain or built-in loss in existence and allocable to the assets we contributed to the Subsidiary Partnership, when recognized, will be allocated to our unitholders as of the contribution date.  We intend to prepare our tax returns on the basis that buyers of common units from such unitholders will not inherit such unitholders’ built-in gains or built-in losses as of that date as a result of the election under Section 754.  However, it is not clear whether this position will be upheld if challenged by the IRS.  While we believe it represents the right result, there is no law directly on point.
 
We will prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred.  The IRS might challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
 
We will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, loss, deduction and credit to our unitholders in a manner that reflects such unitholders’ beneficial ownership of partnership items, taking into account variation in unitholder ownership interests during each taxable year because of trading activity.  Our allocations of items of taxable income and loss between transferors and transferees of our common units generally will be determined annually, will be prorated on a monthly basis and will be subsequently apportioned among the unitholders in proportion to the number of common units owned by each of them as of the opening of trading of our common units on any national exchange on which we are listed, on the first business day of every month.  As a result, a unitholder transferring common units may be allocated items of income, gain, loss, deduction and credit realized after the date of transfer.  However, those assumptions and conventions may not be in compliance with all aspects of applicable U.S. federal income tax requirements.  If the IRS were to challenge this method or new Treasury Regulations were issued, we might be required to change the allocation of items of income, gain, loss, deduction and credit among our unitholders in a manner that adversely affects them.
 
 
Non-U.S. persons face unique U.S. tax issues from owning common units that may result in adverse tax consequences to them.
 
We generally do not intend to engage in activities that will cause us to be treated as engaged in a U.S. trade or business for U.S. federal income tax purposes.  However, it is possible that we may acquire the stock of U.S. corporations owning significant U.S. real property.  The gain from the sale of the stock of such corporations may be treated as effectively connected income (“ECI”) with respect to non-U.S. unitholders.  In addition, it is possible that we may acquire interests in U.S. real property (other than through corporations) as long as the income from the property is “qualifying income” under Section 7704.  The income from such real property, including the gain from the sale of such property, may be ECI to non-U.S. unitholders.  To the extent our income is treated as ECI, non-U.S. unitholders generally will be subject to withholding tax on their allocable share of such income when such income is distributed, will be required to file a U.S. federal income tax return for such year reporting their allocable share of income effectively connected with such trade or business and any other income treated as ECI, and will be subject to U.S. federal income tax at regular U.S. tax rates on any such income (state and local income taxes and filings may also apply in that event).  Non-U.S. unitholders that are corporations may also be subject to a 30 percent branch profits tax on their allocable share of such income, which branch profits tax may be reduced or eliminated pursuant to an income tax treaty.
 
Certain passive income received by us, such as U.S. source dividends and interest that does not qualify as “portfolio interest,” that is allocable to non-U.S. unitholders will be subject to U.S. federal withholding tax of 30 percent (in the absence of relief under an income tax treaty).  We are required to pay to the IRS such withholding tax on such income allocable to non-U.S. unitholders even if we do not make distributions to them.  We will apply this withholding tax in a manner intended to preserve the uniformity of our common units.
 
Tax-exempt entities face unique tax issues from owning common units that may result in adverse tax consequences to them.
 
A holder of common units that is a tax-exempt organization may be subject to U.S. federal income taxation to the extent that its allocable share of our income consists of unrelated business taxable income (“UBTI”).  We may borrow money.  A tax-exempt partner of a partnership may be treated as earning UBTI if the partnership regularly engages in a trade or business that is unrelated to the exempt function of the tax-exempt partner, if the partnership derives income from debt-financed property or if the tax-exempt organization’s partnership interest itself is debt-financed.
 
Unitholders may be subject to state and local taxes and return filing requirements as a result of investing in our common units.
 
In addition to U.S. federal income taxes, our unitholders may be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct activities or own property, if any, now or in the future, even if our unitholders do not reside in any of those jurisdictions.  Our unitholders may be required to file state and local income tax returns and pay state and local income taxes in some or all of these jurisdictions.  Further, unitholders may be subject to penalties for failure to comply with those requirements.  It is the responsibility of each unitholder to file all U.S. federal, state and local tax returns that may be required of such unitholder.
 
We do not expect to be able to furnish to each unitholder specific tax information within 90 days after the close of each calendar year, which means that holders of common units who are U.S. taxpayers should anticipate the need to file annually a request for an extension of the due date of their income tax returns.
 
It will most likely require longer than 90 days after the end of our fiscal year to obtain the requisite information so that IRS Form K-1s may be prepared for us.  Further, we do not expect to provide estimates of such information within such time period.  For this reason, holders of common units who are U.S. taxpayers should anticipate the need to file annually with the IRS (and certain states) a request for an extension past April 15 or the otherwise applicable due date of their income tax returns for the taxable year.
 
 
Item 1B. Unresolved Staff Comments

Not applicable

Item 2. Properties
 
All dollars used in this discussion are in thousands.
 
HNH
 
As of December 31, 2011, HNH had 22 active operating plants in the United States, Canada, China, United Kingdom, Germany, France, and Mexico, with a total area of approximately 1,475,000 square feet, including warehouse, office and laboratory space.  HNH also owns or leases sales, service and warehouse facilities at 8 other locations in the United States which have a total area of approximately 202,000 square feet, and owns or leases 5 non-operating locations with a total area of approximately 326,000 square feet.  Manufacturing facilities are located in: Camden and Bear, Delaware; Evansville, Indiana; Agawam, Massachusetts; Middlesex, New Jersey; Canfield, Ohio; Rancho Cucamonga, California; St. Louis, Missouri; Tulsa and Broken Arrow, Oklahoma; Cudahy, Wisconsin; Toronto and Montreal, Canada; Coahuila and Matamoros, Mexico; Gwent, Wales, United Kingdom; Pansdorf, Germany; Riberac, France; and Suzhou, People’s Republic of China.  All plants are owned except for the Middlesex, Rancho Cucamonga, Montreal, Coahuila and two of the Suzhou plants, which are leased.
 
HNH considers its manufacturing plants and service facilities to be well maintained and efficiently equipped, and therefore suitable for the work being done.  The productive capacity and extent of utilization of its facilities is dependent in some cases on general business conditions and in other cases on the seasonality of the utilization of its products.  Capacity can be expanded at some locations.
 
BNS
 
As of December 31, 2011, Sun Well owned 16 and leased 2 well service rigs located in Montana and North Dakota.  Sun Well also leases 3 facilities, comprising an aggregate of 20,630 square feet of leased space in North Dakota and owns a 15-acre parcel of land in Williams County, North Dakota.  In May 2011, Sun Well signed a contract to commence construction of a new rig shop and headquarters building.  The contract is for $5,054 and the building was completed in February 2012.  BNS has no other properties other than the Sun Well properties noted herein.
 
BNS believes that the above facilities are adequate for SunWell’s current needs and that suitable additional space will be available as required.
 
DGT
 
DGT’s Power Conversion Group owns 55,000 square feet of manufacturing and office space headquartered in Bay Shore, New York.  On September 1, 2010, RFI entered into a mortgage on this property in favor of People’s Bank in the amount of $2,500 payable over 10 years at an annual rate of interest of 4.9%.
 
As discussed elsewhere in this Form 10-K, on November 3, 2011 DGT completed the sale of Villa, its Italian subsidiary. DGT continues to own the real estate property from which Villa operates, which is subject to a six year lease which may be extended for an additional six years after the initial term. The property, which is located in Milan, Italy, consists of 67,000 square feet of design and manufacturing space.
 
DGT believes that its current facilities are sufficient for its present and anticipated future requirements.  DGT’s manufacturing operations run on one shift and DGT has the ability to add a second shift, if needed.
 
 
WebBank
 
As of December 31, 2011, WebBank leases 8,000 square feet of office space headquartered in Salt Lake City, Utah.  The term of the lease expires in March 2017.  WebBank also leases office space in New Jersey through March 2014.  Its WCS subsidiary leases office space in Des Plaines, Illinois through August 2013.
 
WebBank believes that the above facilities are adequate for its current needs and that suitable additional space will be available as required.
 
