UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
( ) 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 Number)
NUMBER ONE TANTALUM PLACE, NORTH CHICAGO, ILLINOIS 60064
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (847) 689-4900
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
COMMON STOCK PAR VALUE $2.50 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 24, 1997 was $30,575,178.
8,598,858
(Number of shares of common stock outstanding as of February 24, 1997)
Part III incorporates information by reference from the Company's definitive
proxy statement for the annual meeting of shareholders to be held on April 23,
1997.
The total number of pages in this Form 10-K is 60 with the exhibit index being
on page 47.
PART I
ITEM 1 - BUSINESS
1
(a) On July 31, 1996, the Company acquired all of the assets and
certain liabilities of American Sintered Technologies, Inc.
(AST) for the cash price of $6,937,000. In addition to the
cash paid, the Company assumed $954,000 of various
Pennsylvania Economic Agencies loans. The nature of the
business of AST is the manufacture of ferrous and non-ferrous
powdered metal components serving the automotive, lawn and
garden, plumbing, hardware, and electrical hardware
industries. The acquisition was accounted for as a purchase
and is included in the Company's Metal Fabrications business
segment.
The Precision Sheet Metal (PSM) plant in Los Angeles,
California completed the phase-out of all operations during
1993. Identifiable assets of PSM included $1,129,000 for
property and plant held for sale which are carried in Other
Non-Current Assets at December 31, 1996.
On June 4, 1992 the assets of the VR/Wesson Industrial Supply
warehouse in Beckley, West Virginia were sold. The Beckley
operation was not significant to the overall operating
performance of the Company.
(b) Incorporated by reference from the Notes to Consolidated
Financial Statements pages 28 through 41.
(c)(1)(i) Fansteel is a specialty metals manufacturer of products for
use in the metalworking; automotive; energy (coal mining, oil
and gas drilling); military and commercial aircraft, aerospace
and weapon systems; agricultural machinery; lawn and garden
equipment; and plumbing and electrical hardware industries.
The principal products of the Industrial Tools business
segment include tungsten carbide cutting tools, milling tools,
toolholding devices, mining tools and accessories,
construction tools, and wear resistant parts. The principal
products of the Metal Fabrications business segment include
titanium, nickel base and alloy steel forgings; high integrity
aluminum and magnesium sand mold castings; carbon steel,
stainless steel, brass and aluminum special wire forms and
fasteners; brass, bronze and ferrous alloy investment
castings; and ferrous and non-ferrous powdered metal
components.
Sales of the Company's products are made through a direct
sales organization and through distributors, manufacturers'
representatives and agents. In the Industrial Tools and Metal
Fabrications business segments, distributors, manufacturers'
representatives and agents account for the majority of sales.
ITEM 1 - BUSINESS (Contd.)
The percentage of net sales for classes of similar products
which equaled or exceeded ten percent of the Company's
consolidated net sales for the years indicated is set forth
below:
2
Consolidated Net Sales
Products Business Segment 1996 1995 1994
Tungsten carbide
cutting tools Industrial Tools 30% 31% 29%
Non-ferrous
forgings Metal Fabrications 12 11 12
Investment
castings Metal Fabrications 9 12 13
(c)(1)(ii) At this time, there are no new products in production or in
the development stage that require investment of a material
amount of the Company's assets.
(iii) The most important raw materials used by the Company are
tungsten carbide powder, cobalt, titanium, magnesium,
aluminum, iron, bronze, copper, and alloy steel. Prices of
some of these raw materials have been volatile in recent
years, and changes in raw material prices have had an impact
on the Company's dollar sales volume. Several of the raw
materials used, including cobalt, are purchased principally
from foreign sources, many of them located in developing
countries, and availability can be affected by political
developments and trade restrictions, both domestic and
foreign. The Company believes that the sources and
availability of these materials are adequate for present
needs, although spot shortages of certain raw materials may
occur from time to time.
(iv) The Company owns a number of patents which relate to a wide
range of products and processes and is licensed under certain
patents. The Company does not consider any of its patents or
group of patents to be material to either of its business
segments taken as a whole.
(v) None of the operations of any business segment are seasonal.
(vi) Working capital requirements for both business segments are
substantial, but the Company's investment in working capital
is fairly typical of the specialty metals manufacturing
industry.
(vii) The Company serves a wide variety of industries. No one
individual customer accounts for a significant portion of the
Company's overall business.
Substantial sales for those operating units within the Metal
Fabrications segment servicing the aerospace market are
concentrated in a relatively small customer base. The loss of
any individual customer within this base could have an adverse
ITEM 1 - BUSINESS (Contd.)
effect on the segment. Relations with these customers have
existed for years and the Company believes them to be sound.
(c)(1)(viii) The backlog of orders not shipped and believed to be firm as
of the dates shown are set forth below (in thousands):
3
December 31,
1996 1995
Industrial Tools $ 6,317 $ 6,197
Metal Fabrications 38,379 25,711
$ 44,696 $ 31,908
In the Industrial Tools segment, virtually all backlog is
shipped in less than 12 months, generally within 3 months. In
the Metal Fabrications segment, shipments are typically made
between 1 and 24 months after an order is received. The
Company believes that approximately 92% of the backlog at
December 31, 1996 will be shipped before the end of 1997.
Because of the substantial size of some orders received by the
Company - particularly orders for products sold by the Metal
Fabrications segment - the Company's backlog can fluctuate
substantially from one fiscal period to another. Because of
the differences in lead-time for filling orders among the
Company's business segments, overall backlogs at different
times will not necessarily be comparable as predictors of the
Company's near-term sales.
(ix) The Company's Metal Fabrications segment has orders subject to
termination at the election of the government. The Company
would be compensated for costs up to the date of termination
if terminated for the convenience of the government.
Termination without compensation could result if the Company
was in default as determined by the government. The Company
is not aware of any current orders which would be terminated
for default.
(x) In general, the Company competes in its markets on the basis
of technical expertise, product reliability, quality, sales
support, availability and price. Most of the Company's
products are sold in highly competitive markets, and some of
the Company's competitors are larger in size and have greater
financial resources than Fansteel.
(c)(1)(xi) The development of new products and processes and the
improvement of existing products and processes is conducted by
each operating unit.
ITEM 1 - BUSINESS (Contd.)
(c)(1)(xi) The Company has a staff of technically trained people who
support sales, manufacturing and quality assurance. The
majority of the Company's products and processes require
technically sophisticated application engineering and process
control. This kind of technical support is charged to the
cost of products sold.
(xii) The Company expensed $94,000 to continuing operations in 1996
for costs related to compliance with government environmental
regulations. Capital expenditures in 1996 included $52,000 at
the Hydro Carbide facility in Latrobe, Pennsylvania for a
4
chiller unit which reduces water consumption, and $16,000 at
the Lexington facility in Lexington, Kentucky for a waste
removal system.
During 1996, the Company charged $230,000 for continuing
operations against reserves for environmental reclamation
established in previous years. Reserves for environmental
reclamation were $361,000 for continuing operations at
December 31, 1996. The Company's Escast operation, located in
Addison, IL, and included in the Metal Fabrications business
segment, has been named as a responsible party for the
clean-up costs of certain hazardous wastes located on-site. A
cost sharing agreement with the former owner of Escast is in
place for any future clean-up costs. The clean-up process has
begun at the site under an Illinois Environmental Protection
permit with total estimated costs of approximately $1.1
million. The Company believes the established reserves are
adequate to cover its share of the clean-up costs.
During 1996, the Company charged $709,000 for discontinued
operations against reserves for environmental reclamation and
decommissioning established in previous years. In addition,
the Company expended $759,000 for design and engineering costs
for the proposed processing plant. Reserves for environmental
reclamation and decommissioning were $3.9 million for
discontinued operations at December 31, 1996. The Company
discontinued its Metal Products business segment in 1989.
Environmental reclamation and decommissioning is required for
the segment's primary plant that processed certain ores which
are subject to regulations of several government agencies.
The residues from these processed ores were stored on-site.
Remaining assets were written down to estimated realizable
value, and provisions were made for the estimated costs for
decommissioning. Application has been made to the appropriate
agencies for a portion of the site to be decommissioned. A
decommissioning plan for the remainder of the site, including
the residue storage areas, has been submitted to the
appropriate governmental agencies for approval. Before
decommissioning procedures begin for the residue storage
areas, the Company plans to extract materials within the
residues which have a commercial value.
At December 31, 1996, the Company had reserves of $3.9 million
for environmental clean-up costs for discontinued operations.
The Company, in association with outside consultants, has
developed a decommissioning plan for the site involved, and
has
ITEM 1 - BUSINESS (Contd.)
submitted that plan and a related decommissioning funding plan
to the Nuclear Regulatory Commission ("NRC") as required by
law. Prior to decommissioning, the Company proposes to
construct and operate for approximately ten years a commercial
plant to complete the processing of residues currently
contained in storage ponds at the site, which would materially
reduce the amount of radioactive materials to be disposed of
during decommissioning. In conjunction with construction of
the processing plant, the Company would modify the wastewater
treatment plant at the site and install a drainage system.
Decommissioning would include construction of an engineered
on-site cell for containment of contaminated soils;
consolidation and stabilization of the contaminated soils in
the containment cell; and the performance of required plant
surveys and characterizations after residue processing ceases
5
to determine whether additional contaminated soils exist which
may require remediation.
The Company has applied for an amendment to its current NRC
license and for a revision to its current wastewater discharge
permit to allow construction and operation of the proposed
processing plant, and believes that these regulatory
authorizations will be issued in the near future. Preliminary
engineering, design and feasibility studies have been
completed for the proposed processing plant, which would
extract commercially valuable materials such as tantalum,
columbium, scandium and other rare earth and rare metal
elements from the feedstock residues. The Company engaged a
process design expert which confirmed the viability of the
proposed plant. The estimated cost of construction is
approximately $12 million. The estimated value of materials
to be extracted is based on analysis of samples taken from the
residues and a valuation of such materials using current
market prices discounted to reflect possible price decreases,
including those which could result from the increased
quantities of certain of these materials made available for
sale. The estimated costs of residue processing were
developed by Company personnel and independent consultants
using third party evaluations based on the pilot testing
performed. Residue processing is expected to start
approximately a year after licensing approval is received.
The provisions for discontinued operations reflect
management's belief that the current value of the extracted
materials will at least equal the estimated cost of
construction and costs of processing, including estimated
costs for disposal of waste generated by the process. The
annual recovery revenues are estimated to be in a range of
$6,000,000 to $7,000,000. However, there can be no assurance
as to the level of demand for the extracted materials or the
actual prices which may be obtained for them, which could vary
over time.
In October 1995 the NRC advised the Company that a
decommissioning funding plan cost estimate based upon on-site
disposal of most of the radioactive wastes at the site is
appropriate to consider at this time. The NRC cautioned the
Company, however, that on-site disposal may require
preparation of an Environmental Impact Statement and that, in
addition to
ITEM 1 - BUSINESS (Contd.)
the required NRC approval, local and other federal agencies
may have to be satisfied that the Company's disposal plan is
sound. Such an approval process can be expected to extend
over a number of years. Management believes that a
decommissioning plan including on-site containment will
ultimately be acceptable to the appropriate regulatory
authorities, based on current and proposed NRC regulations and
a provision of the Nuclear Waste Policy Act of 1982 requiring
the Department of Energy to take title to certain "special
sites" which may include the Company's site; however, there is
no assurance that a plan providing for on-site containment
will ultimately be approved. Implementation of a
decommissioning plan for the Company's site which includes
off-site disposal may not be financially feasible.
The NRC decommissioning regulations require licensees to
estimate the cost for decommissioning and to assure in advance
6
that adequate funds will be available to cover those costs.
NRC regulations identify a number of acceptable methods for
assuring funds for decommissioning, including surety
instruments such as letters of credit, cash deposits and
combinations thereof. The NRC October 1995 letter requested
the Company to submit a decommissioning funding plan
contemplating on-site containment and stated that the cost of
residue processing should be included in the Company's cost
estimate. In March 1996, the Company submitted a revised
decommissioning plan and a related decommissioning funding
plan. The initial level of assurance for decommissioning is
$4,456,000 provided through letters of credit. The amount does
not include assurance for costs of construction or operation
of the residue processing facility. This initial level of
assurance, however, may be changed upon further review by the
NRC. The Company's available cash and/or borrowing capacity
will be reduced by the amount of funding assurance as required
at any particular time. As the decommissioning plan is
implemented, deposited funds or the amount of any surety
instruments may be reduced, provided the Company can
demonstrate the sufficiency of the remaining funds or surety
to assure the completion of decommissioning.
Based upon continuing assessment of the proposed
decommissioning plan, taking into consideration the most
current information, existing technology and regulations in
effect, management believes that the amounts reserved at
December 31, 1996 are adequate to cover the costs of
environmental clean-up for discontinued operations and that
the Company has the ability to meet the NRC's decommissioning
funding assurance requirements.
