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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
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 or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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 (or such shorter period that registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 29, 2005
- ------------------------------- ------------------------------------------
Common Stock, $.01 par value 3,083,074 shares
FANSTEEL INC.
FORM 10-Q - INDEX
March 31, 2005
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1 Financial Statements:
Consolidated Statement of Operations - Three months ended March 31, 3
2005, Two months ended March 31, 2004 (Successor Company), One month
ended January 23, 2004 (Predecessor Company)
Consolidated Balance Sheet - March 31, 2005 and December 31, 2004 4
(Successor Company)
Consolidated Statement of Cash Flows - Three months ended
March 31, 6 2005, Two months ended March 31, 2004 (Successor
Company), and one month ended January 23, 2004 (Predecessor
Company)
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 24
Item 3 Quantitative and Qualitative Disclosures About Market Risk 30
Item 4 Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 31
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3 Defaults Upon Senior Securities 33
Item 4 Submission of Matters to a Vote of Security Holders 33
Item 5 Other Information 33
Item 6 Exhibits 33
Signatures 35
Exhibit 31.1 Certifications- Gary L. Tessitore 36
Exhibit 31.2 Certifications- R. Michael McEntee 37
Exhibit 32.1 Certification 38
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Fansteel Inc.
Consolidated Statement of Operations
(Unaudited)
Predecessor
Successor Company Company
---------------------------------------- ------------------
Three Months Two Months One Month
Ended Ended Ended
March 31, 2005 March 31, 2004 January 23, 2004
------------------ ------------------ ------------------
Net Sales $ 13,230,921 $ 10,542,897 $ 2,695,857
Cost and Expenses
Cost of products sold 11,020,614 8,020,183 2,381,551
Selling, general and administrative 1,691,711 1,325,387 492,141
------------------ ------------------ ------------------
12,712,325 9,345,570 2,873,692
------------------ ------------------ ------------------
Operating Income (Loss) 518,596 1,197,327 (177,835)
Other Expense
Interest expense (207,261) (110,690) (43,977)
Other (419) (12,705) (7,198)
------------------ ------------------ ------------------
(207,680) (123,395) (51,175)
------------------ ------------------ ------------------
Income (Loss) from Continuing Operations Before
Reorganization Items and Income Taxes 310,916 1,073,932 (229,010)
Reorganization items
Professional fees -- -- (333,289)
US trustee fees (18,000) -- --
------------------ ------------------ ------------------
(18,000) -- (333,289)
Fresh Start Adjustments -- -- 43,455,000
Gain on Debt Discharge -- -- 15,048,000
------------------ ------------------ ------------------
Income from Continuing Operations Before
Income Taxes 292,916 1,073,932 57,940,701
Income Tax Provision (Benefit) -- -- --
------------------ ------------------ ------------------
Income from Continuing Operations 292,916 1,073,932 57,940,701
Loss from Discontinued Operations (1,031,605) (433,487) (108,758)
------------------ ------------------ ------------------
Net Income (Loss) $ (738,689) $ 640,445 $ 57,831,943
================== ================== ==================
Weighted Average Number of Common Shares
Outstanding 3,420,000 3,420,000 8,698,858
Basic and Diluted Net Income (Loss) per Share(a)
Continuing operations $ 0.08 $ 0.32 $ 6.66
Discontinued operations (0.30) (0.13) (0.01)
------------------ ------------------ ------------------
Net income (loss) $ (0.22) $ 0.19 $ 6.65
================== ================== ==================
- ---------------------
(a) Basic earnings per share and diluted earnings per share are the same.
See Notes to Consolidated Financial Statements
3
Fansteel Inc.
Consolidated Balance Sheet
March 31, December 31,
2005 2004
-------------------- -------------------
ASSETS (Unaudited)
Current assets
Cash and cash equivalents $ 26,299 $ 7,597
Restricted cash 228,319 394,034
Accounts receivable, less allowance of $553,000 at March 31,
2005 and $541,000 at December 31, 2004 8,547,780 7,668,678
Inventories
Raw material and supplies 1,169,216 1,134,049
Work-in process 4,000,080 3,212,009
Finished goods 668,925 452,420
-------------------- -------------------
Total inventories 5,838,221 4,798,478
-------------------- -------------------
Other assets - current 1,465,581 1,509,106
-------------------- -------------------
Total current assets 16,106,200 14,377,893
-------------------- -------------------
Property, plant and equipment
Land 1,084,419 1,084,419
Buildings 4,784,363 4,784,363
Machinery and equipment 4,638,221 4,581,726
-------------------- -------------------
10,507,003 10,450,508
Less accumulated depreciation 1,296,674 1,037,215
-------------------- -------------------
Net property, plant and equipment 9,210,329 9,413,293
-------------------- -------------------
Other assets
Deposits 5,756,552 5,753,141
Reorganization value in excess of amounts allocable to
identified assets 12,893,734 12,893,734
Property held for sale 1,327,500 2,447,500
Other 140,051 121,649
-------------------- -------------------
Total other assets 20,117,837 21,216,024
-------------------- -------------------
$45,434,366 $45,007,210
==================== ===================
See Notes to Consolidated Financial Statements
4
Fansteel Inc.
