As a result of the foregoing, the Company incurred a net loss of $7.1 million in 2003, compared with a net loss of $130.8 million in 2002.

Liquidity and Capital Resources

Sources and Uses of Cash: Cash provided by operations was $35.1 million, $24.5 million and $5.3 million in 2004, 2003 and 2002, respectively. The 2004 cash flow from operations is primarily a result of improved performance of the business due to increased sales, realized savings due to continued restructuring efforts and the Company’s successful reorganization under the Bankruptcy Code enabling it to return to normal payment terms with most of its vendors, rather than the cash on delivery and other accelerated payment terms the Company was required to use in 2003. These efforts all contributed to the positive cash earnings and cash provided by working capital improvements that occurred in 2004, which management believes should continue in 2005. These positive cash flows were partially offset by increased inventory levels, particularly at the Biomedical segment. The increase is a result of a build-up of inventory to ensure uninterrupted service to customers during the transfer of operations from the Burnsville, Minnesota manufacturing facility to the Canton, Georgia manufacturing facility. During 2005, management expects this inventory level to be reduced to near the pre-build-up level. The Company’s 2003 operating cash flow was generated primarily from the reduction of inventory levels and cost reductions due to manufacturing facility closures. The Company’s 2002 operating cash flow resulted primarily from the receipt of an income tax refund of $9.3 million, due to a change in the tax law allowing a five-year carry-back of net operating losses, as the Company managed its normal working capital requirements to an approximately neutral position in 2002.

Capital expenditures in 2004, 2003 and 2002 were $9.4 million, $2.4 million and $2.9 million, respectively. The 2004 capital expenditures included the expansion of the Canton, Georgia facility to accommodate the transfer of medical manufacturing to that facility, the expansion of the Company’s operations in China and reinvestment into other facilities. The Company limited its capital expenditures in 2003 and 2002 to a maintenance level in order to conserve cash. The Company expects capital expenditures in 2005 to be in the range of $12.0 million to $14.0 million, with these expenditures occurring evenly throughout the year, as the Company continues to reinvest in its remaining facilities, finish the expansion of the Canton, Georgia facility, expand the artificial insemination warehouse and production line in New Prague, Minnesota and complete the construction of a new manufacturing and office facility in China.

The Company received cash proceed on the sale of assets of $6.1 million in 2004 compared with $16.1 million in 2003. The cash proceeds received in 2004 include $4.3 million from the sale of the Burnsville, Minnesota facility, $0.6 million from the sale of a vacant building and parcel of land at the New Prague, Minnesota facility, $1.1 million from the sale of equipment at the Plaistow, New Hampshire facility and $0.1 million from the sale of equipment at the Denver, Colorado facility. The cash proceeds received in 2003 include $13.6 million from the sale of certain assets and liabilities of the former Greenville Tube LLC stainless steel tubing business and $2.5 million from the sale of assets related to the closure of the Columbus, Ohio and Costa Mesa, California facilities.

In 2004, the Company used $1.9 million of cash for its debt restructuring initiatives including costs associated with the reorganization, compared with $12.6 million and $6.7 million used in 2003 and 2002. The Company was required to delay until January 2004, when their fee applications were approved by the U.S. Bankruptcy Court, payments of approximately $1.2 million in bankruptcy related fees to various professional service providers. The majority of the cash used in 2003 was for various professional service firms, primarily bankruptcy attorneys and financial advisors, who assisted the Company with the Chapter 11 reorganization process. The majority of the cash used in 2002 was for payments to the Company’s senior lenders for various amendments to the Old Credit Facility.

In 2004, the Company paid $33.1 million to reduce its long-term debt. This amount included voluntary prepayments made on April 30, 2004, September 27, 2004 and December 31, 2004, of $10 million, $12 million and $8 million respectively, on the term loan portion of its new term loan agreement and revolving credit facility (collectively the “Credit Facility”). The prepayments were made due to the significant amount of cash provided by the operating activities in 2004, and management’s belief that cash forecasted from operations and the ability to borrow cash, if necessary, would be sufficient to satisfy its working capital, capital expenditure, restructuring and debt-related cash requirements for 2004 and 2005. Each prepayment reduced all future scheduled quarterly amortization payments on a pro-rata basis.