The Company's intent is to comply with all applicable federal
environmental statutes and regulations promulgated thereunder,
as well as all state law counterparts, which include but are
not limited to the Resource Conservation and Recovery Act, 42
U.S.C., Section 6901 et. seq., Comprehensive Environmental
Response Compensation and Liability Act, 42 U.S.C., Section
9601 et. seq., Water Pollution Control Act, 33 U.S.C., Section
1251 et. seq., and Nuclear Regulatory Commission regulations
regarding storage of low-level source material.
ITEM 1 - BUSINESS (Contd.)
All of the Company's facilities are generally in compliance
with applicable air pollution control regulations and possess
the required permits from the appropriate state air pollution
control agency in which they operate.
(xiii) The Company employed 1,031 persons as of December 31, 1996.
(d) Net sales, income and identifiable assets of foreign
operations and export sales are not significant. The Company
considers the United States as one inseparable geographic area
for its domestic operations.
ITEM 2 - PROPERTIES
Manufacturing facility locations and corresponding square
footage are as follows:
Business Square Feet
Location Segment Owned Leased Total
7
Plantsville, Connecticut Industrial 59,000 0 59,000
Tools
Gulfport, Mississippi Industrial 28,000 0 28,000
Tools
Latrobe, Pennsylvania Industrial 37,000 0 37,000
Tools
Lexington, Kentucky Industrial 98,000 1,000 99,000
Tools
Los Angeles, California Metal 48,000 5,000 53,000
Fabrications
Sarasota, Florida Metal 6,000 0 6,000
Fabrications
Addison, Illinois Metal 0 46,000 46,000
Fabrications
Creston, Iowa Metal 293,000 0 293,000
Fabrications
Washington, Iowa Metal 86,000 0 86,000
Fabrications
Emporium, Pennsylvania Metal 34,000 0 34,000
Fabrications
ITEM 2 - PROPERTIES (Contd.)
All plants are well-maintained and in good operating order.
The plants have sufficient capacity to meet present market
requirements. All of the properties described above are fully
utilized on a 1 or 2 shift basis, except the Lexington
facility, which is operating at 90% utilization.
The Company owns properties in North Chicago, Illinois and
Muskogee, Oklahoma associated with operations discontinued in
prior years. These properties are included as part of Net
Assets of Discontinued Operations. The Company's PSM facility
in Los Angeles, California completed the phase out of all
operations in 1993. The remaining property and plant has been
reclassified as property held for sale as part of Other Non-
Current Assets.
The Company's executive offices are located in North Chicago,
Illinois.
ITEM 3 - LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or
its subsidiaries are a party or of which any of their property
is the subject other than ordinary routine litigation
incidental to the Company's business. None of these legal
proceedings are material.
However, the Company is involved in certain regulatory
proceedings involving environmental matters which are
8
discussed in Note 4 to the Consolidated Financial Statements
contained in Item 8 hereof.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of 1996.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below are the principal executive officers and directors of the
Company:
Years of Service
In
Position with the Company and With Present
Name Age Principal Occupation Fansteel Position
William D. 44 Director; Chairman of the Board, 4 2
Jarosz President and Chief Executive
Officer
Betty B. 73 Director; Director of HBD 13 13
Evans Industries, Inc.
Robert S. 52 Director; Chairman and Chief 5 5
Evans Executive Officer, Crane Co.;
Chairman and Chief Executive
Officer, Medusa Corp.
Thomas M. 59 Director; Personal Investments 11 11
Evans, Jr.
Peter J. 47 Director; Kirkpatrick and 1 1
Kalis Lockhart (Attorneys)
R. Michael 43 Vice President and Chief 17 6
McEntee Financial Officer
Michael J. 44 Vice President, General Counsel 11 10
Mocniak and Secretary
Jack S. 67 Director; Vice President and 12 12
Petrik Director (Retired), Turner
Broadcasting System, Inc.
Additional information as to Directors of the Company is herein incorporated by
reference to the information under the caption "Nominees for Election as
Directors" in the Company's definitive proxy statement for the annual meeting of
shareholders on April 23, 1997.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The New York Stock Exchange is the principal market upon which
the shares of the Company are traded.
9
The number of shareholders of the Company as of February 24,
1997 were 902.
Per share stock market and dividend information for each
quarter of the last two fiscal years are set forth below:
Cash
Dividends
High Low Declared
1996:
First Quarter $8 1/4 $5 5/8 $ -
Second Quarter 7 5 3/4 -
Third Quarter 7 5 3/4 -
Fourth Quarter 7 1/8 6 1/8 -
1995:
First Quarter $7 3/8 $6 1/8 $.10
Second Quarter 7 1/8 6 3/8 .10
Third Quarter 8 1/4 6 3/4 .10
Fourth Quarter 7 1/2 5 3/4 -
The Company announced on November 10, 1995 the suspension of
its regular quarterly cash dividend pending review of its
dividend policy relative to comparable publicly traded
companies and its capital requirements. The Company believes
it is in the best interests of shareholders to conserve
capital in light of anticipated acquisitions and production
facility expansions as well as uncertainties surrounding
funding requirements for decommissioning at the Company's
discontinued operations at Muskogee, Oklahoma. While the
Company believes that its current reserve for environmental
clean-up for discontinued operations is adequate, it decided
to take this action pending greater certainty as to the costs
which ultimately may be incurred.
ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data for the Company for the five year period ended December
31, 1996 are as follows:
Years Ended December 31,
(thousands of dollars
except per share data) 1996 1995 1994 1993 1992
Operating Results
Net Sales $120,834 $102,598 $ 89,287 $ 89,387 $127,145
Income from
Continuing
Operations 4,277 3,333 3,609 2,516 5,232
(Loss) from Discon-
tinued Operations - - - (1,676) -
Net Income 4,277 3,333 3,609 906 5,232
Per Share of Common
Stock:
Income from
Continuing
Operations .50 .39 .42 .29 .61
(Loss) from
Discontinued
Operations - - - (.19) -
Net Income .50 .39 .42 .11 .61
10
Cash Dividends - .30 .40 .40 .50
Shareholders'
Equity 6.43 5.93 5.83 5.82 6.12
Financial Position
Working capital $ 28,542 $ 21,862 $ 21,101 $ 36,321 $ 34,071
Net property, plant
and equipment 14,306 10,220 9,364 9,661 13,776
Total assets 82,127 74,530 72,881 73,291 78,307
Long-term debt 1,779 298 - - 600
Shareholders' equity 55,284 51,023 50,172 50,083 52,617
Other Data
Common shares
outstanding 8,598,858 8,598,858 8,598,858 8,598,858 8,598,858
Number of
shareholders 812 891 1,055 1,094 1,099
Number of employees 1,031 911 867 799 955
Number of shareholders consists of the approximate shareholders of record which
include nominees and street name accounts.
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(thousands of dollars except
per share data) Mar. 31, Jun. 30 , Sep. 30, Dec. 31,
1996
Net sales $ 28,939 $ 30,638 $ 30,808 $ 30,449
Gross profit 4,905 5,344 5,343 5,251
Net income 1,000 1,159 1,114 1,004
Net income per common share .12 .13 .13 .12
1995
Net sales $ 25,649 $ 25,732 $ 25,631 $ 25,586
Gross profit 4,895 4,286 4,328 4,137
Net income 1,076 720 836 701
Net income per common share .13 .08 .10 .08
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations - 1996 Compared to 1995
Net sales for the year ended December 31, 1996 were $120,834,000, an increase of
$18,236,000 or 18% over 1995 net sales of $102,598,000. The sales growth was due
to improvements in many of the markets served with the most significant
increases in the aircraft industry.
Industrial Tools business segment net sales for 1996 were $54,068,000 compared
to $50,069,000 for 1995, an increase of $3,999,000 or 8%. Sales of tungsten
carbide cutting tools product line increased primarily due to growth in the
metalworking markets. The strategic locations of warehouses, along with quality
parts, enabled the Company to service its customers' growing demands. Stiff
price competition has had a negative effect on standard product sales within the
tungsten carbide cutting tool line. Efforts are concentrated on supplying parts
specialized to customers' requirements. After a sluggish year in 1995, the
construction tools product line experienced an increase in the current year
because of product improvement and new marketing strategies, including increased
consignment of product to customers. Mining tools product line registered a
moderate decline in the current year as several mines closed due to reduced
demand for high sulfur coal. The wear parts product line was down slightly from
last year, with gains in die-related parts offset by lower sales in nozzles and
compacts used extensively for oil drilling.
11
Metal Fabrications business segment net sales for the year ended December 31,
1996 were $66,766,000, an increase of $14,237,000 or 27% over 1995 net sales of
$52,529,000. Powdered metal components, manufactured by American Sintered
Technologies, Inc. (AST), acquired on July 31, 1996, added $3,737,000 in the
current year. The operations serving aircraft manufacturers benefited from a
steadily improving market. Forgings product line revenues were significantly
ahead of the 1995 pace due to a combination of price increases and parts for new
programs. Sale price increases were initiated in 1996 to offset raw material
price increases. New programs have been attained through aggressive pursuit of
business within core markets, including commercial aircraft components for
Boeing and McDonnell Douglas, and structural parts for the F-22 military
aircraft. Forgings sold to the medical field also improved as customers gained
market share on a global basis. Additional forging sales were realized with a
greater utilization of material such as steel, aluminum, and nickel-based
metals, whereas product shipped last year was concentrated more in the use of
titanium. Sand mold casting product lines increased over the prior year due to
an improved aircraft market. Marketing and sales efforts, specifically adding
sales agents to promote wider coverage of territories, along with an emphasis on
commercial programs, had a positive effect. Patterns for sand mold castings
showed a significant increase as several new programs were secured. These new
programs include aircraft structural components, helicopter parts, and aircraft
engines. Sales of wire formed products were up in 1996, largely in lawn and
garden equipment and vending machine parts. This increase in the current year
was due to the growth in most markets served as well as penetration into new
applications. Sales of investment castings decreased in the current year as
customers implemented tighter inventory controls, and price competition caused
the loss early in 1996 of several contracts in the firearms, construction, and
automotive industries. However, sales were definitely in an upward trend over
the last four months as some previously terminated contracts were reactivated.
Backlog of orders at December 31, 1996 was $44,696,000, compared to $31,908,000
at December 31, 1995, an increase of $12,788,000 or 40% with most
of the increase coming from the aircraft industry within the Metal Fabrications
segment. The backlog for the Industrial Tools business segment was $6,317,000
at December 31, 1996, an increase of $120,000 from one year ago. The majority of
the change is within the tungsten carbide cutting tool product line. Cutting
tools used by the automotive and aerospace industries showed the most
improvement. Mining tools product line backlog decreased as the reduced demand
for high-sulfur coal caused several coal mines to close. The construction tools
product line backlog decreased partially due to a slowdown in foreign orders.
The wear parts product line backlog for 1996 remained the same as 1995. Metal
Fabrications business segment backlog at December 31, 1996 was $38,379,000, an
increase of $12,668,000 from December 31, 1995. Backlog for powdered metal
components product line, related to the AST acquisition in 1996, added
$1,366,000 to the backlog. The forgings product line backlog nearly doubled,
adding $9,671,000 over last year. Orders for several new commercial and military
programs have been received in the last year. Backlog in this product line has
also been increased by customers placing orders farther in advance due to long
lead times for raw material supply. Product lines utilizing the sand mold
casting process added $1,231,000 to the December 31, 1996 backlog, with an
increased backlog for sand mold patterns indicating continued demand for new
sand mold castings. Wire forming experienced an increase in backlog at year end
in comparison to December 31, 1995 with growth in most industries served and
expansion into components used in vending machines. Investment castings product
line backlog started off slowly in 1996 with the fourth quarter improving enough
to bring the year-end backlog in line with 1995.
Cost of products sold for the year ended December 31, 1996 was $99,991,000,
compared to $84,952,000 for the same period of 1995, which is an increase of
$15,039,000 or 18%. Cost of sales as a percent of net sales for the year ended
December 31, 1996 was 82.8%, the same percentage as last year. Material, labor,
and overhead components of 1996 costs decreased in relation to net sales due to
greater production volumes and some price increases. However, these favorable
changes were partially offset by a greater amount of tooling, patterns, and die
12
costs, which were primarily related to the development of new parts in the Metal
Fabrications segment. Cost of products sold for 1995 included an unusual
workers' compensation expense of $250,000. Cost of sales as a percent of net
sales before unusual items was 82.6% for 1995.
Selling, general and administrative expenses for the year ended December 31,
1996 were $14,501,000, an increase of $1,290,000 or 9.8% from 1995 expenses of
$13,211,000. This increase related mostly to variable expenses, such as
commissions, which grew with the larger sales volume. Selling, general and
administrative expenses as a percent of net sales for 1996 decreased to 12.0%
compared to 12.9% for 1995.
