Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMER 30, 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 November 1, 2004
- ------------------------------ -----------------------------------
Common Stock, $.01 par value 3,025,274 shares
FANSTEEL INC.
FORM 10-Q - INDEX
September 30, 2004
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1 Financial Statements:
Consolidated Statement of Operations (unaudited)- Three months 3
ended September 30, 2004 (Successor Company), three months ended
September 30, 2003 (Predecessor Company), eight months ended
September 30, 2004 (Successor Company), one month ended January
23, 2004, and nine months ended September 30, 2003 (Predecessor
Company)
Consolidated Balance Sheet - September 30, 2004 (Successor Company) 5
(unaudited), and December 31, 2003 (Predecessor Company)
Consolidated Statement of Cash Flow (unaudited)- Eight months 7
ended September 30, 2004 (Successor Company), one month
ended January 23, 2004 and nine months ended September 30,
2003 (Predecessor Company)
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 27
Item 3 Quantitative and Qualitative Disclosures of Market Risk 35
Item 4 Controls and Procedures 35
PART II. OTHER INFORMATION 36
Item 1 Legal Proceedings 36
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3 Defaults Upon Senior Securities 37
Item 4 Submission of Matters to a Vote of Security Holders 37
Item 5 Other Information 37
Item 6 Exhibits and Reports on Form 8-K 37
Signatures 39
Exhibit 10.1 Employment Agreement for Gary l. Tessitore and Amendment
Exhibit 10.2 Employment Agreement for R. Michael McEntee and Amendment
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 Company Predecessor Company
Three Months Three Months
Ended Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Net sales $ 15,346,756 $ 13,402,609
Cost and expenses
Cost of products sold 13,004,028 11,569,433
Selling, general and administrative 2,092,543 2,235,677
------------ ------------
15,096,571 13,805,110
------------ ------------
Operating income (loss) 250,185 (402,501)
Other income (expense)
Interest expense (225,863) (285,359)
Other (4,838) 95,982
------------ ------------
(230,701) (189,377)
------------ ------------
Income (loss) from continuing operations before
reorganization items and income tax 19,484 (591,878)
Reorganization items (18,000) (2,280,026)
------------ ------------
Income (loss) from continuing operations before income taxes
1,484 (2,871,904)
Income tax provision -- --
------------ ------------
Income (loss) from continuing operations 1,484 (2,871,904)
Income (loss) from discontinued operations (961,829) 2,605,417
------------ ------------
Net loss $ (960,345) $ (266,487)
============ ============
Weighted average number of common shares
outstanding 3,420,000 8,698,858
Basic and diluted net income (loss) per share(a)
Continuing operations $ 0.00 $ (0.33)
Discontinued operations (0.28) 0.30
------------ ------------
Net loss $ (0.28) $ (0.03)
============ ============
- --------
a Basic earnings per share and diluted earnings per share are the same.
See Notes to Consolidated Financial Statements
3
Fansteel Inc.
Consolidated Statement of Operations
(Unaudited)
Successor Predecessor Company
Company ---------------------------------------
Eight Months One Month Nine Months
Ended Ended Ended
September 30, 2004 January 23, 2004 September 30, 2003
------------------ ---------------- ------------------
Net sales $ 45,512,516 $ 3,263,267 $ 43,368,668
Cost and expenses
Cost of products sold 37,474,453 2,971,175 35,472,172
Selling, general and administrative 5,659,104 571,689 8,216,786
------------ ------------ ------------
43,133,557 3,542,864 43,688,958
------------ ------------ ------------
Operating income (loss) 2,378,959 (279,597) (320,290)
Other income (expense)
Interest expense (527,607) (43,977) (584,581)
Other 25,571 (7,198) 110,072
------------ ------------ ------------
(502,036) (51,175) (474,509)
------------ ------------ ------------
Income (loss) from continuing operations
before reorganization items and income taxes
1,876,923 (330,772) (794,799)
Reorganization items (428,999) (340,286) (5,976,861)
Fresh start adjustments -- 42,927,000 --
Gain on debt discharge -- 15,576,000 --
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes 1,447,924 57,831,942 (6,771,660)
Income tax provision -- -- --
------------ ------------ ------------
Income (loss) from continuing operations 1,447,924 57,831,942 (6,771,660)
Income (loss) from discontinued operations (1,758,498) -- 1,432,456
------------ ------------ ------------
Net income (loss) $ (310,574) $ 57,831,942 $ (5,339,204)
============ ============ ============
Weighted average number of common shares
outstanding 3,420,000 8,698,858 8,698,858
Basic and diluted net income (loss) per share(a)
Continuing operations $ 0.42 $ 6.65 $ (0.78)
Discontinued operations (0.51) -- 0.16
------------ ------------ ------------
Net income (loss) $ (0.09) $ 6.65 $ (0.62)
============ ============ ============
- ----------
a Basic earnings per share and diluted earnings per share are the same.
See Notes to Consolidated Financial Statements
4
Fansteel Inc.