The Company generated $5.0 million of cash flow from operating activities in the three months ended December 31, 2003 and forecasted it would build a large cash balance. Additionally, the Company believed that cash forecasted to be generated by operations and the ability to borrow cash, if necessary, under the revolving credit portion of its credit facility, was be sufficient to satisfy its working capital, capital expenditure, restructuring and debt-related cash requirements for 2004. As a result, in December 2003 the Company made a $10.0 million prepayment on the term loan portion of its Credit Facility. The prepayment reduced all future scheduled quarterly amortization payments on a pro-rata basis.

Debt Instruments and Related Covenants: The Old Credit Facility contained certain covenants and conditions which imposed limitations on the Predecessor Company and its operating units, including meeting certain financial tests and the quarterly maintenance of certain financial ratios on a consolidated basis such as: minimum net worth, maximum leverage, minimum pre-tax interest coverage ratio, minimum fixed charge coverage ratio and minimum earnings before interest, taxes, depreciation, amortization and restructuring charges. As of December 31, 2002 and June 30, 2003, the Predecessor Company

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was in default under its Old Credit Facility and its Incremental Credit Facility due to violations of these financial covenants. Following December 31, 2002, the Predecessor Company also was in default under the Old Credit Facility as a result of its failure to make principal payments when due and the insolvency of CHEL. The Predecessor Company’s senior lenders amended the Old Credit Facility and Incremental Credit Facility on April 2, 2003 to waive all defaults existing at December 31, 2002 and through April 30, 2003 and to defer until April 30, 2003 $6.5 million in scheduled term debt amortization payments and $9.8 million in Incremental Credit Facility amortization payments originally due on March 31, 2003. The Predecessor Company’s senior lenders further amended the Old Credit Facility and Incremental Credit Facility as of April 30, 2003 to extend the waiver of defaults obtained on April 2, 2003 through June 30, 2003 and to defer the interest and principal payments to June 30, 2003. The Predecessor Company’s senior lenders further amended the Old Credit Facility and Incremental Credit Facility as of June 30, 2003 to extend the waiver of defaults obtained on April 30, 2003 through July 15, 2003 and to defer the interest and principal payments to July 15, 2003.

On July 8, 2003, the Predecessor Company and all of its then majority-owned U.S. subsidiaries filed voluntary petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code to implement an agreed upon senior debt restructuring plan through a pre-packaged plan of reorganization. None of the Company’s non-U.S. subsidiaries were included in the filing in the United States Bankruptcy Court for the District of Delaware. The Predecessor Company’s Chapter 11 bankruptcy filing was also an event of default under the Old Credit Facility.

In conjunction with the filing of its Reorganization Plan, on July 17, 2003, the Predecessor Company entered into a debtor-in-possession credit facility (the “DIP Credit Facility”) with certain of its senior lenders. The DIP Credit Facility provided a revolving credit line of $40.0 million, of which $30.0 million could also be used for the issuance of letters of credit. On August 13, 2003 the Bankruptcy Court entered a final order approving the DIP Credit Facility. The Predecessor Company issued certain letters of credit but did not borrow any funds under the DIP Credit Facility, which matured on September 15, 2003, the bankruptcy consummation date.

On September 15, 2003, the Company and all of its then majority-owned U.S. subsidiaries emerged from Chapter 11 proceedings pursuant to the Reorganization Plan, which the Bankruptcy Court confirmed by an order entered on September 4, 2003. Under the Reorganization Plan, the Predecessor Company’s senior debt of $255.7 million and related interest and fees of $1.9 million were converted into a $120.0 million secured term loan, with the balance of the existing senior debt being cancelled in return for an initial 95 percent equity ownership position in the Reorganized Company, and the Predecessor Company’s $40.0 million secured DIP Credit Facility was amended and restated as a $40.0 million post-bankruptcy secured revolving credit facility. On September 15, 2003, all of the Predecessor Company’s common stock, warrants, options and other rights to acquire the Predecessor Company’s common stock were cancelled, and the Predecessor Company’s former stockholders received five percent of the initial equity of the Reorganized Company and the opportunity to acquire up to an additional five percent of equity through the exercise of new warrants.

