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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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 1-8676
FANSTEEL INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-1058780
- -------------------------- -------------------------
(State of (I.R.S. Employer
Incorporation) Identification No.)
Number One Tantalum Place
North Chicago, Illinois
60064
(Address of principal executive offices and zip code)
(847) 689-4900
(Registrant's Telephone Number, Including Area Code)
Indicate by checkmark 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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2004
- ------------------------------------- ---------------------------------
Common Stock, $.01 par value 2,878,941 shares
FANSTEEL INC.
FORM 10-Q - INDEX
March 31, 2004
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1 Financial Statements:
Consolidated Statement of Operations - Two months ended March 31, 2004 3
(Successor Company), One month ended January 23, 2004, and three months
ended March 31, 2003 (Predecessor Company)
Consolidated Balance Sheet - March 31, 2004 (Successor Company), and 4
December 31, 2003 (Predecessor Company)
Consolidated Statement of Cash Flow - Two months ended March 31, 2004 6
(Successor Company), one month ended January 23, 2004 and three months
ended March 31, 2003 (Predecessor Company)
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 24
Item 3 Quantitative and Qualitative Disclosures of Market Risk 29
Item 4 Controls and Procedures 29
PART II. OTHER INFORMATION 30
Item 1 Legal Proceedings 30
Item 2 Changes in Securities and Use of Proceeds 30
Item 3 Defaults Upon Senior Securities 31
Item 4 Submission of Matters to a Vote of Security Holders 31
Item 5 Other Information 31
Item 6 Exhibits and Reports on Form 8-K 31
Signatures 32
Exhibit 31.1 Certifications- Gary L. Tessitore
Exhibit 31.2 Certifications- R. Michael McEntee
Exhibit 32.1 Certification
2
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Fansteel Inc.
Consolidated Statement of Operations
(Unaudited)
Successor Predecessor Company
Company ----------------------------------
Two Months One Month Three Months
Ended Ended Ended
March 31, 2004 January 23, 2004 March 31, 2003
-------------- ---------------- --------------
Net sales $ 12,263,015 $ 3,263,267 $ 15,020,970
Cost and expenses
Cost of products sold 9,397,460 2,971,175 11,540,032
Selling, general and administrative 1,534,276 571,689 3,753,806
------------ ------------ ------------
10,931,736 3,542,864 15,293,838
------------ ------------ ------------
Operating income (loss) 1,331,279 (279,597) (272,868)
Other income (expense)
Interest expense (111,383) (43,977) (160,974)
Other (17,905) (7,198) 22,184
------------ ------------ ------------
(129,288) (51,175) (138,790)
------------ ------------ ------------
Income (loss) before taxes,
reorganization items and fresh start
adjustments 1,201,991 (330,772) (411,658)
Reorganization items - (340,286) (1,155,268)
Fresh-Start adjustments - 42,927,000 -
Gain on debt discharge - 15,576,000 -
------------ ------------ ------------
Income (loss) from continuing operations before
income taxes 1,201,991 57,831,942 (1,566,926)
Income tax provision - - -
------------ ------------ ------------
Net income (loss) from continuing operations
1,201,991 57,831,942 (1,566,926)
Loss from discontinued operations, net of taxes
(561,545) - (438,792)
------------ ------------ ------------
Net income (loss) $ 640,446 $ 57,831,942 $ (2,005,718)
============ ============ ============
Weighted average number of common shares
outstanding 3,420,000 8,698,858 8,698,858
Basic and diluted income (loss) per share(a)
Continuing operations
$ 0.35 $ 6.65 $ (0.18)
Discontinued operations (0.16) - (0.05)
------------ ------------ ------------
Net income (loss) $ 0.19 $ 6.65 $ (0.23)
============ ============ ============
- --------
(a) Basic earnings per share and diluted earnings per share are the same.
See Notes to Consolidated Financial Statements
3
Fansteel Inc.
Consolidated Balance Sheet
Successor Predecessor
Company Company
March 31, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 244,195 $ 1,290,206
Restricted cash - 13,377,660
Accounts receivable, less allowance of $241,000 in
2004 and $323,000 in 2003 9,684,696 7,864,348
Income tax refund receivable 61,700 102,359
Inventories
Raw material and supplies 1,336,818 1,251,087
Work-in process 4,938,918 4,178,808
Finished goods 692,674 730,181
----------- -----------
Less: 6,968,410 6,160,076
Reserve to state certain inventories at LIFO cost - 806,493
----------- -----------
Total inventories 6,968,410 5,353,583
----------- -----------
Other assets - current 1,099,210 1,007,400
----------- -----------
Total current assets 18,058,211 28,995,556
----------- -----------
Property, plant and equipment
Land 1,084,419 957,630
Buildings 4,784,363 7,720,354
Machinery and equipment 7,160,673 25,122,992
----------- -----------
13,029,455 33,800,976
Less accumulated depreciation 281,659 22,817,464
----------- -----------
Net property, plant and equipment 12,747,796 10,983,512
----------- -----------
Net assets of discontinued operations - 73,504
----------- -----------
Other assets
Deposits 6,058,331 6,058,331
Reorganization value in excess of amounts allocable
to identified assets 12,893,734 -
Goodwill - 2,207,060
Property held for sale 2,532,500 -
Other 44,297 170,885
----------- -----------
Total other assets 21,528,862 8,436,276
----------- -----------
$52,334,869 $48,488,848
=========== ===========
See Notes to Consolidated Financial Statements
4
Fansteel Inc.
Consolidated Balance Sheet
Successor Predecessor
Company Company
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 6,969,964 $ 5,742,752
Accrued liabilities 6,734,482 8,762,321
Income taxes 318,739 8,890
Short-term borrowings 5,081,345 -
Current maturities of long-term debt 1,066,430 24,000
------------ ------------
Total current liabilities 20,170,960 14,537,963
------------ ------------
Long-term debt 5,388,346 42,276
------------ ------------
Other liabilities - environmental remediation 25,810,834 1,174,389
------------ ------------
Total liabilities not subject to compromise 51,370,140 15,754,628
------------ ------------
Liabilities subject to compromise - 90,242,762
------------ ------------
Shareholders' equity (deficit) 964,729 (57,508,542)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 52,334,869 $ 48,488,848
============ ============
See Notes to Consolidated Financial Statements
5
Fansteel Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Successor
Company Predecessor Company
------------ -------------------------------
Two Months One Month Three Months
Ended Ended Ended
March 31, January 23, March 31,
2004 2004 2003
------------ ------------ ------------
Cash Flows From Operating Activities:
Net income (loss) $ 640,445 $ 57,831,942 $ (2,005,718)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Depreciation and amortization 281,659 87,966 334,741
Fresh-Start adjustments - (42,927,000)
Gain on discharge of debt - (15,576,000) -
Loss from discontinued operations 561,545 - 438,792
Net pension credit - - (535,179)
Gain from disposals of property, plant and equipment - - (17,379)
Change in assets and liabilities:
Increase in accounts receivable (1,735,479) (384,869) (1,034,942)
Decrease in income tax refunds receivable - - 276,229
(Increase) decrease in inventories (564,965) (298,878) 842,123
(Increase) decrease in other assets - current (344,283) 85,571 (67,579)
(Decrease) increase in accounts payable and
accrued liabilities (1,609,711) 32,091 2,852,205
Increase (decrease) in liabilities subject to compromise - 300,000 (1,921,524)
(Decrease) increase in income taxes payable (18,197) (8,272) 2,712
(Increase) decrease in other assets (24,177) 765 (79,366)
------------ ------------ ------------
Net cash provided by (used in) operating activities (2,813,163) (856,684) (914,885)
------------ ------------ ------------
Cash Flows From Investing Activities:
Decrease in restricted cash - 379,457 1,402,187
Proceeds from sale of property, plant and equipment - - 29,359
Capital expenditures (8,177) (3,155) (414,789)
------------ ------------ ------------
Net cash used in investing activities (8,177) 376,302 1,016,757
------------ ------------ ------------
Cash Flows From Financing Activities:
Proceeds from short-term borrowing 2,548,091 - -
Payments on long-term debt (83,835) (2,000) -
------------ ------------ ------------
Net cash provided by (used in) financing activities 2,464,256 (2,000) -
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents
from Continuing Operations (357,084) (482,382) 101,872
Cash Flows From Discontinued Operations (398,508) 191,963 (147,855)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (755,592) (290,419) (45,983)
Cash and Cash Equivalents at Beginning of Period 999,787 1,290,206 4,664,812
------------ ------------ ------------
Cash and Cash Equivalents at End of Period $ 244,195 $ 999,787 $ 4,618,829
============ ============ ============
See Notes to Consolidated Financial Statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
The consolidated financial statements as of March 31, 2004, January 23,
2004, and March 31, 2003 of Fansteel Inc. are unaudited but include all
adjustments (consisting only of normal recurring adjustments) that management
considers necessary for a fair presentation of such financial statements. These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with Article 10 of SEC Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. Operating
results during the period ended March 31, 2004 are not necessarily indicative of
the results that may be expected for the period ending December 31, 2004.