Operating income for the year ended December 31, 1996 was $6,342,000 compared to
$4,435,000 in 1995, an increase of $1,907,000 or 43%. Operating income as a
percent of net sales for 1996 was 5.3% compared to 4.3% for 1995. Industrial
Tool business segment operating income for 1996 was $3,052,000, a decrease of
$57,000 from the prior year. While sales volume improved in this segment, it was
offset by some higher material costs which could not be passed on to customers
due to competitive pricing pressures. Metal Fabrications business segment
operating income for 1996 was $3,352,000, an increase of $1,982,000 from 1995
results. The higher 1996 sales volume improved production efficiencies, which
were partially offset by increased tooling costs.
Other income for the year ended December 31, 1996 was $711,000, a decrease of
$368,000 from 1995 other income of $1,079,000. Interest earned, principally
on marketable securities, for 1996 was $877,000, a decrease of $352,000 from the
prior year. This decrease in interest was due mainly to the use of marketable
securities for the cash purchase of AST.
Net income for the year ended December 31, 1996 was $4,277,000 or $.50 per
share, compared to $3,333,000 or $.39 per share for the year ended December 31,
1995.
Inflation factors did not, and generally do not, significantly affect the
overall operations of the Company.
Results of Operations - 1995 Compared to 1994
Net sales for the year ended December 31, 1995 were $102,598,000, an increase of
$13,311,000 over 1994 net sales of $89,287,000.
Industrial Tools business segment net sales for 1995 were $50,069,000 compared
to $43,558,000 for 1994, an increase of $6,511,000 or 15%. Sales of tungsten
carbide cutting tools increased in 1995. Tungsten carbide rotary tools sales
volume was positively affected through aggressive marketing and supply
techniques. Availability of product demanded by customers was accomplished with
strategic location of warehouses and consignment of inventory to major
customers. The introduction and marketing of new products within the tungsten
carbide inserts category of this product line positively impacted 1995 sales.
Mining tool sales were virtually unchanged. Sales of construction tools were
sluggish in 1995. Quality improvements were made, and the product was price
competitive, but sales efforts were unsuccessful in reaching a broader market.
Metal Fabrications business segment net sales for the year ended December 31,
1995 were $52,529,000, an increase of $6,800,000 or 15% over 1994 net sales of
$45,729,000. Sand mold castings product line sales increased 22% over 1994.
Aircraft engine casting sales rose in 1995 due to an improved market. Sales of
castings for various helicopter programs also increased in 1995. Sales of small
aircraft engine components improved in 1995 as new production processes
introduced in 1994 led to penetration in the commercial market. Forgings
product line sales were ahead of the 1994 pace by 38% as sales to commercial
aircraft manufacturers increased. Sales of investment castings improved 8% in
1995 due to expansion in the domestic manufacturing economy, particularly truck
manufacturing. However, indications signaled a reduction in the production of
13
trucks, thus causing a slowdown in the demand for castings. Sales of wire
formed products and garden products were down slightly in 1995.
Backlog of orders at December 31, 1995 was $31,908,000, compared to $27,274,000
at December 31, 1994, an increase of $4,634,000 or 17%. Industrial Tools
business segment backlog at December 31, 1995 was $6,197,000, an increase of
$1,710,000 from 1994. Introduction of new products within the tungsten carbide
inserts offerings, specifically VR/Notch inserts and diamond tipped inserts, led
to an increase in customer orders in 1995. Orders from producers of synthetic
diamonds led to a backlog increase in other wear parts product line in 1995.
Tungsten carbide rotary tool products attracted orders, resulting in a
significant increase to the backlog. Backlog of construction tools product line
grew with improved promotion of a quality product. Wear drill parts and nozzle
product lines were adversely affected by a decline in the oil industry. Metal
Fabrications business segment backlog at December 31, 1995 was $25,711,000, an
increase of $2,924,000 from December 31, 1994. Forgings product line backlog
was up $2,865,000 due to improved commercial aircraft market conditions, and
continuing strength of the medical instruments industry. Product lines
utilizing the sand mold castings process also increased backlog at December 31,
1995. The introduction of the cell manufacturing process in 1994 resulted in an
increase of commercial orders for small aircraft cylinder heads. Orders for
older helicopter castings also had a beneficial effect on the 1995 year-end
backlog. New programs for 1996 were also reflected in the backlog increase.
Orders for commercial aircraft structural components and helicopter gear
housings strengthened the December 31, 1995 backlog. Investment castings
product line backlog was off substantially from December 31, 1994. Stiff price
competition in a tentative economy had a negative effect on this product line
with a quick turnaround not expected. Wire forming experienced a slight
decrease in backlog at the 1995 year end in comparison to December 31, 1994 as
lawn and garden customers became more adapted to just-in-time ordering.
Cost of products sold for the year ended December 31, 1995 was $84,952,000,
compared to $72,033,000 for the same period of 1994, which was an increase of
$12,919,000 or 18%. Cost of sales as a percent of net sales for the year ended
December 31, 1995 was 82.8% compared to 80.7% for the same period of 1994.
Unusual items in cost of products sold included a large workers' compensation
expense of $250,000 in 1995 and a cost recovery of $433,000 from processing
thoriated magnesium in 1994. Cost of sales as a percent of net sales before
unusual items was 82.6% for 1995 compared to 81.2% for 1994. Raw material price
increases, not all of which could be passed on to customers, negatively impacted
profit margins.
Selling, general and administrative expenses for the year ended December 31,
1995 were $13,211,000, an increase of $609,000 or 5% from 1994 expenses of
$12,602,000. Selling, general and administrative expenses as a percent of net
sales for 1995 were 12.9% compared to 14.1% for 1994. Efforts to contain
expenses, through improved efficiencies and concentrated cost controls, resulted
in the lower expense to sales ratio in 1995. Expansion of sales volume while
restraining expenses is a continuing objective of the Company.
Operating income for the year ended December 31, 1995 was $4,435,000 compared to
$4,652,000 in 1994, a decrease of $217,000 or 5%. Operating income as a percent
of net sales for 1995 was 4.3% compared to 5.2% for 1994. Industrial Tool
business segment operating income for 1995 was $3,109,000, an increase of
$253,000 from 1994. Increased sales volume had a beneficial effect on operating
income in 1995; however, this was partially offset by rising raw material
prices. Metal Fabrications business segment operating income for 1995 was
$1,370,000, a decrease of $439,000 from 1994 results. A one-time cost recovery
from residue material skewed the 1994 results, while an unusual workers'
compensation claim negatively affected the 1995 operating income.
Other income for the year ended December 31, 1995 was $1,079,000, a decrease of
$215,000 from 1994 other income of $1,294,000. Other income for 1994 included a
$251,000 gain on the sale of property related to an operation closed in 1993.
14
Interest earned, principally on marketable securities, for 1995 was $1,216,000,
an increase of $162,000 from 1994. A rise in short-term interest rates improved
the income performance of marketable securities.
Net income for the year ended December 31, 1995 was $3,333,000 or $.39 per
share, compared to $3,609,000 or $.42 per share for the year ended December 31,
1994.
Outlook
Improvements in the Company's production processes, new product development, and
investment in capital equipment have increased opportunities for growth,
directed primarily at commercial markets. The Company is seeking increased
share of current markets, as well as new markets, through investment in
operating facilities and new acquisitions, such as the 1996 AST acquisition.
The Company has utilized funding assistance on favorable terms from states and
municipalities for expansion of production capabilities, and will continue to do
so wherever available. Cost control programs are active in all operations
throughout the Company.
The formerly defense-dependent operating units are continuing to place primary
focus on becoming diversified suppliers to both military and commercial markets.
Investment in equipment has been initiated and new production techniques
employed to facilitate this transition. The Company is beginning to realize the
benefits from these efforts with increased sales and orders.
Liquidity and Capital Resources
Cash and cash equivalents amounted to $3,588,000 at December 31, 1996, a
decrease of $3,251,000 from December 31, 1995. The net cash effect of the AST
acquisition was a usage totaling $6,937,000, much of which came from the
disposition of marketable securities which had been classified as long-term
assets. Capital expenditures for the year were $2,039,000, including building
expansions at the Gulfport, MS and Washington, IA operations to service
increased business volume, and a die sinking shop at the Los Angeles, CA
operation to increase production capabilities. Cash flows from financing
activities included $171,000 in debt payments and $957,000 in proceeds from
long-term debt. In the fourth quarter of 1995, the Company announced the
suspension of the quarterly shareholder dividend for the purpose of reserving
cash for capital reinvestment, possible future acquisitions, and due to
uncertainty regarding funding requirements for decommissioning at the Company's
discontinued operation in Muskogee, Oklahoma. Cash of $968,000 was used for the
design, management and engineering of the processing plant related to this
discontinued operation for the reclamation of commercially valuable materials.
Operations used $243,000 of cash. Net income, depreciation and amortization
provided $4,277,000 and $1,933,000, respectively. As evidenced by accounts
receivable increasing $3,557,000 and inventories increasing $2,664,000, working
capital needs heightened due to higher sales, thus reducing available cash.
Sales as a percentage of working capital remained stable at 20.3% in comparison
to 1995.
It is expected that sufficient cash will be generated from operations to cover
normal operating requirements. If the need arises, the Company has strong,
long-term relationships with several large banking institutions.
Funding assistance by states and municipalities is investigated when any
significant expenditures are proposed. Loans were received in 1995 from State
of Iowa Development Programs for production improvements at our sand mold
casting and wire forming operations. In 1996, the State of Mississippi Business
Finance Corporation provided development loans for expansion of the
Company's tungsten carbide products facility in Gulfport, MS. As part of the
AST acquisition, the Company assumed $954,000 of development loans with interest
rates ranging from 2% to 5%.
15
At December 31, 1996, the Company had $5,000,000 of current marketable
securities, and $4,989,000 of non-current marketable securities, classified as
held-to-maturity, invested in U.S. Treasury Notes. These securities had a fair
market value of $9,950,000 at December 31, 1996. The intent of the Company is
to hold these notes to maturity.
The Company discontinued its Metal Products business segment in 1989.
Environmental reclamation and decommissioning are required for the segment's
primary plant that processed certain ores which are subject to regulations of
several government agencies. The residues from these processed ores were stored
on site. Remaining assets were written down to estimated realizable value, and
provisions were made for the estimated costs for decommissioning. Application
has been made to the appropriate agencies for a portion of the site to be
decommissioned. A decommissioning plan for the remainder of the site, including
the residue storage areas, has been submitted to the appropriate governmental
agencies for approval. Before decommissioning procedures begin for the residue
storage areas, the Company plans to extract materials within the residues which
have a commercial value.
At December 31, 1996, the Company had reserves of $3.9 million for environmental
clean-up costs for discontinued operations. The Company, in association with
outside consultants, has developed a decommissioning plan for the site involved,
and has submitted that plan and a related decommissioning funding plan to the
Nuclear Regulatory Commission ("NRC") as required by law. Prior to
decommissioning, the Company proposes to construct and operate for approximately
ten years a commercial plant to complete the processing of residues currently
contained in storage ponds at the site, which would materially reduce the amount
of radioactive materials to be disposed of during decommissioning. In
conjunction with construction of the processing plant, the Company would modify
the wastewater treatment plant at the site and install a drainage system.
Decommissioning would include construction of an engineered on-site cell for
containment of contaminated soils; consolidation and stabilization of the
contaminated soils in the containment cell; and the performance of required
plant surveys and characterizations after residue processing ceases to determine
whether additional contaminated soils exist which may require remediation.
The Company has applied for an amendment to its current NRC license and for a
revision to its current wastewater discharge permit to allow construction and
operation of the proposed processing plant, and believes that these regulatory
authorizations will be issued in the near future. Preliminary engineering,
design and feasibility studies have been completed for the proposed processing
plant, which would extract commercially valuable materials such as tantalum,
columbium, scandium and other rare earth and rare metal elements from the
feedstock residues. The Company engaged a process design expert which confirmed
the viability of the proposed plant. The estimated cost of construction is
approximately $12 million. The estimated value of materials to be extracted is
based on analysis of samples taken from the residues and a valuation of such
materials using current market prices discounted to reflect possible price
decreases, including those which could result from the increased quantities of
certain of these materials made available for sale. The estimated costs of
residue processing were developed by Company personnel and independent
consultants using third party evaluations based on the pilot testing performed.
Residue processing is expected to start approximately a year after licensing
approval is received. The provisions for discontinued operations reflect
management's belief that the current value of the extracted materials will at
least equal the estimated cost of construction and costs of processing,
including estimated costs for disposal of waste generated by the process. The
annual recovery revenues are estimated to be in a range of $6,000,000 to
$7,000,000. However, there can be no assurance as to the level of demand for
the extracted materials or the actual prices which may be obtained for them,
which could vary over time.