Item 3. Legal Proceedings
 
The information set forth under Note 23 - Commitments and Contingencies of our Notes to Consolidated Financial Statements, included in Part II, Item 8, Financial Statements, of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see the section entitled Part I, Item 1A, Risk Factors, of this Report.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
PART II
 
Item 5. 
Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
As of December 31, 2011, we had 25,183,039 common units issued and outstanding.
 
Our common units, no par value, are quoted on the over-the-counter market on the Pink Sheets under the symbol “SPNHU.PK”.  The following table sets forth the high and low bid prices for our common units for the periods indicated as reported by the OTC Bulletin Board. Prior to April 19, 2011, there was no active trading market for our common units. The prices state inter-dealer quotations, which do not include retail mark-ups, mark-downs or commissions. These prices do not necessarily represent actual transactions.
 
Fiscal year ending December 31, 2011
 
High
   
Low
 
Second Quarter
  $ 16.75     $ 15.50  
Third Quarter
  $ 16.75     $ 14.60  
Fourth Quarter
  $ 14.78     $ 11.50  
 
Holders
 
As of December 31, 2011, there were approximately 411 unitholders of record.
 
Distributions
 
In connection with the Exchange Transaction, we agreed to distribute to the holders of our common units the Target Distribution, subject to certain limitations, during the period from July 16, 2009 to the Final Distribution Date.  On April 1, 2010, we distributed to our unitholders of record as of March 26, 2010, approximately $54.4 million, or $1.95 per common unit.  On April 6, 2011, we distributed to our unitholders of record as of March 25, 2011, approximately $33.1 million, or $1.18 per common unit, representing the final required distribution in full satisfaction of the Target Distribution.
 
 
We may, at our option, make further distributions to the unitholders although we currently have no plan to make any distributions in excess of the Target Distribution.
 
Unit Performance Graph
 
The following graph compares the cumulative total return provided to unitholders on SPH’s common units since the common units began trading on April 19, 2011, relative to the cumulative total returns of the Russell 2000 index, and a customized peer group of seven companies that includes: Blackstone Group L.P., Leucadia National Corporation, Apollo Investment Corporation, Compass Diversified Holdings LLC, Gladstone Capital Corporation, Knights Capital Group, Inc. and Main Street Capital Corporation.  An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common units, in the peer group, and the index on April 19, 2011 and its relative performance is tracked through December 31, 2011.  We did not declare or pay any dividends during the comparison period.
 

   
4/19/2011
   
6/30/2011
   
9/30/2011
   
12/31/2011
 
Steel Partners Holdings L.P.
  $ 100.00     $ 105.71     $ 94.29     $ 74.92  
Russell 2000 Index
  $ 100.00     $ 100.81     $ 78.77     $ 90.96  
Peer Group
  $ 100.00     $ 95.78     $ 75.29     $ 76.44  

The unit price performance included in this graph is not necessarily indicative of future unit price performance
 
The performance graph shall not be deemed to be incorporated by reference by means of any general statement incorporating by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate such information by reference, and shall not otherwise be deemed filed under such acts.
 
 
Item 6. Selected Financial Data
 
The following table contains our selected historical consolidated financial data, which should be read in conjunction with our consolidated financial statements and the related notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report on Form 10-K. The selected financial data as of December 31, 2011 and 2010 and for the fiscal years ended December 31, 2011 and 2010, and the periods from January 1, 2009 to July 15, 2009 and July 16, 2009 to December 31, 2009 have been derived from our audited consolidated financial statements at those dates and for those periods, contained elsewhere in this Annual Report on Form 10-K. The historical selected financial data as of December 31, 2009 and 2008 and for the fiscal years ended December 31, 2008 and 2007 have been derived from our audited consolidated financial statements at those dates and for those periods, not contained in this Annual Report on Form 10-K. The selected historical financial data as of December 31, 2007 is unaudited and consolidates SPH (formerly known as WebFinancial L.P.), WebFinancial, and SPII based on information derived from SPH’s and SPII’s separately audited financial statements and other unaudited financial information, not contained in this Form 10-K, on a basis consistent with the consolidated financial statements presented elsewhere in this Form 10-K.

SPH entered into the Exchange Transaction pursuant to which SPII became a wholly-owned subsidiary of SPH on July 15, 2009, subject to no further conditions.  The Exchange Transaction is accounted for as a transaction between entities under common control and as such SPII’s accounts are consolidated with SPH for all periods presented.
 
The operations of SPH prior to taking into account the assets acquired as a result of the Exchange Transaction (the “Pre-Exchange Operations”), together with the operations related to the assets acquired as a result of the acquisition of SPII as of July 15, 2009 are accounted for and presented on an operating company basis of accounting, in accordance with U.S. generally accepted accounting principles (“GAAP”).  These operations are presented in the consolidated financial statements as “Diversified Industrial, Financial Services and Other”.
 
SPH accounts for the consolidation of SPII in the consolidated financial statements as “Investment Operations” on the basis of the specialized GAAP prescribed in ASC 946, “Financial Services – Investment Companies” for all periods presented through July 15, 2009.  After July 15, 2009, the date which SPII became a subsidiary of SPH, SPH accounts for the assets it acquired as part of the Exchange Transaction in accordance with its accounting policies as an operating company, and therefore it does not report Investment Operations in its consolidated financial statements after July 15, 2009.
 
SPH acquired a controlling interest in HNH, which has been consolidated as of May 7, 2010.  In addition, as discussed elsewhere in this Form 10, on February 2, 2011, through BNS, SPH acquired SWH and on July 5, 2011 acquired a controlling interest in DGT that have been consolidated since their acquisition dates.  These acquisitions affect the comparability of our selected financial data presented below.
 
 
         
July 16,
   
January 1,
       
         
2009 to
   
2009 to
       
   
Year Ended December 31,
   
December 31,
   
July 15,
   
Year Ended December 31,
 
   
2011
   
2010
   
2009
   
2009
   
2008
   
2007
 
                                     
STATEMENTS OF OPERATIONS DATA (a)
                                   
Revenues:
                                   
Diversified Industrial, Financial Services and Other
  $ 712,222     $ 424,665     $ 14,424     $ 2,225     $ 23,445     $ 5,534  
Investment Operations
    -       -       -       (51,681 )     (736,747 )     94,665  
Total revenues
  $ 712,222     $ 424,665     $ 14,424     $ (49,456 )   $ (713,302 )   $ 100,199  
Net income (loss) from continuing operations
  $ 80,537     $ 18,316     $ (4,254 )   $ (57,527 )   $ (756,949 )   $ 19,724  
Income from discontinued operations
    740       28,130       1,177       -       -       -  
Net income (loss)
    81,277       46,446       (3,077 )     (57,527 )     (756,949 )     19,724  
Net income attributable to redeemable partners' capital
    -       -       -       54,064       767,812       (18,613 )
Less: Net (income) loss attributable to non-controlling interests:
    (45,808 )     (14,699 )     (442 )     -       100       -  
Net income (loss) attributable to common unitholders
  $ 35,469     $ 31,747     $ (3,519 )   $ (3,463 )   $ 10,963     $ 1,111  
                                                 
Per common unit and per share (c)
                                               
Net income (loss) per common unit - basic
                                               
Net income (loss) from continuing operations
  $ 1.39     $ 0.69     $ (0.16 )   $ (1.59 )   $ 5.02     $ 0.51  
Net income from discontinued operations
    0.02       0.57       0.02       -       -       -  
Net income (loss) attributable to common unitholders
  $ 1.41     $ 1.26     $ (0.14 )   $ (1.59 )   $ 5.02     $ 0.51  
Basic weighted average common units outstanding
    25,233       25,235       25,219       2,183       2,183       2,183  
                                                 
Net income (loss) per common unit - diluted
                                               
Net income (loss) from continuing operations
  $ 0.98     $ 0.63     $ (0.16 )   $ (1.59 )   $ 5.02     $ 0.51  
Net income from discontinued operations
    0.01       0.53       0.02       -       -       -  
Net income (loss) attributable to common unitholders
  $ 0.99     $ 1.16     $ (0.14 )   $ (1.59 )   $ 5.02     $ 0.51  
Diluted weighted average common units outstanding
    29,670       27,483       25,219       2,183       2,183       2,183  
 
 
   
December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007(d)
 
BALANCE SHEET DATA
       
(In thousands, except per unit data)
   
(unaudited)
 