Consolidated Balance Sheet
March 31, December 31,
2005 2004
-------------------- -----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) (Unaudited)
Liabilities
Current liabilities
Accounts payable $ 6,404,348 $ 6,025,129
Accrued liabilities 6,039,976 6,554,494
Short-term borrowings 6,079,911 4,108,457
Current maturities of long-term debt 1,552,876 1,549,175
-------------------- -----------------------
Total current liabilities 20,077,111 18,237,255
-------------------- -----------------------
Long-term debt 5,018,981 4,933,038
-------------------- -----------------------
Other liabilities - environmental remediation 24,521,051 25,276,826
-------------------- -----------------------
Total liabilities 49,617,143 48,447,119
-------------------- -----------------------
Shareholders' equity (deficit)
Common stock, par value $0.01; Authorized 3,600,000 shares,
issued and outstanding 3,420,000 shares 34,200 34,200
Capital in excess of par value 296,314 296,314
Accumulated (deficit) (4,499,654) (3,760,965)
Other comprehensive income
Foreign currency translation (13,637) (9,458)
-------------------- -----------------------
Total other comprehensive income (13,637) (9,458)
-------------------- -----------------------
Total shareholders' equity (deficit) (4,182,777) (3,439,909)
-------------------- -----------------------
Total liabilities and shareholders' equity (deficit) $45,434,366 $45,007,210
==================== =======================
See Notes to Consolidated Financial Statements
5
Fansteel Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Predecessor
Successor Company Company
-------------------------------------- ----------------
Three Months Two Months One Month
Ended Ended Ended
March 31, 2005 March 31, 2004 January 23, 2004
---------------- ---------------- ----------------
Cash Flows From Operating Activities:
Net income (loss) $ (738,689) $ 640,445 $ 57,831,943
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 251,602 212,827 72,994
Fresh start adjustments -- -- (43,455,000)
Gain on discharge of debt -- -- (15,048,000)
Loss from discontinued operations 1,031,605 433,487 108,758
Change in assets and liabilities:
Increase in accounts receivable (891,602) (1,696,342) (321,198)
Increase in inventories (1,039,743) (373,069) (280,153)
Decrease (increase) in other assets - current 61,866 (361,566) 79,568
Increase (decrease) in accounts payable and
accrued liabilities 406,490 (1,294,202) (104,217)
Increase in liabilities subject to compromise -- -- 300,000
(Increase) decrease in other assets (21,813) (24,870) 765
---------------- ---------------- ----------------
Net cash used in operating activities (940,284) (2,463,290) (814,540)
---------------- ---------------- ----------------
Cash Flows From Investing Activities:
Decrease in restricted cash 165,715 -- 379,457
Capital expenditures (56,495) (8,177) (3,155)
---------------- ---------------- ----------------
Net cash provided by (used in) investing activities 109,220 (8,177) 376,302
---------------- ---------------- ----------------
Cash Flows From Financing Activities:
Proceeds from short-term borrowing 2,128,271 2,548,091 --
Payments on long-term debt (67,173) (81,835) --
---------------- ---------------- ----------------
Net cash provided by financing activities 2,061,098 2,466,256 --
---------------- ---------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents
from Continuing Operations 1,230,034 (5,211) (438,238)
Cash Flows From Discontinued Operations (1,211,332) (750,381) 147,819
---------------- ---------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents 18,702 (755,592) (290,419)
Cash and Cash Equivalents at Beginning of Period 7,597 999,787 1,290,206
---------------- ---------------- ----------------
Cash and Cash Equivalents at End of Period $ 26,299 $ 244,195 $ 999,787
================ ================ ================
See Notes to Consolidated Financial Statements
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
The consolidated financial statements as of and for the periods ending
March 31, 2005, March 31, 2004, and January 23, 2004 of Fansteel Inc. are
unaudited but include all adjustments (consisting only of normal recurring
adjustments) that management considers necessary for a fair presentation of such
financial statements. These financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with Article 10 of SEC Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. Operating results during the period ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
Fansteel Inc. and its subsidiaries ("Fansteel" or the "Company") are
manufacturers of engineered metal components using the sand castings, investment
casting and powdered metal processes. Products manufactured are used in a
variety of markets including automotive, energy, military and commercial
aerospace, agricultural and construction machinery, lawn and garden equipment,
marine, 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 powdered metal components and investment castings.
The Company's business segments have separate management teams and
infrastructures that offer different products and services.
The consolidated financial statements include the accounts of Fansteel Inc.
and its subsidiaries. Inter-company accounts and transactions have been
eliminated in consolidation.
Certain reclassifications have been made to prior periods' financial
statements to conform with the 2005 presentation.
The accompanying consolidated financial statements do not include all
disclosers normally provided in annual financial statements, and therefore,
should be read in conjunction with the year-end financial statements.
NOTE 2 - STOCK-BASED COMPENSATION
In accounting for stock-based employee compensation, the Company uses the
intrinsic-value method specified in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting 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."
7
Successor Company Predecessor Company
-------------------------------------------- -----------------------
(Dollars in millions, except for Three Months Two Months One Month
earnings per-share) Ended Ended Ended
March 31, 2005 March 31, 2004 January 23, 2004
-------------------- -------------------- -----------------------
Net income (loss) as reported $ (738,689) $ 640,445 $ 57,831,943
Deduct: Total stock based compensation expense
determined under the fair value based method,
net of related tax effect - - -
-------------------- -------------------- -----------------------
Pro forma - net income (loss) $ (738,689) $ 640,445 $ 57,831,943
==================== ==================== =======================
Basic/diluted income (loss) per share
As reported $ (0.22) $ 0.19 $6.65
==================== ==================== =======================
Pro forma $ (0.22) $ 0.19 $6.65
==================== ==================== =======================
NOTE 3 - REORGANIZATION AND EMERGENCE FROM CHAPTER 11
On January 15, 2002 (the "Petition Date"), Fansteel Inc. and eight of its
then subsidiaries (collectively, the "Filing Debtors") filed voluntary petitions
for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. After
the Petition Date, the Predecessor Company (referring to the Company prior to
the Effective Date) continued to operate its business and manage its affairs as
debtor-in-possession ("DIP") with court approval for transactions outside the
ordinary course of business. The Chapter 11 case with respect to a former
subsidiary, Fansteel Schulz Products, Inc. ("Schulz"), was dismissed on November
27, 2002 pursuant to a bankruptcy court-approved sale by Fansteel Inc. of all of
the stock of Schulz. 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"). 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").
