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, 2001
Commission file number 1-3919
Keystone Consolidated Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 37-0364250
- --------------------------------- ---------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
5430 LBJ Freeway, Suite 1740
Three Lincoln Centre, Dallas, TX 75240-2697
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 458-0028
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1 par value None
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 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]
As of April 8, 2002, 10,068,450 shares of common stock were outstanding. The
aggregate market value of the 5,077,977 shares of voting stock held by
nonaffiliates of the Registrant, as of such date, was approximately $5.8
million.
Documents incorporated by reference
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
PART I
ITEM 1. BUSINESS.
General
Keystone Consolidated Industries, Inc. ("Keystone" or the "Company")
believes it is a leading manufacturer of steel fabricated wire products,
industrial wire and wire rod for the agricultural, industrial, construction,
original equipment manufacturer and retail consumer markets, and believes it is
the largest manufacturer of fabricated wire products in the United States based
on tons shipped (281,000 tons in 2001). Keystone is vertically integrated,
converting substantially all of its fabricated wire products and industrial wire
from wire rod produced in its steel mini-mill. The Company's vertical
integration has historically allowed it to benefit from the higher and more
stable margins associated with fabricated wire products as compared to wire rod,
as well as from lower production costs of wire rod as compared to wire
fabricators which purchase wire rod in the open market. Moreover, management
believes Keystone's downstream fabricated wire products and industrial wire
businesses better insulate it from the effects of wire rod imports as compared
to non-integrated wire rod producers. In 2001, Keystone had net sales of $309
million. Approximately 72% of the Company's net sales were generated from sales
of fabricated wire products and industrial wire with the balance generated
primarily from sales of wire rod not used in Keystone's downstream operations.
The Company's fabricated wire products, which comprised 59% of its 2001 net
sales, include fencing, barbed wire, welded and woven hardware cloth, welded and
woven wire mesh and nails. These products are sold to agricultural,
construction, industrial, consumer do-it-yourself and other end-user markets.
Keystone serves these markets through distributors, agricultural retailers,
building supply centers and consumer do-it-yourself chains such as Tractor
Supply Co., Lowe's Companies, Inc., and Ace Hardware Corporation. A significant
proportion of these products are sold to agricultural, consumer do-it-yourself
and other end-user markets which in management's opinion are typically less
cyclical than many steel consuming end-use markets such as the automotive,
construction, appliance and machinery manufacturing industries. Management
believes the Company's ability to service these customers with a wide range of
fabricated wire products through multiple production and distribution locations
provides it a competitive advantage in accessing these growing and less cyclical
markets. Approximately 59% of Keystone's fabricated wire products net sales are
generated by sales under the RED BRAND trademark, a widely recognized brand name
in the agricultural and construction fencing marketplaces for more than 75
years.
The Company also sells industrial wire, an intermediate product used in the
manufacture of fabricated wire products, to third parties who are generally not
competitors. Keystone's industrial wire customers include manufacturers of
nails, coat hangers, barbecue grills, air conditioners, tools, containers,
refrigerators and other appliances. In 2001, net sales of industrial wire
accounted for 13% of Company net sales. In addition, Keystone also sells carbon
steel rod into the open market which it is not able to consume in its downstream
fabricated wire products and industrial wire operations. During 2001, open
market sales of wire rod accounted for 25% of Company net sales.
Keystone is also engaged in the distribution of wire, plastic and wood lawn
and garden products to retailers through its 51% owned subsidiary Garden Zone
LLC ("Garden Zone"). During 2001, sales by Garden Zone accounted for 3% of
Company net sales. In addition, Keystone is engaged in scrap recycling through
its unconsolidated 50% interest in Alter Recycling Company, L.L.C. ("ARC"). See
Note 2 to the Consolidated Financial Statements.
See "Business -- Products, Markets and Distributions" and Notes 2 and 11 to
the Consolidated Financial Statements.