Diversified Industrial, Financial Services and Other:
                             
   Cash and cash equivalents
  $ 127,027     $ 180,684     $ 114,247     $ 30,072     $ 3,359  
   Investments at fair value
    150,020       71,872       200,015       1,325       13,610  
Investments in associated companies
    128,218       163,270       121,148       5,066       5,369  
Investment Operations:
                                       
   Investments
    -       -       -       1,118,294       2,801,447  
Total assets
    1,129,843       1,091,865       731,903       1,442,618       3,234,824  
Redeemable partners’ capital (b)
    -       -       -       1,258,725       2,138,144  
SPH Partners’ capital
    415,797       405,732       416,913       42,090       31,120  
SPH Partners’ capital per common unit
  $ 14.02     $ 16.07     $ 16.53     $ 19.28     $ 14.25  


(a)
Statement of operations data for the Diversified Industrial segment includes the consolidation of the results of acquired entities from their respective acquisition dates: the acquisition of HNH effective May 7, 2010, the acquisition of SWH by BNS on February 2, 2011 and the acquisition of DGT on July 5, 2011.  On February 18, 2010, BNS sold its interest in Collins.  The criteria for discontinued operations presentation were met at the date of sale and Collins’ operations are reported as discontinued operations for all periods presented.
 
(b)
The Exchange Transaction was subject to being unwound, in whole or part, until July 15, 2009.  Accordingly, the entire partners’ capital of SPII represented a redeemable interest in SPH and is presented as “Redeemable Partners’ Capital” until July 15, 2009, when the capital relating to SPII was no longer subject to redemption.
 
(c)
Prior to December 31, 2008, SPH (as WebFinancial) was a corporation with common shares outstanding.  On December 31, 2008 SPH converted into a limited partnership.  Each common share of WebFinancial Corporation was exchanged for a common unit of WebFinancial L.P., now known as SPH.
 
(d)
The selected balance sheet data for 2007 is unaudited and consolidates SPH and SPII based on information derived from SPH’s and SPII separately audited financial statements and other unaudited financial information on a basis consistent with the consolidated financial statements presented elsewhere in Annual Report on Form 10-K.
 
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto that are available elsewhere in this Annual Report on Form 10-K.  The following is a discussion and analysis of SPH’s consolidated results of operations for the years ended December 31, 2011 and 2010, and the periods from January 1, 2009 to July 15, 2009 and July 16, 2009 to December 31, 2009.  In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors” in Item 1A.
 
All monetary amounts used in this discussion are in thousands except common units and share amounts.
 
Overview
 
We are a global diversified holding company that engages in multiple businesses through consolidated subsidiaries, associated companies and other interests.  We have interests in a variety of businesses, including diversified industrial products, energy, defense, banking, insurance, food products and services, oilfield services, sports, training, education, and the entertainment and lifestyle industries.  The securities of some of the companies in which we have interests are traded on national securities exchanges, while others are privately held or less liquid.  We seek to work with our companies to increase corporate value over the long term for all stakeholders and shareholders by implementing Steel Partners Operational Excellence programs, the Steel Partners Purchasing Council, Steel Partners Corporate Services, balance sheet improvements, capital allocation policies and growth initiatives.
 
The Company’s consolidated subsidiaries, associated companies and other core companies are as follows:
 
Consolidated Subsidiaries
Associated Companies
Other Core Companies
BNS Holding, Inc.
CoSine Communications, Inc.
API Group PLC (e)
DGT Holdings Corp. (a)
SL Industries, Inc. (c)
Barbican Group Holdings Limited
Handy & Harman Ltd. (b)
Steel Excel Inc. (d)
Fox & Hound Restaurant Corp.
WebBank
 
GenCorp Inc.
   
JPS Industries, Inc. (f)
_______________
(a)
DGT was an Associated Company until July 5, 2011, when it became a Consolidated Subsidiary.
(b)
HNH was an Associated Company until May 7, 2010, when it became a Consolidated Subsidiary.
(c)
SLI became an Associated Company on December 31, 2010..
(d)
Steel Excel, which was formerly known as ADPT, became an Associated Company on June 3, 2010 and is presented on the equity method on a retroactive basis in the consolidated financial statements for the period July 16, 2009 to December 31, 2009.
(e)
API became an Associated Company on September 1, 2010 and on December 31, 2011 was reclassified to Investments at fair value.
(f)
JPS was an Associated Company through 2011 and on December 31, 2011 was reclassified to Investments at fair value.
 
 
Segment Information
 
Our operations are conducted through consolidated subsidiaries and associated companies which represent significant equity interests in operating businesses that are accounted for under the equity method of accounting.  We also own interests directly and indirectly in other core companies and certain other interests that are accounted for as available-for-sale securities or held by the SPII Liquidating Trust.  Our reportable business segments are: Diversified Industrial (from July 14, 2009, the date SPH acquired BNS from SPII, Financial Services (for all periods presented), Investment Operations (for all periods through July 15, 2009) and Corporate.
 
 
Diversified Industrial
 
As of December 31, 2011, our Diversified Industrial segment for financial reporting purposes consists of HNH, BNS and DGT, which are consolidated subsidiaries, SLI which is an associated company, API and JPS, which are classified as Investments at fair value. There were no Diversified Industrial operations presented for periods prior to July 14, 2009.
 
HNH is a holding company that owns and manages a group of businesses on a decentralized basis whose strategic business units encompass its five reportable segments: precious metal, tubing, engineered materials, electronic materials, and Kasco replacement products and services.  Subsequent to December 31, 2009, SPH purchased additional shares of HNH in the open market and on May 7, 2010 its ownership exceeded 50%, at which point HNH became a controlled subsidiary.  HNH’s operations are consolidated with SPH from May 7, 2010.  HNH was an associated company accounted for under the fair value option from July 15, 2009 until May 6, 2010.
 
The Diversified Industrial segment also includes our majority owned consolidated subsidiary BNS, which was acquired from SPII on July 14, 2009, which in turn principally operated through its 80% ownership of Collins, a manufacturer of small school, activity and shuttle buses, ambulances, and terminal trucks/road construction equipment.  Collins was sold on February 18, 2010, and its results of operations and financial position are reported in our consolidated financial statements from July 15, 2009 as discontinued operations for all periods presented.
 
On February 2, 2011, BNS acquired all of the capital stock of SWH which owns all of the capital stock of Sun Well, its sole asset.  Sun Well is a work-over rig provider to oil and gas exploration companies throughout the Williston Basin in North Dakota and eastern Montana.  SWH was acquired to further the Company’s position as a global diversified holding company.
 
DGT, through its subsidiary RFI, manufactures and sells electronic systems and components for a variety of applications.  SPH purchased additional shares of DGT and on July 5, 2011 its ownership exceeded 50%, at which point DGT became a controlled subsidiary.  DGT’s operations are consolidated with SPH from July 5, 2011.  In November 2011, DGT sold its subsidiary, Villa, which comprised its Medical Systems Group Division.  As a result, the operations of Villa are reflected as discontinued operations in our consolidated financial statements for the period from July 5, 2011.  DGT was an associated company accounted for under the equity method from July 15, 2009 until July 5, 2011.
 
Financial Services
 
Our Financial Services segment, for financial reporting purposes, primarily consists of our consolidated and wholly-owned subsidiary WebBank, which operates in niche banking markets.  WebBank provides commercial and consumer loans and services.  WebBank’s deposits are insured by the FDIC, and the bank is examined and regulated by the FDIC and UDFI.
 
Investment Operations
 
The Investment Operations segment consisted of the operations of SPII, an entity of the SPII Fund1 acquired by SPH in an Exchange Transaction on July 15, 2009.  The SPII operations are presented as the Investment Operations segment on an investment company basis for all periods through July 15, 2009.  From July 16, 2009 the Investment Operations ceased upon the completion of the Exchange Transaction when SPII’s net assets were in effect acquired by SPH and such net assets were no longer managed as an investment fund.  After July 15, 2009 the SPII assets in effect acquired by SPH, as appropriate, are reported as part of the Company’s Diversified Industrial, Financial Services and Corporate segments.
 
See description of the Exchange Transaction in the SPH 2011 Audited Consolidated Financial Statements – Note 21 - “Exchange Transaction”.