On January 23, 2004, the Company entered into a secured credit facility
with Wachovia Capital Finance (formerly known as Congress Financial
Corporation), 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 inventories and up to $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, which requires it 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
8
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 were entitled by the Plan to receive approximately 50% stock
ownership of the reorganized Company. 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, outstanding
obligations under the Predecessor Company's debtor-in-possession financing
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, either (i) were paid or are being paid in accordance with the terms of
their respective agreements, (ii) received or are receiving periodic cash
payments totaling the value of the collateral securing the allowed claim as of
the Effective Date, (iii) received a return of the collateral securing the
allowed claim, or (iv) received such other treatment as may be agreed to with
the Debtors.
Pursuant to the Plan, 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 2003 asset sale
proceeds and a 2004 cash contribution from Fansteel of $3.1 million) and (ii)
pro rata distributions of 55% of the New Common Stock of Fansteel, subject to
dilution for issuances pursuant to an employee plan. The initial distributions
of cash and stock were made on February 23, 2004. Distributions of cash and
stock have been made, and it is anticipated that a final distribution of cash
and stock will be made during 2005 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
expense 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 the
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) a
$9.5 million, non-interest bearing, ten-year, note, dated January 23, 2004, from
Fansteel Inc., secured by land, buildings, and equipment owned by or used in
9
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).
The Plan also provided for settlement of various existing and potential
environmental claims and obligations of the Debtors. In particular, the Plan
provided 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 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
and/or to be 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, an additional
mandatory annual payment, based on excess available cash flow, if any, with the
maximum additional mandatory annual payment capped at $4 million, and the net
proceeds of recoveries by Fansteel, if any, on certain insurance claims; and
(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 and treat/monitor
groundwater. If an FMRI contingent note is required, it is anticipated that it
would be issued in 2012.
Pursuant to the Plan, FMRI can 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 and provided certain terms and conditions are
satisfied. Consistent with the NRC License, FMRI in April 2004 drew $525,000
from the Trust. On April 13, 2005, the decommissioning trust was amended, with
the consent of the NRC, to allow additional draws of up to $2,500,000 to be
drawn by FMRI to complete Phase 1 of the decommissioning plan. The amounts of
these additional draws are dependent upon, among other things, the weight of
material disposed of offsite at the approved disposal site.
10
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
FMRI's 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
became 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 Decommissioning Plan, effectively
precluding FMRI from undertaking to commence certain actions required by its 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, taking into account
preparation, scheduling, cost and weather. 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. Such negotiations and discussions resulted in an April 13, 2005
amendment to the decommissioning trust that now permits an additional $2,500,000
to be drawn by FMRI to complete Phase 1 of the decommissioning plan. The amounts
of these additional draws are dependent upon the weight of material disposed of
offsite at the approved disposal site. Notwithstanding FMRI access to additional
funding, FMRI has been unable, to date, to reach consensus with the NRC on
modifications necessary to eliminate the violation of not starting the Phase 1
of the decommissioning plan, in part because certain conditions to the
commencement of Phase 1 decommissioning still remains. As a result, FMRI remains
in technical 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 Plan. However, if
FMRI is unable to commence Phase 1 decommissioning by the end of June 2005
and/or to reach consensus with the NRC on necessary modifications to its
license, it could have an adverse effect on the Company.
(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
11
with respect to the North Chicago Facility. The operations of NCI were to be
funded primarily from proceeds of certain non-interest bearing notes issued
and/or to be 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, to be issued
in the future, 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 was obligated
under the Plan to transfer any funds received from the City to the United States
Environmental Protection Agency (the "EPA") and was 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 and the obligation to issue
the above-described contingent note by the Company to NCI was to be cancelled.
In addition, the Company was obligated to 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. On December 31, 2004, the City did notify
NCI that it was exercising its option. On March 7, 2005, NCI sold the real
property to the City, transferred the proceeds of $1,400,000 received from the
City to the EPA and the Company delivered to the EPA an unsecured, non-interest
bearing promissory note in the principal amount of $677,232, payable in equal
semi-annual payments to be made over a three-year period beginning six months
after issuance. The NCI Notes (including the obligation to issue a contingent
note) were canceled, and the City entered into a six-month lease with Fansteel
Inc. with respect to portions of the North Chicago Facility.
(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
12
(ii) A contingent note, to be issued in the future, 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 operations 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 of 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, net 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 for Wellman to characterize the
extent of any contamination associated with certain Solid Waste Management Units
("SWMUs") and to evaluate 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
aggregate approximately $2,166,000 through 2009. Environmental liabilities are
estimated to be funded from the cash flow generated by operations of Wellman.
13
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 enterprise value of the Company as of the Effective Date of the Plan
(January 23, 2004) 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.
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
14
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)(b) $ - $ 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 8,412 892 (h) - 9,304
Accrued income taxes 9 328 (h) - 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 5,242 - 19,798
--------------- ----------------- ----------------- -----------------
Long-term debt 42 9,775 (h) (4,474)(i) 5,343
Environmental remediation 1,174 47,168 (j) (23,112)(j) 25,230
Liabilities subject to
compromise 90,440 (90,440)(k) - -
Shareholders' equity (deficit) (58,179) 15,048 43,455 324
--------------- ----------------- ----------------- -----------------
Total liabilities and equity $ 48,033 $ (13,207) $ 15,869 $ 50,695
=============== ================= ================= =================
Adjustments reflected in the consolidated balance sheet are as follows (in
dollars):
(a) In accordance with the Plan, the Company made a cash settlement with the
general unsecured creditors that included payout from the restricted cash
of $12,300,000 to the benefit of general unsecured creditors and $698,000
to the Company. The Company also
15
distributed $3,100,000 for 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 for 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.