In October 1995 the NRC advised the Company that a decommissioning funding plan
cost estimate based upon on-site disposal of most of the radioactive wastes at
16
the site is appropriate to consider at this time. The NRC cautioned the
Company, however, that on-site disposal may require preparation of an
Environmental Impact Statement and that, in addition to the required NRC
approval, local and other federal agencies may have to be satisfied that the
Company's disposal plan is sound. Such approval process can be expected to
extend over a number of years. Management believes that a decommissioning plan
including on-site containment will ultimately be acceptable to the appropriate
regulatory authorities, based on current and proposed NRC regulations and a
provision of the Nuclear Waste Policy Act of 1982 requiring the Department of
Energy to take title to certain "special sites" which may include the Company's
site; however, there is no assurance that a plan providing for on-site
containment will ultimately be approved. Implementation of a decommissioning
plan for the Company's site which includes off-site disposal may not be
financially feasible.
The NRC decommissioning regulations require licensees to estimate the cost for
decommissioning and to assure in advance that adequate funds will be available
to cover those costs. NRC regulations identify a number of acceptable methods
for assuring funds for decommissioning, including surety instruments such as
letters of credit, cash deposits and combinations thereof. The NRC October 1995
letter requested the Company to submit a decommissioning funding plan
contemplating on-site containment and stated that the cost of residue processing
should be included in the Company's cost estimate. In March 1996, the Company
submitted a revised decommissioning plan and related decommissioning funding
plan. The initial level of assurance for decommissioning is $4,456,000 provided
through letters of credit. The amount does not include assurance for costs of
construction or operation of the residue processing facility. This initial level
of assurance, however, may be changed upon further review by the NRC. The
Company's available cash and/or borrowing capacity will be reduced by the amount
of funding assurance as required at any particular time. As the decommissioning
plan is implemented, deposited funds or the amount of any surety instruments may
be reduced, provided the Company can demonstrate the sufficiency of the
remaining funds or surety to assure the completion of decommissioning.
Expenditures for environmental reclamation and decommissioning were $1,516,000,
$1,221,000 and $1,061,000 in 1996, 1995, and 1994, respectively. Costs which
are expected to be incurred within the next year are included as plant shutdown
costs in Accrued Liabilities. Costs expected to be incurred after one year are
reflected on the balance sheet in Discontinued Operations as part of Other
Liabilities. Based upon continuing assessment of the proposed decommissioning
plan, taking into consideration the most current information, existing
technology and regulations in effect, management believes that the amounts
reserved at December 31, 1996 are adequate to cover the costs of environmental
clean-up for discontinued operations and that the Company has the ability to
meet the NRC decommissioning funding assurance requirements.
The remaining land and buildings of the Company's former Precision Sheet Metal
(PSM) operation within the Metal Fabrications business segment are carried as
Other Assets - Property held for sale at a cost of $1,129,000 at December 31,
1996. The cost of preparing the property for sale, principally environmental
clean-up, will be capitalized. Management believes that proceeds from the sale
of the property will be adequate to recover its costs, including costs of
preparing the property for sale. The Company believes the reserves established
for other costs associated with the close-down of PSM are adequate to cover such
costs.
The Company's Escast operation, located in Addison, IL, included in the Metal
Fabrications business segment, has been named as a responsible party for the
clean-up costs of certain hazardous wastes located on site. A cost sharing
agreement with the former owner of Escast is in place for any future clean-up
costs. The clean-up process has begun at the site under an Illinois
Environmental Protection permit with total estimated costs of approximately $1.1
million. The Company believes the established reserves are adequate to cover
its share of the clean-up costs.
17
Environmental matters arising at other units are routinely reviewed and handled
through operations. The Company believes that the ultimate disposition of any
other pending environmental matters will not have a material adverse effect upon
the consolidated financial position of the Company.
The statements related to environmental matters are based on current
expectations. These statements contain forward-looking estimates, and actual
results may differ materially.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Fansteel Inc.:
We have audited the accompanying consolidated balance sheet of Fansteel Inc. as
of December 31, 1996 and 1995, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)(2). These financial
statements and schedule are the responsibility of Fansteel Inc. management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Fansteel Inc. at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
\s\ Ernst & Young LLP
Chicago, Illinois
January 17, 1997
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31,
1996 1995 1994
Net Sales $120,833,831 $102,597,754 $ 89,287,336
Cost and Expenses
18
Cost of products sold 99,990,541 84,951,756 72,033,115
Selling, general and
administrative 14,500,746 13,210,850 12,601,816
114,491,287 98,162,606 84,634,931
Operating Income 6,342,544 4,435,148 4,652,405
Other Income (Expense)
Interest income 876,745 1,229,317 1,076,740
Interest expense (40,184) (15,577) (17,769)
Other (125,677) (134,957) 235,002
710,884 1,078,783 1,293,973
Income Before Income Taxes 7,053,428 5,513,931 5,946,378
Income Tax Provision 2,776,000 2,181,000 2,337,000
Net Income $ 4,277,428 $ 3,332,931 $ 3,609,378
Net Income Per Common Share $.50 $.39 $.42
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED BALANCE SHEET
At December 31,
1996 1995
ASSETS
Current Assets
Cash and cash equivalents $ 3,588,290 $ 6,838,960
Marketable securities 5,173,804 2,072,902
Accounts receivable, less allowance of
$276,000 in 1996 and 1995 18,700,927 14,305,629
Inventories
Raw material and supplies 4,715,341 3,850,864
Work-in-process 13,461,036 11,610,410
Finished goods 6,423,995 5,942,269
24,600,372 21,403,543
Less:
Reserve to state certain inventories at
LIFO cost 7,083,466 6,888,236
Total inventories 17,516,906 14,515,307
Other assets - current
Deferred income taxes 1,681,398 1,452,160
Other 1,370,062 1,002,076
Total Current Assets 48,031,387 40,187,034
Net Assets of Discontinued Operations 2,532,431 1,344,591
Property, Plant and Equipment
Land 1,421,641 1,337,641
Buildings 10,559,942 9,396,838
Machinery and equipment 49,561,052 45,019,335
61,542,635 55,753,814
Less accumulated depreciation 47,236,179 45,533,604
Net Property, Plant and Equipment 14,306,456 10,220,210
Other Assets
Marketable securities 4,989,159 13,608,993
Prepaid pension asset 7,697,238 7,709,808
Deferred income taxes 30,277 227,317
19
Property held for sale 1,128,851 1,200,837
Goodwill 3,358,580 -
Other 53,063 31,063
Total Other Assets 17,257,168 22,778,018
$ 82,127,442 $ 74,529,853
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED BALANCE SHEET (Contd.)
At December 31,
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 9,913,437 $ 9,162,757
Accrued liabilities 8,650,505 8,391,200
Income taxes 590,093 694,247
Current maturities of long-term debt 335,522 77,207
Total Current Liabilities 19,489,557 18,325,411
Long-term Debt 1,779,057 297,906
Other Liabilities
Discontinued operations 3,500,000 3,500,000
Deferred income taxes 2,074,811 1,374,911
Obligations under capital leases - 8,638
Total Other Liabilities 5,574,811 4,883,549
Shareholders' Equity
Preferred stock without par value
Authorized and unissued 1,000,000 shares - -
Common stock, par value $2.50
Authorized 12,000,000 shares; issued and
outstanding 8,598,858 shares 21,497,145 21,497,145
Retained earnings 33,786,872 29,509,444
Unrealized (loss) on securities - 16,398
Total Shareholders' Equity 55,284,017 51,022,987
$ 82,127,442 $ 74,529,853
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31,
1996 1995 1994
Cash Flows From Operating
Activities
Net income $ 4,277,428 $ 3,332,931 $ 3,609,378
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 1,933,166 1,998,557 1,975,038
Net pension charge (credit) 12,570 232,933 (153,175)
20
Deferred income tax charge 667,702 887,580 1,301,924
Gain from disposals of
property, plant and equipment - (7,750) (291,852)
Gain on sale of marketable
securities (2,899) - -
Change in assets and
liabilities:
(Increase) in marketable
securities (147,702) (289,093) (169,988)
(Increase) in accounts
receivable (3,557,360) (1,257,235) (722,584)
Decrease in income tax
refunds receivable - - 208,450
(Increase) in inventories (2,664,065) (1,734,758) (1,425,746)
(Increase) decrease in other
assets - current (325,909) (52,597) 48,901
(Decrease) increase in
accounts payable and accrued
liabilities (309,505) (520,087) 389,570
(Decrease) increase in income
taxes payable (104,154) 636,766 (465,823)
(Increase) decrease in other
assets (22,000) 160,171 2,579
Net cash (used in)
provided by operating
activities (242,728) 3,387,418 4,306,672
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF CASH FLOWS (Contd.)
For the Years Ended December 31,
1996 1995 1994
Cash Flows From Investing
Activities
Acquisition of American
Sintered Technologies
Accounts Receivable (837,938) - -
Inventory (337,534) - -
Other assets - current (42,077) - -
Property, plant and
equipment (3,884,000) - -
Goodwill (3,454,540) - -
Accounts payable and accrued
liabilities 664,586 - -
Debt 954,094 - -
Total acquisition of
American Sintered
Technologies (6,937,409) - -
Investment in marketable
securities (9,100,000) (5,280,031) (14,104,906)
Proceeds from disposition of
marketable securities 14,753,135 5,280,031 13,950,000
Proceeds from sale of assets
held for sale 597,255 - -
Proceeds from sale of property,
plant and equipment - 7,750 303,513
Capital expenditures (2,039,452) (2,854,855) (1,654,453)
Design and engineering for
21
processing plant (968,424) (821,954) -
Net cash (used in)
investing activities (3,694,895) (3,669,059) (1,505,846)
Cash Flows From Financing
Activities
Payments on long-term debt (171,224) (17,197) (600,000)
Proceeds from long-term debt 956,596 392,310 -
Proceeds from capital leases - - 113,924
Principal payments for capital
leases (98,419) (103,885) (90,589)
Dividends paid - (2,579,658) (3,439,543)
Net cash provided by (used
in) financing activities 686,953 (2,308,430) (4,016,208)
Net (Decrease) In Cash And Cash
Equivalents (3,250,670) (2,590,071) (1,215,382)
Cash And Cash Equivalents At
Beginning Of Year 6,838,960 9,429,031 10,644,413
Cash And Cash Equivalents At End
Of Year $ 3,588,290 $ 6,838,960 $ 9,429,031
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unrealized
Years Ended Common Retained (Loss) on
December 31, Stock Earnings Securities Total
1994
Balance at January 1 $ 21,497,145 $ 28,586,336 $ - $ 50,083,481
Net income - 3,609,378 - 3,609,378
Unrealized (loss)
on securities - - (81,525) (81,525)
Dividends ($.40 per
share) - (3,439,543) - (3,439,543)
Balance at
December 31 21,497,145 28,756,171 (81,525) 50,171,791
1995
Net income - 3,332,931 - 3,332,931
Unrealized gain
on securities - - 97,923 97,923
Dividends ($.30 per
share) - (2,579,658) - (2,579,658)
Balance at
December 31 21,497,145 29,509,444 16,398 51,022,987
1996
Net income - 4,277,428 - 4,277,428
Unrealized (loss)
on securities - - (16,398) (16,398)
22
Dividends ($.00 per - - - -
share)
Balance at
December 31 $ 21,497,145 $ 33,786,872 $ - $ 55,284,017
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
The consolidated financial statements include the accounts of Fansteel Inc. and
its subsidiaries (the "Company").
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company considers all investments purchased with a maturity of three months
or less to be cash equivalents. On December 31, 1996 and 1995, the Company had
purchased $1,900,000 and $4,800,000, respectively, of U.S. Government securities
under agreements to resell on January 2, 1997 and January 2, 1996, respectively.
Due to the short-term nature of the agreements, the Company did not take
possession of the securities which were instead held in the Company's
safekeeping accounts at the banks.
Effective January 1, 1994, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The Company determines the appropriate classification at
time of purchase. Securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at cost, adjusted for amortization of
premiums and discounts to maturity. Marketable securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value, which is based on quoted prices.
Unrealized gains and losses, net of tax, are reported as a separate component of
shareholders' equity. The cost of securities available-for-sale is adjusted for
amortization of premiums and discounts to maturity. Interest and amortization
of premiums and discounts for all securities are included in interest income.
Realized gains and losses are included in other income. Cost of securities sold
is determined on a specific identification basis.
Inventories are valued at the lower of cost, determined principally on the
"last-in, first-out" (LIFO) basis, or market. Costs include direct material,
labor and applicable manufacturing overhead. Inventories valued using the LIFO
method comprised 92% and 93% of inventories at current cost at December 31, 1996
and 1995, respectively.
Acquisitions of properties and additions to existing facilities and equipment
are recorded at cost. Accelerated depreciation is the principal method used for
both financial reporting and income tax purposes on additions placed in service
before January 1, 1996. For assets placed in service beginning in 1996,
depreciation is recorded using the straight-line method over the estimated
useful life in order to better match expenses and revenues for financial
reporting purposes. This change in accounting method resulted in depreciation
expense being $416,000 less in 1996 than it would have been if the prior method
had been used. This change increased net income by $250,000 or $.03 per share
for 1996. Accelerated depreciation is still the method used for income tax
23
purposes.