1 “SPII Fund” refers collectively to the entities that indirectly invested in SPII, Steel Partners II (Onshore) LP, (“SPII Onshore”) and Steel Partners II (Offshore) Ltd. (“SPII Offshore”).
 
 
Corporate
 
Corporate revenues primarily consist of investment and other income and investment gains and losses.  Corporate assets, revenues, overhead expenses and interest expense are not allocated to the operating units.  Corporate also has investments in Steel Excel and CoSine.  Steel Excel acquired certain businesses in 2011, and is seeking to acquire additional business operations. CoSine is in the business of seeking to acquire one or more business operations. In addition, Corporate has investments in securities, investments in the SPII Liquidating Trust and, cash and cash equivalents.  Steel Excel and CoSine are associated companies that we account for under the equity method of accounting, with Steel Excel reported at its fair value.
 
Basis of Presentation
 
Our financial statements include the consolidated financial results of SPH, WebFinancial (which was merged with and into SPH on December 31, 2008), and their subsidiaries for all periods presented.  WebFinancial completed, through a merger transaction, its conversion into WebFinancial L.P., on December 31, 2008.  Each share of WebFinancial was exchanged for limited partnership interests of WebFinancial L.P. designated as common units.  WebFinancial L.P. was renamed Steel Partners Holdings L.P. in April 2009.
 
In the consolidated financial statements, the Diversified Industrial, Financial Services and Corporate segments are reported as “Diversified Industrial, Financial Services and Other” to denote the operations accounted for and reported on an operating company basis; the Investment Operations segment is reported as “Investment Operations” on the basis of the specialized GAAP prescribed in ASC 946, “Financial Services – Investment Companies” for all periods presented through July 15, 2009 to denote the operations accounted for and reported on an investment company basis.  From July 16, 2009 forward, the Company operates in three segments, Diversified Industrial, Financial Services and Corporate, and uses one basis of accounting, the operating company basis.  To present the change from reporting two bases of accounting to reporting one basis of accounting, the operating company basis, beginning July 16, 2009 the consolidated statements of operations, cash flows and changes in capital and comprehensive income (loss) have been presented in two periods, January 1, 2009 to July 15, 2009 and July 16, 2009 to December 31, 2009.
 
History
 
The Company entered into the Exchange Transaction pursuant to which SPII became a wholly-owned subsidiary of SPH without further condition on July 15, 2009 (see “Asset Acquisitions and Unit Issuance” below).  The Exchange Transaction is accounted for as a transaction between entities under common control and as such SPII’s accounts are consolidated with SPH for all periods presented.
 
The Exchange Transaction, which initially occurred on January 1, 2009, was subject to being unwound, in whole or part, until July 15, 2009.  Accordingly, the net assets of SPII on January 1, 2009 represented a redeemable interest of SPH, and are therefore presented as “Redeemable Partners’ Capital” in the consolidated financial statements for all periods presented until July 15, 2009.  Redeemable Partners’ Capital accordingly only participated in 100% of the economic results of SPII and did not participate in the economic results of the Pre-Exchange Operations.  At July 15, 2009, (i) certain assets of SPII were distributed in redemption of a portion of the Redeemable Partners’ Capital of equal value, (ii) the remaining net assets of SPII were then acquired by SPH in the Exchange Transaction as of July 15, 2009, and (iii) the unredeemed portion of the Redeemable Partners’ Capital (of equal value to the net assets of SPII then acquired) became nonredeemable and thereafter participates in an undivided interest in SPH and its economic results.  See the consolidated statements of changes in capital and comprehensive income (loss) for 2009.
 
The SPII assets acquired by SPH in the Exchange Transaction as of July 15, 2009 were valued at fair value.  The fair values of SPII assets acquired on July 15, 2009 established the initial carrying values from which operating company accounting principles began to be applied to such assets, including those applicable to accounting for investments and business combinations.
 
 
In the consolidated financial statements the primary difference between the operating company accounting policies of Diversified Industrial, Financial Services and Other operations and the investment company accounting policies of Investment Operations relate to accounting for investments:
 
 
·
SPH evaluates its investments and determines the appropriate classification as a consolidated subsidiary, an equity method investment, an available-for-sale security, or a held-to-maturity security each with a different financial reporting treatment.  For investments that are accounted for under the fair value option that otherwise would be subject to the equity method, unrealized gains and losses are presented in the consolidated statement of operations.  Unrealized changes in the fair value of available for-sale-securities are presented in other comprehensive income in the consolidated statement of changes in capital and comprehensive income (loss).
 
 
·
For Investment Operations, investments are accounted for in the consolidated financial statements at fair value with changes in fair value reported in the revenue section of the consolidated statements of operations as “change in unrealized gains (losses)” when they occur.  Under investment company accounting, Investment Operations does not consolidate investments and it does not apply the equity method of accounting.
 
Asset Acquisitions and Unit Issuance
 
Acquisition of Assets of SPII
 
Effective as of July 15, 2009, SPH in effect acquired certain assets (the “Acquisition”) from certain former investors of the SPII Fund, which was managed by Steel Partners and its affiliates.  Through this transaction SPH acquired from the SPII Fund net assets with a fair value of $454,262 as of July 15, 2009, which included interests in DGT, JPS, HNH, Steel Excel, various other companies and a 43.75% interest in the SPII Liquidating Trust and $251,547 in cash.  In exchange, the contributing SPII Fund investors received 25,761,587 SPH common units.  This was implemented though the Exchange Transaction discussed below.  The transaction contemplated that as a result SPH would become a global diversified holding company.
 
Acquisition of HNH
 
As part of the Acquisition, SPH acquired a 32.8% interest in HNH valued at $11,390.  Through open market purchases between July 16, 2009 and December 31, 2009, SPH acquired, in the aggregate, 5.8% of additional interests in HNH for $1,069 bringing its ownership interest in HNH to 38.6% at December 31, 2009.  During 2010 and through December 31, 2011, SPH acquired an additional 16.9% interest in HNH for $15,889 through open market purchases bringing its ownership in HNH as of December 31, 2011 to approximately 55.5%.  SPH’s ownership and control of HNH reached 50.3% on May 7, 2010 and HNH became a majority-owned subsidiary; beginning on this date HNH is accounted for as a consolidated subsidiary of SPH. As part of the Acquisition, SPH also acquired an indirect interest in certain debt held through the SPII Liquidating Trust of certain HNH subsidiaries valued at $29,296 at December 31, 2009 (representing its 43.75% pro rata interest).  On October 15, 2010, HNH, through a newly formed subsidiary, Handy & Harman Group Ltd. (“H&H Group”), refinanced substantially all of its indebtedness in a simplified lending structure principally with its existing lenders or their affiliates, including the SPII Liquidating Trust.  H&H Group refinanced the prior indebtedness of Handy & Harman (“H&H”) and Bairnco Corporation (“Bairnco”) to the SPII Liquidating Trust pursuant to which H&H Group made an approximately $6,000 cash payment in partial satisfaction of prior indebtedness to the SPII Liquidating Trust and exchanged the remainder of such prior obligations for units consisting of (a) $72,926 aggregate principal amount of Subordinated Notes issued by H&H Group and (b) Warrants to purchase an aggregate of 1,500,806 shares of HNH common stock.  The Warrants have an exercise price of $11.00 per share and are exercisable beginning October 14, 2013.  The Subordinated Notes bear interest at a rate of 10%, 6% of which is payable in cash and 4% of which is payable in-kind.  The Subordinated Notes, together with any accrued and unpaid interest thereon is due on October 15, 2017.  As a result, as a beneficiary of the SPII Liquidating Trust, SPH had an indirect interest in $31,905 of the Subordinated Notes and 656,605 of the Warrants.  On December 14, 2010, the SPII Liquidating Trust distributed SPH’s indirect interest in the Subordinated Notes and Warrants to SPH. As described below, on October 14, 2011, HNH redeemed $25,000 face amount of its outstanding Subordinated Notes.  Approximately $12,500 of this amount was paid to SPH to redeem its pro rata share of the Subordinated Notes.  As of December 31, 2011, the Company directly held $20,715 of the Subordinated Notes and $620 of the Warrants.
 