(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 $47.2
million of liabilities subject to compromise and fresh start adjustment in
reorganization to discount the liability to its present value based on the
estimated timing of the future cash expenditures.
(k) Liabilities subject to compromise have been eliminated to reflect
settlement of the claims for cash and the issuance of common stock in the
reorganized company as well as the assumptions by the Successor Company.
As part of fresh start accounting, liabilities subject to compromise in the
amount of $31 million were written off as part of the discharge of debt in the
bankruptcy. These liabilities consisted of the following:
January 23, 2004
----------------------
Accounts payable $ 9,646,000
Long-term debt 6,632,000
Environmental 523,000
Pension 14,104,000
----------------------
Total liabilities subject to compromise discharged $ 30,905,000
======================
16
NOTE 5 - EARNINGS (LOSS) 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:
Predecessor
Successor Company Company
------------------------------------- ------------------
Three Months Two Months One Month
Ended Ended Ended
March 31, March 31, January 23,
Numerator: 2005 2004 2004
----------------- ---------------- ------------------
Net income (loss) $ (738,689) $ 640,445 $ 57,831,943
Denominator:
Denominator for basic earnings
per share- weighted average 3,420,000
shares 3,420,000 8,698,858
Effect of dilutive securities
Employee stock options - - -
Employee restricted stock - - -
----------------- ---------------- ------------------
Dilutive potential common
Shares 3,420,000 3,420,000 8,698,858
================= ================ ==================
Basic earnings per share $ (0.22) $ 0.19 $ 6.65
================= ================ ==================
Diluted earnings per share $ (0.22) $ 0.19 $ 6.65
================= ================ ==================
As discussed in Note 3, the Company emerged from Chapter 11 protection 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 and the issuance of New Common Stock as of the Effective
Date.
NOTE 6 - DISCONTINUED OPERATIONS INCLUDING CERTAIN ENVIRONMENTAL REMEDIATION
The Predecessor Company had been licensed by the NRC to possess and use
source material at the Muskogee Facility since 1967. Under the Predecessor
Company's NRC permit, it was authorized to process ore concentrates and tin
slags in the production of refined tantalum products. Licensable quantities of
natural uranium and thorium are present in the slags, ores, concentrates and
process residues.
The Predecessor Company discontinued its Metal Products business segment in
1989. In 1990, the NRC included the Muskogee Facility in the NRC's Site
Decommissioning Management Plan. The Predecessor Company completed a remedial
assessment in 1993 to determine what areas of the Muskogee Facility were
required to undergo decommissioning.
17
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 then 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 consisted 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 an amended NRC License and related
decommissioning plan to FMRI. At December 31, 2004, the liability for the
environmental remediation decreased from $41.6 million to $37.2 million due to
planned spending for remediation, safety and security and the recorded
discounted liability, using a discount rate of 11.3%, was $19.1 million. At
March 31, 2005, the gross estimated liability was $36.9 million and the recorded
discounted liability, using a discount rate of 11.3%, was $20.1 million. This
liability could be reduced by potential net insurance recoveries that the
Company is seeking from its insurers.
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 were
estimated to cost $2.17 million, for which a liability was recorded at January
23, 2004. At December 31, 2004, the gross estimated liability was $2.00 million
and the recorded discounted liability, using a discount rate of 11.3%, was $1.73
million. On March 7, 2005, NCI sold the real property to the City, transferred
the proceeds of $1,400,000 received from the City to the EPA and the Company
delivered to the EPA an unsecured, non-interest bearing promissory note in the
principal amount of $677,232, payable in equal semi-annual payments to be made
over a three-year period beginning six months after issuance. At March 31, 2005,
the gross estimated liability was $.7 million and the recorded discounted
liability, using a discount rate of 11.3%, was $.5 million. This liability could
be reduced by potential net insurance recoveries that the Company is seeking
from its insurers. In the first quarter 2005 a loss of $129,000 was reported for
costs related to closing the transaction.
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
18
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, a
special purpose subsidiary, which pursuant to the Plan now owns the Lexington
facility. 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 December 31, 2004
the gross estimated liability was $1.6 million and the recorded discounted
liability, using a discount rate of 11.3%, was $1.2 million. At March 31, 2005,
the gross estimated liability was $1.6 million and the recorded discounted
liability, using a discount rate of 11.3%, was $1.2 million. This liability
could be reduced by potential net insurance recoveries that the Company is
seeking from its insurers.
The buildings at the former Waukegan Facility have been demolished and only
foundations remain. As part of the Predecessor Company'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. In the second quarter 2004, a gain of $773,000 was
recognized due to the elimination of the environmental liabilities on the site
as part of the sale.
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.
On December 31, 2004, Fansteel Inc. sold substantially all of the assets
(including, but not limited to, machinery and equipment, raw material items,
work-in-process items, finished goods items, receivables, machinery and
equipment contracts, customer contracts and supplier contracts, but excluding
real estate, fixtures and certain other assets) of the division of the Company
known as "Washington Manufacturing" (the "Washington Division") to Whitesell
Corporation
19
("Whitesell"), a customer of the Washington Division, for consideration
consisting of a combination of (i) cash (in the initial amount of approximately
$2.0 million, subject to post-closing adjustment) and (ii) the assumption by
Whitesell of certain liabilities of the Washington Division (in the initial
amount of approximately $1.0 million, determined in accordance with U.S.
generally accepted accounting principles consistently applied, subject to
post-closing adjustment) (collectively, the "Washington Sale"). A loss of $1.6
million was recognized in the fourth quarter 2004 from this sale.