Consolidated Balance Sheet
Successor Predecessor
Company Company
September 30, December 31,
2004 2003
------------- -----------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 436,837 $ 1,290,206
Restricted cash 318,426 13,377,660
Accounts receivable, less allowance of $256,000 in
2004 and $323,000 in 2003 9,828,846 7,864,348
Income tax refund receivable -- 102,359
Inventories
Raw material and supplies 1,258,745 1,251,087
Work-in process 4,447,788 4,178,808
Finished goods 776,130 730,181
----------- -----------
Less: 6,482,663 6,160,076
Reserve to state certain inventories at LIFO cost -- 806,493
----------- -----------
Total inventories 6,482,663 5,353,583
Other assets - current 1,592,301 1,007,400
----------- -----------
Total current assets 18,659,073 28,995,556
----------- -----------
Property, plant and equipment
Land 1,084,419 957,630
Buildings 4,784,362 7,720,354
Machinery and equipment 7,216,005 25,122,992
----------- -----------
13,084,786 33,800,976
Less accumulated depreciation 1,002,375 22,817,464
----------- -----------
Net property, plant and equipment 12,082,411 10,983,512
----------- -----------
Net assets of discontinued operations -- 73,504
----------- -----------
Other assets
Deposits 5,719,844 6,058,331
Reorganization value in excess of amounts allocable
to identified assets 12,893,734 --
Property held for sale 2,447,500 2,207,060
Other 97,719 170,885
----------- -----------
Total other assets 21,158,797 8,436,276
----------- -----------
$51,900,281 $48,488,848
=========== ===========
See Notes to Consolidated Financial Statements
5
Fansteel Inc.
Consolidated Balance Sheet
Successor Predecessor
Company Company
September 30, December 31,
2004 2003
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) (Unaudited)
Current liabilities
Accounts payable $ 6,222,408 $ 5,742,752
Accrued liabilities 6,211,662 8,762,321
Income taxes 319,286 8,890
Short-term borrowings 6,635,170
Current maturities of long-term debt 1,569,523 24,000
------------ ------------
Total current liabilities 20,958,049 14,537,963
------------ ------------
Long-term debt 5,598,101 42,276
------------ ------------
Other liabilities - environmental remediation 25,329,620 1,174,389
------------ ------------
Total liabilities not subject to compromise 51,885,770 15,754,628
------------ ------------
Liabilities subject to compromise -- 90,242,762
------------ ------------
Shareholders' equity (deficit) 14,511 (57,508,542)
------------ ------------
Total liabilities and shareholders' equity $ 51,900,281 $ 48,488,848
============ ============
See Notes to Consolidated Financial Statements
6
Fansteel Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Successor
Company Predecessor Company
------------ ----------------------------
Eight Months One Month Nine Months
Ended Ended Ended
September 30, January 23, September 30,
2004 2004 2003
------------ ------------ ------------
Cash Flows From Operating Activities:
Net income (loss) $ (310,574) $ 57,831,942 $ (5,339,204)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation and amortization 1,007,793 87,966 1,011,808
Fresh start adjustments -- (42,927,000) --
Gain on discharge of debt -- (15,576,000) --
Loss (income) from discontinued operations 1,758,498 -- (1,432,456)
(Gain) loss from disposals of property, plant and
equipment (32,917) -- 138,768
Change in assets and liabilities:
Increase in accounts receivable (1,879,629) (384,869) (433,568)
Decrease in income tax refunds receivable 61,700 -- 276,229
(Increase) decrease in inventories (79,218) (298,878) 982,499
(Increase) decrease in other assets - current (820,749) 85,571 1,305,880
(Decrease) increase in accounts payable and
accrued liabilities (3,015,971) 32,091 2,821,734
Decrease (increase) in liabilities subject to
compromise -- 300,000 (1,411,094)
Decrease in income taxes payable (17,650) (8,272) (2,685)
Increase in other assets 299,945 765 429,385
------------ ------------ ------------
Net cash used in operating activities (3,028,772) (856,684) (1,652,704)
------------ ------------ ------------
Cash Flows From Investing Activities:
(Increase) decrease in restricted cash (318,426) 379,457 2,078,425
Proceeds from sale of property, plant and equipment 34,000 -- --
Capital expenditures (70,009) (3,155) (614,938)
------------ ------------ ------------
Net cash (used in) provided by investing activities (354,435) 376,302 1,463,487
------------ ------------ ------------
Cash Flows From Financing Activities:
Proceeds from short-term borrowing 4,451,287 -- --
Payments on long-term debt (245,358) (2,000) --
Proceeds from long-term debt -- -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,205,929 (2,000) --
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents
from Continuing Operations 822,722 (482,382) (189,217)
Cash Flows From Discontinued Operations (1,385,672) 191,963 (3,223,573)
------------ ------------ ------------
Net Decrease in Cash and Cash Equivalents (562,950) (290,419) (3,412,790)
Cash and Cash Equivalents at Beginning of Period 999,787 1,290,206 4,664,812
------------ ------------ ------------
Cash and Cash Equivalents at End of Period $ 436,837 $ 999,787 $ 1,252,022
============ ============ ============
See Notes to Consolidated Financial Statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
The consolidated financial statements as of and for the periods ending
September 30, 2004, January 23, 2004, and September 30, 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 September 30,
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 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 two business segments; Advanced Structures which produces aluminum and
magnesium sand castings and Industrial Metal Components which produces 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 financial statements 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 September 30, 2004 and December
31, 2003, the Company had not purchased any debt investments with a maturity of
three months or less.