The Credit Facility entered into by the Company on September 15, 2003 grants a security interest in substantially all of the assets of the Company to the agent bank as representative of the senior lenders. The Credit Facility provides a term loan of $120.0 million with final maturity in 2009 and a revolving credit line of $40.0 million that expires on September 15, 2008, of which $30.0 million may be used for the issuance of letters of credit. Under the terms of the Credit Facility, term loans bear interest, at the Company’s option, at rates equal to the prime rate plus 2.50 percent or LIBOR plus 3.50 percent and the revolving credit line bears interest, at the Company’s option, at rates equal to the prime rate plus 1.50 percent or LIBOR plus 2.50 percent. The Company is also required to pay a commitment fee of 0.375 percent per annum on the unused amount of the revolving credit line of the Credit Facility.

The Credit Facility contains certain covenants and conditions which impose limitations on the Company and its operating units, including a restriction on the payment of cash dividends and a requirement to meet certain financial tests and to maintain on a quarterly basis certain consolidated financial ratios, including maximum leverage (calculated as total debt less cash divided by earnings before interest, taxes, depreciation, amortization and restructuring charges (“EBITDAR”)), minimum interest coverage ratio (calculated as EBITDAR divided by interest expense), minimum fixed charge coverage ratio (calculated as EBITDAR less capital expenditures divided by the sum of interest expense, scheduled debt payments and taxes paid), minimum EBITDAR and maximum capital expenditures. The Credit Facility also contains a feature whereby if the Company generates cash from operations above a pre-defined calculated amount, the Company is required to use a portion of that cash to make a pre-payment on the term loan portion of the Credit Facility.

At December 31, 2004, the Company had borrowings outstanding of $79.4 million under the term loan portion of the Credit Facility, letters of credit outstanding and bank guarantees totaling $19.3 million supported by the revolving credit line portion of the Credit Facility. As of December 31, 2004, the Company was in compliance with all of the required financial covenants.

Cash Requirements: The Company does not anticipate any unusual cash requirements for working capital needs in 2005. In order to complete its operational restructuring activities, particularly the closures of the Burnsville, Minnesota facility, the

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Company forecasts that it will use approximately $0.5 million of cash, excluding capital expenditure requirements discussed above, for one-time employee termination benefits, contract termination costs and other associated facility closure costs in 2005. Based upon current actuarial estimates, the Company also expects to contribute approximately $1.0 million in cash to its four defined benefit pension plans in 2005 to meet ERISA minimum funding requirements. In addition, the Company expects to pursue acquisitions in 2005 that would require additional use of cash and borrowing on the revolving credit facility or additional borrowing outside the existing revolving credit facility.

The Company’s known contractual obligations as of December 31, 2004 and cash requirements resulting from those obligations are as follows:

The Company’s commercial commitments as of December 31, 2004, which include letters of credit and bank guarantees, represent potential cash requirements resulting from contingent events that require performance by the Company or its subsidiaries pursuant to funding commitments, and are as follows:

In March 2003, the Company completed the closure of its Wolverhampton, United Kingdom manufacturing facility, operated by CHEL, and all heat exchanger manufacturing is being conducted at the Company’s LaCrosse, Wisconsin facility. On March 28, 2003, CHEL filed for a voluntary administration under the U.K. Insolvency Act of 1986. CHEL’s application for voluntary administration was approved on April 1, 2003 and an administrator was appointed. Additionally, CHEL’s net pension plan obligations increased significantly, primarily due to a decline in plan asset values and interest rates, resulting in an estimated plan deficit of approximately $12 million. Based on the Company’s financial condition, in March 2003 it determined not to advance funds to CHEL in amounts necessary to fund CHEL’s obligations. CHEL did not have the necessary funds to enable it to fund its net pension plan deficit, pay remaining severance due to former employees or pay other creditors. As a result, the trustees of the CHEL pension plan requested a decision to wind-up the plan from a United Kingdom pension regulatory board, which approved the wind-up as of March 28, 2003. At the present time, the Company is unable to determine the final financial impact of the April 1, 2003 approval of insolvency administration for CHEL and the related termination of the Company’s United Kingdom pension plan. CHEL’s administrator has asserted certain claims on behalf of CHEL against the Company related to the insolvency matter and the Company can provide no assurance that further claims will not be asserted against the Company for pension or other obligations of CHEL related to this matter. To the extent the Company has significant liability with respect to CHEL’s obligations as a result of CHEL’s insolvency, such liability could have a material adverse impact on the Company’s liquidity and its financial position.