Goodwill of $3,359,000 at December 31, 1996, from the acquisition of American
Sintered Technologies, Inc. on July 31, 1996, represents the excess of cost over
fair value of the assets acquired and is being amortized over its estimated
useful life of 15 years using the straight-line method for financial reporting
and income tax purposes. Amortization of goodwill was $96,000 in 1996.
Revenue from sales of products is generally recognized upon shipment to
customers. Revenue from sales of tooling, patterns and dies is generally
recognized upon acceptance by the customer.
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes reflect the temporary difference between assets and liabilities
recognized for financial reporting and such amounts recognized for tax purposes
which requires recognition of deferred tax liabilities and assets. Deferred
tax liabilities and assets are determined based on the differences between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
A valuation allowance is recognized if it is anticipated that some or all of a
deferred tax asset will not be realized.
Certain reclassifications have been made to prior years' financial statements to
conform with the 1996 presentation.
2. Marketable Securities
At December 31, 1996, all the Company's investments in marketable securities
were classified as held-to-maturity. These securities included both a security
due within one year and a security with a maturity date beyond one year. The
security with a maturity date within one year is classified as Marketable
Securities as a part of Current Assets and is stated at amortized cost plus
accrued interest. The security with a maturity date beyond one year is included
in Other Non-Current Assets and is stated at amortized cost.
The held-to-maturity securities at December 31, 1996 include the following:
Amortized Fair
Cost Value
Marketable Securities - Current:
U.S. Treasury Note, face value of
$5,000,000, interest at 6.250%, due
January 31, 1997 $ 5,000,000 $ 5,001,563
Accrued interest 173,804
5,173,804
Marketable Securities - Non-Current:
U.S. Treasury Note, face value of
$5,000,000, interest at 5.125%, due
April 30, 1998 4,989,159 $ 4,948,438
Net Book Value - Held-to-Maturity
Securities: $ 10,162,963
At December 31, 1995, the Company held investments in marketable securities
which it classified as either available-for-sale or held-to-maturity, depending
upon the security.
24
Securities classified as available-for-sale at December 31, 1995 included both
securities due within one year and securities with a maturity date beyond one
year. Securities with a maturity date within one year were classified as
Marketable Securities as a part of Current Assets and were stated at fair value
plus accrued interest. Securities with a maturity date beyond one year were
included in Other Non-Current Assets and were stated at fair value.
The available-for-sale securities at December 31, 1995 included the following:
Marketable Securities - Current: Amortized Fair
Cost Value
Northern Trust Advantage investment
portfolio consisting of government
securities, municipal bonds and
commercial paper $ 1,840,760 $ 1,840,760
Accrued interest 232,142 232,142
$ 2,072,902 2,072,902
Marketable Securities - Non-Current:
Northern Trust Advantage investment
portfolio consisting of government
securities and municipal bonds $ 3,601,329 3,627,992
Net Book Value - Available-
for-Sale Securities: $ 5,700,894
Securities classified as held-to-maturity were stated at amortized cost and were
included in Other Non-Current Assets on the December 31, 1995 Consolidated
Balance Sheet.
These held-to-maturity securities at December 31, 1995 included the following:
Amortized Fair
Cost Value
U.S. Treasury Note, face value of
$5,000,000, interest at 5.125%,
due April 30, 1998 $ 4,981,001 $ 4,987,500
U.S. Treasury Note, face value of
$5,000,000, interest at 6.250%,
due January 31, 1997 5,000,000 $ 5,054,688
Net Book Value - Held-to-
Maturity Securities: $ 9,981,001
The calculation of gross unrealized gain (loss) for the years ended December 31,
1996 and 1995 is as follows:
Gross
Unrealized
Fair Value Cost Gain (Loss)
1996:
Held-to-maturity securities:
U.S. Treasury Note, face
value of $5,000,000,
25
interest at 5.125%, due
April 30, 1998 $ 4,948,438 $ 4,989,159 $ (40,721)
U.S. Treasury Note, face
value of $5,000,000,
interest at 6.250%, due
January 31, 1997 5,001,563 5,000,000 1,563
Gross Unrealized (Loss) $ (39,158)
1995:
Available-for-sale
securities $ 5,468,752 $ 5,442,089 $ 26,663
Held-to-maturity securities:
U.S. Treasury Note, face
value of $5,000,000,
interest at 5.125%, due
April 30, 1998 4,987,500 4,981,001 6,499
U.S. Treasury Note, face
value of $5,000,000,
interest at 6.250%, due
January 31, 1997 5,054,688 5,000,000 54,688
Gross Unrealized Gain $ 87,850
Net unrealized gains (losses) on held-to-maturity securities have not been
recognized in the accompanying consolidated financial statements. Net
unrealized gain on available-for-sale securities included in shareholders'
equity at December 31, 1995 was $16,398, consisting of a gross unrealized gain
of $26,663 net of deferred income taxes.
Net realized gains on marketable securities for the year ended December 31, 1996
were $2,899. There were no realized gains or losses for the years ended
December 31, 1995 or 1994.
3. Accrued Liabilities
Accrued liabilities at December 31, 1996 and 1995 include the following:
1996 1995
Payroll and related costs $ 3,159,997 $ 2,552,041
Taxes, other than income 217,544 243,223
Profit sharing 770,873 464,472
Insurance 2,421,667 3,476,589
Plant shutdown and environmental 1,589,268 1,189,639
Other 491,156 465,236
$ 8,650,505 $ 8,391,200
4. Discontinued Operations, Contingent Liabilities, and Other Liabilities
The Company discontinued its Metal Products business segment in 1989.
Environmental reclamation and decommissioning is required for the segment's
primary plant that processed certain ores which are subject to regulations of
several government agencies. The residues from these processed ores were stored
on-site. Remaining assets were written down to estimated realizable value, and
provisions were made for the estimated costs for decommissioning. Application
26
has been made to the appropriate agencies for a portion of the site to be
decommissioned. A decommissioning plan for the remainder of the site, including
the residue storage areas, has been submitted to the appropriate governmental
agencies for approval. Before decommissioning procedures begin for the residue
storage areas, the Company plans to extract materials within the residues which
have a commercial value.
At December 31, 1996, the Company had reserves of $3.9 million for environmental
clean-up costs for discontinued operations. The Company, in association with
outside consultants, has developed a decommissioning plan for the site involved,
and has submitted that plan and a related decommissioning funding plan to the
Nuclear Regulatory Commission ("NRC") as required by law. Prior to
decommissioning, the Company proposes to construct and operate for approximately
ten years a commercial plant to complete the processing of residues currently
contained in storage ponds at the site, which would materially reduce the amount
of radioactive materials to be disposed of during decommissioning. In
conjunction with construction of the processing plant, the Company would modify
the wastewater treatment plant at the site and install a drainage system.
Decommissioning would include construction of an engineered on-site cell for
containment of contaminated soils; consolidation and stabilization of the
contaminated soils in the containment cell; and the performance of required
plant surveys and characterizations after residue processing ceases to determine
whether additional contaminated soils exist which may require remediation.
The Company has applied for an amendment to its current NRC license and for a
revision to its current wastewater discharge permit to allow construction and
operation of the proposed processing plant, and believes that these regulatory
authorizations will be issued in the near future. Preliminary engineering,
design and feasibility studies have been completed for the proposed processing
plant, which would extract commercially valuable materials such as tantalum,
columbium, scandium and other rare earth and rare metal elements from the
feedstock residues. The Company engaged a process design expert which confirmed
the viability of the proposed plant. The estimated cost of construction is
approximately $12 million. The estimated value of materials to be extracted is
based on analysis of samples taken from the residues and a valuation of such
materials using current market prices discounted to reflect possible price
decreases, including those which could result from the increased quantities of
certain of these materials made available for sale. The estimated costs of
residue processing were developed by Company personnel and independent
consultants using third party evaluations based on the pilot testing performed.
Residue processing is expected to start approximately a year after licensing
approval is received. The provisions for discontinued operations reflect
management's belief that the current value of the extracted materials will at
least equal the estimated cost of construction and costs of processing,
including estimated costs for disposal of waste generated by the process. The
annual recovery revenues are estimated to be in a range of $6,000,000 to
$7,000,000. However, there can be no assurance as to the level of demand for
the extracted materials or the actual prices which may be obtained for them,
which could vary over time.
In October 1995 the NRC advised the Company that a decommissioning funding plan
cost estimate based upon on-site disposal of most of the radioactive wastes at
the site is appropriate to consider at this time. The NRC cautioned the
Company, however, that on-site disposal may require preparation of an
Environmental Impact Statement and that, in addition to the required NRC
approval, local and other federal agencies may have to be satisfied that the
Company's disposal plan is sound. Such an approval process can be expected to
extend over a number of years. Management believes that a decommissioning plan
including on-site containment will ultimately be acceptable to the appropriate
regulatory authorities, based on current and proposed NRC regulations and a
provision of the Nuclear Waste Policy Act of 1982 requiring the Department of
Energy to take title to certain "special sites" which may include the Company's
site; however, there is no assurance that a plan providing for on-site
containment will ultimately be approved. Implementation of a decommissioning
27
plan for the Company's site which includes off-site disposal may not be
financially feasible.
The NRC decommissioning regulations require licensees to estimate the cost for
decommissioning and to assure in advance that adequate funds will be available
to cover those costs. NRC regulations identify a number of acceptable methods
for assuring funds for decommissioning, including surety instruments such as
letters of credit, cash deposits and combinations thereof. The NRC October 1995
letter requested the Company to submit a decommissioning funding plan
contemplating on-site containment and stated that the cost of residue processing
should be included in the Company's cost estimate. In March 1996, the Company
submitted a revised decommissioning plan and a related decommissioning funding
plan. The initial level of assurance for decommissioning is $4,456,000 provided
through letters of credit. The amount does not include assurance for costs of
construction or operation of the residue processing facility. This initial level
of assurance, however, may be changed upon further review by the NRC. The
Company's available cash and/or borrowing capacity will be reduced by the amount
of funding assurance as required at any particular time. As the decommissioning
plan is implemented, deposited funds or the amount of any surety instruments may
be reduced, provided the Company can demonstrate the sufficiency of the
remaining funds or surety to assure the completion of decommissioning.
Expenditures for environmental reclamation and decommissioning were $1,516,000,
$1,221,000 and $1,061,000 in 1996, 1995, and 1994, respectively. Costs which
are expected to be incurred within the next year are included as plant shutdown
costs in Accrued Liabilities. Costs expected to be incurred after one year are
reflected on the balance sheet in Discontinued Operations as part of Other
Liabilities. Based upon continuing assessment of the proposed decommissioning
plan, taking into consideration the most current information, existing
technology and regulations in effect, management believes that the amounts
reserved at December 31, 1996 are adequate to cover the costs of environmental
clean-up for discontinued operations and that the Company has the ability to
meet the NRC decommissioning funding assurance requirements.
The net assets of discontinued operations at December 31, 1996 and 1995 include
the following (in thousands of dollars):
1996 1995
Land $ 110 $ 110
Building 5,218 5,218
5,328 5,328
Less accumulated depreciation 4,805 4,805
Net land and buildings 523 523
Design and engineering costs
for processing plant 2,009 822
$ 2,532 $ 1,345
The remaining land and buildings of the Company's former Precision Sheet Metal
(PSM) operation within the Metal Fabrications business segment are carried as
Other Assets - Property held for sale at a cost of $1,129,000 at December 31,
1996. The cost of preparing the property for sale, principally environmental
clean-up, will be capitalized. Management believes that proceeds from the sale
of the property will be adequate to recover its costs, including costs of
preparing the property for sale. The Company believes the reserves established
for other costs associated with the close-down of PSM are adequate to cover such
costs.
The Company's Escast operation, located in Addison, IL, and included in the
Metal Fabrications business segment, has been named as a responsible party for
the clean-up costs of certain hazardous wastes located on-site. A cost sharing
agreement with the former owner of Escast is in place for any future clean-up
28
costs. The clean-up process has begun at the site under an Illinois
Environmental Protection permit with total estimated costs of approximately $1.1
million. The Company believes the established reserves are adequate to cover
its share of the clean-up costs.
Environmental matters arising at other units are routinely reviewed and handled
through operations. The Company believes that the ultimate disposition of any
other pending environmental matters will not have a material adverse effect upon
the consolidated financial position of the Company.
5. Debt
Long-term debt at December 31, 1996 and 1995 consisted of the following:
1996 1995
Mississippi Business Finance
Corporation 5.487% Note, due 2011 $ 956,596 $ -
Loans from various Pennsylvania
Economic Agencies with interest rates
ranging from 2.0% to 5.0%, due from
1997 to 2009 860,076 -
Loans from various Iowa Economic
Agencies with interest rates ranging
from 0.0% to 4.0%, due 2000 297,907 375,113
Less current maturities 2,114,579 375,113
Total long-term debt 335,522 77,207
$ 1,779,057 $ 297,906
The above loans are collateralized by machinery and equipment with a net book
value of $2,386,000.