Under the Company's revolving loan facility with Wachovia Capital Finance,
Wachovia Capital Finance's consent was required for the Company to enter into
its agreement with Whitesell. On December 30, 2004, Wachovia Capital Finance
consented to the Company's entry into its agreement with Whitesell and agreed to
release its security interest in the assets specified in such agreements to be
sold by the Company to Whitesell, subject to the satisfaction of certain
conditions precedent, including, without limitation, that all of the cash
proceeds to the Company of the Washington Sale (net of certain transaction
expenses and payments to secured claim holders) be applied to the payment of
outstanding indebtedness under the revolving loan facility. On December 31,
2004, as contemplated by Wachovia Capital Finance's consent, approximately $1.75
million of the cash proceeds to the Company of the Washington sale were applied
by the Company to the repayment of outstanding indebtedness under the revolving
loan facility.
The operations described above are classified as discontinued operations
for all periods presented.
Discontinued operations reported losses of $1,032,000 for the three months
ended March 31, 2005, $433,000 for the two months ended March 31, 2004, and
$109,000 for the one month ended January 23, 2004. The losses for the three
months ended March 31, 2005 and two months ended March 31, 2004 relate primarily
to the amortization of discounted environmental liabilities arising from the
Company's unsecured note obligations to its special purpose subsidiaries and the
pension note for the terminated pension plan. The losses for the three months
ended March 31, 2005 also included losses from the sale of the North Chicago
Inc. property and charges from the Washington IA facility. Results for the two
months ended March 31, 2004 also included income from operations of $128,000
from the Washington Manufacturing facility, which was sold on December 31, 2004.
For the one month ended January 23, 2004, the $109,000 loss resulted from
operations at the discontinued Washington Manufacturing facility.
NOTE 7 - 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 December 31, 2004 the gross estimated liability
was $2.1 million and the recorded discounted liability, using a discount rate of
11.3%, was $1.6 million. At March 31, 2005 the gross estimated liability was
$2.1 million and the recorded discounted liability, using a discount rate of
11.3%, was $1.7 million.
20
Wellman is permitted to operate a sanitary landfill for the disposal of its
foundry sand. It is anticipated, based upon recent projections 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 December 31, 2004 and March 31, 2005 was
$445,000 and $457,000, respectively.
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 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
current estimated cost to remediate the thorium is $1,075,000. The recorded
discounted liability, using a discount rate of 11.3%, at December 31, 2004 and
March 31, 2005 was $422,000 and $433,000, respectively.
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. These liabilities 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.
NOTE 8 - DEBT
On January 23, 2004, the Company entered into a secured credit facility
with Wachovia Capital Finance. The 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 inventories,
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 6.2%)
and there is a .5% unused line fee. Substantially all of the assets of the
Company are pledged as security for this financing. Borrowing under the
revolving line of credit is included as short-term borrowings. At March 31,
2005, the Company had letters of credit for $769,000 outstanding for casualty
insurance collateral and environmental assurance under the new credit facility
with an interest rate of 2.5%.
The Company is working to design and implement strategies in efforts to
ensure that the Company maintains adequate liquidity and currently has a
proposal from a bank to refinance the Company's current indebtedness with a $15
million secured revolving loan facility. The new
21
credit facility is anticipated to be effective before the end of the second
quarter 2005. However, there can be no assurance as to the success of such
efforts or that any such refinancing will be successfully negotiated or
consummated.
NOTE 9 - INCOME TAXES
Deferred income taxes reflect the tax effect of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes.
Valuation allowances are established in accordance with provisions of FASB
Statement No. 109 "Accounting for Income Taxes". The valuation allowances are
attributable to federal and state deferred tax assets.
At March 31, 2005 the Company had potential federal and state income tax
benefits from net operating loss carry-forwards of $21.0 million that expire in
various years through 2023. Valuation allowances have been recorded for the full
amount of all net operating loss carry-forwards as the net operating loss
carry-forwards are not anticipated to be realized before expiration.
NOTE 10 - BUSINESS SEGMENTS
The Company is a manufacturer of engineered metal components, using the
sand castings, investment casting and powdered metal processes, that are 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 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 for the
periods ended March 31, 2005, March 31, 2004 and January 23, 2004 is as follows:
Predecessor
Successor Company Company
-------------------------------------------- ---------------------
Three Months Ended Two Months Ended One Month Ended
March 31, March 31, January 23,
2005 2004 2004
-------------------- ------------------ ---------------------
NET SALES
Advanced Structures $ 6,954,783 $ 4,457,367 $ 926,011
Industrial Metal Components 6,276,138 6,085,530 1,769,846
-------------------- ------------------ ---------------------
Total Net Sales $ 13,230,921 $ 10,542,897 $ 2,695,857
==================== ================== =====================
OPERATING INCOME (LOSS):
Advanced Structures $ 365,945 280,552 $ (329,169)
Industrial Metal Components 152,651 916,775 151,334
-------------------- ------------------ ---------------------
Total Operating Income (Loss) $ 518,596 $ 1,197,327 $ (177,835)
==================== ================== =====================
22
The identifiable assets at March 31, 2005 and December 31, 2004 are as
follows:
March 31, 2005 December 31, 2004
--------------------- ---------------------
IDENTIFIABLE ASSETS:
Advanced Structures $12,408,606 $11,695,093
Industrial Metal Components 10,027,504 9,450,631
Corporate / Discontinued 22,998,256 23,861,486
--------------------- ---------------------
Total Assets $45,434,366 $45,007,210
===================== =====================
Depreciation and capital expenditures by business segment, for the periods
indicated, are set forth below:
Predecessor
Successor Company Company
---------------------------------------------- ------------------------
Three Months Two Months One Month
Ended Ended Ended
March 31, March 31, January 23,
2005 2004 2004
--------------------- ---------------------- ------------------------
DEPRECIATION AND AMORTIZATION:
Advanced Structures $ 68,797 $ 66,803 $ 17,780
Industrial Metal Components 182,805 146,024 55,214
Discontinued 7,857 68,832 14,972
--------------------- ---------------------- ------------------------
Total depreciation and amortization $ 259,459 $ 281,659 $ 87,966
===================== ====================== ========================
CAPITAL EXPENDITURES:
Advanced Structures $ 47,750 $ - $ -
Industrial Metal Components 8,745 8,177 3,155
--------------------- ---------------------- ------------------------
Total capital expenditures $ 56,495 $ 8,177 $ 3,155
===================== ====================== ========================
23
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto that are included in
this 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 Chapter 11 protection 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 three months ended March 31, 2004 represent the mathematic addition of the
historical amounts for the Predecessor Company for the one-month ended January
23, 2004 and the Successor Company for the two months ended March 31, 2004.