Fansteel Inc. and its subsidiaries ("Fansteel" or the "Company") is a
manufacturer of aerospace castings and engineered metal components used in a
variety of markets including automotive, energy, military and commercial
aerospace, agricultural and construction machinery, lawn and garden equipment,
marine, and plumbing and electrical hardware industries.
For financial reporting purposes, the Company classifies its products
into the following two business segments:
Advanced Structures:
Aluminum and magnesium sand castings.
Industrial Metal Components:
Special wire products, powdered metal components, and
investment castings.
The Company's business segments have separate management teams and
infrastructures that offer different products and services.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Fansteel
Inc. and its subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the balance sheet and
accompanying notes. Actual results could differ from those estimates.
The Company considers all debt investments purchased with a maturity of
three months or less to be cash equivalents. At March 31, 2004 and 2003, the
Company had not purchased any debt investments with a maturity of three months
or less.
7
Trade accounts receivable are classified as current assets and are
reported net of allowances for doubtful accounts. The Company records such
allowances based on a number of factors, including historical trends and
specific customer liquidity.
Starting January 23,2004, inventories are valued at the lower of cost,
determined on the "first-in, first-out" (FIFO) basis, or market. Prior to
January 23, 2004, substantial portions of the inventories were valued at lower
of cost, determined on the "last-in, last-out" (LIFO) basis, or market. Costs
include direct material, labor and applicable manufacturing overhead.
Acquisitions of properties and additions to existing facilities and
equipment are recorded at cost. For financial reporting purposes, straight-line
depreciation is used. The estimated useful lives for machinery and equipment
range from three years to 15 years while the estimated useful lives of buildings
are 39 years. Accelerated depreciation is used for income tax purposes.
Excess reorganization value represents the excess of the Successor
Company's enterprise value over the aggregate fair value of the Company's
tangible and identifiable intangible assets and liabilities at the balance sheet
date. Excess reorganization value is not amortized, however, it is evaluated
annually or when events or changes occur that suggest an impairment in carrying
value.
The Company periodically re-evaluates carrying values and estimated
useful lives of long-lived assets to determine if adjustments are warranted. The
Company uses estimates of undiscounted cash flows from long-lived assets to
determine whether the book value of such assets is recoverable over the assets'
remaining useful lives.
The Company recognizes sales when the risks and rewards of ownership
have transferred to the customer, which is generally considered to have occurred
as products are shipped. Revenue from sales of tooling, patterns and dies is
recognized upon acceptance by the customer.
The Company classifies distribution costs, including shipping and
handling costs, in cost of products sold.
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes reflect the temporary difference between assets and liabilities
recognized for financial reporting and such amounts recognized for tax purposes
which requires recognition of deferred tax liabilities and assets. Deferred tax
liabilities and assets are determined based on the differences between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse. A
valuation allowance is recognized if it is anticipated that some or all of a
deferred tax asset may not be realized. No income tax provision or benefit has
been recognized for any periods presented as valuation allowances have been
recorded for all net operating loss benefits and deferred tax assets.
The functional currency for the Company's foreign operation is the
applicable local currency. The translation from the applicable foreign currency
to U.S. Dollars is performed for the balance sheet accounts using current
exchange rates in effect at the balance sheet date. The resulting translation
adjustments are recorded as a component of shareholders' equity (deficit). Gains
or losses resulting from foreign currency transactions are included on other
income. For the two months ended March 31, 2004 comprehensive income was
$646,676. For the one month
8
ended January 23, 2004, comprehensive income equaled net income. For the three
months ended March 31, 2003 comprehensive loss was $2,000,540. The difference
between comprehensive income (loss) and net income (loss) was due to foreign
currency translation adjustments.
In accounting for stock-based employee compensation, the Company uses
the intrinsic-value method specified in Accounting Principles Board (APB)
Opinion No. 25, "Account for Stock Issued to Employees." Shown below are net
income (loss) and basic and diluted earnings (loss) per share as reported and
adjusted to reflect the use of the fair-value method in determining stock-based
compensation costs, as prescribed in SFAS No. 123, "Accounting for Stock-Based
Compensation."
(Dollars in thousands, except for earnings per-share)
Two Months One Month Three Months
Ended Ended Ended
March 31, January 23, March 31,
2004 2004 2003
--------- ----------- ------------
(a) Net income (loss) $ 640 $57,832 $(2,006)
After-tax adjustment of stock-based
compensation costs:
Intrinsic-value method - - -
Fair-value method - - -
Pro Forma - Net Loss $ 640 $57,832 $(2,006)
(b) Net income (loss) per share
Basic and Diluted $ .19 $ 6.65 $ (0.23)
Adjustment of stock-based compensation
costs:
Intrinsic-value method - - -
Fair-value method - - -
Pro Forma - Net income (loss) per share $ .19 $ 6.65 $ (0.23)
In January 2003, the FASB issued Financial Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities." FIN No. 46 addresses accounting
for variable interest entities (VIEs), defined as separate legal structures that
either do not have equity investors with voting rights or have equity investors
with voting rights that do not provide sufficient financial resources for
entities to support their activities. FIN No. 46 requires that (1) companies
consolidate VIEs if they are required to recognize the majority of such
entities' gains and losses and (2) disclosures be made regarding VIEs that
companies are not required to consolidate but in which they have a significant
variable interest. As of March 31, 2004, Fansteel does not have any VIE's which
are not consolidated.
NOTE 3 - REORGANIZATION AND EMERGENCE FROM CHAPTER 11
On January 15, 2002 (the "Petition Date"), Fansteel Inc. and eight of
its subsidiaries (collectively, the "Filing Debtors") filed voluntary petitions
for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. The
Chapter 11 case was dismissed with respect to Fansteel Schulz Products, Inc.
("Schulz") on November 27, 2002 pursuant to a sale by Fansteel
9
Inc. of all of the stock of Schulz. All the Filing Debtors other than Schulz
(collectively, the "Debtors") emerged from Chapter 11 of the U.S. Bankruptcy
Code on January 23, 2004 (the "Effective Date"). After the Petition Date, the
Predecessor Company (referring to the Company prior to the Effective Date)
continued to operate its business and manage its affairs as debtor-in-possession
("DIP") with court approval for transactions outside the ordinary course of
business.
By order dated December 23, 2003, the U.S. Bankruptcy Court for the
District of Delaware (the "Court") confirmed the Second Amended Joint
Reorganization Plan (the "Plan"). On January 23, 2004, the Company entered into
a secured credit facility with Congress Financial Corp., which provided a new
credit facility of up to $10 million in credit, comprised of a revolving loan
facility and letter of credit issuances. Under the revolving loan facility,
subject to certain borrowing conditions, the Company may incur revolving loans
in an amount up to a borrowing base comprised of a percentage of eligible
accounts receivable and $2 million for machinery and equipment. Revolving loans
are due and payable in full on January 23, 2007. The Company is required to meet
certain financial covenants to achieve certain EBITDA and that limit future
capital expenditures. The interest rate on the line is prime plus 1% and there
is a .5% unused line fee. Substantially all of the assets of the Company are
pledged as security for this financing.
As of the Effective Date, all common stock and options to purchase
common stock of the Predecessor Company were canceled.
Pursuant to the Plan, on the Effective Date, the Company filed an
amended and restated certificate of incorporation authorizing new shares of
common stock, par value $.01 per share of the Company ("New Common Stock"). The
Plan authorized the issuance of 3,600,000 shares of New Common Stock. Holders of
allowed general unsecured claims against the Debtors are entitled by the Plan to
receive approximately 50% stock ownership. The Pension Benefit Guarantee
Corporation (the "PBGC") received approximately 21% of the common stock being
issued in the reorganization as part of the settlement of its claims related to
the under-funding of the Predecessor Company's now-terminated Consolidated
Employees' Pension Plan (the "Pension Plan"), a defined benefit pendion plan
covered under Title IV of the Employee Retirement Income Security Act ("ERISA").