Capital Structure: The Reorganization Plan became effective on September 15, 2003 (the “Consummation Date”), at which time all then-outstanding Company common stock, warrants, options and other rights to acquire the Company’s common stock were cancelled. Pursuant to the Reorganization Plan, the Reorganized Company issued new common stock, $0.01 par value per share (“New Common Stock”), representing 95 percent of the initial equity of the Reorganized Company, to its senior lenders in partial satisfaction of such senior lenders’ claims against the Company in the Chapter 11 proceedings. Additionally, pursuant to the Reorganization Plan, the Reorganized Company issued to the Company’s former stockholders New Common Stock representing five percent of the initial equity of the Reorganized Company and 280,281 warrants to acquire New Common Stock (“New Warrants”) representing the opportunity to acquire up to an additional five percent of equity upon exercise. These warrants to acquire new common stock have an exercise price of $32.97 per share and are exercisable for a period of seven years, subject to early termination in certain cases.

Pursuant to the terms of the Reorganziation Plan, the Reorganized Company issued an aggregate of 5,325,331 shares of New Common Stock on the Consummation Date. Of this number, 5,059,064 shares initially were issued to the Company’s senior lenders and 266,267 shares initially were issued to the Company’s former stockholders, constituting 95 percent and five percent, respectively, of the aggregate shares of New Common Stock issued under the Reorganization Plan. A full description of the New Common Stock was previously reported in the Company’s Current Report on Form 8-K filed on September 30, 2003.

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On the Consummation Date, the Company’s former stockholders were issued New Warrants to acquire an aggregate of 280,281 shares (subject to anti-dilution adjustments) of New Common Stock pursuant to the terms of the Reorganization Plan. An equal number of shares of New Common Stock are reserved for issuance upon exercise of the New Warrants. A complete description of the New Warrants, including the exercise price, expiration date and adjustment provisions, was previously reported in the Company’s Registration Statement on Form 8-A filed on October 8, 2003.

Under the Reorganization Plan, the Company’s former stockholders were entitled to receive their respective shares of New Common Stock and New warrants (collectively, together with New Common stock, “New Equity”) upon surrendering to the Company their stock certificates representing the cancelled Company common stock no later that September 15, 2004 in accordance with written instructions distributed by the Company. The terms of the Reorganization Plan required that any certificates representing cancelled common stock be surrendered by September 15, 2004 and provided that all New Equity distribution to the holders of such certificates that were not surrendered by September 15, 2004 be cancelled and be of no further force or effect. On September 16, 2004, 1,431 shares of New Common stock and 1,519 New Warrants were cancelled in accordance with these terms of the Reorganization Plan.

On March 19, 2004, the Company granted 435,701 options to purchase shares of the Company’s new common stock (the “New Options”) with an exercise price of $13.89 per share when the closing market price of the Company’s common stock was $28.00 per share. These non-qualified stock options are exercisable for a period of 10 years and have two different vesting schedules: 319,701 options vest in equal annual installments over a four-year period and 116,000 options vest over a 45-month period commencing April 1, 2004 based upon the achievement of specific operating performance goals during that 45-month period as determined by the Compensation Committee of the Board of Directors. The 319,701 New Options on the time-based vesting schedule are being accounted for as a fixed compensatory plan under APB 25. For these options, the Company expects to record $4,313 as compensation expense over the vesting period based on the $14.11 difference between the closing market price and the exercise price on the date of grant. The 116,000 New Options on the performance-based vesting schedule are being accounted for as a variable compensatory plan under APB 25. For these options, the Company will record compensation expense over the vesting period based upon the difference between the closing market price of the Company’s stock and the exercise price at each balance sheet measurement date, and the Company’s estimate of the probable number of options that will ultimately vest based upon actual and estimated performance in comparison to the performance targets.

As of December 31, 2004, 14,000 New Options on the time based vesting schedule and 14,000 New Options on the performance based vesting schedule have been cancelled, and 42,000 additional New Options on the time based vesting schedule and 30,000 additional New Options on the performance based vesting schedule have been issued at the closing market price on the date of grant. The 42,000 New Options with the time based vesting schedule are being accounted for as a fixed plan under APB 25. For these options, the Company will record no compensation expense since the exercise price was equal to the market price at the date of grant. The 30,000 New Options with the performance based vesting schedule are being accounted for as a variable compensatory plan under APB 25 and the Company will record compensation expense using the same method as the initial 116,000 performance based options.