Management believes that a combined discussion of Predecessor Company and
Successor Company periods is reasonable and appropriate because there were no
material adjustments to the presented items other than depreciation,
amortization and interest expense resulting from adoption of fresh start
reporting.
24
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes thereto.
2005 FIRST QUARTER AS COMPARED TO 2004 FIRST QUARTER
Net Sales
The following table sets forth the combined net sales of the Company
included in the consolidated statement of operations:
First Quarter First Quarter
Net Sales 2005 2004
---------------------- ----------------------
Advanced Structures $ 6,954,783 $ 5,383,378
Industrial Metal Components 6,276,138 7,855,376
---------------------- ----------------------
$13,230,921 $13,238,754
====================== ======================
Consolidated net sales for the first quarter 2005 were flat compared to the
first quarter 2004.
The Advanced Structures' net sales for the first quarter 2005 increased by
$1.6 million, or 29.2%, over the first quarter 2004. This increase resulted from
improvement in sand casting sales, primarily in missile and helicopter product
lines.
The Industrial Metal Components' net sales for the first quarter 2004
decreased $1.6 million, or 20.1%, due primarily to the loss in the fourth
quarter of 2004 of a major portion of investment casting business related to
truck engine components to this segments largest customer. This business was
converted to a different manufacturing process. Net sales of powdered metal
components increased 12.3% with improvement in the hardware and the lawn and
garden markets.
Operating Income
The following table sets forth the combined operating income of the Company
included in the consolidated statement of operations:
First Quarter First Quarter
Operating Income 2005 2004
---------------------- ----------------------
Advanced Structures $ 365,945 $ (48,617)
Industrial Metal Components 152,651 1,068,109
Corporate - -
---------------------- ----------------------
$ 518,596 $ 1,019,492
====================== ======================
Operating income of $519,000 for the first quarter 2005 decreased $501,000
from operating income of $1,019,000 in the first quarter 2004. Despite flat
sales, income decreased due to the mix of lower volume in the investment casting
business, which was higher margin, and increased volume from sand casting sales,
which is lower margin.
25
Operating income of $366,000 in the Advanced Structures segment for the
first quarter 2005 improved from an operating loss of $49,000 in the first
quarter 2004, due to higher volume and price increases in the missile product
line.
Operating income of $153,000 in the Industrial Metal Components segment for
the first quarter 2005 decreased by $915,000, as compared to operating income in
the first quarter 2004 of $1,068,000. The loss of sales to its largest customer
have had a negative impact on operating income in the investment casting
operation, and are the primary reason for the reduced income for the Company
overall. The powdered metal operation improved operating income by $70,000 in
the first quarter 2005 compared to an operating loss in the first quarter 2004,
due to higher sales and reduced selling and administrative expenses.
Other Expenses
The following table sets forth the combined other expenses of the Company
included in the consolidated statement of operations:
First Quarter First Quarter
Other expenses 2005 2004
---------------------- ----------------------
Interest expenses $ (207,261) $ (154,667)
Other (419) (19,903)
---------------------- ----------------------
$ (207,680) $ (174,570)
====================== ======================
Interest expense increased $53,000 in the first quarter 2005 compared to
the first quarter 2004 due primarily to increased borrowing outstanding.
Reorganization Items
Bankruptcy reorganization items relate to professional fees and US Trustee
Fees. The first quarter 2005 reorganization expenses were $18,000, related to US
Trustee Fees, as compared to $333,000 in the first quarter 2004 that related
primarily to professional fees.
Discontinued Operations
Discontinued operations reported a loss of $1,032,000 in the first quarter
2005 compared to a loss of $542,000 in the first quarter 2004. Discontinued
operation losses related primarily to the amortization of discounted
environmental liabilities from the Company's special purpose subsidiaries, and
the note payable to the Pension Benefit Guarantee Corporation. The increase in
losses relates to an additional month of amortization of discount in 2005, loss
of $129,000 related to the March 2005 sale of the NCI property and first quarter
2005 losses from the Washington Manufacturing facility of $129,000, which was
sold on December 31, 2004.
Income taxes
No income tax provision or benefit has been recognized for any periods
presented as valuation allowances have been recorded for all net operating loss
benefits and deferred tax assets.
26
Net Income (Loss)
A net loss of $739,000 was reported in the first quarter 2005. Net income
of $58,472,000 for the first quarter of 2004 included a $15,048,000 gain from
the discharge of debt under the Plan and a $43,455,000 gain from the adoption of
fresh start accounting.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2005, the Company had cash of $26,000 compared to $8,000 of
cash on December 31, 2004. Cash increased $1,230,000 from continuing operations
and decreased $1,211,000 from discontinued operations in the first quarter 2005.