The stockholders of the Predecessor Company are entitled by the Plan to receive
approximately 24% of the newly issued stock. All of the foregoing percentages
have been subject to dilution by the 5% of New Common Stock reserved for an
employee stock plan.
Under the Plan, allowed administrative expense claims, DIP facility
claims and priority claims, including allowed priority tax claims, have been
paid in full in cash.
Under the Plan, holders of allowed secured claims against the Debtors,
other than secured creditors whose treatment is specifically provided for in the
Plan, are either to (i) be paid in accordance with the terms of their respective
agreements, (ii) receive periodic cash payments totaling the value of the
collateral securing the allowed claim as of the Effective Date, (iii) receive a
return of the collateral securing the allowed claim, (iv) make payments or grant
liens amounting to the indubitable equivalent of the value the collateral
securing the allowed claim, or (v) receive such other treatment as may be agreed
to with the Debtors.
10
The Plan further provides that holders of allowed general unsecured
claims against the Debtors shall receive (i) pro rata distributions from a fixed
cash pool of approximately $15.6 million funded from a portion of certain asset
sale proceeds and a cash contribution from Fansteel of $3.1 million and (ii) pro
rata distributions of 55% of the new common stock of Fansteel (subject to
dilution for issuances pursuant to an employee plan). The initial distributions
of cash and stock were made on February 23, 2004. Additional distributions of
cash and stock will be made in the future as currently distributed unsecured
claims are adjudicated. The Plan also provides that holders of allowed general
unsecured claims are to receive 70% of the net proceeds of the settlement or
recoveries in respect of avoidance actions commenced by the Debtors seeking
approximately $6 million. A dispute concerning how certain settlements are
structured for purposes of applying the proceeds was settled and approved by the
court on April 29, 2004. The settlement, in relevant part, makes clear the
Company's entitlement to (a) 30% of the net proceeds solely from new cash (as
opposed to the assignment or waiver of claims) and (b) be reimbursed for any and
all expenses of the litigation from the new cash, and, if necessary, from up to
$500,000 of cash currently reserved on account of disputed claims.
The Plan also provided for a convenience class for general unsecured
claims totaling $1,500 or less and such holders received cash distributions
equal to 60% of their allowed claim.
In accordance with the Plan, the Predecessor Company terminated the
Pension Plan as of December 15, 2003. Fansteel and the PBGC entered into a
settlement agreement pursuant to the Plan pursuant to which the PBGC received,
in full satisfaction of the claims resulting from the Pension Plan's
termination: (i) $9.5 million, non-interest bearing, ten-year, note from
Fansteel Inc., secured by land, buildings, and equipment owned by or used in
connection with operations of Fansteel de Mexico, together with (ii)
distributions of cash and stock on account of a $1.5 million allowed general
unsecured claim and (iii) an additional 20% of the New Common Stock (subject to
dilution for issuances pursuant to an employee stock plan). Included in
liabilities subject to compromise at December 31, 2003 is $12.6 million related
to the Pension Plan.
The Plan also provides for settlement of various existing and potential
environmental obligations of the Debtors. In particular, the Plan provides for
the following treatment of environmental claims and obligations with respect to
the various properties as set forth below in full satisfaction and release of
all such environmental claims against and obligations of any Debtor or its
successors:
(a) Holders of environmental claims and/or obligations arising from or
with respect to the property at Number Ten Tantalum Place, Muskogee, Oklahoma
(the "Muskogee Facility") shall receive and/or be the beneficiaries of the
remediation of the Muskogee Facility to be undertaken by FMRI, Inc. ("FMRI"),
one of the special purpose subsidiaries of the Company formed pursuant to the
Plan. FMRI (and not Fansteel Inc.) is solely and directly responsible for the
monitoring and performance of remedial actions to be undertaken in accordance
with respect to the Muskogee Facility. Pursuant to the Plan, the operations of
FMRI are to be funded solely by a series of non-interest bearing notes issued to
FMRI by Fansteel Inc. as follows:
(i) A $30.6 million unsecured note maturing December 31, 2013
payable with mandatory minimum semi-annual payments of $700,000 and an
additional mandatory annual payment, based on excess available cash flow, with
the maximum additional mandatory annual payment capped at $4 million; and
11
(ii) A $4.2 million unsecured note to cover estimated costs of
groundwater treatment and monitoring to be completed to a standard to be agreed
upon between FMRI and the Nuclear Regulatory Commission (the "NRC"), maturing
December 31, 2023 with annual payments of approximately $282,000 commencing on
or about January 1, 2009 until maturity; and
(iii) An unsecured contingent note in an amount, to the extent
necessary and as to be determined following further site characterization,
reflecting additional costs to remediate soils in excess of costs estimated in
the Amended Decommissioning Plan and the NRC License (as such terms are defined
in the Plan) and treat/monitor groundwater. It is anticipated that if an FMRI
contingent note is required, it will be issued in 2012.
FMRI may draw up to $2 million from an existing decommissioning trust
established in accordance with the Amended Standby Trust Agreement with the NRC.
The draws against the decommissioning trust may be made on a revolving basis as
long as the aggregate amounts outstanding under such draws shall not exceed $2
million. The NRC was also granted a pledge on the proceeds from any of the FMRI
notes and benefits from an indemnity in its favor from FMRI Inc. with respect to
Fansteel Inc.'s obligations under the notes.
On November 3, 2003, an administrative law judge of the Nuclear
Regulatory Commission ("NRC") granted a request of the State of Oklahoma for a
hearing to challenge certain aspects of the NRC License and Amended
Decommissioning Plan of FMRI with respect to FMRI's (and not the Company's)
obligation to decommission the Muskogee, Oklahoma property. The State of
Oklahoma has challenged a number of aspects of the NRC License and Amended
Decommissioning Plan, including, the adequacy of site characterization, the
appropriate modeling of the site of remediation levels, cost estimates, and
sufficiency of the NRC Staff's environmental review. The matter has been fully
briefed and is before the judge for decision, although further proceedings are
possible. This proceeding and/or the possibility of delay in the resolution
thereof may require FMRI to seek NRC approval of modification of the timetable,
previously approved, for certain aspects of decommissioning. A decision adverse
to FMRI regarding issues raised by the State of Oklahoma could adversely affect
the ability of FMRI to meet its obligations.
(b) Holders of environmental claims and/or obligations arising from or
with respect to the property at Number One Tantalum Place, North Chicago,
Illinois (the "North Chicago Facility") shall receive and/or be the
beneficiaries of the remediation of the North Chicago Facility to be undertaken
by North Chicago, Inc. ("NCI"), one of the special purpose subsidiaries formed
pursuant to the Plan, in accordance with the North Chicago Consent Decree.
Pursuant to the Plan, the North Chicago Facility, consisting of Fansteel's real
property and other assets associated with its operation, was transferred to NCI
on the Effective Date. NCI (and not Fansteel Inc.) is solely and directly
responsible for the monitoring and performance of remedial actions to be
undertaken with respect to the North Chicago Facility. The operations of NCI are
to be funded by a series of non-interest bearing notes issued to NCI by Fansteel
Inc. as follows:
(i) A $2.17 million unsecured note maturing December 31, 2013
with payments matched to correspond to NCI's anticipated expenditures for
remediation costs of the North Chicago Facility; and
12
(ii) an unsecured contingent note of up to $500,000 if the costs
of performing the response actions at the North Chicago Facility will exceed
$2,025,000.
On November 13, 2003 the City of North Chicago (the "City") and
Fansteel executed an option agreement (the "Option") allowing the City to
acquire the North Chicago Facility from Fansteel for $1.4 million. The City has
until August 31, 2004 to exercise the Option. Upon exercise of the Option, NCI
is obligated under the Plan to transfer any funds received from the City to the
United States Environmental Protection Agency (the "EPA") and will be released
from any and all of its obligations to implement the North Chicago response
action under the North Chicago Consent Decree, subject to completing the
environmental engineering/cost analysis report, and any outstanding notes issued
by the Company to NCI shall be cancelled. The Company will issue and deliver to
the EPA an unsecured, non-interest bearing promissory note in the principal
amount of $700,000, less any amounts previously paid to NCI under the original
notes, payable in equal semi-annual payments to be made over a three-year period
beginning six months after issuance.