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
8
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 3 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 January 23, 2004.
Although excess reorganization value is not amortized, 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. Revenues from sales of tooling, patterns and dies are
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 net 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 in other
income. For the eight months ended September 30, 2004 comprehensive loss was
$316,003. For the one month ended January 23, 2004, comprehensive income equaled
net income. For the nine months ended September 30, 2003 comprehensive loss was
$5,340,161. The difference between comprehensive income (loss) and net income
(loss) was due to foreign currency translation adjustments.
9
In accounting for stock-based employee compensation, the Company uses the
intrinsic-value method specified in Accounting Principles Board Opinion ("APB")
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 Eight Months One Month Nine Months
per-share) Ended Ended January Ended September
September 30, 23, 2004 30, 2003
2004
------------- ------------ --------------
(a) Net income (loss) $ (311) $57,832 $(5,339)
After-tax adjustment of stock-based compensation costs:
Intrinsic-value method -- -- --
Fair-value method -- -- --
Pro Forma - Net income (loss) $ (311) $57,832 $(5,339)
(b) Net income (loss) per share
Basic and Diluted $ (.09) $ 6.65 $ (0.62)
Adjustment of stock-based compensation costs:
Intrinsic-value method -- -- --
Fair-value method -- -- --
Pro Forma - Net income (loss) per share $ (.09) $ 6.65 $ (0.62)
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 September 30, 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 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
10
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 pension 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 New Common Stock. All of the foregoing percentages are,
pursuant to the Plan, subjected 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.
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
11
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 have been made, and will continue to
be made in accordance with the Plan as previously disputed 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 to receive 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 claims and 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.), pursuant to an Amended Decommissioning Plan
and an Amended License (collectively, the "NRC License") issued by the Nuclear
Regulatory Commission (the "NRC"), 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 primarily by the proceeds of certain 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
12
(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 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. Consistent with the NRC License, FMRI in April, 2004 drew $525,000 from
the Trust. 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 NRC granted a
request of the State of Oklahoma for a hearing to challenge certain aspects of
the NRC License. The State of Oklahoma challenged a number of aspects of the NRC
License, 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. On May 26, 2004, the administrative law
judge overseeing the proceeding issued his decision, finding in favor of FMRI
and against the State of Oklahoma on all matters under consideration. The State
of Oklahoma's ability to appeal the ruling of the administrative law judge
expired on June 15, 2004 such that the ruling of the administrative law judge is
now final and non-appealable. Notwithstanding the victory by FMRI, the
challenges by the State of Oklahoma, both to the NRC License and to confirmation
of the Plan, resulted in considerable additional expense and significant delays
with respect to the implementation of the Reorganization Plan, including
precluding FMRI from undertaking to commence certain actions required by the NRC
License. Among other things, the NRC License sets forth the benchmarks and
timeline for the decommissioning of the Muskogee Facility. Specifically, the NRC
License required FMRI (i) by September 1, 2004, to commence Phase 1 work of
removing certain residue materials ("WIP") from the site and (ii) by March 31,
2006 to complete the removal of the WIP materials. Realizing its inability to
satisfy certain of its NRC License conditions, FMRI timely notified the NRC and
commenced discussions with the NRC and third parties with a view to, as soon as
possible and subject to available funding, commence and complete Phase 1
remediation. Unfortunately, FMRI has been unable, to date, to reach consensus
with the NRC on modifications necessary to commence removal of WIP materials. As
a result, FMRI remains in violation of its NRC License but continues to maintain
the health and safety of the Muskogee Facility. Fansteel can provide no
assurance that FMRI will be able to reach consensus with the NRC and eliminate
the existing violations. Notwithstanding FMRI's violations, the obligations of
Fansteel with respect to the Muskogee Facility are unchanged and remain limited
to Fansteel's obligations to FMRI under the FMRI Notes, as described in the
Reorganization Plan. However, if FMRI is unable to reach consensus with the NRC
on necessary modifications to its license, it could have an adverse effect on
the Company.
13
(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 primarily from proceeds of certain 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
(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 for $1.4 million. The City had until August 31, 2004 to
exercise the Option. However, Fansteel and NCI initially agreed to extend the
Option until November 29, 2004 and subsequently to January 31, 2005 in
consideration of, among other things, the extension of certain free rent to the
Company for usage of certain space in the North Chicago Facility if and after
the City exercises 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. In addition, 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 are to be funded primarily 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
14
(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 to be funded by the proceeds of 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. During June 2004, WI sold the Waukegan Facility to Ampsky &
Associates, LLC ("Ampsky") for approximately $100,000 in cash and the
assumption/indemnification by Ampsky of all environment claims and obligations.