The aggregate maturities for long-term debt for the five years after December
31, 1996 are $336,000, $317,000, $283,000, $241,000, and $112,000, respectively.
Interest paid on debt for the years ended December 31, 1996, 1995 and 1994
amounted to $17,000, $4,000, and $13,000, respectively.
The fair value of the Company's debt is $2,189,000 which was estimated using a
discounted cash flow analysis, based upon the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
6. 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.
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1996 and 1995 are as follows:
1996 1995
29
Deferred tax assets - current:
Plant shutdown, idle facilities and
environmental costs $ 154,316 $ 103,482
Self insurance accruals 648,718 825,569
Vacation accruals 395,352 339,829
State income taxes 291,582 238,216
Other 191,430 (54,936)
$ 1,681,398 $ 1,452,160
Deferred tax assets (liabilities) -
non-current:
State income tax net operating loss
carryforwards net of valuation
allowance $ 520,633 $ 549,350
State income taxes (490,356) (322,033)
$ 30,277 $ 227,317
Deferred tax (assets) liabilities -
non-current:
Pension credits $ 2,414,493 $ 2,426,922
Plant shutdown, idle facilities and
environmental costs (438,344) (1,055,712)
Tax depreciation in excess of book
depreciation 131,046 -
Other (32,384) 3,701
$ 2,074,811 $ 1,374,911
At December 31, 1996 and 1995, the Company had potential state income tax
benefits of $926,000 and $1,085,000, respectively, from net operating loss
carryforwards that expire in various years through 2010. For financial
reporting purposes, valuation allowances of $405,000 and $536,000 at December
31, 1996 and 1995, respectively, were recognized for net operating loss
carryforwards not anticipated to be realized before expiration.
Details of the provision for income taxes in the consolidated statements of
operations are as follows:
1996 1995 1994
Current taxes
Federal $ 1,747,000 $ 935,000 $ 900,000
State and other 481,000 379,000 331,000
2,228,000 1,314,000 1,231,000
Deferred income tax
charge
Federal 544,000 829,000 950,000
State 4,000 38,000 156,000
548,000 867,000 1,106,000
Total 2,776,000 2,181,000 2,337,000
The deferred income tax charge in 1996 results primarily from payments for
certain plant shutdown, idle facilities and environmental costs accrued in prior
years and for the net effect of timing of the deduction of certain employee
fringe benefits.
The deferred income tax charges in 1995 and 1994 result primarily from payments
for certain plant shutdown, idle facilities and environmental costs accrued in
30
prior years.
A reconciliation of the total provision for income taxes with amounts determined
by applying the statutory U.S. federal income tax rate to income before income
tax provision is as follows:
1996 1995 1994
Income tax provision at
statutory rate $ 2,398,000 $ 1,875,000 $ 2,022,000
Add (deduct):
State income taxes, net of
federal income tax provision 320,000 275,000 321,000
Other, net 58,000 31,000 (6,000)
Total income tax provision $ 2,776,000 $ 2,181,000 $ 2,337,000
Income taxes paid for each of the three years in the period ended December 31,
1996 amounted to $2,189,000, $1,147,000 and $1,610,000, respectively.
Income tax refunds received during the three years in the period ended December
31, 1996 amounted to $30,000, $427,000 and $319,000, respectively.
7. Retirement Plans
The Company has several non-contributory defined benefit plans covering
approximately 28% of its employees. Benefits for salaried plans are generally
based on salary and years of service, while hourly plans are based upon a fixed
benefit rate in effect at retirement date and years of service. The Company's
funding of the plans is equal to the minimum contribution required by ERISA.
Contributions to defined benefit plans totaled $22,380, $63,113 and $108,435 in
1996, 1995 and 1994, respectively.
The net pension expense (credit) in 1996, 1995 and 1994 is comprised of:
1996 1995 1994
Service cost $ 485,000 $ 368,000 $ 376,000
Interest cost on projected
benefit obligations 3,058,000 3,181,000 3,003,000
Actual return on Plan assets (1,750,000) (6,021,000) 823,000
Net amortization and
deferral (1,587,000) 2,660,000 (4,355,000)
Net pension expense (credit) $ 206,000 $ 188,000 $ (153,000)
The plans' funded status and amounts recognized in the balance sheet at December
31 are as follows:
1996 1995
Actuarial present value of benefit
obligations
Vested $ 38,581,143 $ 40,274,444
Non-vested 572,069 538,534
Total accumulated benefit obligations $ 39,153,212 $ 40,812,978
Projected benefit obligations for services
rendered to date $ 41,417,209 $ 43,253,191
Plan assets at fair value, primarily U.S.
31
Government securities and publicly traded
stocks and bonds 40,136,249 41,902,910
Plan assets less than projected
benefit obligations (1,280,960) (1,350,281)
Effect of change in assumptions,
net gains and losses 10,365,078 11,127,442
Unrecognized net excess plan assets
at January 1, 1986 being recognized
over approximately 15 years (1,386,880) (2,067,353)
Prepaid pension asset $ 7,697,238 $ 7,709,808
The assumptions used in determining the actuarial present value of projected
benefit obligations were as follows:
1996 1995 1994
Discount rate 7.75% 7.50% 8.50%
Rate of increase in future
compensation levels 5.00% 5.00% 5.50%
Expected long-term rate
of return on assets 8.00% 8.00% 8.00%
The Company has several defined contribution plans covering approximately 85% of
its employees. Almost all of the defined contribution plans have funding
provisions which, in certain situations, require Company contributions based
upon formulae relating to employee gross wages, participant contributions or
hours worked. Almost all of the defined contribution plans also allow for
additional discretionary Company contributions based upon profitability. The
costs of these plans for 1996, 1995 and 1994 were $1,235,000, $869,000, and
$839,000, respectively.
The Company makes medical insurance available and provides limited amounts of
life insurance to retirees. Retirees electing to be covered by
Company-sponsored health insurance pay the full cost of such insurance. The
Company accrues the cost of the retiree life insurance benefits in relation to
the employee's service with the Company. Costs of postretirement benefits other
than pensions for the years ended December 31, 1996, 1995 and 1994 were $37,000,
$37,000, and $44,000, respectively.
8. Business Segments
The Company is a specialty metals manufacturer. For financial reporting
purposes, the Company classifies its products into the following two business
segments:
Industrial Tools:
Tungsten carbide cutting tools, milling tools, toolholding devices, mining tools
and accessories, construction tools, wear parts and related industrial parts.
Metal Fabrications:
Titanium, nickel base and high alloy steel forgings; aluminum and magnesium sand
mold castings; powdered metal components; special wire products and investment
castings.
Financial information concerning the Company's segments for the years ended
32
December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
NET SALES:
INDUSTRIAL TOOLS -
Sales $ 54,068,214 $ 50,068,802 $ 43,558,081
Intersegment sales (239) (95) -
54,067,975 50,068,707 43,558,081
METAL FABRICATIONS -
Sales 66,784,892 52,551,291 45,783,951
Intersegment sales (19,036 (22,244 (54,696)
66,765,856 52,529,047 45,729,255
$120,833,831 $102,597,754 $ 89,287,336
OPERATING INCOME (LOSS):
INDUSTRIAL TOOLS $ 3,052,446 $ 3,109,433 $ 2,856,607
METAL FABRICATIONS 3,351,717 1,370,067 1,809,048
CORPORATE (61,619 (44,352 (13,250
$ 6,342,544 $ 4,435,148 $ 4,652,405
Intersegment sales are accounted for at prices equivalent to the competitive
market prices for similar products.
The percentages of net sales for classes of similar products which exceeded ten
percent of the Company's consolidated net sales, for the period indicated, are
set forth below:
Percentage of
Consolidated Net Sales
Products Business Segments 1996 1995 1994
Tungsten carbide
cutting tools Industrial Tools 30% 31% 29%
Nonferrous forgings Metal Fabrications 12% 11% 12%
Investment castings Metal Fabrications 9% 12% 13%
The identifiable assets, depreciation and capital expenditures for the years
ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994
Identifiable assets
Industrial Tools $17,383,706 $15,895,229 $14,007,160
Metal Fabrications 36,727,565 23,553,746 22,089,022
Corporate/Discontinued 28,016,171 35,080,878 36,784,736
Total assets $82,127,442 $74,529,853 $72,880,918
33
Depreciation
Industrial Tools $ 773,130 $ 778,260 $ 716,800
Metal Fabrications 1,160,036 1,220,297 1,258,238
Corporate/Discontinued - - -
Total depreciation $ 1,933,166 $ 1,998,557 $ 1,975,038
Capital expenditures
Industrial Tools $ 1,553,372 $ 1,062,578 $ 1,055,600
Metal Fabrications 4,370,080 1,792,277 598,853
Corporate/Discontinued - - -
Total capital expenditures $ 5,923,452 $ 2,854,855 $ 1,654,453
Capital expenditures for the Metal Fabrications segment include $3,884,000 from
the acquisition of American Sintered Technologies, Inc. on July 31, 1996.
9. Lease Commitments
The Company leases data processing, transportation and other equipment, as well
as certain facilities, under operating leases. Such leases do not involve
contingent rentals, nor do they contain significant renewals or escalation
clauses.
Total minimum future rentals under noncancelable leases at December 31, 1996
were $1,188,000, including $494,000 in 1997, $443,000 in 1998, $213,000 in 1999,
$27,000 in 2000, and $11,000 in 2001 and thereafter. Rental expense was
$1,174,000 in 1996, $1,094,000 in 1995, and $1,187,000 in 1994.
10. Acquisition
On July 31, 1996, the Company acquired all of the assets and certain liabilities
of American Sintered Technologies, Inc. (AST) for the cash price of $6,937,000.
In addition to the cash paid, the Company assumed $954,000 of various
Pennsylvania Economic Agencies loans. The nature of the business of AST is the
manufacture of ferrous and non-ferrous powdered metal components serving the
automotive, lawn and garden, plumbing, hardware, and electrical hardware
industries. The acquisition was accounted for as a purchase and is included in
the Company's Metal Fabrications business segment.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and executive
officers is included in Part I page 10.
Additional information concerning the Company's directors is
incorporated by reference to information under the caption
"Nominees for Election as Directors" in the Company's
definitive proxy statement for the annual meeting of
shareholders to be held on April 23, 1997.
34
ITEM 11 - EXECUTIVE COMPENSATION
Incorporated herein by reference to information under the
caption "Compensation of Directors and Executive Officers" in
the Company's definitive proxy statement for the annual
meeting of shareholders to be held on April 23, 1997.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)(b)(c) The information required by this Item 12 is incorporated
herein by reference to the information under the captions
"Voting Securities and Principal Holders Thereof" and
"Nominees for Election as Directors" in the Company's
definitive proxy statement for the annual meeting of
shareholders to be held on April 23, 1997.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the information under the
caption "Nominees for Election as Directors" in the Company's
definitive proxy statement for the annual meeting of
shareholders to be held on April 23, 1997.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(a)(1) Index to Consolidated Financial Statements:
Form 10-K
Page
Summary Quarterly Financial Data for the
years ended December 31, 1996 and 1995. 12
Report of Independent Auditors. 21
Consolidated Statement of Income for each of
the three years in the period ended December
31, 1996. 22
Consolidated Balance Sheet at December 31,
1996 and 1995. 23-24
Consolidated Statement of Cash Flows for each
of the three years in the period ended
December 31, 1996. 25-26
Consolidated Statement of Shareholders'
Equity for each of the three years in the
period ended December 31, 1996. 27
Notes to Consolidated Financial Statements. 28-41
(a)(2) Index to Consolidated Financial Statement Schedule:
Consolidated Financial Statement Schedule
for each of the three years ended
December 31, 1996:
II. Valuation and qualifying accounts 44
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in
35
the Consolidated Financial Statements and Notes thereto.
(a)(3) The following exhibits required by Item 601 of Regulation S-K
are submitted as follows:
Exhibit 3.1 - Certificate of Incorporation
Exhibit 3.2 - By-Laws
Exhibit 10a - Incentive Compensation Plan
Exhibit 10b - Change in Control Agreement
Exhibit 22 - Subsidiaries of the Registrant
All other exhibits are omitted since the required information is not
present or is not present in amounts sufficient to require submission.