(c) Holders of environmental claims and/or obligations arising from or
with respect to the property at 203 Lisle Industrial Road, Lexington, Kentucky
(the "Lexington Facility"), shall receive and/or be the beneficiaries of the
remediation of the Lexington Facility to be undertaken by FLRI, Inc. ("FLRI"), a
special purpose subsidiary formed pursuant to the Plan. Pursuant to the Plan,
the Lexington Facility, consisting of Fansteel's real property and other assets
associated with the operation, was transferred to FLRI on the Effective Date.
FLRI (and not Fansteel Inc.) is solely and directly responsible for the
monitoring and remedial actions to be undertaken with respect to the Lexington
Facility and the operations of FLRI were funded by:
(i) A $1.78 million unsecured, non-interest bearing note maturing
December 31, 2013 issued by Fansteel Inc. to FLRI with payments matched to
correspond to FLRI's anticipated expenditures for remediation costs; and
(ii) A contingent note in an amount to be determined by FLRI
following completion of the site characterization (expected to be completed by
March 31, 2006) and sufficient to fund any remaining costs of remediation that
may exist.
(d) Holders of environmental claims and/or obligations arising from or
with respect to the property at 801 Market Street, Waukegan, Illinois (the
"Waukegan Facility"), shall receive and/or be the beneficiaries of the
remediation of the Waukegan Facility to be undertaken by Waukegan, Inc. ("WI"),
one of the special purpose subsidiaries formed pursuant to the Plan. Pursuant to
the Plan, the Waukegan Facility, consisting of Fansteel's real property and
other assets associated with the operation was transferred to WI. WI (and not
Fansteel Inc.) is solely and directly responsible for the monitoring and
remedial actions to be undertaken with respect to the Waukegan Facility and the
operations WI were funded by a $1.25 million unsecured, non-interest bearing
note maturing December 31, 2013 issued by the Company to WI with payments
matched to correspond to WI's anticipated expenditures for remediation costs.
(e) The remaining environmental claims and obligations arising from or
related to Fansteel's (i) Li Tungsten site Superfund Site in Glen Cove, New
York, (ii) Old Southington Landfill Site in Southington, Connecticut and (iii)
Operating Industries, Inc. Superfund Site in Monterrey Park, California are each
subject to an EPA CERCLA PRP Settlement Agreement
13
approved by order of the Court entered on November 17, 2003. In full
satisfaction of such claims and obligations under the Plan, the holders of such
claims received a pro rata share of the cash distribution to holders of general
unsecured claims as if such parties held allowed general unsecured claims of:
$132,000 (PCB Treatment), $460,898 (Operating Industries), $25,000 (Li
Tungsten), and $100,000 (Old Southington).
(f) The environmental claims and obligations associated with the
facility owned and operated by Wellman located at 1746 Commerce Road, Creston,
Union County, Iowa (the "Iowa Facility") have been resolved in accordance with
the Administrative Order on Consent by and between Wellman Dynamics Corp., a
subsidiary of the Company ("Wellman") and the EPA, approved by order of the
Court on November 4, 2003. The Administrative Order on Consent provides for EPA
approval of a work plan to characterize the extent of any contamination
associated with certain Solid Waste Management Units ("SWMUs") and evaluation of
alternatives to remediate any residual contamination associated with SWMUs in
accordance with Wellman's on-going obligations under the Resource Conservation
and Recovery Act of 1976 and the Waste Disposal Amendments of 1984
(collectively, "RCA") at the Iowa Facility. Wellman estimates the costs
associated with the closure activities for the SWMUs will be approximately
$2,166,000 through 2009.
NOTE 4 - BASIS OF PRESENTATION AND FRESH START ACCOUNTING
The Company accounted for the consummation of the Plan as of January
23, 2004, coinciding with the end of its January reporting period for financial
reporting convenience purposes.
The Company adopted fresh start accounting pursuant to the guidance
provided by the American Institute of Certified Public Accountant's Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7"). In accordance with the principles of fresh start
accounting, the Company has adjusted the value of its assets and liabilities to
their fair values as of the Effective Date with the excess of the Company's
value over the fair value of its tangible and identifiable intangible assets and
liabilities reported as excess reorganization value in the consolidated balance
sheet.
Fresh-Start accounting requires that the reorganization value be
allocated to the entity's net assets in conformity with procedures specified by
Accounting Principles Board Opinion ("APB") No. 16, "Business Combinations,"
("APB No. 16") as superseded by Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS No. 141"). The Company engaged independent
appraisers to assist in the allocation of the reorganization value to the
reorganized Company's assets and liabilities by determining the fair market
value of its property, equipment, and intangibles.
The enterprise value of the Company as of the Effective Date was
established at $35.1 million, based on a calculation using a weighted average of
the following valuations approaches: comparable company, comparable precedent
transaction and discounted cash flow. The net equity value of $324,000
represents an enterprise value of $35.1 million less long-term debt (including
current maturities) and less revolving loan facilities of $2,650,000. The
revolving loan facilities are not working capital loans and are due January 23,
2007; therefore, they are considered in calculating the net equity value.
14
The reorganization value of $35.1 million was determined by the Company
with the assistance of its financial advisors and was approved by the Court. The
financial advisors: (i) reviewed certain historical financial information of the
Company; (ii) reviewed certain internal operating reports, including
management-prepared financial projections and analyses; (iii) discussed
historical and projected financial performance with senior management and
industry experts; (iv) reviewed industry trends and operating statistics as well
as analyzed the effects of certain economic factors on the industry; (v)
analyzed the capital structures, financial performance, and market valuations of
the Company's competitors, and; (vi) prepared such other analyses as they deemed
necessary to their valuation determination. Based upon the foregoing, the
financial advisors developed a range of values for the Company as of the
Effective Date. In developing this valuation estimate, the financial advisors,
using rates ranging from 14% to 20%, discounted the Company's five-year
forecasted free cash flows and an estimate of sales proceeds assuming the
Company would be sold at the end of the five-year period within a range of
comparable company multiples. Certain of the projected results used in the
valuation were materially better than those achieved historically by the
Company.
The calculated reorganization value was based on a variety of estimates
and assumptions about circumstances and events not all of which have taken place
to date. These estimates and assumptions are inherently subject to significant
economic and competitive uncertainties beyond our control. In addition to
relying on management's projections, the valuation analysis made a number of
assumptions including, but not limited to, a successful and timely
reorganization of the Company's capital structure and the continuation of
current market conditions through the forecast period.
The effects of the Plan and the application of fresh start accounting
on the Company's pre-confirmation consolidated balance sheet are as follows (in
thousands):
Predecessor Successor
Company Company
January 23, Reorganization Fresh Start January 23,
2004 Adjustments Adjustments 2004
--------------- ----------------- ----------------- -----------------
Current assets:
Cash $ 702 $ 298 (a) $ 1,000
Restricted cash 12,998 (12,998)(a) -
Accounts receivable 8,352 (341)(b) 8,011
Inventories 5,652 751 (c) 6,403
Other assets - current 921 (166)(d) 755
------------ ----------------- ----------------- -----------------
Total current assets 28,625 (13,207) 751 16,169
------------ ----------------- ----------------- -----------------
Net property, plant & equipment 10,133 2,888 (e) 13,021
Reorganization value in excess of
amounts allocable to
identifiable assets - 12,894 (f) 12,894
Other assets - long term 9,275 (664) (g) 8,611
------------ ----------------- ----------------- -----------------
Total assets $ 48,033 $ (13,207) $ 15,869 $ 50,695
============ ================= ================= =================
15
Current liabilities
Accounts payable $ 6,111 $ 317 (h) $ 6,428
Accrued liabilities 8,412 418 (h) 8,830
Accrued income taxes 9 328 (i) 337
Short-term borrowings - 2,650 (a) 2,650
Current maturities of
long-term debt 24 1,055 (h) 1,079
------------ ----------------- ----------------- -----------------
Total current liabilities 14,556 4,768 - 19,324
------------ ----------------- ----------------- -----------------
Long-term debt 42 9,775 (h) (4,474) (i) 5,343
Environmental
Remediation 1,174 47,114 (j) (22,584) (j) 25,704
Liabilities subject to
compromise 90,440 (90,440) (k) -
Shareholders' equity (deficit) (58,179) 15,576 42,927 324
------------ ----------------- ----------------- -----------------
Total liabilities and Equity $ 48,033 $ (13,207) $ 15,869 $ 50,695
============ ================= ================= =================
Adjustments reflected in the consolidated balance sheet are as follows
(in dollars):
(a) In accordance with the Plan, the Company made a cash settlement with
the general unsecured creditors that included payout from the
restricted cash of $12,300,000 to the benefit of general unsecured
creditors and $698,000 to the Company. The Company also distributed
$3,100,000 to the benefit of the general unsecured creditors with
$450,000 from cash and short-term borrowing of $2,650,000.