As a result, the Company's $1.25 million note has been extinguished.
(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 Federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") Potentially Responsible Parties (CERCLA PRP) Settlement
Agreement 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 (Polychlorinated Biphenyls or "PCB" Treatment), $460,898 (Operating
Industries), $25,000 (Li Tungsten), and $100,000 (Old Southington), and certain
proceeds, if any, of insurance recoveries.
(f) Substantially all of 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, "RCRA") at the Iowa Facility. Wellman
estimates the costs associated with the closure activities for the SWMUs will be
approximately $2,166,000 through 2009. Environmental liabilities are estimated
to be funded from the cash flow generated by operations of Wellman.
15
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". 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 APB No.
16, "Business Combinations," as superseded by Statement of Financial Accounting
Standards ("SFAS") 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 allocation of reorganization value is preliminary and subject to adjustment
upon obtaining a valuation of certain of the intangible assets not included in
the previous appraisals.
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.
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.
16
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 the Company's 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
======== ======== ======== =======
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):
17
(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.
(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.
18
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
SFAS 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:
Eight Months One Month Nine Months
Ended Ended Ended
September 30, January 23, September 30,
Numerator: 2004 2004 2003
----------- ----------- -----------
Net income (loss) $ (310,574) $57,831,942 $(5,339,204)
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 -- -- --
----------- ----------- -----------
Dilutive potential common shares 3,420,000 8,698,858 8,698,858
=========== =========== ===========
Basic earnings per share $(.09) $6.65 $(0.62)
=========== =========== ===========
Diluted earnings per share $(.09) $6.65 $(0.62)
=========== =========== ===========
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 Effective
Date.
19
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 issuance of the NRC 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
September 30, 2004, the gross estimated liability was $37.5 million and the
recorded discounted liability, using a discount rate of 11.3%, was $19.5
million. This liability could be reduced by potential net insurance recoveries
that the Company is seeking from its insurers, but there is no assurance any net
recoveries will be received.
In September 2000, the EPA issued a unilateral administrative order under
Section 106 of 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 September 30, 2004, the gross estimated liability was $2.05 million
and the recorded discounted liability, using a discount rate of 11.3%, was $1.70
million. This liability could be
20
reduced by potential net insurance recoveries that the Company is seeking from
its insurers, but there is no assurance any net recoveries will be received.
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 down gradient boundary of the facility, no VOCs were
detected in an unnamed stream that is located down gradient 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 a detailed Site Characterization Plan will be submitted
by FLRI. FLRI anticipates implementing the Site Characterization Plan in 2006
and has estimated $1.78 million to perform the remedial activities and a
liability in that amount was recorded at January 23, 2004. At September 30, 2004
the gross estimated liability was $1.66 million and the recorded discounted
liability, using a discount rate of 11.3%, was $1.21 million. This liability
could be reduced by potential net insurance recoveries that the Company is
seeking from its insurers, but there is no assurance any net recoveries will be
received.
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
estimated 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. On June
29, 2004, WI, sold its only asset consisting of land in Waukegan IL, for
$100,000 in cash and the assumption by the buyer of all environmental
remediation of the site. The estimated cost of remediation was $1,250,000 to be
expended within 9 years. Fansteel Inc. was to fund the cleanup through an
unsecured note payable to WI maturing on December 31, 2012. WI is a 100% owned
special purpose subsidiary organized as part of the plan of reorganization that
was effective January 23, 2004 for the purpose of environmental remediation of
the property owned in Waukegan, Illinois. In connection with the sale of this
property, the buyer provided a standby letter of credit for $1,250,000 as
financial assurance to the City of Waukegan for remediation. As part of the
sale, the Department of Justice on behalf of the U.S. Government, pursuant to a
settlement agreement, agreed to the buyer's assumption of all of the
environmental obligations of WI and the cancellation of the note payable from
Fansteel Inc. to WI.
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 2004. This loss relates
primarily to the amortization of discounted environmental liabilities arising
from the Company's unsecured note
21
obligations to its special purpose subsidiaries and the pension note for the
terminated pension plan. In 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 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:
September 30, December 31,
2004 2003
------------- ------------
Payroll and related costs $1,828,218 $1,756,298
Taxes, other than income 214,510 231,235
Profit sharing 494,209 481,743
Insurance 2,568,481 2,427,831
Environmental 244,910 163,929
Professional fees 359,777 3,304,616
Other 501,557 396,669
---------- ----------
$6,211,662 $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. At September 30, 2004 the gross estimated
liability was 2.1 million and the recorded discounted liability, using a
discount rate of 11.3%, was $1.58 million.
Wellman is permitted to operate a sanitary landfill for the disposal of its
foundry sand. It is anticipated, based upon recent projection by third party
consultants, 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 September 30, 2004 was $433,000.
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
22
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 September 30, 2004 was $410,000.