(b) No reports have been filed on Form 8-K during the last quarter
of the year ended December 31, 1996.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance
Beginning Cost and Deductions at End
of Year Expenses (1) of Year
Allowance for Doubtful
Accounts:
Year ended 12/31/96 $ 276,440
$ 11,665 $ 11,655 $ 276,440
Year ended 12/31/95 $ 276,440 $ 16,022 $ 16,022 $ 276,440
Year ended 12/31/94 $ 276,440 $ (21,929) $ (21,929) $ 276,440
(1) Accounts written off, net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 10, 1997 By: \s\ William D. Jarosz
William D. Jarosz, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated:
Signature Title Date
Director; Chairman of the
Board, President and
36
\s\ William D. Jarosz Chief Executive Officer March 10, 1997
William D. Jarosz
Vice President and Chief
\s\ R. Michael McEntee Financial Officer March 10, 1997
R. Michael McEntee
\s\ Betty B. Evans Director March 18, 1997
Betty B. Evans
\s\ R. S. Evans Director March 17, 1997
Robert S. Evans
\s\ Thomas M. Evans, Jr. Director March 21, 1997
Thomas M. Evans, Jr.
\s\ Peter J. Kalis Director March 13, 1997
Peter J. Kalis
\s\ Jack S. Petrik Director March 26, 1997
Jack S. Petrik
INDEX TO EXHIBITS
The following Exhibits to this report are filed herewith or, if marked with an
asterisk (*), are incorporated by reference:
Exhibit Prior Filing or Sequential
No. Page Number Herein
3.1 Certificate of Incorporation Company's Form 10-K filed
March 31, 1993 (*)
3.2 By-Laws Annex II to the Company's
annual proxy statement
dated March 15, 1985,
File No. 1-8676 (*)
10a Incentive Compensation Plan 48-50
10b Change in Control Agreement 51-59
22 Subsidiaries of the Registrant 60
37
EXHIBIT 10a - INCENTIVE COMPENSATION PLAN
FANSTEEL INC.
INCENTIVE COMPENSATION PLAN - EVA
IN EFFECT AS OF 01-01-96
PURPOSE OF PLAN:
To maximize shareholder value by aligning management's interests with those of
shareholders and rewarding management for sustainable and continuous improvement
in EVA (Economic Value Added).
ELIGIBILITY:
Corporate Officers, General Managers, Key Managers as designated and approved,
including discretionary pools where appropriate.
ADMINISTRATION:
The plan is administered by the Corporation's President and Chief Executive
Officer and approved by the Compensation Committee of the Board of Directors.
Awards are calculated and recommended on year-end audited results.
Discretionary bonus pools in addition to EVA payouts may be considered from time
to time upon the approval of the Compensation Committee of the Fansteel Board of
Directors. The Board of Directors may, at its discretion, effect a change in
the formula awards as a result, but not limited to, extraordinary income/expense
items, losses from operations, and marginal returns on investment.
THE PLAN CONCEPTS:
The plan is designed using the concept of Economic Value Added (EVA). Economic
Value Added is defined as the difference between the return on capital and the
cost of that capital multiplied by the amount of capital invested. The key
elements of this plan are:
- Cost of capital (C*)
- Return on Capital (R)
- Capital Employed (C)
- Net Operating Profit After Tax (NOPAT)
- Economic Value Added (EVA). EVA = (R-C*) x C
- Base EVA
- Bonus Account - 1/3 paid out each year
1. Actual results are compared to prior year (not Plan).
2. Return on capital invested is compared to a cost of capital.
3. Bonus awards earned in a given year are put into an accrual with 1/3 of
the accrual being paid out each year.
The participants and their percentage allocation for operations are developed by
the operation's general manager based upon their determination of each
individual's relative value to the operation's success or, at his/her
discretion, based upon a peer evaluation of each participant as to how the bonus
pool should be allocated. The final percentage awarded into each individual's
accrual will be determined by the operation's general manager based on the
individual's performance for the year as well as his relative performance
compared to the other participants in that operation. All awards are reviewed
and approved by Corporate prior to distribution.
Corporate office awards are developed in the same manner and are subject to the
approval of the Compensation Committee of the Board of Directors.
1
CURRENT BONUS POOL FORMULA:
If Prior Year EVA was
Negative Positive
- - Units under $30MM sales & distribution 25/0% 15/10%
- - All other Units 15/0% 10/6%
BONUS POOL CALCULATION:
The bonus pool is generated by applying a formula to the EVA calculated. If
your prior year EVA was:
- negative - The current year's formula is 25% or 15% of the change
in EVA (positive or negative).
- positive - The current year's formula is 15% or 10% of the change
in EVA (positive or negative) plus 10% or 6% of any
positive EVA in the current year.
ACCRUAL AND PAY-OUT CALCULATIONS:
The EVA award is added to the individual's accrual account and then 1/3 of the
account balance is paid out in cash to the participant. The remainder of the
accrued account balance represents the individual's "equity" in the account.
DISPOSITION OF THE EQUITY BALANCE:
Certain events may occur that change the status of the plan and/or the
employee's right to participate in the plan. The following is an outline of
what would happen to any positive equity balance upon a particular event:
EVENT DISPOSITION
- Terminate/quit - Lose equity balance**
- Removed from plan/demotion - Equity balance paid out over
next 2 years
- Unit sold by Fansteel - Receive in cash
- Retire*/death/disabled - Receive in cash
- Unit spun off - Don't receive. Continued
- Fansteel acquired - Receive in cash
- Transfer to another - Equity balance transfers
operation with you
- Plan discontinued - Receive in cash
* Retirement is defined as normal retirement - age 65.
** Former employee's EVA balance reverts to Company.
RIGHT TO AMEND AND MODIFY:
EVA has become the way we measure our business performance and to establish the
funds available (positive or negative) to recognize the results. As we have
2
seen, formula driven plans are not perfect and, from time to time, need to be
modified by the Company and the Compensation Committee of the Board of Directors
to achieve the desired result of enhancing shareholder value for Fansteel Inc.
We, therefore, must reserve the right to make changes in the overall plan,
and/or by Business Unit, and/or by individual participants.
\s\ W. D. Jarosz
Chairman of the Board, President and
Chief Executive Officer
3
EXHIBIT 10b - CHANGE IN CONTROL AGREEMENT
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into as of this 15th
day of January, 1996 (the "Effective Date"), by and among Fansteel, Inc., a
Delaware corporation (hereinafter referred to as the "Company"), and the
individual identified on the signature page of this Agreement (the "Executive").
W I T N E S E T H:
WHEREAS, the Board of Directors of the Company (the "Board") has
approved the Company entering into agreements with certain key executives of the
Company providing for certain severance protection following a Change in Control
(as hereinafter defined);
WHEREAS, the Executive is a key executive of the Company;
WHEREAS, the Board of the Company believes that, should the
possibility of a Change in Control arise, it is imperative that the Company be
able to receive and rely upon the Executive's advice, if requested, as to the
best interests of the Company and its shareholders without concern that he or
she might be distracted by the personal uncertainties and risks created by the
possibility of a Change in Control; and
WHEREAS, in addition to the Executive's regular duties, he or she may
be called upon to assist in the assessment of a possible Change in Control,
advise management and the Board of the Company as to whether such Change in
Control would be in the best interests of the Company and its shareholders, and
to take such other actions as the Board determines to be appropriate;
NOW THEREFORE, to assure the Company that it will have the continued
dedication of the Executive and the availability of his or her advice and
counsel notwithstanding the possibility, threat, or occurrence of a Change in
Control, and to induce the Executive to remain in the employ of the Company, and
for other good and valuable consideration, the Company and the Executive,
intending to be legally bound, agree as follows:
Article 1. Definitions
Whenever used in this Agreement, the following terms shall have the
meanings set forth below when the initial letter of the word is capitalized:
(a) "Base Salary" shall mean the salary of record paid by the
Company to the Executive as annual salary, excluding amounts
received under incentive or other bonus plans, whether or not
deferred.
(b) "Beneficiary" shall mean the persons or entities designated or
deemed designated by the Executive pursuant to Section 7.2
herein.
(c) "Cause" shall mean the occurrence of any one or more of the
following:
(i) willful misconduct by the Executive in the performance of
his duties (other than due to disability);
(ii) dishonesty or breach of trust by the Executive which is
demonstrably injurious to the Company or its subsidiaries;
or
1
(iii) conviction or plea of nolo contendere to a felony or a
misdemeanor involving moral turpitude.
(d) A "Change in Control" shall mean, and shall be deemed to have
occurred upon the occurrence of, any one of the following
events:
(i) The acquisition in one or more transactions, other than
from the Company, by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of either (i)
30% or more of the outstanding Common Stock of the Company
(the "Outstanding Common Stock") or 30% or more of the
Company Voting Securities; provided, however, that the
following shall not constitute a Change in Control: any
acquisition by (1) the Company or any of its subsidiaries,
any employee benefit plan (or related trust) sponsored or
maintained by the Company or any of its subsidiaries, or
(2) any corporation with respect to which, following such
acquisition, more than 70% of, respectively, the then
outstanding shares of common stock of such corporation and
the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally
in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners,
respectively, of the Outstanding Common Stock and Company
Voting Securities immediately prior to such acquisition in
substantially the same proportion as their ownership,
immediately prior to such acquisition, of the Outstanding
Common Stock and Company Voting Securities, as the case
may be; or
(ii) Individuals who constitute the Board as of the date of
this Agreement (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director
subsequent to the date of this Agreement whose election or
nomination for election by the Company was approved by a
vote of at least a majority of the directors then
comprising the Incumbent Board or was approved by a
stockholder beneficially owning in excess of 40% of the
Outstanding Common Stock at the date hereof and at the
date of such nomination or election (unless such
nomination or election (a) was at the request of an
unrelated third party who has taken steps reasonably
calculated to effect a Change in Control, or (b) otherwise
arose in connection with or in anticipation of the Change
in Control) shall be considered as though such individual
were a member of the Incumbent Board; or
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, unless, following
such reorganization, merger or consolidation, all or
substantially all of the individuals and entities who were
the respective beneficial owners of the Outstanding Common
Stock and Company Voting Securities immediately prior to
such reorganization, merger or consolidation, following
such reorganization, merger or consolidation beneficially
own, directly or indirectly, more than 70% of,
respectively, the then outstanding shares of common stock
and the combined voting power of the then outstanding
- 2 -
voting securities entitled to vote generally in the
election of directors, as the case may be, of the
corporation resulting from such reorganization, merger or
consolidation in substantially the same proportion as
their ownership of the Outstanding Common Stock and
Company Voting Securities immediately prior to such
reorganization, merger or consolidation, as the case may
be; or
(iv) Approval by the shareholders of the Company of (i) a
complete liquidation or dissolution of the Company or (ii)
a sale or other disposition of 60% or more by value of the
assets of the Company other than to a corporation with
respect to which, following such sale or disposition, more
than 70% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally
in the election of directors is then owned beneficially,
directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners,
respectively, of the Outstanding Common Stock and Company
Voting Securities immediately prior to such sale or
disposition in substantially the same proportion as their
ownership of the Outstanding Common Stock and Company
Voting Securities, as the case may be, immediately prior
to such sale or disposition.
(e) "Company Voting Securities" shall mean the combined voting power
of all outstanding voting securities of the Company entitled to
vote generally in the election of directors for the Board.
(f) "Effective Date of Termination" shall mean the date on which the
Executive's employment terminates in a circumstance in which
Section 2.1 provides for Severance Benefits (as defined in
Section 2.1).
(g) "Good Reason" shall mean, without the Executive's express
written consent, the occurrence of any one or more of the
following:
(i) A material diminution of the Executive's authorities,
duties, responsibilities, and status (including offices,
titles, and reporting requirements) as an employee of the
Company from those in effect as of one hundred eighty
(180) days prior to the Change in Control, other than an
insubstantial and inadvertent act that is remedied by the
Company promptly after receipt of notice thereof given by
the Executive, and other than any such alteration which is
consented to by the Executive in writing;
(ii) The Company's requiring the Executive to be based at a
location in excess of thirty-five (35) miles from the
location of the Executive's principal job location or
office immediately prior to the Change in Control, except
for required travel on the Company's business to an extent
substantially consistent with the Executive's present
business obligations;
(iii) A reduction in the Executive's base salary or any material
reduction by the Company of the Executive's other
compensation or benefits from that in effect immediately
before the Change in Control occurred;
(iv) The failure of the Company to obtain a satisfactory
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agreement from any successor to the Company to assume and
agree to perform the Company's obligations under this
Agreement, as contemplated in Article 5 herein; and
(v) Any purported termination by the Company of the
Executive's employment that is not effected pursuant to a
Notice of Termination satisfying the requirements of
Section 2.4 herein, and for purposes of this Agreement, no
such purported termination shall be effective.
The Executive's right to terminate employment for Good Reason
shall not be affected by the Executive's (A) incapacity due to
physical or mental illness or (B) continued employment following
the occurrence of any event constituting Good Reason herein.
Article 2. Severance Benefits
2.1. Right to Severance Benefits. The Executive shall be entitled to
receive from the Company the severance benefits as described in Section 2.2
("Severance Benefits") if a Change in Control shall occur and within two years
after the Change in Control either of the following shall occur:
(i) an involuntary termination of the Executive's employment
with the Company without Cause; or
(ii) a voluntary termination of the Executive's employment with
the Company for Good Reason.