(b) Accounts receivables were reduced to reflect the $300,000 note
receivable payment related to the sale of certain operations, of which
$250,000 was distributed to the benefit of general unsecured creditors
and $50,000 to the Company. The income tax refund receivable was
reduced by $41,000 to net realizable value.
(c) Inventories have been valued at fair market value. All "last-in,
first-out" (LIFO) reserves have been eliminated.
(d) Loan issuance costs related to the DIP line of credit were eliminated.
(e) Property, plant and equipment have been adjusted to reflect the fair
value of the assets based on independent appraisals.
(f) The Successor Company has recorded reorganization value in excess of
amounts allocable to identifiable assets in accordance with SFAS No.
141. This is a preliminary number awaiting appraisal of intangible
assets.
(g) The unamortized balance of goodwill of $2,207,000 for the Predecessor
Company and the unamortized balance for landfill closure at its Wellman
Dynamics subsidiary for $989,000 have been eliminated. The Company
recorded $2,532,000 for property held for sale related to discontinued
operations based on current purchase offers or independent appraisals.
16
(h) Certain liabilities that were subject to compromise have been recorded
as assumed.
(i) Long-term debt has been discounted to its present value of the $9.5
million, non-interest bearing 10-year note due to the PBGC.
(j) Environmental remediation was adjusted to include the assumption of
$47.1 million of liabilities subject to compromise and fresh start
adjustment in reorganization to discount the liability to its present
value based on the estimated timing of the future cash expenditures.
(k) Liabilities subject to compromise have been eliminated to reflect
settlement of the claims for cash and the issuance of common stock in
the reorganized company as well as the assumptions by the successor
company.
As part of fresh start accounting, liabilities subject to compromise in
the amount of $31 million were written off as part of the discharge of debt in
the bankruptcy. These liabilities consisted of the following:
January 23, 2004
----------------
Accounts payable $ 9,970,767
Long-term debt 6,631,693
Environmental 522,562
Pension 14,104,413
----------------
Total liabilities subject to compromise discharged $ 31,229,435
================
NOTE 5 - EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" requires a dual presentation of earnings per share, basic and diluted.
Basic earnings per share are computed by dividing net income applicable to
common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share reflects the increase in average common shares
outstanding that would result from the assumed exercise of outstanding stock
options, calculated using the treasury stock method, if dilutive.
The following table sets forth the computation of basic and diluted
earnings per share:
Numerator: Two Months One Month Three Months
Ended March Ended January Ended March
31, 2004 23, 2004 31, 2003
----------------- ----------------- -----------------
Net income (loss) $ 640,446 $ 57,831,942 ($2,005,718)
Denominator:
Denominator for basic earnings
per share- weighted average shares 3,420,000 8,698,858 8,698,858
Effect of dilutive securities
Employee stock options -- -- --
Employee restricted stock -- -- --
----------------- ----------------- -----------------
17
Dilutive potential common shares 3,420,000 8,698,858 8,698,858
================= ================= =================
Basic earnings per share $ 0.19 $ 6.65 ($0.23)
================= ================= =================
Diluted earnings per share $ 0.19 $ 6.65 ($0.23)
================= ================= =================
Options to purchase shares of common stock were outstanding during
2003, but were not included in the computation of diluted earnings per share
because they would be anti-dilutive.
As discussed in Note 3, the Company emerged from bankruptcy on January
23, 2004 and has a reorganized equity structure. In particular, implementation
of the Plan resulted in the cancellation of all of the shares of the Predecessor
Company's common stock and options that were outstanding prior to the Petition
Date.
NOTE 6 - DISCONTINUED OPERATIONS INCLUDING CERTAIN ENVIRONMENTAL REMEDIATION
The Predecessor Company had been licensed by the NRC to possess and use
source material at the Muskogee Facility since 1967. Under the Predecessor
Company's NRC permit, it was authorized to process ore concentrates and tin
slags in the production of refined tantalum products. Licensable quantities of
natural uranium and thorium are present in the slags, ores, concentrates and
process residues.
The Predecessor Company discontinued its Metal Products business
segment in 1989. In 1990, the NRC included the Muskogee Facility in the NRC's
Site Decommissioning Management Plan. The Predecessor Company completed a
remedial assessment in 1993 to determine what areas of the Muskogee Facility
were required to undergo decommissioning.
During 2002, the Predecessor Company, with the assistance of its third
party environmental consultants, prepared a revised decommissioning plan, which
was submitted to the NRC on January 15, 2003. The revised decommissioning plan
assumed offsite disposal of all contaminated residues and soils as well as
groundwater treatment and monitoring using current criteria for acceptable
decommissioning under NRC regulations. Based on available information, with
assistance from third party environmental consultants, the Predecessor Company
estimated the total future costs of the revised decommissioning plan based upon
current costs of decommissioning activities to be $41.6 million. The estimated
decommissioning costs consist of $20.4 million for excavating, hauling, and
offsite disposal of residues and soils, $15.6 million for site plans,
maintenance, safety, security and consulting costs, and $5.6 million for
groundwater treatment and monitoring. As a result of the revised decommissioning
cost estimate, the Predecessor Company reduced the long-term liability for
discontinued operations and environmental remediation for the Muskogee site from
$52.6 million to $41.6 million in December 2002.
During 2003, the Predecessor Company continued to maintain the safety
and security of the Muskogee Facility. Pursuant to the Plan, the Company
negotiated with the NRC to develop acceptable mechanisms for providing financial
assurance for the decommissioning of the Muskogee Facility (see Note 3). In
December 2003, the NRC approved the Amended Decommissioning Plan and an amended
license to FMRI. At December 31, 2003, the liability for the environmental
remediation decreased from $41.6 million to $38.8 million due to planned
spending for remediation, safety and security. At March 31, 2004, the gross
estimated liability
18
was $38.4 million and the recorded discounted liability, using a discount rate
of 11.3%, was $19.3 million.
In September 2000, the EPA issued a unilateral administrative order
under Section 106 of the Federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") requiring the Company to investigate
and abate releases of hazardous substances from the North Chicago Facility that
were contributing to contamination at an adjacent vacant lot (the "Vacant Lot
Site"). The Company completed an engineering evaluation/cost analysis and
submitted it to EPA for review in 2003. The proposed remedial actions at the
North Chicago Facility are estimated to cost $2.17 million, for which a
liability was recorded at January 23, 2004. At March 31, 2004 the gross
estimated liability was $2.09 million and the recorded discounted liability,
using a discount rate of 11.3%, was $1.67 million.
The Lexington Facility was constructed in 1954 and ceased operations in
2003. Investigations performed in 1997 as part of a company-wide environmental
audit revealed the presence of volatile organic compounds ("VOCs") and PCBs in
soils and groundwater in excess of state cleanup levels. The contaminants are
believed to have been discharged through a former drainage field. While VOCs
were detected at the downgradient boundary of the facility, no VOCs were
detected in an unnamed stream that is located downgradient of the facility. To
Fansteel's knowledge, the contamination at this site does not pose an imminent
threat to health, safety or welfare. In May 2003, the Kentucky Natural Resources
and Environmental Protection Cabinet ("KNREPC") requested that Fansteel submit a
plan for further characterization of the facility. Fansteel submitted a letter
to the KNREPC in June 2003 setting forth a conceptual characterization plan and
advising the agency that it will submit a detailed Site Characterization Plan
following confirmation of its Plan. Fansteel anticipates implementing the Site
Characterization Plan in 2006 and has estimated $1.78 million to perform the
remedial activities and recorded a liability in that amount at January 23, 2004.
At March 31, 2004 the gross estimated liability was $1.75 million and the
recorded discounted liability, using a discount rate of 11.3%, was $1.23
million.
The buildings at the former Waukegan Facility have been demolished and
only foundations remain. As part of the Fansteel's environmental audit, soil and
groundwater samples were collected in 1998, which revealed the presence of
petroleum and PCBs in the soils and groundwater. While the contamination does
not pose an imminent threat to health, safety or welfare, remediation will be
required to satisfy the Illinois Environmental Protection Agency Tiered Approach
to Corrective Action Objectives, ("TACO") cleanup standards. The Company
estimates that the cost to remediate the site to achieve TACO standards will be
$1.25 million, for which a liability is recorded at January 23, 2004. At March
31, 2004 the gross estimated liability was $1.22 million and the recorded
discounted liability, using a discount rate of 11.3%, was $.79 million.