This liability could be reduced by potential net insurance recoveries that the
Company is seeking from its insurers, but there is no assurance any net
recoveries will be received.
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:
September 30, December 31,
2004 2003
------------ ------------
Revolving line of credit through Congress Financial $6,635,170 $--
---------- ------
Total short-term borrowings $6,635,170 $--
========== ======
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 September 30, 2004, the Company had
letters of credit for $769,000 outstanding for casualty insurance collateral
under the new credit facility with an interest rate of 2.5%.
23
Long-term debt consisted of the following:
September 30, December 31,
2004 2003
------------- ------------
PBGC, non-interest bearing ten-year note, due from 2004 to 2013
(net of an imputed discount of $3,851,548 at an interest
rate of 11.3%) $5,648,452 $--
Loans from various Pennsylvania economic agencies
with interest rates ranging from 2.0% to 5.5%, due
from 2008 to 2009 945,896 --
Loans from Decommissioning Trust for FMRI 525,000 --
Capital lease, non-interest bearing, due 2005 48,276 66,276
---------- ----------
7,167,624 66,276
---------- ----------
Less current maturities 1,569,523 24,000
---------- ----------
Total long-term debt $5,598,101 $ 42,276
========== ==========
The Pension Benefit Guarantee Corporation note is collateralized by land,
building and equipment located in Mexico with a book value of $1,859,000 at
September 30, 2004. The Pennsylvania long-term debt is collateralized by
machinery and equipment with a net book value of $817,000 at September 30, 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, which produces aluminum
and magnesium sand castings and Industrial Metal Components, which produces
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:
Operating
Net Income
Sales (Loss)
----------- -----------
THIRD QUARTER 2004 (SUCCESSOR COMPANY)
Advanced Structures $ 5,324,706 $ (223,630)
Industrial Metal Components 10,022,050 473,815
Corporate -- --
----------- -----------
Consolidated $15,346,756 $ 250,185
=========== ===========
THIRD QUARTER 2003 (PREDECESSOR COMPANY)
Advanced Structures $ 4,630,119 $ (114,473)
Industrial Metal Components 8,772,490 (288,028)
Corporate -- --
----------- -----------
Consolidated $13,402,609 $ (402,501)
=========== ===========
24
EIGHT MONTHS ENDED SEPTEMBER 30, 2004
(SUCCESSOR COMPANY)
Advanced Structures $16,730,414 $ 289,090
Industrial Metal Components 28,782,102 2,089,869
Corporate -- --
----------- -----------
Consolidated $45,512,516 $ 2,378,959
=========== ===========
ONE MONTH ENDED JANUARY 23, 2004
(PREDECESSOR COMPANY)
Advanced Structures $ 926,011 $ (297,436)
Industrial Metal Components 2,337,256 17,839
Corporate -- --
----------- -----------
Consolidated $ 3,263,267 $ (279,597)
=========== ===========
NINE MONTHS ENDED SEPTEMBER 30, 2003 (PREDECESSOR COMPANY)
Advanced Structures $12,950,116 $(1,130,288)
Industrial Metal Components 30,418,552 887,316
Corporate -- (77,318)
----------- -----------
Consolidated $43,368,668 $ (320,290)
=========== ===========
The identifiable assets are as follows:
September 30, December 31,
2004 2003
------------- -----------
IDENTIFIABLE ASSETS:
Advanced Structures $12,350,920 $ 8,742,605
Industrial Metal Components 16,155,966 18,091,794
Reorganization value in excess of amounts allocable
to identified assets 12,893,734 --
Corporate / Discontinued 10,499,661 21,654,449
----------- -----------
Total Assets $51,900,281 $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 $447,000, 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
25
contribution required by ERISA. The impact of this plan on pretax income from
continuing operations was as follows:
Eight Months One Month Nine Months
Ended Ended Ended
September 30, January 23, September 30,
2004 2004 2003
------------- ---------- -------------
Components of net periodic-benefit costs
Service cost $ 113,904 $ 14,238 $ 124,047
Interest cost 232,416 29,052 263,535
Expected rate of return 290,392 (36,299) (323,511)
Amortization of prior service costs 48 6 48
--------- --------- ---------
Total net periodic-benefit cost $ 55,976 $ 6,997 $ 64,119
========= ========= =========
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.
26
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the financial
statements and notes thereto that are included in this quarterly report on Form
10-Q. Certain statements made in this section or elsewhere in this report
contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. 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 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 nine
months ended September 30, 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 eight months ended September 30,
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 THIRD QUARTER AS COMPARED TO 2003 THIRD QUARTER
Net Sales
The following table sets forth the combined net sales of the Company
included in the consolidated statement of operations:
Third Quarter Third Quarter
Net Sales 2004 2003
------------- -------------
Advanced Structures $ 5,324,706 $ 4,630,119
Industrial Metal Components 10,022,050 8,772,490
----------- -----------
$15,346,756 $13,402,609
=========== ===========
27
Consolidated net sales for the third quarter 2004 were 14.5% higher than
the third quarter 2003.