2.2. Severance Benefits. In the event that the Executive becomes
entitled to receive Severance Benefits, as provided in Section 2.1, the Company
shall provide the Executive with total Severance Benefits as follows (but
subject to Sections 2.5 and 2.6):
(a) The Executive shall receive a single lump sum payment within
thirty (30) days of the Effective Date of Termination in an
amount equal to 2.99 times the sum of (i) the highest rate of
the Executive's monthly Base Salary in effect during the twelve
(12) month period prior to the Change in Control at any time up
to and including the Effective Date of Termination and (ii) the
Executive's average annual bonus earned over the most recent
three (3) full bonus plan years ending prior to the Effective
Date of Termination.
(b) The Executive shall receive an amount, paid within thirty (30)
days of the Effective Date of Termination, equal to the
Executive's unpaid Base Salary, accrued but unused vacation pay
and earned but unpaid bonuses and all other cash entitlements
through the Effective Date of Termination plus an amount equal
to the aggregate amount of matching contributions that would be
credited to the Executive under the Fansteel Savings and Profit
Sharing Plan for the three years following the Effective Date of
Termination if (i) the Executive were to continue to participate
and make the maximum permissible contribution thereunder and
(ii) the applicable rate of matching contributions during such
period were to equal the average rate of match under the plan
for the three years immediately prior to the Effective Date of
Termination.
(c) All welfare benefits, including medical, dental, vision, life
and disability benefits pursuant to plans under which the
Executive and/or the Executive's family is eligible to receive
benefits and/or coverage shall be continued for a period of
eighteen (18) months after the Effective Date of Termination.
Such benefits shall be provided to the Executive at no less than
- 4 -
the same coverage level as in effect as of the date of the
Change in Control. The Company shall pay the full cost of such
continued benefits, except that the Executive shall bear any
portion of such cost as was required to be borne by key
executives of the Company generally at the date of the Change in
Control. Notwithstanding the foregoing, the benefits described
in this Section 2.2(c) may be discontinued prior to the end of
the periods provided in this Section to the extent, but only to
the extent, that the Executive receives substantially similar
benefits from a subsequent employer.
2.3. Termination for any other Reason. If the Executive's employment
with the Company is terminated under any circumstances other than those set
forth in Section 2.1, including without limitation by reason of retirement,
death, disability, discharge for Cause or resignation without Good Reason, or
any termination for any reason that occurs prior to a Change in Control or after
two years following a Change in Control, the Executive shall have no right to
receive the Severance Benefits under this Agreement or to receive any payments
in respect of this Agreement. In such event Executive's benefits, if any, in
respect of such termination shall be determined in accordance with the Company's
retirement, survivor's benefits, insurance, and other applicable plans,
programs, policies and practices then in effect. Anything in this Agreement to
the contrary notwithstanding, if the Executive's employment with the Company is
terminated prior to the date on which a Change in Control occurs either (i) by
the Company other than for Cause or (ii) by the Executive for Good Reason, and
it is reasonably demonstrated that termination of employment (a) was at the
request of an unrelated third party who has taken steps reasonably calculated to
effect a Change in Control, or (b) otherwise arose in connection with or in
anticipation of the Change in Control, then for all purposes of this Agreement
the termination shall be deemed to have occurred upon a Change in Control and
the Executive will be entitled to Severance Benefits as provided in Section 2.2
hereof.
2.4. Notice of Termination. Any termination by the Company for Cause
or by the Executive for Good Reason shall be communicated by Notice of
Termination to the other party. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which shall indicate the specific
termination provision in this Agreement relied upon, and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
2.5. Withholding of Taxes. The Company shall withhold from any
amounts payable under this Agreement all Federal, state, local, or other taxes
as legally shall be required to be withheld.
2.6. Certain Limitations on Payments by the Company. Notwithstanding
the foregoing or any other provision of this Agreement to the contrary, if tax
counsel selected by the Company and reasonably acceptable to the Executive
determines that any portion of any payment under this Agreement would constitute
an "excess parachute payment" under Section 280G of the Internal Revenue Code,
then the payments to be made to the Executive under this Agreement shall be
reduced (but not below zero) such that the value of the aggregate payments that
the Executive is entitled to receive under this Agreement and any other
agreement or plan or program of the Company shall be one dollar ($1) less than
the maximum amount of payments which the Executive may receive without becoming
subject to the tax imposed by Section 4999 of the Internal Revenue Code.
Article 3. The Company's Payment Obligation
3.1. Payment Obligations Absolute. Except as otherwise provided in
the last sentence of Section 2.2(a) and the last sentence of Section 2.2(c), the
Company's obligation to make the payments and the arrangements provided for
herein shall be absolute and unconditional, and shall not be affected by any
circumstances, including, without limitation, any offset, counterclaim,
- 5 -
recoupment, defense, or other right which the Company may have against the
Executive or any other party. All amounts payable by the Company hereunder
shall be paid without notice or demand. Each and every payment made hereunder
by the Company shall be final, and the Company shall not seek to recover all or
any part of such payment from the Executive or from whomsoever may be entitled
thereto, for any reasons whatsoever.
Notwithstanding any other provisions of this Agreement to the contrary, the
Company shall have no obligation to make any payment to the Executive hereunder
to the extent, but only to the extent, that such payment is prohibited by the
terms of any final order of a Federal or state court or regulatory agency of
competent jurisdiction; provided, however, that such an order shall not affect,
impair, or invalidate any provision of this Agreement not expressly subject to
such order.
3.2. Contractual Rights to Benefits. This Agreement establishes and
vests in the Executive a contractual right to the benefits to which he is
entitled hereunder. Nothing herein contained shall require or be deemed to
require, or prohibit or be deemed to prohibit, the Company to segregate,
earmark, or otherwise set aside any funds or other assets, in trust or
otherwise, to provide for any payments to be made or required hereunder. The
Executive shall not be obligated to seek other employment in mitigation of the
amounts payable or arrangements made under any provision of this Agreement, and
the obtaining of any such other employment shall in no event effect any
reduction of the Company's obligations to make the payments and arrangements
required to be made under this Agreement, except to the extent provided in the
last sentence of Section 2.2(c).
Article 4. Enforcement and Legal Remedies
4.1 Resolution of Differences Over Breaches of Agreement. In the
event of any controversy, dispute or claim arising out of, or relating to this
Agreement, or the breach thereof, or arising out of any other matter relating to
the Executive's employment with the Company or the termination of such
employment, the Company and the Executive agree that such underlying
controversy, dispute or claim shall be settled by arbitration conducted in
Chicago, Illinois in accordance with this Section 4.1 of the Agreement and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The matter shall be heard and decided, and award rendered by a panel of three
(3) arbitrators (the "Arbitration Panel"). The Company and the Executive shall
each select one arbitrator from the AAA National Panel of Commercial Arbitrators
(the "Commercial Panel") and AAA shall elect a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration Panel shall be final
and binding as between the parties hereto and their heirs, executors,
administrators, successors and assigns, and judgment on the award may be entered
by any court having jurisdiction thereof.
4.2 Cost of Enforcement. In the event that it shall be necessary or
desirable for the Executive to retain legal counsel in connection with the
enforcement of any or all of his rights to Severance Benefits under Section 2.2
of this Agreement, and provided that the Executive substantially prevails in the
enforcement of such rights, the Company, as applicable, shall pay (or the
Executive shall be entitled to recover from the Company, as the case may be) the
Executive's reasonable attorneys' fees, costs and expenses in connection with
the enforcement of his rights.
Article 5. Binding Effect; Successors
The rights of the parties hereunder shall inure to the benefit of
their respective successors, assigns, nominees, or other legal representatives.
The Company shall require any successor (whether direct or indirect, by
purchase, merger, reorganization, consolidation, acquisition of property or
stock, liquidation, or otherwise) to all or a significant portion of the assets
of the Company, as the case may be, by agreement in form and substance satis-
- 6 -
factory to the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company, as the
case may be, would be required to perform if no such succession had taken place.
Regardless of whether such agreement is executed, this Agreement shall be
binding upon any successor in accordance with the operation of law and such
successor shall be deemed the "Company", as the case may be, for purposes of
this Agreement.
Article 6. Term of Agreement
The term of this Agreement shall commence on the Effective Date and
shall continue in effect for three (3) full years. However, in the event a
Change in Control occurs during the term, this Agreement will remain in effect
for the longer of: (i) twenty-four (24) months beyond the month in which such
Change in Control occurred; or (ii) until all obligations of the Company
hereunder have been fulfilled, and until all benefits required hereunder have
been paid to the Executive or other party entitled thereto. The term of this
Agreement may be extended by written agreement of the parties.
Article 7. Miscellaneous
7.1. Employment Status. Neither this Agreement nor any provision
hereof shall be deemed to create or center upon the Executive any right to be
retained in the employ of the Company or any subsidiary or other affiliate
thereof.
7.2. Beneficiaries. The Executive may designate one or more persons
or entities as the primary and/or contingent Beneficiaries of any Severance
Benefits owing to the Executive under this Agreement. Such designation must be
in the form of a signed writing acceptable to the Board of Directors of the
Company. The Executive may make or change such designation at any time.
7.3. Entire Agreement. This Agreement contains the entire
understanding of the Company and the Executive with respect to the subject
matter hereof. The payments provided for under this Agreement in the event of
the Executive's termination of employment shall be in lieu of any severance
benefits payable under any severance plan, program, or policy of the Company to
which he might otherwise be entitled.
7.4. Gender and Number. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular, and the singular shall include the plural.
7.5. Notices. All notices, requests, demands, and other
communications hereunder must be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first-class certified mail, return receipt requested, postage prepaid, to the
other party, addressed as follows:
(a) if to the Company:
Fansteel, Inc.
One Tantalum Place
North Chicago, IL 60064
Attn: Chairman of the Board
(b) if to Executive, to him or her at the address set forth at the
end of this Agreement. Addresses may be changed by written notice sent to the
other party at the last recorded address of that party.
7.6. Execution in Counterparts. This Agreement may be executed by
the parties hereto in counterparts, each of which shall be deemed to be
original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
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7.7. Severability. In the event any provision of this Agreement
shall be held illegal or invalid for any reason, the illegality or invalidity
shall not affect the remaining parts of the Agreement, and the Agreement shall
be construed and enforced as if the illegal or invalid provision had not been
included. Further, the captions of this Agreement are not part of the provisions
hereof and shall have no force and effect.
7.8. Modification. No provision of this Agreement may be modified,
waived, or discharged unless such modification, waiver, or discharge is agreed
to in writing and signed by the Executive and on behalf of the Company.
7.9. Applicable Law. To the extent not preempted by the laws of the
United States, the laws of the State of Delaware, other than the conflict of law
provisions thereof, shall be the controlling law in all matters relating to this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
FANSTEEL, INC.
By:
Title:
EXECUTIVE
William D. Jarosz
President and Chief Executive
Officer
R. Michael McEntee
Vice President, Chief Financial
Officer
Michael J. Mocniak
Vice President, Secretary and
General Counsel
- 8 -
EXHIBIT 22 - SUBSIDIARIES OF THE REGISTRANT
The subsidiaries of Fansteel Inc. and their state or country of incorporation
are as follows:
State or Country
Name of Subsidiary of Incorporation
Custom Technologies Corporation Delaware
Wellman Dynamics (1) Delaware
Escast, Inc. (1) Illinois
Washington Manufacturing (1) Delaware
Fansteel Holdings Incorporated Delaware
Fansteel Sales Corporation, Inc. Barbados
Phoenix Aerospace Corp. Delaware
American Sintered Technologies Delaware
(1) These entities are wholly-owned subsidiaries of Custom Technologies
Corporation.
1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Fansteel Inc. as of December 31, 1996 and
the related consolidated statement of operations for the year ended
December 31, 1996 and is qualified in its entirety by reference to the
Company's Form 10K filing for 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,588,290
<SECURITIES> 5,173,804
<RECEIVABLES> 18,977,367
<ALLOWANCES> 276,440
<INVENTORY> 17,516,906
<CURRENT-ASSETS> 48,031,387
<PP&E> 61,542,635
<DEPRECIATION> 47,236,179
<TOTAL-ASSETS> 82,127,442
<CURRENT-LIABILITIES> 19,489,557
<BONDS> 1,779,057
<COMMON> 21,497,145
0
0
<OTHER-SE> 33,786,872
<TOTAL-LIABILITY-AND-EQUITY> 82,127,442
<SALES> 120,833,831
<TOTAL-REVENUES> 120,833,831
<CGS> 99,990,541
<TOTAL-COSTS> 114,491,287
<OTHER-EXPENSES> (710,884)
<LOSS-PROVISION> (11,665)
<INTEREST-EXPENSE> 40,184
<INCOME-PRETAX> 7,053,428
<INCOME-TAX> 2,776,000
<INCOME-CONTINUING> 4,277,428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,277,428
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