Actual costs to be incurred in future periods to decommission the above
sites may vary, which could result in adjustment to future accruals, from the
estimates, due to, among other things, assumptions related to the quantities of
soils to be remediated and inherent uncertainties in costs over time of actual
disposal.
Discontinued operations reported a loss in the first quarter 2004. This
loss relates to the amortization of discounted environmental liabilities from
the Company's special purpose
19
subsidiaries and the pension note for the terminated pension plan. In the first
quarter 2003, discontinued operations reported a loss, which related to the
Industrial Tool segment and California Drop Forge operations sold in 2003 as
part of the Plan.
NOTE 7 - PROPERTY HELD FOR SALE
The Company is pursuing the sale of its North Chicago Facility,
Waukegan Facility and Lexington Facility. During the fresh start reporting
process, the land and buildings held for sale were adjusted to their estimated
fair value based upon (i) a current offer received in the market place from a
potential third party buyer and (ii) the estimated fair value as determined by
third party financial advisors.
NOTE 8 - ACCRUED LIABILITIES
Accrued liabilities include the following at:
March 31, 2004 December 31, 2003
---------------- ----------------------
Payroll and related costs $ 2,107,526 $1,756,298
Taxes, other than income 221,535 231,235
Profit sharing 515,347 481,743
Insurance 2,385,400 2,427,831
Environmental 125,634 163,929
Professional fees 814,652 3,304,616
Other 564,388 396,669
----------- ----------
$ 6,734,482 $ 8,762,321
=========== ===========
NOTE 9 - OTHER ENVIRONMENTAL REMEDIATION
Wellman Dynamics Corporation ("Wellman"), a subsidiary of Fansteel
Inc., entered into an Administrative Order on Consent with the EPA to perform a
RCRA Facility Investigation ("RFI") for the purpose of determining the extent of
releases of hazardous wastes and/or hazardous constituents, and, if appropriate,
a Corrective Measures Study ("CMS") to evaluate possible corrective action
measures that may be necessary at the Iowa Facility owned and operated by
Wellman. Wellman has estimated that the cost for conducting the RFI/CMS will be
$2,147,000 from 2004 to 2009. The recorded discounted liability, using a
discount rate of 11.3%, at March 31, 2004 was $1.54 million.
Wellman is permitted to operate a sanitary landfill for the disposal of
its foundry sand. It is anticipated, based upon recent projection by ESCI, that
Wellman is likely to be required to close the landfill in 2037 at a future cost
approximating $1,166,000. The recorded discounted liability, using a discount
rate of 11.3%, at March 31, 2004 was $408,000.
In October 2000, Fansteel provided the Iowa Department of Health (the
"IDPH") with a "Historical Site Assessment" that identified uranium and thorium
concentrations at the site. The IDPH required Wellman to perform a Risk
Assessment ("RA") to determine whether the thorium-containing materials are a
threat to human health or the environment. Wellman is awaiting the final report,
but to its knowledge, the existing data forming the basis for the RA
20
indicates that there is no imminent threat to health, safety or the environment.
Wellman anticipates that the IDPH will allow it to address the thorium issue
when it closes the sanitary landfill. However, there is a risk that the IDPH
will require Wellman to remove or remediate the thorium prior to that time. The
estimated cost to remediate the thorium is $1,075,000. The recorded discounted
liability, using a discount rate of 11.3%, at March 31, 2004 was $387,000.
The liabilities were recorded for estimated environmental investigatory
and remediation costs based upon an evaluation of currently available facts,
including the results of environmental studies and testing conducted for all
Predecessor Company-owned sites in 1997 and since, and considering existing
technology, presently enacted laws and regulations and prior experience in
remediation of contaminated sites. Actual costs to be incurred in future periods
at identified sites may vary from the estimates, given the inherent
uncertainties in evaluating environmental exposures. Future information and
developments will require the Company to continually reassess the expected
impact of these environmental matters.
NOTE 10 - DEBT
Short-term borrowings consisted of the following:
March 31, 2004 December 31, 2003
------------------ ------------------
Revolving line of credit through Congress Financial $ 5,081,345 $ -
------------------ ------------------
Total short-term borrowings $ 5,081,345 $ -
================== ==================
On January 23, 2004, the Company entered into a secured credit facility
with Congress Financial Corp. The new credit facility provides up to $10 million
in credit, which is comprised of a revolving loan facility and letter of credit
issuances. Under the revolving loan facility, subject to certain borrowing
conditions, the Company may incur revolving loans in an amount up to a borrowing
base comprised of a percentage of eligible accounts receivable and $2 million
for machinery and equipment. Revolving loans are due and payable in full on
January 23, 2007. The Company is required to meet certain financial covenants to
achieve certain EBITDA and that limit future capital expenditures. The interest
rate on the line is prime plus 1% (weighted average rate of 5%) and there is a
..5% unused line fee. Substantially all of the assets of the Company are pledged
as security for this financing. Borrowing under the revolving line of credit is
included as short-term borrowings. At March 31, 2004, the Company had letters of
credit for $1,388,000 outstanding for casualty insurance collateral under the
new credit facility with an interest rate of 2.5%.
Long-term debt consisted of the following:
March 31, 2004 December 31, 2003
--------------- ------------------
PBGC, non-interest bearing ten-year note, due from
2004 to 2013 (net of an imputed discount of $4,279,012
at an interest rate of 11.3%) $ 5,325,205 $ -
Loans from various Pennsylvania economic agencies with
interest rates ranging from 2.0% to 5.5%, due
from 2004 to 2009 1,069,295 -
Capital lease, non-interest bearing, due 2005 60,276 66,276
--------------- ------------------
21
--------------- ------------------
6,454,776 66,276
--------------- ------------------
Less current maturities 1,066, 430 24,000
--------------- ------------------
Total long-term debt $ 5,388,346 $ 42,276
=============== ==================
The Pension Benefit Guarantee Corporation note is collateralized by
land, building and equipment located in Mexico with a book value of $1,906,000
at March 31, 2004
The Pennsylvania long-term debt is collateralized by machinery and
equipment with a net book value of $883,000 at March 31, 2004.
NOTE 11 - BUSINESS SEGMENTS
The Company is a manufacturer of aerospace castings and engineered
metal components used in a variety of markets including automotive, energy,
military and commercial aerospace, agricultural and construction machinery, lawn
and garden equipment, marine, and plumbing and electrical hardware industries.
For financial reporting purposes, the Company classifies its products
into the following two business segments:
Advanced Structures:
Aluminum and magnesium sand castings.
Industrial Metal Components:
Special wire products, powdered metal components, and
investment castings.
The Company's business segments have separate management teams and
infrastructures that offer different products and services. Financial
information concerning the Company's segments is as follows:
Two Months Ended One Month Ended Three Months Ended
March 31, 2004 January 23, 2004 March 31, 2003
-------------------- --------------------- ----------------------
NET SALES
Advanced Structures $ 4,457,367 $ 926,011 $ 4,100,729
Industrial Metal Components 7,805,648 2,337,256 10,920,241
-------------------- --------------------- ----------------------
Total Net Sales $12,263,015 $3,263,267 $ 15,020,970
==================== ===================== ======================
OPERATING INCOME (LOSS):
Advanced Structures 350,105 $ (297,436) $ (684,319)
Industrial Metal Components 981,174 17,839 466,401
Corporate - - (54,950)
-------------------- --------------------- ----------------------
Total Operating Income (Loss) $ 1,331,279 $ (279,597) $ (272,868)
==================== ===================== ======================
22
The identifiable assets are as follows:
March 31, 2004 December 31, 2003
-------------------- ---------------------
IDENTIFIABLE ASSETS:
Advanced Structures $ 12,485,848 $ 8,742,605
Industrial Metal Components 17,125,414 18,091,794
Reorganization value in excess of amounts allocable
to identified assets 12,893,734 -
Corporate / Discontinued 9,829,873 21,654,449
-------------------- ---------------------
Total Assets $ 52,334,869 $ 48,488,848
==================== =====================
NOTE 12 - LEASE COMMITMENTS
The Company leases data processing, transportation and other equipment,
as well as certain facilities, under operating leases. Such leases do not
involve contingent rentals, nor do they contain significant renewals or
escalation clauses. Total minimum future rentals under non-cancelable leases at
December 31, 2003 were $446,000, including $269,000 in 2004, $127,000 in 2005,
$41,000 in 2006, $5,000 in 2007, and $5,000 in 2008 and thereafter.