The Advanced Structures' net sales for the third quarter 2004 were
$695,000, or 15.0% higher, as compared to the third quarter 2003. This
improvement is attributed to increased sales of castings for engine components
for military programs, private jets and regional jets.
The Industrial Metal Components' net sales for the third quarter 2004
increased $1,250,000, or 14.2%, as sales of powdered metal components and
investment castings improved primarily for components sold to automobile related
customers, partially offset by a decrease in special wire form sales due to the
loss of a major customer 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 8.7% lower in the third quarter
2004, as compared to the third quarter 2003 as the Company has been able to
retain a small portion of this business by selling to the third party
integrator. Net sales of powdered metal components improved 31.4% due to an
increase in automotive components, primarily for the light duty truck market.
Net sales of investment casting increased 18.1% in the third quarter 2004, as
compared to the third quarter 2003, due to an increase in castings and the
related machining and assembly for light duty truck engines.
Operating Income (Loss)
The following table sets forth the combined operating income of the Company
included in the consolidated statement of operations:
Third Quarter Third Quarter
Operating Income (Loss) 2004 2003
------------- -------------
Advanced Structures $(223,630) $(114,473)
Industrial Metal Components 473,815 (288,028)
Corporate -- --
--------- ---------
$ 250,185 $(402,501)
========= =========
Operating income of $250,000 for the third quarter 2004 improved from an
operating loss of $403,000 in the third quarter 2003, due to higher sales and
lower administrative expenses primarily related to reduced employee related
costs and insurance expenses.
Operating loss of $224,000 in the Advanced Structures segment for the third
quarter 2004 was worse than an operating loss of $114,000 in the third quarter
2003, due to higher scrap on newer programs.
Operating income of $474,000 in the Industrial Metal Components segment for
the third quarter 2004 improved from an operating loss in the third quarter 2003
of $288,000. The increase in the operating income is primarily the result of
higher sales in investment castings and powdered metal components as well as
cost reductions at all three product lines in the segment.
28
Other Income (Expenses)
The following table sets forth the combined other income (expense) of the
Company included in the consolidated statement of operations:
Third Quarter Third Quarter
Other expense 2004 2003
------------ -------------
Interest expenses $(225,863) $(285,359)
Other (4,838) 95,982
--------- ---------
$(230,701) $(189,377)
========= =========
Other expense in total increased $41,000 in the third quarter 2004 compared
with the third quarter 2003, as the third quarter of 2003 included a gain of
$114,000 from sale of real estate. Interest expenses were lower in the third
quarter 2004 as a result of a one-time adjustment of $133,000 in 2003 for
interest on a secured loan while in bankruptcy.
Reorganization Items
Reorganization items relate to U.S. Trustee and bankruptcy professional
fees. The third quarter 2004 reorganization expenses were $18,000, as compared
to $2,280,000 in the third quarter 2003, as the Company emerged from Chapter 11
on January 23, 2004, the Effective Date.
Discontinued Operations
Discontinued operations reported a loss of $962,000 in the third 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, as well as charges related to employee benefits from operations
sold or closed in 2003. In the third quarter 2003, discontinued operations
reported a gain of $2,605,000, which related to a tax refund of $3,723,000
related to losses from environmental liabilities at discontinued operations
reduced by operating losses at the Industrial Tool segment and California Drop
Forge operations sold in 2003 as part of the Plan of Reorganization.
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 net deferred tax assets, except for the gain in discontinued
operations from the carry-back refund from the net operating loss related to
environmental liabilities.
Net Income (Loss)
Net loss of $960,000 in the third quarter 2004 resulted in no earnings per
share from continuing operations and a loss per share of $.28 from discontinued
operations. Net loss for the third quarter 2003 was $266,000 with loss per share
of $.33 from continuing operations and earnings per share of $.30 from
discontinued operations.
29
2004 NINE MONTHS AS COMPARED TO 2003 NINE MONTHS
Net Sales
The following table sets forth the combined net sales of the Company
included in the consolidated statement of operations:
Nine months ended Nine months ended
September 30, September 30,
Net Sales 2004 2003
------------------ ------------------
Advanced Structures $17,656,425 $12,950,116
Industrial Metal Components 31,119,358 30,418,552
----------- -----------
$48,775,783 $43,368,668
=========== ===========
Consolidated net sales for the nine months ended September 30, 2004 were
12.5% higher than the same period in 2003.
The Advanced Structures' net sales for the nine months ended September 30,
2004 were higher by $4.7 million, or 36.3%, as compared with the nine months
ended September 30, 2003. This improvement is attributed to increased sales of
castings for military programs related to aircraft engine and helicopter
components, as well as, engine components for regional jets and private jets.
Tooling sales doubled in 2004, primarily for new products to foreign customers,
and were 23% of the increase in sales.