Operating Activities
During the first quarter 2005, operating activities consumed $940,000 of
cash, as compared to $3,278,000 in the first quarter 2004, with the significant
variance in accounts payable.
Investing Activities
Investing activities provided $109,000 in the first quarter 2005, as
compared to $368,000 in the first quarter 2004, due to restricted cash received
from preference actions as part of the Plan.
Financing Activities
Financing activities provided $2,061,000 in the first quarter 2005, as
compared to $2,466,000 in the first quarter 2004, related to net borrowing from
the revolving line of credit in each quarter, less payments of long-term debt.
On the Effective Date of the Plan, the Company entered into a secured
credit facility with Wachovia Capital Finance (formerly known as Congress
Financial Corporation). The new credit facility provides up to $10 million in
credit, which is comprised of a revolving loan facility and letter of credit
issuances. Under the revolving loan facility, subject to certain borrowing
conditions, the Company may incur revolving loans in an amount up a borrowing
base comprised of a percentage of eligible accounts receivable and $2 million
for machinery and equipment. Revolving loans are due and payable in full on the
January 23, 2007. The Company is required to meet certain financial covenants,
which require it to achieve certain EBITDA and that limit future capital
expenditures. The interest rate on the line is prime plus 1% (weighted average
weight of 6.2%) and there is a .5% unused line fee. Substantially all of the
assets of the Company are pledged as security for this financing. Borrowing
under the revolving line of credit is included as short-term borrowings. At
March 31, 2005, 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%.
The Company's high level of debt could have important consequences,
including, among others, the following:
- - the inability of the Company's current cash generation level to support future
interest and principal payments on the Company's existing indebtedness;
27
- - inadequate cash for other purposes, such as capital expenditures and the
Company's other business activities, since the Company may need to use all or
most of the operating cash flow to pay principal and interest on its outstanding
debt;
- - making it more difficult for the Company to satisfy its contractual
obligations;
- - increasing the Company's vulnerability to general adverse economic and
industry conditions;
- - limiting the Company's ability to fund future working capital, capital
expenditures or other general corporate requirements;
- - placing the Company at a competitive disadvantage compared to the Company's
competitors that have less debt relative to their operating scale;
- - limiting the Company's flexibility in planning for, or reacting to, changes in
the Company's business and its industry; and
- - limiting, along with the financial and other restrictive covenants in the
Company's indebtedness, among other things, the Company's ability to borrow
additional funds, make acquisitions, dispose of assets or pay cash dividends.
The Company's liquidity, including its ability to meet its ongoing
operational obligations, is dependent upon, among other things, the Company's
ability to (i) maintain adequate cash on hand, (ii) generate positive cash flow
from operations, (iii) comply with the revolving loan facility, and (iv) achieve
profitability. The Company is working to design and implement strategies in
efforts to ensure that the Company maintains adequate liquidity and currently
has a proposal from a bank to refinance the Company's indebtedness with a $15
million secured revolving loan facility. The new credit facility is anticipated
to be effective before the end of the second quarter 2005. However, there can be
no assurance as to the success of such efforts or that any such refinancing will
be successfully negotiated or consummated.
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 principles 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.
28
Excess reorganization value represents the excess of the Successor
Company's enterprise value over the aggregate fair value of the Company's
tangible and identifiable intangible assets and liabilities at the balance sheet
date. Excess reorganization value is not amortized, however, it is evaluated at
a minimum annually or when events or changes occur that suggest impairment in
carrying value. The Company anticipates performing the evaluation in the third
quarter 2005.
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 require 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. Significant portions
of raw materials consumed by the Company are various steel alloys. Price
increases were experienced beginning in 2004 and in the three months ended March
31, 2005, 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.
29
CONTRACTUAL OBLIGATIONS
The following table summarizes payments due by year for the contractual
obligations at March 31, 2005:
(In thousands) After
Total 2005 2006 2007 2008 2009 2009
----- ---- ---- ---- ---- ---- ----
PBGC Note $ 8,750 $ - $ 750 $ 750 $ 750 $ 750 $5,750
PA economic agencies notes 958 207 289 305 143 14 -
Operating leases 58 14 17 16 11 - -
Revolving line 6,080 - - 6,080 - - -
Letters of credit 769 - - 769 - - -
Environmental liabilities 38,982 1,503 2,796 2,912 2,022 1,879 27,870
------------- ---------- ---------- ---------- ---------- ---------- ------------
Total $ 55,597 $1,724 $3,852 $10,832 $2,926 $2,643 $33,620
============= ========== ========== ========== ========== ========== ============
The above table excludes discounts of the long-term debt and environmental
liabilities as well as any related interest.
The payments for environmental liabilities are based on estimated timing of
remediation activities and not mandatory payment schedules. A minimum annual
funding of $1.4 million is required for environmental liabilities related to
FMRI.
The revolving line of credit requires immediate repayment from cash
receipts. Borrowings can be made as needed, based on availability. The
availability at March 31, 2005 was $690,000.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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-15(e) and 15d-15(e) 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 is 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.
30
During the most recent fiscal quarter, there has not occurred any change in
our internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15(d)-15(f) under the Exchange Act) that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
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 Chapter 11 protection on the Effective Date.