 
Acquisition of BNS
 
SPII owned 50.2% of BNS at December 31, 2008.  On July 14, 2009, SPH acquired for cash from SPII its 50.2% interest in BNS for $5,815, at the market price per share on that date.  After July 15, 2009 SPH acquired 27,400 additional BNS shares for cash and owned 51.1% of BNS as of December 31, 2009.  In addition, during 2010 SPH acquired for cash additional BNS shares through open market purchases and owns 84.9% of BNS as of December 31, 2011.  SPH reports BNS as a consolidated subsidiary, including noncontrolling interests, from the July 14, 2009 purchase date.  BNS operated primarily through its 80% ownership of Collins, which was sold on February 18, 2010.  The Collins operations are classified in the consolidated financial statements as discontinued operations.  BNS, subsequent to the sale of Collins, is currently in the business of seeking to acquire one or more new business operations.  As part of the Acquisition, SPH also acquired an indirect interest from SPII in certain debt held through the SPII Liquidating Trust of BNS valued at $9,770 at December 31, 2009 (representing its 43.75% pro rata interest).  This intercompany debt of BNS, related to Collins, is eliminated against the investment acquired from SPII.  In connection with the sale of Collins, the intercompany debt held via the SPII Liquidating Trust was paid in full; all other debt was assumed by the acquirer of Collins.  On February 2, 2011, BNS acquired all of the capital stock of SWH for an aggregate purchase price of $50,463 in cash.  SWH owns all of the capital stock of Sun Well, its sole asset.
 
Acquisition of DGT
 
On July 5, 2011, SPH acquired for cash an additional 5% interest in DGT common stock for $1,933, bringing its total interest in DGT as of July 5, 2011 to 51.1%.  Accordingly, the accounting for the investment in DGT has been changed from the equity method to a majority-owned controlled subsidiary and is consolidated with SPH from that date.  Prior to July 5, 2011, SPH owned a 46.1% interest in DGT, which was acquired primarily between July 15, 2009 and March 2011.
 
Acquisition of API
 
We have an ownership of approximately 32.4% as of December 31, 2011 in API.  Through December 31, 2011, the investment in API was reported under the equity method of accounting at fair value, at which date the investment was reclassified to an available-for sale security. SPH’s ownership interest in API exceeded 20% on September 1, 2010, and, accordingly, API was accounted for as an associated company using the fair value election from January 1, 2010.  Effective December 31, 2011, the Company determined that it no longer had significant influence over the operating and financial polices of API, as a result of which the Company reclassified API to Investments at fair value on our Consolidated Balance Sheet. For additional information, see Note 5 – “Investments in Associated Companies” to the consolidated SPH financial statements found elsewhere in this Form 10-K.
 
Acquisition of CoSine
 
In two transactions on July 14, 2009 and July 15, 2009, SPH acquired for cash, in the aggregate, a 26.1% interest in CoSine from SPII for $4,211, at the market price per share on that date.  On July 31, 2009, SPH acquired for cash from HNH an additional 18.8% interest in CoSine and on August 11, 2009, acquired an additional 2.5% interest in the open market for a total cost of $3,616. As of December 31, 2011, SPH’s ownership interest in CoSine was 46.8%.
 
Acquisition of JPS
 
On July 14, 2009, SPH acquired for cash an 18.2% interest in JPS from SPII for $6,427, at the market price per share on that date.  As part of the Acquisition, SPH acquired an additional 11.3% interest in JPS valued at $4,722 at the Acquisition date.  Through open market cash purchases between July 16, 2009 and December 31, 2009, SPH acquired, in the aggregate, 8.8% of additional interests in JPS for $2,742, bringing its ownership interest in JPS to 38.3% at December 31, 2009. Between January 1 and December 31, 2010, SPH acquired an additional 143,244 shares for cash for $560 through open market purchases. As of December 31, 2011 SPH’s ownership in JPS was 39.3%. Effective December 31, 2011, the Company determined that it no longer had significant influence over the operating and financial polices of JPS, as a result of which the Company reclassified JPS to Investments at fair value. For additional information, see Note 5 – “Investments in Associated Companies” to the consolidated SPH financial statements found elsewhere in this Form 10-K.
 
 
Acquisition of SLI
 
On July 14, 2009, SPH acquired for cash, in the aggregate, a 11.5% interest in SLI from SPII for $5,524.  The investment in SLI is reported at fair value.  The Company’s ownership interest in SLI exceeded 20% on December 31, 2010 and, accordingly, SLI has been accounted for as an associated company using the fair value option election from January 1, 2010.  At December 31, 2011, SPH’s ownership of SLI is 21.7%.
 
Acquisition of Steel Excel
 
As part of the Acquisition, SPH acquired an 8.4% interest in Steel Excel valued at $27,168.  Through open market purchases between July 16, 2009 and December 31, 2009, SPH acquired, in the aggregate, 11.1% of additional interests in Steel Excel for $42,061 bringing its ownership interest in Steel Excel to 19.5% at December 31, 2009.  During 2010, SPH acquired an additional 13.5% interest in Steel Excel for $37,202 through open market purchases, bringing its ownership in Steel Excel as of December 31, 2010 to 33.0%.  From January 1, 2011 to December 31, 2011, SPH acquired an additional 7.2% interest for cash in the open market for $21,931. As of December 31, 2011, SPH’s ownership interest in Steel Excel was 40.3%.  On June 3, 2010, SPH ownership of Steel Excel reached 20% and Steel Excel became an associated company.  Steel Excel is accounted for under the fair value option on a retroactive basis and is presented in SPH’s results as an associated company for all periods subsequent to July 15, 2009.
 
Results of Operations
 
Substantially all of our operations are affected by worldwide economic conditions.  Poor economic conditions have reduced demand for the products and services of our diversified industrial businesses, resulted in additional loan losses in our financial services business and may adversely impact the value of our associated companies and other core companies.  The discussions below consider the effect of current economic conditions on results of operations and financial position.  Should current conditions worsen or the U.S. enters another recession, we believe all of our operations could be adversely affected.
 
For the periods presented prior to July 16, 2009, revenue and costs and expenses in the consolidated statements of operations are presented in two sections.  The Diversified Industrial, Financial Services and Other section represents the Pre-Exchange Operations presented on an operating company basis and the Investment Operations section represents SPII’s investment operations (the Investment Operations segment) presented on an investment company basis.
 
 
·
The consolidated statements of operations, cash flows and changes in capital and comprehensive income (loss) for 2009 are presented in two periods, January 1, 2009 to July 15, 2009 and July 16, 2009 to December 31, 2009, reflecting the financial results and the applicable basis of accounting for the period in 2009 before and after the completion of the Exchange Transaction on July 15, 2009, respectively.
 
 
·
For all periods subsequent to July 15, 2009, Diversified Industrial, Financial Services and Other are presented on an operating company basis.
 
 
·
Investment Operations, representing SPII’s operations, for the period from January 1, 2009 to July 15, 2009, are presented on an investment company basis.  Additionally, the net assets of the Investment Operations represented a redeemable interest in SPH which participated only in 100% of the economic results of the net assets of SPII.  Accordingly, all of the net income or loss of Investment Operations is allocated to redeemable partners’ capital in determining net income attributable to common units.
 