The Industrial Metal Components' net sales for the nine months ended
September 30, 2004 increased $701,000, or 2.3%, with greater demand from the
automotive market for investment casting and powdered metal components reduced
by lower special wire form sales due to the loss of a major customer 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 20.9% lower in the nine months ended September 30, 2004, as
compared to the nine months ended September 30, 2003. The Company has been able
to retain a small portion of this business by selling to the third party
integrator. Net sales of investment casting were 6% higher in the nine months
ended September 30, 2004 as compared with the nine months ended September 30,
2003, due to an increase in sales of diesel engine components for light duty
trucks to meet a change over to a different process, fine blanking, which will
result in the loss of approximately $8 million in sales annually. Net sales of
powdered metal components improved 20.9% 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:
Nine months ended Nine months ended
Operating Income (Loss) September 30, 2004 September 30, 2003
------------------ ------------------
Advanced Structures $ (8,346) $(1,130,288)
Industrial Metal Components 2,107,708 887,316
Corporate -- (77,318)
----------- -----------
$ 2,099,362 $ (320,290)
=========== ===========
30
Operating income of $2.1 million for the nine months ended September 30,
2004 improved from an operating loss of $321,000 in the nine months ended
September 30, 2003, due to higher sales and lower administrative expenses
related primarily to reduced employee related costs and insurance expenses.
Operating loss of $8,000 in the Advanced Structures segment for the nine
months ended September 30, 2004 improved from an operating loss of $1,130,000 in
the nine months ended September 30, 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, but the high number of newer parts
being produced has resulted in increased scrap.
Operating income of $2,108,000 in the Industrial Metal Components segment
for the nine months ended September 30, 2004 improved $1.2 million as compared
to operating income in the nine months ended September 30, 2003. 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 in the nine months ended
September 30, 2004 compared to the nine months ended September 30, 2003, due to
higher sales and reduced selling and administrative expenses. The special wire
forms operation reported a higher operating loss in the nine months ended
September 30, 2004 compared to the same period in 2003 as sales decreased
significantly due to the loss of a major customer, discussed above, and the
temporary shutdown of the plating line from the last week of April through the
second week of July due to a fatal accident causing an increase in outside
processing costs.
Other Income (Expenses)
The following table sets forth the combined other income (expense) of the
Company included in the consolidated statement of operations:
Nine months ended Nine months ended
September 30, September 30,
Other income (expense) 2004 2003
----------------- -----------------
Interest expenses $(571,584) $(584,581)
Other 18,373 110,072
--------- ---------
$(553,211) $(474,509)
========= =========
Other expense increased $79,000 in the nine months ended September 30, 2004
compared to the nine months ended September 30, 2003, as 2003 included a gain on
the sale of real estate.
Reorganization Items
For the nine months ended September 30, 2004, reorganization expenses
related to U.S Trustee fees and bankruptcy professional fees were $769,000, as
compared to $5,977,000 in the nine months ended September 30, 2003, as the
Company emerged from Chapter 11 on January 23, 2004.
31
Discontinued Operations
Discontinued operations reported a loss of $1,758,000 in the nine months
ended September 30, 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 as well as charges related to employee
benefits from operations sold or closed in 2003, reduced by a gain of $773,000
being recognized on the sale of the land owed by special purpose subsidiary
Waukegan Inc. and assumption by the buyer of the related environmental
liabilities at the site. In the nine months ended September 30, 2003,
discontinued operations reported income of $1,432,000, which related to gain
from a tax refund for environmental liabilities of $3,723,000 reduced by
operating losses at the Industrial Tool segment and California Drop Forge
operations sold in 2003 as part of the Plan of Reorganization.
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 net deferred tax assets, except for the gain in discontinued
operations from the carry-back refund from the net operating loss related to
environmental liabilities.
Net Income (Loss)
Net income of $57,521,000 in the nine months ended September 30, 2004
included a $15,576,000 gain from the discharge of debt under the Plan and a
$42,927,000 gain from the adoption of fresh start accounting. Net loss for the
nine months ended September 30, 2003 was $5,339,000.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2004, the Company had cash of $437,000 compared to
$1,290,000 of cash on December 31, 2003. Cash increased $340,000 from continuing
operations and decreased $1,194,000 from discontinued operations in the nine
months ended September 30, 2004. The significant reduction in working capital in
the nine months ended September 30, 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 nine months ended September 30, 2004, operating activities
consumed $3.9 million of cash with $2.3 million related to an increase in
accounts receivable due to higher sales. Accounts payable and accrued
liabilities decreased $2.9 million, primarily for payments to bankruptcy
professionals. In the nine months ended September 30, 2003 operating activities
used $1.7 million with $1.4 million related to payments of liabilities subject
to compromise for critical vendors and environmental health and safety costs.
32
Investing Activities
Investing activities provided $22,000 in the nine months ended September
30, 2004, as compared to $1,463,000 provided in the nine months ended September
30, 2003, due to timing of receipts from restricted cash in 2003. Capital
expenditures have only been $73,000 in 2004 compared with $615,000 in 2003.