NOTE 13 - RETIREMENT PLANS
The Company has one non-contributory defined benefit plan covering
salaried employees at Wellman. This plan covers approximately 11% of the
Company's employees. Benefits are based on salary and years of service. The
Company's funding of this plan is equal to the minimum contribution required by
ERISA. The impact of this plan on pretax income from continuing operations was
as follows:
Two Months One Month Three Months
Ended March Ended January Ended March
31, 2004 23, 2004 31, 2004
----------------- ------------------ -------------------
Components of net periodic-benefit costs
Service cost $ 28,476 $ 14,238 $ 41,349
Interest cost 58,105 29,052 87,845
Expected rate of return (72,598) (36,299) (107,837)
Amortization of prior service costs 11 6 16
----------------- ------------------ -------------------
Total net periodic-benefit cost $ 13,994 $ 6,997 $ 21,373
================= ================== ===================
NOTE 14 - STOCK-BASED COMPENSATION PLAN
On the Effective Date, as part of the Plan, all common stock and
options for the Predecessor Company's common stock were cancelled. Subsequent to
that date, no options or non-vested stock have been granted.
23
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements. Forward-looking statements
are subject to certain risks, uncertainties and assumptions, which could cause
actual results to differ materially from those projected. From time to time,
information provided by the Company or statements made by its employees may
contain other forward-looking statements. Factors that could cause actual
results to differ materially from the forward-looking statements include, but
are not limited to: general economic conditions, including inflation, interest
rate fluctuations, trade restrictions and general debt levels; competitive
factors, including price pressures, technological development and products
offered by competitors; inventory risks due to changes in market demand or
business strategies; and changes in effective tax rates. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
The Company emerged from bankruptcy during its first quarter financial
reporting period of 2004. For financial statement purposes, the Company's
results of operations and cash flows have been separated before and after the
Effective Date due to the change in basis of accounting in the underlying assets
and liabilities resulting from application of fresh start accounting. To
facilitate a meaningful comparison of the Company's quarterly performance, the
following discussion of results of operations is presented on a traditional
comparative basis for both periods. Accordingly, the results of operations for
the quarter ended March 31, 2004 represent the mathematic addition of the
historical amounts for the Predecessor Company for the one month ended January
23, 2004 and the Successor Company for the two months ended March 31, 2004.
Management believes that a combined discussion of Predecessor Company and
Successor Company periods is reasonable and appropriate because there were no
material adjustments to the presented items other than depreciation,
amortization and interest expense resulting from adoption of fresh start
reporting.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes thereto.
2004 FIRST QUARTER AS COMPARED TO 2003 FIRST QUARTER
Net Sales
The following table sets forth the combined net sales of the Company
included in the consolidated statement of operations:
First Quarter First Quarter
Net Sales 2004 2003
---------------------- ----------------------
Advanced Structures $ 5,383,378 $ 4,100,729
Industrial Metal Components 10,142,904 10,920,241
---------------------- ----------------------
$15,526,282 $15,020,970
====================== ======================
24
Consolidated net sales for the first quarter 2004 were 3.4% higher than
the first quarter 2003.
The Advanced Structures' net sales for the first quarter 2004 were $1.3
million, or 31.3% higher, as compared to the first quarter 2003. This
improvement is attributed to increased sales of castings for military programs,
primarily aircraft engine and helicopter components.
The Industrial Metal Components' net sales for the first quarter 2004
decreased $777,000, or 7.1%, due to the loss of a major customer of special wire
form products in the lawn and garden market. This customer changed its method of
procuring wire forms, using a third-party integrator instead of directly
purchasing from a manufacturer, in an attempt to source the product offshore.
Net sales of special wire forms were 25.4% lower in the first quarter 2004, as
compared to the first quarter 2003. The Company has been able to retain a
portion of this business by selling to the third party integrator, but this
volume was not significant in the first quarter 2004. Net sales of investment
casting decreased 5.8% in the first quarter 2004, as compared to the first
quarter 2003, due to a decline in sales of automotive parts due primarily to a
redesign of the parts in order to achieve lower costs for the customer. Net
sales of powdered metal components improved 11.1% due to an increase in
automotive components, primarily for the light duty truck market.
Operating Income (Loss)
The following table sets forth the combined operating income of the
Company included in the consolidated statement of operations:
First Quarter First Quarter
Operating Income (Loss) 2004 2003
---------------------- ----------------------
Advanced Structures $ 52,669 $ (684,319)
Industrial Metal Components 999,013 466,401
Corporate - (54,950)
---------------------- ----------------------
$1,051,682 $(272,868)
====================== ======================
Operating income of $1.1 million for the first quarter 2004 improved
from an operating loss of $273,000 in the first quarter 2003, due to higher
sales and lower administrative expenses related primarily to reduced employee
related costs and insurance expenses.
Operating income of $53,000 in the Advanced Structures segment for the
first quarter 2004 improved from an operating loss of $684,000 in the first
quarter 2003, due to higher volume and better manufacturing efficiencies. The
sand casting operation in this segment has implemented continuous improvement
programs that have improved production processing and manufacturing efficiency.
Operating income of $999,000 in the Industrial Metal Components segment
for the first quarter 2004 doubled, as compared to operating income in the first
quarter 2003. Despite lower sales, a majority of the improvement was in the
investment casting operation, as cost reduction actions have reduced overhead
costs in manufacturing and administrative expenses. The powdered metal operation
improved to a operating income in the first quarter 2004 compared to
25
an operating loss in the first quarter 2003, due to higher sales and reduced
selling and administrative expenses. The special wire forms operation reported
an operating loss in the first quarter 2004 compared to operating income in the
first quarter 2003 as sales decreased significantly due to the loss of a major
customer, discussed above.
Other Income (Expenses)
The following table sets forth the combined other income (expense) of
the Company included in the consolidated statement of operations:
First Quarter First Quarter
Other income (expense) 2004 2003
---------------------- ----------------------
Interest expenses $ (155,360) $ (160,974)
Other (25,103) 22,184
---------------------- ----------------------
$ (180,463) $(138,790)
====================== ======================
Other expense increased $42,000 in the first quarter 2004 compared to
the first quarter 2003, as other expense in the first quarter 2003 included
investment income from deposits held in trust for decommission under an NRC
license, while no such income was earned in first quarter 2004.
Reorganization Items
Bankruptcy reorganization items relate to professional fees. The first
quarter 2004 reorganization expenses were $340,000, as compared to $1,155,000 in
the first quarter 2003, as the Company emerged from Chapter 11 on the Effective
Date. No expenses have been recorded since.
Discontinued Operations
Discontinued operations reported a loss of $562,000 in the first
quarter 2004. This loss relates to the accretion of discounted environmental
liabilities from the Company's special purpose subsidiaries and the pension note
for the Pension Plan. In the first quarter 2003, discontinued operations
reported a loss of $439,000, which related to operating losses at the Industrial
Tool segment and California Drop Forge operations sold in 2003 as part of the
Plan.
Income taxes:
No income tax provision or benefit has been recognized for any periods
presented as valuation allowances have been recorded for all net operating loss
benefits and deferred tax assets.
Net Income (Loss)
Net income of $59,033,933 in the first quarter 2004 included a
$15,556,000 gain from the discharge of debt under the Plan and $42,927,000 gain
from the adoption of fresh start accounting. Net loss for the first quarter 2003
was $2,006,000.
26
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2004, the Company had cash of $244,000 compared to
$1,290,000 of cash on December 31, 2003. Cash decreased $839,000 from continuing
operations and $207,000 from discontinued operations in the first quarter 2004.
The significant reduction in working capital in the first quarter 2004 related
primarily to the use of restricted cash of $13 million to make payments to the
unsecured creditors under the amended Plan.
Operating Activities
During the first quarter 2004, operating activities consumed $3.7
million of cash , as compared to $915,000 in the first quarter 2003, with $2.1
million related to an increase in accounts receivable due to higher sales.
Receivables outstanding remained consistent in the first quarter 2004, being in
the low 50 day range. Accounts payable decreased $1.6 million, as $2.2 million
was expended on payments to bankruptcy professionals in the first quarter 2004.