The Company's operating strategy is to enhance profitability by:
o Establishing a leading position as a supplier of choice among its
fabricated wire products and industrial wire customers by offering a
broad product line and by satisfying growing customer quality and
service requirements;
o Shifting its product mix towards higher margin, value-added fabricated
wire products;
o Achieving manufacturing cost savings and production efficiencies
through capital improvements and investment in new and upgraded steel
and wire production equipment; and
o Increasing vertical integration through internal growth and selective
acquisitions of fabricated wire products manufacturing facilities.
During December 1998, the Company substantially completed a two-year $75
million capital improvements plan to upgrade certain of its plant and equipment
and eliminate production capacity bottlenecks in order to reduce costs and
improve production efficiency. The principal components of Keystone's capital
improvements plan included reconfiguring its electric arc furnace, replacing its
billet caster and upgrading its wire and rod mills. As a result of these capital
improvements, beginning in 2001, the Company increased its annual billet
production capacity to 1 million tons from 655,000 tons. Since Keystone's rod
production is constrained by the 800,000 ton capacity of its rod mill, the
Company anticipates any excess billet production will be sold externally.
The Company is the successor to Keystone Steel & Wire Company, which was
founded in 1889. Contran Corporation ("Contran") and other entities controlled
by Mr. Harold C. Simmons beneficially own approximately 50% of the Company's
voting stock. Substantially all of Contran's outstanding voting stock is held by
trusts established for the benefit of certain children and grandchildren of Mr.
Simmons, of which Mr. Simmons is sole trustee. Keystone may be deemed to be
controlled by Contran and Mr. Simmons.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that statements in this
Annual Report on Form 10-K relating to matters that are not historical facts
including, but not limited to, statements found in this Item 1 - "Business",
Item 3 - "Legal Proceedings", Item 7 - "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations", and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risk", are forward-looking statements that
represent management's beliefs and assumptions based on currently available
information. Forward-looking statements can be identified by the use of words
such as "believes", "intends", "may", "should", "could", "anticipates",
"expected", or comparable terminology, or by discussions of strategies or
trends. Although Keystone believes the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve substantial risks and uncertainties that could significantly impact
expected results, and actual future results could differ materially from those
described in such forward-looking statements. While it is not possible to
identify all factors, Keystone continues to face many risks and uncertainties.
Among the factors that could cause actual future results to differ materially
are the risks and uncertainties discussed in this Annual Report and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission, including, but not limited to, future supply and demand
for the Company's products (including cyclicality thereof), customer inventory
levels, changes in raw material and other operating costs (such as scrap and
energy), general economic conditions, competitive products and substitute
products, customer and competitor strategies, the impact of pricing and
production decisions, the possibility of labor disruptions, environmental
matters (such as those requiring emission and discharge standards for existing
and new facilities), government regulations and possible changes therein, any
significant increases in the cost of providing medical coverage to employees and
retirees, the ultimate resolution of pending litigation, international trade
policies of the United States and certain foreign countries and any possible
future litigation and other risks and uncertainties as discussed in this Annual
Report, including, without limitation, the sections referenced above. Should one
or more of these risks materialize (or the consequences of such a development
worsen), or should the underlying assumptions prove incorrect, actual results
could differ materially from those forecasted or expected. Keystone disclaims
any intention or obligation to update or revise any forward-looking statement
whether as a result of new information, future events or otherwise.
Manufacturing
The Company's manufacturing operations consist of an electric arc furnace
mini-mill, a rod mill and five wire and wire product fabrication facilities. The
manufacturing process commences in Peoria, Illinois with scrap steel being
loaded into an electric arc furnace where it is converted into molten steel and
then transferred to a ladle refining furnace where chemistries and temperatures
are monitored and adjusted to specifications prior to casting. The molten steel
is transferred from the ladle refining furnace into a six-strand continuous
casting machine which produces five-inch square strands referred to as billets
that are cut to predetermined lengths. These billets, along with any billets
purchased from outside suppliers, are then transferred to the adjoining rod
mill.