In 2005, the Company is required to adopt SFAS No. 123 (revised 2004) “Share-Based Payments.” SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and eliminates the pro forma disclosure option allowed under SFAS No. 123. The Company does not expect the adoption of this statement to have a material impact on the Company’s financial position or results of operations.

The New Options generally may not be transferred, and any shares of stock that are acquired upon exercise of the New Options generally may not be sold, transferred, assigned or disposed of except under certain predefined liquidity events or in the event of a change in control. For the year ended December 31, 2004, the Company recorded $1.1 million in compensation expense related to the time-based vesting New Options and $0.9 million in compensation expense related to the performance-based vesting New Options.

The Company did not pay any dividends in 2004, 2003 or 2002. The Credit Facility prohibits the Reorganized Company from paying cash dividends on shares of its capital stock, but permits the Company to pay dividends payable in shares of common stock upon the approval of the Company’s Board of Directors. No assurance can be given as to whether dividends will be declared in the future, and if declared, the amount and timing of such dividends. The Company has no present intention of paying cash or stock dividends to its shareholders in the future.

In November 1996, the Board of Directors authorized a program to repurchase 2,250,000 shares of the Predecessor Company’s common stock. The Predecessor Company acquired 242,700 and 130,400 shares in the nine months ended September 30, 2003 and the year ended December 31, 2002, respectively, under the program to provide shares of common stock for use in making the Predecessor Company’s employer match contribution under its defined contribution pension plan. The Company discontinued this repurchase program in 2003.

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Off-Balance Sheet Arrangements : The Company does not have any off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.

Contingencies

The Company is involved with environmental compliance, investigation, monitoring and remediation activities at certain of its operating facilities, and accrues for these activities when commitments or remediation plans have been developed and when costs can be reasonably estimated. Historical annual cash expenditures for these activities have been less than $0.5 million, and have been charged against the related environmental reserves. Future expenditures relating to these environmental remediation efforts are expected to be made over the next ten years as ongoing costs of remediation programs. Management believes that any additional liability in excess of amounts accrued which may result from the resolution of such matters will not have a material adverse effect on the Company’s financial position, liquidity, cash flows or results of operations.

As previously mentioned, CHEL filed for a voluntary administration under the U.K. Insolvency Act of 1986. It is uncertain whether the Company will be subject to any significant liability resulting from CHEL’s insolvency administration. In addition, the Company continues to resolve proofs of claim in its bankruptcy proceedings, including one related to a purported finder’s fee. These proceedings are more fully described in “Item 3. Legal Proceedings.”

In 2004, the Company, as part of the Plaistow, New Hampshire manufacturing facility closure, withdrew from the multi-employer pension plan related to the Plaistow employees. The Company has recorded a related estimated withdrawal liability of $0.2 million at December 31, 2004. Any additional liability in excess of amount accrued is not expected to have a material adverse impact on the Company’s financial position, liquidity, cash flow or results of operations.

The Company is occasionally subject to various other legal actions related to performance under contracts, product liability and other matters, several of which actions claim substantial damages, in the ordinary course of its business. Based on the Company’s historical experience in litigating these actions, as well as the Company’s current assessment of the underlying merits of the actions and applicable insurance, the Company believes the resolution of these other legal actions will not have a material adverse effect on the Company’s financial position, liquidity, cash flows or results of operations.

Foreign Operations

During 2004, the Company had operations in Australia, China, the Czech Republic, Germany and the United Kingdom, which accounted for 23.6 percent of consolidated revenues and 17.1 percent of total assets at December 31, 2004. Functional currencies used by these operations include the Australian Dollar, the Chinese Renminbi Yuan, the Czech Koruna, the Euro and the British Pound. The Company is exposed to foreign currency exchange risk as a result of transactions by these subsidiaries in currencies other than their functional currencies, and from transactions by the Company’s domestic operations in currencies other than the U.S. Dollar. The majority of these functional currencies and the other currencies in which the Company records transactions are fairly stable. The use of these currencies, combined with the use of foreign currency forward purchase and sale contracts, has enabled the Company to be sheltered from significant gains or losses resulting from foreign currency transactions. This situation could change if these currencies experience significant fluctuations in their value as compared to the U.S. Dollar.