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
FMRI's 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
became 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 Decommissioning Plan, effectively
precluding FMRI from undertaking to commence certain actions required by its 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, taking into account
preparation, scheduling, cost and weather. 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. Such negotiations and discussions resulted in an April 13, 2005
amendment to the decommissioning trust that now permits an additional $2,500,000
to be drawn by FMRI to complete Phase 1 of the decommissioning plan. The amounts
of these additional draws are dependent upon the weight of material disposed of
offsite at the approved disposal site. Notwithstanding FMRI access to additional
funding, FMRI has been unable, to date, to reach consensus with the NRC on
modifications necessary to eliminate the violation of not starting the Phase 1
of the decommissioning plan, in part because certain conditions to the
commencement of Phase 1 decommissioning still remains. As a result, FMRI remains
in technical 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 Plan. However, if
FMRI is unable to commence Phase 1 decommissioning by June 2005 and/or to reach
consensus with the NRC on necessary modifications to its license, it could have
an adverse effect on the Company.
31
On December 31, 2004, the Company sold its special wire forms operation.
Pursuant to the asset purchase agreement ("APA"), the buyer had until March 1,
2005 to provide a closing statement of the final purchase price. On February 28,
2005, the buyer submitted a closing statement alleging that the Company owed
$480,922 to the buyer. Per the APA, the Company has 30 days from receipt of the
closing statement to object, then 20 days thereafter to negotiate a settlement
and then submit any unresolved issues to an independent accounting firm for
resolution. By agreement with the buyer, the 30-day objection period was
extended for an additional 15 days to April 14, 2005. The Company has reviewed
the closing statement and on April 14, 2005 issued a Notice of Objection to
Whitesell asserting that Whitesell owes Fansteel $441,266. Whitesell continues
to dispute the Company's purchase price calculation. If a consensual resolution
cannot be achieved within the timeframe prescribed in the APA, disputed items
will be subject to determination by the independent accounting firm. The Company
can provide no assurance that a consensual resolution can be achieved and a
negative outcome of such dispute could have an adverse effect on the Company.
Certain environmental claims have been made against the Company by the EPA
and various other regulatory agencies, entities and persons in connection with
the investigation and cleanup of certain sites, and the Company has sought
recovery from certain of its insurers in respect of certain defense and cleanup
costs relating to the claims. Prior to the date hereof, the Company has reached
agreements in principle with Zurich American Insurance Company and Zurich
International (Bermuda) Ltd. (collectively, "Zurich") and with KWELM Management
Services Limited on behalf of the Scheme Administrator for KWELM in an
insolvency proceeding under the laws of Great Britain and the Joint Liquidators
for The Bermuda Fire & Marine Insurance Company (collectively, "KWELM"). Zurich
has agreed in principle to enter into a settlement providing for a cash
settlement payment to the Company of $1.4 million, to be received within 45 days
after execution/effectiveness of a definitive settlement agreement. KWELM has
agreed in principle to a Notified Scheme Claim totaling $400,000. Cash
distributions in respect of the claims would be paid out to the Company in
accordance with KWELM's approved Scheme of Arrangement. The Scheme administrator
has represented that Fansteel can anticipate total cash payments equal to
approximately 50% -57% of its Notified Scheme Claim (approximately $200,000 -
$228,000), with the initial cash distribution (approximately one-half of the
total) to be made approximately 90 days after execution of a definitive
settlement agreement. The proceeds of the proposed settlements will first be
used in accordance with the Plan to pay certain professional fees and expenses
related to such settlements. The Department of Justice notified the Company on
April 29, 2005 that the NRC and other interested federal agencies did consent to
the settlements. It is anticipated that the net proceeds from the settlements
will be allocated in accordance with the Plan and will, among other things,
result in prepayments under the FMRI Notes (of approximately $795,000), the FLRI
Primary Note (of approximately $101,000) and the ED Note (of approximately
$133,000) and payments aggregating approximately $60,000 on account of EPA
CERCLA claims.
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.
32
ITEM 2 - UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
Pursuant to the Plan, on the Effective Date, all outstanding shares of the
Predecessor Company's common stock, $2.50 par value, were cancelled.
The Plan authorized the issuance of 3,600,000 shares of common stock, $.01
par value, of the Successor Company. The general unsecured creditors received
approximately 50% stock ownership. The PBGC received approximately 21% of the
common stock being issued in the reorganization as part of the settlement of its
claims related to the under-funding of the Company's now-terminated Pension
Plan. The common stockholders of the Predecessor Company received approximately
24% of the newly issued stock. Finally, 5% of the Successor Company's common
stock has been set aside in an employees stock options plan, also approved as
part of the confirmation.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the first
quarter of 2005.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.1 First Amendment dated as of January 19, 2005, and Second
Amendment dated as of March 31, 2005, to Loan and Security
Agreement dated as of January 23, 2004 among Fansteel Inc,
Wellman Dynamics Corporation and Congress Financial
Corporation (now known as Wachovia Capital Finance)
(previously filed as Exhibit 10.3 to Fansteel Inc.'s Form
10-K filed on April 15, 2005, and incorporated herein by
reference).
10.2 Stipulation And Order Clarifying And/Or Modifying Consent
Decree, dated March 3, 2005, between Fansteel Inc., North
Chicago, Inc. the City of North Chicago and the Untied
States, on behalf of the Environmental Protection Agency, the
Department of the Navy the Untied States Department of the
Interior, and the National Oceanic And Atmospheric
Administration of the United States Department of Commerce
(previously filed as Exhibit 10.8 to Fansteel Inc.'s Form
10-K filed on April 15, 2005, and incorporated herein by
reference).
33
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 203 of the
Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 203 of the
Sarbanes-Oxley Act of 2002
32.1 Certifications by Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FANSTEEL INC.
(Registrant)
/s/ Gary L. Tessitore
----------------------------------------
Gary L. Tessitore
Chairman of the Board, President
May 13, 2005 and Chief Executive Officer
/s/ R. Michael McEntee
----------------------------------------
R. Michael McEntee
Vice President and
May 13, 2005 Chief Financial Officer
35