Investing Activities
Investing activities provided $368,000 in the first quarter 2004, as
compared to $1,017,000 in the first quarter 2003, due to restricted cash
received from the sale of discontinued operations as part of the Plan.
Financing Activities
Financing activities provided $2,462,000 in the first quarter 2004, as
compared to zero in the first quarter 2003, with net borrowing from the
revolving line of credit in the first quarter 2004 totaling $2.5 million, less
payments of long-term debt of $85,000.
On the Effective Date, the Company entered into a secured credit
facility with Congress Financial Corp. The new credit facility provides up to
$10 million in credit, which is comprised of a revolving loan facility and
letter of credit issuances. Under the revolving loan facility, subject to
certain borrowing conditions, the Company may incur revolving loans in an amount
up a borrowing base comprised of a percentage of eligible accounts receivable
and $2 million for machinery and equipment. Revolving loans are due and payable
in full on the January 23, 2007. The Company is required to meet certain
financial covenants to achieve certain EBITDA and that limit future capital
expenditures. The interest rate on the line is prime plus 1% (weighted average
rate of 5%) and there is a .5% unused line fee. Substantially all of the assets
of the Company are pledged as security for this financing. Borrowing under the
revolving line of credit is included as short-term borrowings. At March 31,
2004, the Company had letters of credit for $1,388,000 outstanding for casualty
insurance collateral under the new credit facility with an interest rate of
2.5%.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of financial conditions and
results of operations is based upon its consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principals
in the United States. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to
27
make estimates and assumptions that affect the amounts reported in the balance
sheet and accompanying notes. The Company bases its estimates on historical
experience and assumptions that it believes to be reasonable under the
circumstances. Actual results could differ from those estimates. The Company
believes the accounting policies described below are the policies that most
frequently require estimates and judgments and are therefore critical to the
understanding of its results of operations.
Trade accounts receivable are classified as current assets and are
reported net of allowances for doubtful accounts. The Company records such
allowances based on a number of factors, including historical trends and
specific customer liquidity.
Excess reorganization value represents the excess of the Successor
Company's enterprise value over the aggregate fair value of the Company's
tangible and identifiable intangible assets and liabilities at the balance sheet
date. Excess reorganization value is not amortized, however, it is evaluated
when events or changes occur that suggest impairment in carrying value.
The Company periodically re-evaluates carrying values and estimated
useful lives of long-lived assets to determine if adjustments are warranted. The
Company uses estimates of undiscounted cash flows from long-lived assets to
determine whether the book value of such assets is recoverable over the assets'
remaining useful lives.
The Company recognizes sales when the risks and rewards of ownership
have transferred to the customer, which is generally considered to have occurred
as products are shipped. Revenue is recognized from sales of tooling, patterns
and dies upon customer acceptance.
Environmental liabilities are estimated with the assistance of third
party environmental advisors and governmental agencies based upon an evaluation
of currently available facts, including the results of environmental studies and
testing, and considering existing technology, presently enacted laws and
regulations, and prior experience in remediation of contaminated sites. Future
information and developments requires the Company to continually reassess the
expected impact of these environmental matters.
INFLATION
Inflationary factors such as increases in the costs of raw materials,
labor, and overhead affect the Company's operating profits. A significant
portions of raw materials consumed by the Company are various steel alloys.
Price increases were experienced in the first quarter of 2004, following stable
prices over the past few years. To offset these price increases, the Company
began adding material surcharges in March 2004.
Although the Company's recent results have not been significantly
affected by inflation, there can be no assurance that a high rate of inflation
in the future would not have an adverse effect on its operating results.
28
OFF-BALANCE SHEET ARRANGEMENTS
The Company is not party to off-balance sheet arrangements other than
normal operating leases for any period presented.
CONTRACTUAL OBLIGATIONS
The following table summarizes payments due by year for the contractual
obligations at March 31, 2004:
(In thousands) After
Total 2004 2005 2006 2007 2008 2008
------- ------- ------- ------- ------- ------- -------
PBGC Note $ 9,500 $ 750 $ 750 $ 750 $ 750 $ 750 $ 5,750
PA economic agencies notes 1,222 197 274 289 305 143 14
Capital Leases 60 18 42 -- -- -- --
Operating leases 380 202 127 41 5 5 --
Revolving line 5,081 -- -- -- 5,081 -- --
Letters of credit 1,388 -- -- -- 1,388
Environmental liabilities 47,848 1,741 3,148 4,593 4,301 3,047 31,018
Total $65,479 $ 2,908 $ 4,341 $ 5,673 $11,830 $ 3,945 $36,782
The above table excludes discounts of the long-term debt and
environmental liabilities.
The payments for environmental liabilities are based on estimated
timing of remediation activities and not mandatory payment schedules. A minimum
annual funding of $1.4 million is required for environmental liabilities related
to FMRI.
The revolving line of credit requires immediate repayment from cash
receipts. Borrowings can be made as needed, based on availability. The
availability at March 31, 2004 was $2.5 million.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company's operations are not currently subject to market risks of a
material nature for interest risks, foreign currency rates or other market price
risks. The only debt subject to interest fluctuations is the short-term
borrowing under the revolving line of credit. A significant portion of raw
materials consumed by the Company is various steel alloys. Price increases have
been experienced in the first quarter of 2004, following stable prices for the
past few years. To offset these price increases, the Company began adding
material surcharges in March 2004.
ITEM 4 - CONTROLS AND PROCEDURES
Based on their evaluation of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
period covered by this Report on Form 10-Q, the
29
Company's President and Chief Executive Officer and its Vice President and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act are
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms and are operating in
an effective manner.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these internal
controls subsequent to the date of their most recent evaluation.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On the Petition Date, the Debtors filed voluntary petitions in the
Court for protection under Chapter 11 of the U.S. Bankruptcy Code. The Company
emerged from bankruptcy on the Effective Date.
From time to time, the Company is involved in routine litigation
incidental to its business. The Company is not a party to any pending or
threatened legal proceeding which it believes would have a material adverse
effect on its results of operations or financial condition.
On November 3, 2003, an administrative law judge of the NRC granted a
request of the State of Oklahoma for a hearing to challenge certain aspect of
the NRC License and Amended Decommissioning Plan of FMRI with respect to FMRI's
(and not the Company's) obligation to decommission the Muskogee, Oklahoma
property. The State of Oklahoma has challenged a number of aspects of the NRC
License and Amended Decommissioning Plan, including the adequacy of site
characterization, the appropriate modeling of the site of remediation levels,
cost estimates, and sufficiency of the NRC Staff's environmental review. The
matter has been fully briefed and is before the judge for decision, although
further proceedings are possible. This proceeding and/or the possibility of
delay in the resolution thereof may require FMRI to seek NRC approval of
modification of the timetable, previously approved, for certain aspects of
decommissioning. A decision adverse to FMRI regarding issues raised by the State
of Oklahoma could adversely affect the ability of FMRI to meet its obligations.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the Plan, on the Effective Date, all outstanding shares of
the Predecessor Company's common stock, $2.50 par value, were cancelled.
The Plan authorized the issuance of 3,600,000 shares of common stock,
$.01 par value, of the Successor Company. The general unsecured creditors
received approximately 50% stock ownership. The PBGC received approximately 21%
of the common stock being issued in the reorganization as part of the settlement
of its claims related to the under-funding of the Company's now-terminated
Pension Plan. The common stockholders of the Predecessor Company received
approximately 24% of the newly issued stock. Finally, 5% of the Successor
30
Company's common stock has been set aside in an employees stock options plan,
also approved as part of the confirmation.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
first quarter of 2004.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certifications
31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certifications
32.1 Section 1350 Certifications
(b) Reports on Form 8-K
Current 8-K Report dated January 7, 2004 Item 5 - Other Events
Current 8-K Report dated January 28, 2004 Item 5 - Other Events and Item 7
Financial Statements and Exhibits
Current 8-K Report dated February 4, 2004 Item 3 - Bankruptcy and
Receivership
Current 8-K Report dated February 26, 2004 Item 5 - Other Events and Item 7
Financial Statements and Exhibits
31
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
FANSTEEL INC.
(Registrant)
/s/ Gary L. Tessitore
-----------------------------------
Gary L. Tessitore
Chairman of the Board, President
May 14, 2004 and Chief Executive Officer
/s/ R. Michael McEntee
-----------------------------------
R. Michael McEntee
Vice President and
May 14, 2004 Chief Financial Officer
32