 
The following presents a summary of SPH’s consolidated operating results:
 

               
July 16, 2009
   
January 1,
 
         
to
   
to
 
   
Year Ended December 31,
   
December 31,
   
July 15,
 
   
2011
   
2010
   
2009
   
2009
 
Revenues:
                       
Diversified industrial
  $ 700,969     $ 385,805     $ -     $ -  
Financial services
    14,921       10,803       2,997       2,326  
Investment operations
    -       -       -       (51,681 )
Corporate
    (3,668 )     28,057       11,427       (101 )
Total Revenues
  $ 712,222     $ 424,665     $ 14,424     $ (49,456 )
Net income from continuing operations before income taxes:
                               
Diversified industrial
  $ 55,545     $ 30,523     $ (2,141 )   $ -  
Financial services
    6,165       4,381       (4,380 )     (3,809 )
Investment operations
    -       -       -       (54,064 )
Corporate
    (45,138 )     (13,931 )     2,324       (522 )
Totals
    16,572       20,973       (4,197 )     (58,395 )
Income tax benefit (provision)
    63,965       (2,657 )     (57 )     868  
Net income (loss) from continuing operations
    80,537       18,316       (4,254 )     (57,527 )
Income from discontinued operations
    740       28,130       1,177       -  
Net loss attributable to redeemable partners' capital
    -       -       -       54,064  
Net (income) loss attributable to noncontrolling interests in consolidated entities
    (45,808 )     (14,699 )     (442 )     -  
Net income (loss) attributable to common unitholders
  $ 35,469     $ 31,747     $ (3,519 )   $ (3,463 )
Other comprehensive (loss) income
    (19,499 )     (45,580 )     53,374       247  
Comprehensive income (loss) attributable to common unitholders
  $ 15,970     $ (13,833 )   $ 49,855     $ (3,216 )

Diversified Industrial
 
The following presents a summary of the Diversified Industrial segment operating results as reported in our consolidated financial statements:
 

   
Year Ended December 31,
 
   
2011
   
2010 (1)
   
2009(2)
 
Revenue:
                 
HNH
  $ 664,017     $ 385,805     $ -  
BNS
    32,984       -       -  
DGT
    3,968       -       -  
Total Revenue
  $ 700,969     $ 385,805     $ -  
                         
Net income (loss) from continuing operations before income taxes:
                       
HNH
  $ 40,696     $ 9,345     $ -  
BNS
    6,558       -       -  
DGT
    (421 )     -       -  
Income of associated companies
    8,712       21,178       (2,141 )
Total
  $ 55,545     $ 30,523     $ (2,141 )

(1)
Includes HNH from May 7, 2010 through December 31, 2010.
(2)
Represents the period from July 16, 2009 through December 31, 2009.

Total revenue for the Diversified Industrial segment increased to $700,969 for the year ended December 31, 2011 as compared to $385,805 in the prior year period.  This results from the consolidation of HNH effective May 7, 2010, the acquisition of SWH by BNS on February 2, 2011 and the acquisition of DGT on July 5, 2011.
 
 
Total revenue for the Diversified Industrial segment was $385,805 for the year ended December 31, 2010, which represents revenues of HNH for the period from May 7, 2010 through December 31, 2010.  There was no revenue for this segment for the year ended December 31, 2009.
 
HNH
 
As noted above, we consolidated HNH effective May 7, 2010, the date that our interest in HNH exceeded 50%.  For comparative purposes however, unaudited pro forma revenues and earnings of HNH are presented in the tables and discussion below for all periods indicated.  We believe this presentation is more meaningful for management’s discussion and analysis in that it allows comparability to prior periods.
 
The pro forma results of HNH for the years ended December 31, 2010 and 2009 have been prepared as if the acquisition of the controlling interest in HNH had occurred on January 1, 2009.  The pro forma information is not necessarily indicative of the results that actually would have occurred if the above transactions had been consummated for the periods, nor do they purport to represent the financial position and results of operations for future periods.  The unaudited pro forma condensed combined statements of operations of HNH for the years ended December 31, 2010 and 2009 have been derived from the financial statements of HNH which are included as exhibit 99.1 in this Form 10-K.  The pro forma adjustments are described below.
 

   
Year Ended December 31,
 
   
2011
   
2010
   
2009
 
   
(Historical)
   
(Pro Forma)
   
(Pro Forma)
 
Sales
  $ 664,017     $ 568,212     $ 460,702  
Cost of sales
    493,026       417,383       353,741  
Gross profit
    170,991       150,829       106,961  
Selling, general and administrative expenses
    115,999       106,710       96,062  
Restructuring and impairment charges
    460       507       3,378  
Interest expense, Net
    11,926       13,808       14,881  
Derivative activity loss
    397       5,983       777  
Other expense (income) , net
    1,513       (1,068 )     (4,013 )
Net income (loss) from continuing operations before income taxes
  $ 40,696     $ 24,889     $ (4,124 )

Pro forma adjustments
 
Unaudited pro forma information in the above table includes adjustments to HNH’s operating results as reflected in the financial statements of HNH for the applicable periods.  In accordance with ASC Topic 805, Business Combinations, the application of purchase accounting required us to allocate the total purchase price of HNH to the fair value of assets acquired and liabilities assumed based on their fair values at the acquisition date.  Therefore, the amounts of assets, liabilities and expenses reflected for HNH at their acquisition date fair value in SPH’s consolidated financial statements differ in certain respects from that reflected in HNH’s separate financial statements.  A summary of the key differences are as follows:
 
 
1.
Property, plant and equipment and intangible assets were increased to their fair value, which impacted selling, general and administrative expenses.  During each of the years ended December 31, 2010 and 2009, SPH reflected pro forma additional depreciation and amortization expense amounts of approximately $680.  In addition, asset impairment charges recorded by HNH of $1,643 and $1,860 in 2010 and 2009, respectively, were not required on the SPH basis due to a lower SPH value for certain specified assets.
 
 
2.
Inventory was increased to its fair value which resulted in an additional charge to cost of sales in 2009 of $7,395.
 
 
3.
Amortizable intangible assets were recognized at fair value that resulted in additional amortization expense of $5,159 and $5,170 in 2010 and 2009, respectively.
 
 
 
4.
Pension expense recorded by HNH was reduced by SPH due to the application of purchase accounting.  As a result, the pro forma pension expense (income) reflected in the above table is  $(4,573) and $859 for the years ended December 31, 2010 and 2009, respectively, which is included in selling, general and administrative expenses.
 
 
5.
Interest expense recorded by HNH of $12,502 and $10,860 in 2010 and 2009, respectively, relating to debt payable to two series of the SPII Liquidating Trust was eliminated.
 
Comparison of the Years ended December 31, 2011 and 2010
 
Net sales for the year ended December 31, 2011 increased by $95,805, or 16.9%, to $664,017, as compared to $568,212 for the year ended December 31, 2010.  The higher sales volume from most of the Company’s segments was driven by both higher demand for HNH’s products, and the impact of higher silver prices, which accounted for approximately $46,300 of the increase in sales for the year ended December 31, 2011. Higher sales were also driven by the impact of a increase in the average market price of silver increased by 75.6% in 2011 ($35.40 per troy oz.) as compared to 2010 ($20.16 per troy oz).
 
In addition, incremental sales were driven by higher volume of commercial roofing products and fasteners, increased sales of printed circuit board materials related to the telecommunications infrastructure in China, increased sales of flex heater and coil insulation products for the general industrial market, and higher sales of tubing to the petrochemical and ship building markets and the medical industry markets.  This was partially offset by weakness in tubing sales to the refrigeration market.
 
Gross profit for the year ended December 31, 2011 increased to $170,991 as compared to $150,829 million for the same period of 2010. Gross profit margin for the year ended December 31, 2011 decreased to 25.8% as compared to 26.5% during the same period of 2010.  The lower gross margin was primarily due to higher silver costs from the Precious Metal segment. Since HNH’s precious metal inventory is hedged and the cost of silver is passed-through to the customer principally at market, higher silver prices generally result in moderation or, at times, a reduction in the Precious Metal segment’s gross profit margin.
 
SG&A expenses were $9,289 higher for the year ended December 31, 2011 compared to the same period of 2010, reflecting higher variable selling costs and non-cash restricted stock expense of approximately $3,100.  SG&A as a percentage of net sales was 17.5% for the year ended December 31, 2011 as compared to 18.8% for the same period of 2010.
 
Realized and unrealized loss on derivatives totaled $397 for the year ended December 31, 2011, compared to a loss of $5,983 in the same period of 2010.  The lower loss in 2011 was primarily driven by a reduction in the amount of ounces under contract in 2011 as compared to 2010.  The derivative financial instruments utilized by HNH are precious metal forward and future contracts which are used to economically hedge HNH’s precious metal inventory against price fluctuations. The trend in the market price of silver could significantly affect the income from continuing operations of the Company.  If there is a material increase in silver prices, it could reasonably be expected to cause a loss on HNH’s open silver derivatives contracts.
 
Interest expense was $11,926 for the year ended December 31, 2011, compared to $13,808 in the same period of 2010.  The decrease was primarily due to lower interest rates as a result of the Company’s debt refinancing during the fourth quarter of 2010.
 