Application of Critical Accounting Policies

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and are based on the selection and application of significant accounting policies, which require management to make estimates and assumptions. Fresh-Start accounting required the selection of appropriate accounting policies for the Reorganized Company. The significant accounting policies previously used by the Predecessor Company have generally continued to be used by the Reorganized Company. As of September 30, 2003, the Company changed its method of accounting for inventories at sites of the Company’s Chart Heat Exchangers Limited Partnership legal entity and former Process Systems, Inc. legal entity from the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method since the value of inventory on the LIFO method was approximately equal to the value on a FIFO basis. Management believes the following are some of the more critical judgmental areas in the application of its accounting policies that affect its financial position and results of operations.

Allowance for Doubtful Accounts: The Company evaluates the collectibility of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings, substantial downgrading of credit scores), a specific reserve is recorded to reduce the receivable to the amount the Company believes will be collected. The Company also records allowances for doubtful accounts based on the length of time the receivables are past due and historical experience. If circumstances change (e.g., higher-than-expected defaults or an unexpected material adverse change in a customer’s ability to meet its financial obligations), the Company’s estimates of the collectibility of amounts due could be changed by a material amount.

Inventory Valuation Reserves: The Company determines inventory valuation reserves based on a combination of factors. In circumstances where the Company is aware of a specific problem in the valuation of a certain item, a specific reserve is recorded to reduce the item to its net realizable value. The Company also recognizes reserves based on the actual usage in recent history and projected usage in the near-term. If circumstances change (e.g., lower-than-expected or higher-than-expected usage), estimates of the net realizable value could be changed by a material amount.

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Indefinite Lived Intangible Assets, Including Reorganization Value in Excess of Amounts Allocable to Identifiable Assets (“Reorganization Value”): As a result of the adoption of SFAS No. 142, the Company evaluates Reorganization Value and indefinite lived intangible assets for impairment on an annual basis. To test for impairment, the Company is required to estimate the fair market value of each of its reporting units. Using management’s judgment, the Company developed a model to estimate the fair market value of its reporting units. This fair market value model incorporates the Company’s estimates of future cash flows, estimates of allocations of certain assets and cash flows among reporting units, estimates of future growth rates and management’s judgment regarding the applicable discount rates to use to discount those estimated cash flows. Changes to these judgments and estimates could result in a significantly different estimate of the fair market value of the reporting units, which could result in a different assessment of the recoverability of indefinite lived intangible assets and Reorganization Value.

Pensions: The Company accounts for its defined benefit pension plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” which requires that amounts recognized in financial statements be determined on an actuarial basis. The Company’s funding policy is to contribute at least the minimum funding amounts required by law. SFAS No. 87 and the policies used by the Company, notably the use of a calculated value of plan assets (which is further described below), generally reduce the volatility of pension expense from changes in pension liability discount rates and the performance of the pension plans’ assets.

A significant element in determining the Company’s pension expense in accordance with SFAS No. 87 is the expected return on plan assets. The Company has assumed that the expected long-term rate of return on plan assets as of December 31, 2004 will be 8.25 percent. These expected return assumptions were developed using a simple averaging formula based upon the plans’ investment guidelines and the historical returns of equities and bonds as indicated by the SEC in their 2003 study on average annual returns. Over the long term, the investment strategy employed with the Company’s pension plan assets has earned in excess of such rates; therefore, the Company believes its assumptions are reasonable. The assumed long-term rate of return on assets is applied to the market value of plan assets. This produces the expected return on plan assets that is included in pension expense. The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset gains or losses affects the calculated value of plan assets and, ultimately, future pension expense. The plan assets have earned a rate of return substantially less than the assumed rates in the last two years. Should this trend continue, future pension expense will likely increase.

At the end of each year, the Company determines the rate to be used to discount plan liabilities. The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company looks to rates of return on high quality, fixed-income investments that receive one of the two highest ratings given by a recognized rating agency. At December 31, 2004, the Company determined this rate to be 5.75 percent. Changes in discount rates over the past three years have not materially affected pension expense, and the net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, have been deferred as allowed by SFAS No. 87.