Financing Activities
Financing activities provided $4,204,000 in the nine months ended September
30, 2004, as compared to zero in the nine months ended September 30, 2003, with
net borrowing from the revolving line of credit in the nine months ended
September 30, 2004 totaling $4.5 million, less payments of long-term debt of
$247,000.
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
January 23, 2007. The Company is required to meet certain financial covenants to
achieve certain EBITDA and that limit future capital expenditures, all of which
have been met as of September 30, 2004. 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 September 30, 2004, the Company had letters of credit
for $769,000 outstanding primarily 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 make estimates
and assumptions that affect the amounts reported in the financial statements 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
33
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
portion of raw materials consumed by the Company are various steel alloys. Price
increases were experienced in the nine months ended September 30, 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is not party to off-balance sheet arrangements other than
normal operating leases for any period presented.
34
CONTRACTUAL OBLIGATIONS
The following table summarizes payments due by year for the contractual
obligations at September 30, 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 1,104 79 274 289 305 143 14
Capital leases 48 6 42 -- -- -- --
Operating leases 246 68 127 41 5 5 --
Revolving line 6,635 -- -- -- 6,635 -- --
Letters of credit 769 -- -- -- 769
Environmental liabilities 46,537 790 2,337 3,826 4,113 5,657 29,814
------- ------- ------- ------- ------- ------- -------
Total $64,839 $ 1,693 $ 3,530 $ 4,906 $12,577 $ 6,555 $35,578
======= ======= ======= ======= ======= ======= =======
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 September 30, 2004 was $1.2 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 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 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.
35
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 that 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 aspects of
the NRC License. The State of Oklahoma challenged a number of aspects of the NRC
License, 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. On May 26, 2004, the administrative law
judge overseeing the proceeding issued his decision, finding in favor of FMRI
and against the State of Oklahoma on all matters under consideration. The State
of Oklahoma's ability to appeal the ruling of the administrative law judge
expired on June 15, 2004 such that the ruling of the administrative law judge is
now final and non-appealable. Notwithstanding the victory by FMRI, the
challenges by the State of Oklahoma, both to the NRC License and to confirmation
of the Plan, resulted in considerable additional expense and significant delays
with respect to the implementation of the Reorganization Plan, including
precluding FMRI from undertaking to commence certain actions required by the NRC
License. Among other things, the NRC License sets forth the benchmarks and
timeline for the decommissioning of the Muskogee Facility. Specifically, the NRC
License required FMRI (i) by September 1, 2004, to commence Phase 1 work of
removing certain residue materials ("WIP") from the site and (ii) by March 31,
2005 to complete the removal of the WIP materials. Realizing its inability to
satisfy certain of its NRC License conditions, FMRI timely notified the NRC and
commenced discussions with the NRC and third parties with a view to, as soon as
possible and subject to available funding, commence and complete Phase 1
remediation. Unfortunately, FMRI has been unable, to date, to reach consensus
with the NRC on modifications necessary to commence removal of WIP materials. As
a result, FMRI remains in violation of its NRC License but continues to maintain
the health and safety of the Muskogee Facility. Fansteel can provide no
assurance that FMRI will be able to reach consensus with the NRC and eliminate
the existing violations. Notwithstanding FMRI's violations, the obligations of
Fansteel with respect to the Muskogee Facility are unchanged and remain limited
to Fansteel's obligations to FMRI under the FMRI Notes, as described in the
Reorganization Plan. However, if FMRI is unable to reach consensus with the NRC
on necessary modifications to its license, it could have an adverse effect on
the Company.
36
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURTIES 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 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 third
quarter of 2004.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
((a) Exhibits
Exhibit No. Description
- ----------- -----------
10.1* Employment Agreement dated as of January 16, 2004, between the
Registrant and Gary L. Tessitore, as amended by that certain
amendment dated as of October 22, 2004, between such parties.
10.2* Employment Agreement dated as of January 16, 2004, between the
Registrant and R. Michael McEntee, as amended by that certain
amendment dated as of October 22, 2004, between such parties.
31.1* Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to
Section 203 of the Sarbanes-Oxley Act of 2002.
31.2* Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act of 1934, as adopted pursuant to
Section 203 of the Sarbanes-Oxley Act of 2002.
37
32.1* Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Filed herewith.
(b) Reports on Form 8-K
A Report on Form 8-K was filed on July 7, 2004 which announced, under Item 5,
the sale by Waukegan, Inc., a subsidiary of the Registrant, of its only asset,
consisting of land in Waukegan, Illinois, for cash and the assumption by the
buyer of all environmental remediation of the site.
A Report on Form 8-K was filed on August 16, 2004, which included, under Item
12, a press release that announced the Registrant's financial results for the
second quarter ended June 30, 2004. Also included in this filing was an
unaudited statement of operations for the three months ended June 30, 2004 and
June 30, 2003 and the five months ended June 30, 2004 and June 30, 2003.
38
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
November 12, 2004 and Chief Executive Officer
/s/ R. Michael McEntee
-----------------------------------------
R. Michael McEntee
Vice President and
November 12, 2004 Chief Financial Officer
39