Comparison of the Years Ended December 31, 2010 and 2009
 
Net sales for the year ended December 31, 2010 increased by $107,510, or 23.3%, to $568,212, as compared to $460,702 for the year ended December 31, 2009.  The higher sales volume across all segments was primarily driven by higher demand resulting from the improvement in the world-wide economy and strengthening in the markets served by HNH that began in the fourth quarter of 2009.  Precious metal product sales rose in 2010 compared to 2009 due to more volume to the commercial construction and electrical markets, as well as the impact of a 37.0% increase in the average market price of silver in 2010 ($20.16 per troy oz.) as compared to 2009 ($14.72 per troy oz).  In addition, incremental sales were also driven by higher volume of commercial roofing and branded fasteners, electro-galvanized rolled sheet steel, electrical and gas connector products, higher tubing sales to refrigeration, automotive, and HVAC markets along with strong sales from petrochemical and precision material markets.  In addition, there were increased sales of flex heater and coil insulation products for the general industrial market as a result of the economic rebound and increased sales of printed circuit board materials related to the telecommunications infrastructure in China.
 
 
Gross profit for the year ended December 31, 2010 increased to $150,829 as compared to $106,961 for the same period of 2009.  The 2009 period reflects a one-time charge of $7,395 to cost of sales related to the initial purchase accounting for HNH upon SPH acquiring a controlling interest.  Gross profit margin for the year ended December 31, 2010 improved to 26.5% as compared to 23.2% during the same period of 2009 (25.0%  in 2009 excluding the one-time adjustment), with improvement in all segments.  Greater absorption of fixed manufacturing costs due to a higher volume of production, more profitable product mix, and greater manufacturing efficiencies were the primary drivers that contributed to improved gross profit margin.
 
SG&A expenses were $10,648 higher for the year ended December 31, 2010 compared to the same period of 2009, reflecting higher variable costs plus the reinstatement of certain employee compensation costs.  The 2009 period reflected the suspension of these programs as well as a reduction in accruals related to incentive pay.  These higher expenses were partially offset by a non-cash pension credit of ($4,573) for the year ended December 31, 2010, as compared to $859 of non-cash pension expense for the same period of 2009.  The reduction in non-cash pension expense in 2010 as compared to 2009 primarily represented interest on pension assets in excess of the interest on the pension liability in 2010.  SG&A as a percentage of net sales was 18.8% for the year ended December 31, 2010 as compared to 20.9% for the same period of 2009.
 
Interest expense was $13,808 for the year ended December 31, 2010, compared to $14,881 in the same period of 2009.  The decrease was primarily due to lower interest rates during the fourth quarter of 2010 as a result of HNH’s debt refinancing.
 
Realized and unrealized losses on derivatives were $5,983 for the year ended December 31, 2010 compared to $777 in the same period of 2009.  The higher loss was primarily driven by much higher silver prices during 2010 as compared to the same period of the prior year.  The derivative financial instruments utilized by H&H are precious metal forward and future contracts which are used to economically hedge H&H’s precious metal inventory against price fluctuations.
 
For the year ended December 31, 2010, HNH recorded a gain of $1,292 from insurance proceeds related to a loss from a fire that occurred at its Indiana Tube Mexico location.  In 2009, HNH recorded income totaling $4,035 from the settlement of insurance claims.  In one matter, HNH reached a settlement agreement with an insurer for reimbursement of $3,000 in connection with five sites where H&H and/or its subsidiaries had incurred environmental remediation expenses.  In another matter, HNH accrued a settlement reached with an insurance company related to an environmental site, and in January 2010, H&H received $1,035 as the final settlement.
 
BNS
 
Operating results for BNS for the year ended December 31, 2011 and pro forma results for 2010 are as follows:
 

 
   
Year Ended December 31,
 
   
2011 (a)
   
2010
 
   
(Historical)
   
(Pro Forma)
 
Revenues
  $ 32,984     $ 26,015  
Cost of revenues
    18,200       14,208  
Gross profit
    14,784       11,807  
Selling, general and administrative expenses
    7,906       6,239  
Interest expense, net
    509       1,307  
Other income, net
    (189 )     (134 )
Net income from continuing operations before income taxes
  $ 6,558     $ 4,395  

 
(a)
Includes the results of BNS’ corporate expenses for the year ended December 31, 2011 and Sun Well for the period from February 2, 2011 through December 31, 2011.

BNS’ operations include the results of its wholly-owned subsidiary, Sun Well, from its February 2, 2011 acquisition date.  Sun Well’s revenue and income from continuing operations before income taxes included in the consolidated financial statements for the year ended December 31, 2011 are $32,984 and $8,100, respectively.  Revenue for the period February 2, 2011 through December 31, 2011 grew by 26.8% as compared to the pro forma results for the full year ended December 31, 2010.  The revenue increase is due to an increase in the average number of rigs in operation (17 in 2011 as compared to 14 in 2010) and an increase in the revenue per rig hour.  Gross profit for the period February 2, 2011 through December 31, 2011 grew by 25.2% as compared to the pro forma results for the year ended December 31, 2010, consistent with the increase in revenue.  Selling, general and administrative expenses for the period February 2, 2011 through December 31, 2011 grew by 32.4% as compared to the pro forma results for the year ended December 31, 2010, due primarily to $1,572 in retention payments made in June 2011 in connection with the February 2, 2011 acquisition agreement.  Excluding the retention payments, selling, general and administrative expenses increased by 6.1% over the year ended December 31, 2010, due to increased customer demand.
 
DGT
 
As noted above, we consolidated DGT effective July 5, 2011, the date that our interest in DGT exceeded 50%.  In addition, on November 3, 2011 DGT sold its Medical Systems Group, which comprised approximately 84% of DGT’s net sales of $67,921 for its fiscal year ended July 30, 2011.  As a result, the operations of Villa are reflected as discontinued operations in our consolidated financial statements for the period from July 5, 2011.  Revenues for DGT’s continuing operations, its Power Conversion Group, totaled $10,783 for the same period.  Operating income reported by DGT for its Power Conversion Group for its fiscal year ended July 30, 2011 was $116. For the period July 5, 2011 through December 31, 2011, revenues and pretax loss from continuing operations reported in our consolidated financial statements relating to DGT were $3,968 and $(421), respectively.
 
Associated Companies
 
Income (loss) of associated companies included in the Diversified Industrial segment net income (loss) from continuing operations includes the following:
 
 
   
Ownership at December 31,
   
Year Ended December 31,
   
July 16, 2009
to
December 31,
 
   
2011
   
2011
   
2010
   
2009
 
HNH (a)
    55.5 %   $ -     $ 8,670     $ (1,161 )
DGT (b)
    51.5 %     213       886       (745 )
JPS (c)
    39.3 %     -       1,228       (754 )
API (c)
    32.4 %     9,809       2,615       146  
SLI
    21.7 %     (1,310 )     7,779       373  
            $ 8,712     $ 21,178     $ (2,141 )
 
______________
(a)
Effective May 7, 2010 we consolidated HNH.  Prior to this date the investment in HNH was accounted for under the equity method at fair value.
(b)
Effective July 5, 2011, we consolidated DGT.  Prior to this date the investment in DGT was accounted for under the equity method.
(c)
During 2011 we determined that we do not have significant influence over API and JPS. Accordingly, effective December 31, 2011 we have reclassified these investments from Investments in associated companies to Investments at fair value.

Income (loss) of associated companies includes income or loss we recognize on investments where we own between 20% and 50% of the outstanding equity and have the ability to exercise influence, but not control, over the investee.  In 2009 we purchased certain investments from SPII, acquired additional investments on July 15, 2009 in connection with the Acquisition, and we purchased additional shares in the open market.  We classify these investments as investments in associated companies, account for them using the equity method, report our share of their net income/loss in our consolidated statement of operations, report our share of their comprehensive income/loss in our consolidated statements of changes in capital and comprehensive income (loss) from the dates we reach 20% ownership.  Through May 7, 2010, our investment in HNH is accounted for under the equity method at fair value.
 
In the consolidated statements of operations, we recognize the income of associated companies only from the date the investment qualifies for equity method accounting where the fair value option has not been elected.  Investment purchases in our associated companies were made from July 14, 2009 through December 31, 2009 resulting in increasing ownership interests throughout the period.  As a result, amounts in our consolidated statement of operations represent less than a full year of operating results for our equity-method investees where the fair value option has not been elected, and may have been included based on a lower percentage interest than that held at December 31, 2009.
 