At December 31, 2004, the Company’s consolidated net pension liability recognized was $11.1 million, an increase from $10.1 million at December 31, 2003. The increase is principally due to the reduction in the estimated discount rate used to determine the plan liabilities from 6.25 percent in 2003 to 5.75 percent in 2004. For the year ended December 31, 2004, the Company recognized consolidated pretax pension expense of $0.8 million, down from $2.0 million in 2003. The decrease in 2004 pension expense is primarily due to the elimination of amortization of prior service costs at September 30, 2003 as part of Fresh Start Accounting. The Company currently expects that pension expense in 2005 will be at approximately the same level as 2004.

Environmental Remediation obligations: The Company’s obligations for known environmental problems at its current and former manufacturing facilities have been recognized on an undiscounted basis based on estimates of the cost of investigation and remediation at each site. If the estimate can only be estimated as a range of possible amounts, with no specific amount being most likely, the minimum of the range is accrued. Management reviews its environmental remediation sites quarterly to determine if additional cost adjustments or disclosures are required. The characteristics of environmental remediation obligations, where information concerning the nature and extent of clean-up activities is not immediately available and changes in regulatory requirements frequently occur, result in a significant risk of increase to the obligations as they mature. Expected future expenditures are not discounted to present value. Potential insurance recoveries are not recognized until realized.

Product Warranty Costs: The Company estimates product warranty costs and accrues for these costs as products are sold. Estimates are principally based upon historical product warranty claims experience over the warranty period for each product line. Due to the uncertainty and potential volatility of these warranty estimates, changes in assumptions could materially affect net income.

Revenue Recognition — Long-Term Contracts: The Company recognizes revenue and profit as work on long-term contracts progresses using the percentage of completion method of accounting, which relies on estimates of total expected contract revenues and costs. The Company follows this method since reasonably dependable estimates of the revenue and costs applicable to various stages of a contract can be made. Since the financial reporting of these contracts depends on estimates,

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which are assessed continually during the term of the contract, recognized revenues and profit are subject to revisions as the contract progresses toward completion. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revision become known. Accordingly, favorable changes in estimates result in additional profit recognition, and unfavorable changes in estimates result in the reversal of previously recognized revenue and profits. When estimates indicate a loss is expected to be incurred under a contract, cost of sales is charged with a provision for such loss. As work progresses under a loss contract, revenue and cost of sales continue to be recognized in equal amounts, and the excess of costs over revenues is charged to the contract loss reserve.

Recently Adopted Accounting Standards

Effective January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which amends SFAS No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies,” and is effective for all companies. This statement addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of this statement did not have a material impact on the Company’s financial position, liquidity, cash flows or results of operations.

Effective January 1, 2003, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The adoption of this statement did not have a material impact on the Company’s financial position, liquidity, cash flows or results of operations.

Effective January 1, 2003, the Company adopted Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued, including product warranties. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN No. 45 have been made in Note A to the Company’s consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The adoption of this interpretation did not have a material impact on the Company’s financial position, liquidity, cash flows or results of operations.

Effective July 1, 2003, the Company adopted SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The adoption of this statement did not have a material impact on the Company’s financial position, liquidity, cash flows or results of operations.

Effective July 1, 2003, the Company adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how certain financial instruments with characteristics of both liabilities and equity are classified. SFAS No. 150 requires that certain financial instruments should be classified as liabilities (or as assets in some circumstances). The adoption of this statement did not have a material impact on the Company’s financial position, liquidity, cash flows or results of operations.

Effective September 30, 2003, the Company adopted FIN No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 provides guidance for identifying a controlling interest in a variable interest entity (“VIE”) established by means other than voting interests. FIN No. 46 also requires consolidation of a VIE by an enterprise that holds such a controlling interest. The adoption of this interpretation did not have a material impact on the Company’s financial position, liquidity, cash flows or results of operations.

Effective January 1, 2004, the Company adopted SFAS No. 132 (Revised) (“Revised SFAS No. 132”), “Employer’s Disclosure about Pensions and Other Postretirement Benefits.” Revised SFAS No. 132 retains disclosure requirements in the original SFAS No. 132 and requires additional disclosures to assets, obligations, cash flows and net periodic benefit cost.