Financial Services
 
For comparability purposes, in the following discussion, the revenue and costs and expenses for the periods from January 1, 2009 to July 15, 2009 and from July 16, 2009 to December 31, 2009 are combined.  We believe this presentation is more meaningful for management’s discussion because the Financial Services segment is presented on an operating company basis for all periods, including all of 2009 and the segment existed prior to, and its basis of accounting was not changed, as a result of the Exchange Transaction.  Accordingly, we believe that combining the two periods reported for 2009 for management’s discussion allows comparability to all prior periods presented.
 
 
The following presents a summary of the Financial Services segment:
 
   
Year Ended December 31,
 
   
2011
   
2010
   
2009
 
Revenue:
                 
Interest income (including fees)
  $ 10,749     $ 8,055     $ 3,177  
Non-interest income
    4,172       2,748       2,146  
      14,921       10,803       5,323  
Costs and expenses:
                       
Interest
    941       796       472  
Provision for (recovery of) loan losses
    8       (420 )     6,645  
Selling, general and administrative
    6,763       6,046       6,395  
Asset impairment charge (a)
    1,044       -       -  
      8,756       6,422       13,512  
Net income (loss) from continuing operations before taxes
  $ 6,165     $ 4,381     $ (8,189 )

 
(a)
Represents impairment of investment securities held by WFAC.

Net Interest Income, Margin and Interest Rate Spreads
 
Net interest income is the difference between interest earned on interest-bearing assets and interest incurred on interest-bearing liabilities.  By its nature, net interest income is especially vulnerable to changes in the mix and amounts of interest-earning assets and interest-bearing liabilities. In addition, changes in the interest rates and yields associated with these assets and liabilities can significantly impact net interest income. The following table summarizes the average balances, the amount of interest earned or incurred and the applicable yields for interest-earning assets and the costs of interest-bearing liabilities that generate net interest income.  For purposes of calculating the yields in these schedules, the average loan balances also include the principal amounts of nonaccrual and restructured loans.  However, interest received on nonaccrual loans is included in income only to the extent that cash payments have been received and not applied to principal reductions. In addition, interest on restructured loans is generally accrued at reduced rates.
 

 
 
   
Year Ended December 31,
 
   
2011
   
2010
   
2009
 
   
Average
   
Interest
         
Average
   
Interest
         
Average
   
Interest
       
   
Outstanding
   
Earned/
   
Yield/
   
Outstanding
   
Earned/
   
Yield/
   
Outstanding
   
Earned/
   
Yield/
 
   
Balance
   
Paid
   
Rate
   
Balance
   
Paid
   
Rate
   
Balance
   
Paid
   
Rate
 
                                                       
Interest Earning Assets:
                                                     
Loans Receivable
  $ 39,666     $ 10,598       26.7 %   $ 35,819     $ 7,978       22.3 %   $ 34,502     $ 3,157       9.2 %
Mortgaged-Backed Security
    1       -       -       1       -       -       2       -       -  
Available for Sale Investments
    507       19       -       -       -       -       -       -       -  
Fed Funds Sold
    1,438       2       -       4,854       8       0.2 %     5,838       19       0.3 %
Interest Bearing Deposits in other Banks
    52,916       130       -       28,369       69       0.2 %     1,220       1       0.1 %
Total Interest-Earning Assets
    94,528       10,749       11.4 %     69,043       8,055       11.7 %     41,562       3,177       7.6 %
                                                                         
Non Interest-Earning Assets
    865                       984                       128                  
Total Assets
  $ 95,393                     $ 70,027                     $ 41,690                  
                                                                         
                                                                         
Interest-Bearing Liabilities:
                                                                       
Money Market Accounts
  $ 8,902       31       0.3 %   $ 6,280       23       0.4 %     3,063       3       0.1 %
Time Deposits
    61,476       910       1.5 %     45,510       773       1.7 %     25,233       469       1.9 %
Other Borrowings
    -       -       -       10       -       -       3       -       -  
Total Interest-Bearing Liabilities
    70,378       941       1.3 %     51,800       796       1.5 %     28,299       472       1.7 %
                                                                         
Other Non Interest-Bearing Liabilities
    3,148                       2,483                       1,586                  
Total Liabilities
    73,526                       54,283                       29,885                  
                                                                         
Shareholder's Equity
    21,867                       15,744                       11,805                  
Total Liabilities & Shareholder's Equity
  $ 95,393                     $ 70,027                     $ 41,690                  
                                                                         
                                                                         
Net Interest Income
          $ 9,808                     $ 7,259                     $ 2,705          
                                                                         
Spread on Average Interest-Bearing Funds
                    10.1 %                     10.1 %                     6.0 %
Net Interest Margin
                    13.9 %                     10.5 %                     6.5 %
Return on Assets
                    7.5 %                     6.2 %                     -14.2 %
Return on Equity
                    28.3 %                     27.6 %                     -68.1 %
Equity to Assets
                    26.4 %                     25.9 %                     19.3 %
 
WebBank has several lending arrangements with companies where it originates private label credit card and other loans for consumers and small businesses.  These loans are classified as held for sale and are typically sold a few days after origination.  As part of these arrangements WebBank earns origination fees that are recorded in interest income, and which increase WebBank’s yield on loans.
 
Interest income increased by $2,694, or 33.4%, in 2011 compared to 2010 due primarily to a new lending program.  The program began in the third quarter of 2010.
 
Interest income increased by $4,878, or 153.5%, in 2010 compared to 2009, due primarily to two new lending programs.  One program began in the 4th quarter of 2009 and the other program began in the 3rd quarter of 2010.  The entire loan portfolio (gross) decreased $5,550, or 16%, primarily due to the sale of $2,729 of nonperforming loans sold to a subsidiary of SPH and $1,541 in charge offs during 2010.
 
 
Interest income decreased by $276, or 8.0%, in 2009 compared to 2008, due primarily to an increase in nonaccrual loans and charge offs which reduced the net loan portfolio by 7.4% at December 31, 2009 compared to the prior year-end.  Loan balances were relatively flat in 2009 as loan growth was offset by principal payments, charge offs, and reserves.
 
Interest expense represents interest accrued on WebBank depositor accounts. Interest expense increased $145, or 18.2%, for the year ended December 31, 2011, compared to 2010, largely due to growth in average deposits partially offset by a decrease in average interest rates on certificates of deposits.  Deposits increased $34,003, or 54.9%, from December 31, 2010 to December 31, 2011.  The increase in deposits occurred late in the third quarter in order to fund the increased liquidity needs of an existing lending program.
 
Interest expense increased $324, or 68.6%, in 2010 largely due to growth in average deposits partially offset by a decrease in average interest rates on certificates of deposit from 1.7% to 1.5%.  Deposits increased $11,578, or 23.1%, in 2010 in order to fund the growth in assets.  Interest expense decreased $611, or 56.4%, in 2009 largely due to a decline in average interest rates.  The decline in interest rates is mostly due to the decline in overall interest rates, but is also due in part to shorter maturities in 2009, which carry lower rates.  Average maturities on certificates of deposit were 3 months at December 31, 2008.  By year end December 31, 2009 WebBank increased the average maturity to 22 months.
 
The following table presents the effects of changing rates and volumes on WebBank’s net interest income for the periods indicated.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).  The total column represents the sum of the prior columns.  For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
 
   
Year Ended December 31,
 
   
2011 vs. 2010
   
2010 vs. 2009
   
2009 vs. 2008
 
   
Increase/
   
Increase/
   
Total
   
Increase/
   
Increase/
   
Total
   
Increase/
   
Increase/
   
Total
 
Rate/Volume
 
(Decrease)
   
(Decrease)
   
Increase/
   
(Decrease)
   
(Decrease)
   
Increase/
   
(Decrease)
   
(Decrease)
   
Increase/
 
   
Due to Volume
   
Due to Rate
   
(Decrease)
   
Due to Volume
   
Due to Rate
   
(Decrease)
   
Due to Volume
   
Due to Rate
   
(Decrease)
 
                                                       
Interest Earning Assets:
                                                     
Loans Receivable
  $ 917     $ 1,702     $ 2,619     $ 115     $ 4,706     $ 4,821