Effective September 30, 2004, the Company adopted EITF Issue No. 02-14, “Whether an Investor Should Apply the Equity Method of Accounting Investments Other Than Common Stock.” EITF No. 02-14 addresses whether the equity method of accounting applies when an investor does not have an investment in voting common stock of an investee but exercises significant influence through other means. EITF no. 02-14 states that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee. The adoption of EITF No.02-14 did not have a material impact on the Company’s financial position or results of operations.

Recently Issued Accounting Standards

In December 2004, the FASB issued FASB Staff Position (FSP”) FSP No. 109-1, “Application for FASB Statement No 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs

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Creation Act of 2004.” FSP 109-1 is intended to clarify that the domestic manufacturing deduction should be accounted for as a special deduction (rather than a rate reduction) under SFAS No. 109, “Accounting for Income Taxes.” A special deduction is recognized under SFAS 109 as it is earned. The Company is currently evaluating the effect the adoption of FSP 109-1 will have on the Company’s financial position or results of operations.

In December 2004, the FASB issued FSP No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” FSP 109-2 provides guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company has not yet completed evaluating the impact of the repatriation provisions. Accordingly, as provided for in FSP 109-2, the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123(R) is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supercedes Accounting Principles Board (“APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS no. 95, “Statement of Cash Flows.” SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and eliminates the pro forma disclosure option allowed under SFAS N0. 123. All public companies must adopt the new standard, including those companies that previously adopted FAS 123. SFAS No. 123(R) is effective at the beginning of the first interim or annual period beginning after June 15, 2005. Currently, the Company uses the intrinsic value based method prescribed by APB Opinion No. 25 “Accounting for Stock Issued to Employees”. The Company does not expect the adoption of this statement to have a material impact on the Company’s financial position or results of operations.

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs.” SFAS No 151 requires abnormal amounts of inventory costs related to idle facility, freight handling and wasted material expenses to be recognized as current period charges. Additionally SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The standard is effective for fiscal years beginning after June 15, 2004. The Company is currently evaluating the effect the adoption of SFAS No. 151 will have on the Company’s financial position or results of operations.

Certain Factors That May Affect Future Results and Financial Condition

In addition to other information included in this Annual Report on Form 10-K (including the factors listed under the caption “Forward-Looking Statements”), the following factors could cause the Company’s results and financial condition to differ materially from those anticipated or otherwise expressed or implied by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by the Company’s management from time to time.

Current Economic Conditions: Certain of the Company’s core businesses underperformed over the past few years prior to 2004. While the Company experienced an upturn in 2004 in the various markets its core businesses served, there can be no assurance that such an upturn will continue or that the businesses’ performance will be markedly better in 2005. In addition, current world economic and political conditions may reduce the willingness of the Company’s customers and prospective customers to commit funds to purchase its products and services.

Success of Operational Restructuring Improvements: The Company believes the operational restructuring activities and facility closures it has in process ultimately will continue to result in operational savings for the Company. The Company, however, cannot provide any certainty as to the timing and amount of true savings. Certain factors, including unanticipated closure costs and negative employee reactions, could affect the timing and amount of these operational savings.

Insolvency Proceeding of the Company’s Subsidiary: On March 28, 2003, the Company’s CHEL subsidiary, which previously operated the closed Wolverhampton, United Kingdom manufacturing facility, filed for a voluntary administration under the U.K. Insolvency Act 1986. CHEL’s application for voluntary administration was approved on April 1, 2003 and an administrator was appointed. Additionally, CHEL’s net pension plan obligations increased significantly, primarily due to a decline in plan asset values and interest rates, resulting in an estimated plan deficit of approximately $12 million. Based on the Company’s financial condition, in March 2003 it determined not to advance funds to CHEL in amounts necessary to fund CHEL’s obligations. CHEL did not have the necessary funds to enable it to fund its net pension plan deficit, pay remaining severance due to former employees or pay other creditors. As a result, the trustees of the CHEL pension plan terminated this plan in April 2003. CHEL ‘s administrator has asserted certain claims on behalf of CHEL against the Company related to the insolvency matters, and the Company can provide no assurance that further claims will not be asserted against the Company for pension or other obligations of CHEL related to these matters. To the extent the Company has significant liability with respect to CHEL’s obligations, such liability could have a material adverse impact on the Company’s liquidity and its financial position as a result of CHEL’s insolvency.

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