Upon entering the rod mill, the billets are brought to rolling temperature
in a reheat furnace and are fed to the rolling mill, where they are finished to
a variety of diameters and specifications. After rolling, the wire rod is coiled
and cooled. After cooling, the coiled wire rod passes through inspection
stations for metallurgical, surface and diameter checks. Finished coils are
compacted and tied, and either transferred to the Company's other facilities for
processing into industrial wire, nails and other fabricated wire products or
shipped to wire rod customers.
While the Company does not maintain a significant "shelf" inventory of
finished wire rod, it generally has on hand approximately a one-month supply of
industrial wire and fabricated wire products inventory which enables Keystone to
fill customer orders and respond to shifts in product demand.
Products, Markets and Distribution
The following table sets forth certain information with respect to the
Company's steel and wire product mix in each of the last three years.
Year Ended December 31,
1999 2000 2001
---------------- ---------------- -----------
Percent Percent Percent Percent Percent Percent
of Tons Of of Tons of of Tons of
Product Shipped Sales Shipped Sales Shipped Sales
----------------- ------- ----- ------- ----- ------- -----
Fabricated wire
products 45.2% 62.5% 44.7% 61.9% 42.2% 60.9%
Industrial wire 20.7 19.4 18.4 17.4 14.2 13.5
Wire rod 34.1 18.1 36.9 20.7 43.6 25.6
----- ----- --------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ========= ========= ========= =========
Fabricated Wire Products. Keystone is one of the leading suppliers in the
United States of agricultural fencing, barbed wire, stockade panels and a
variety of welded and woven wire mesh, fabric and netting for agricultural,
construction and industrial applications. The Company produces these products at
its Peoria, Illinois; Sherman, Texas and Caldwell, Texas facilities. These
products are distributed by Keystone through farm supply distributors,
agricultural retailers, building supply centers, building and industrial
materials distributors and consumer do-it-yourself chains such as Tractor Supply
Co., Lowe's Companies, Inc., and Ace Hardware Corporation. Many of the Company's
fencing and related wire products are marketed under the Company's RED BRAND
label, a recognized trademark of Keystone for more than 75 years. As part of its
marketing strategy, Keystone designs merchandise packaging, and supportive
product literature for marketing many of these products to the retail consumer
market. Keystone also manufactures products for residential and commercial
construction, including bulk, packaged and collated nails, rebar ty wire, stucco
netting, welded wire mesh, forms and reinforcing building fabric at its Peoria,
Illinois; Sherman, Texas; Caldwell, Texas; Springdale, Arkansas; and Upper
Sandusky, Ohio facilities. The primary customers for these products are
construction contractors and building materials manufacturers and distributors.
The Company sells approximately 63% of its nails through PrimeSource, Inc., one
of the largest nail distributors in the United States, under PrimeSource's
Grip-Rite(R) label.
Keystone believes its fabricated wire products are less susceptible than
industrial wire or wire rod to the cyclical nature of the steel business because
the commodity-priced raw materials used in such products, such as scrap steel,
represent a lower percentage of the total cost of such value-added products when
compared to wire rod or other less value-added products.
Industrial Wire. Keystone is one of the largest manufacturers of industrial
wire in the United States. At its Peoria, Illinois; Sherman, Texas and Caldwell;
Texas facilities, the Company produces custom-drawn industrial wire in a variety
of gauges, finishes and packages for further consumption by Keystone's
fabricated wire products operations or for sale to industrial fabrication and
original equipment manufacturer customers. The Company's industrial wire is used
by customers in the production of a broad range of finished goods, including
nails, coat hangers, barbecue grills, air conditioners, tools, containers,
refrigerators and other appliances. Management believes that with a few
exceptions, its industrial wire customers do not generally compete with
Keystone.
Wire Rod. Keystone produces low carbon steel wire rod at its rod mill
located in Peoria, Illinois. Low carbon steel wire rod, with carbon content of
up to 0.38%, is more easily shaped and formed than higher carbon wire rod and is
suitable for a variety of applications where ease of forming is a consideration.
Although Keystone's five wire fabrication facilities on occasion buy wire rod
from outside suppliers, during 2001, approximately 55% of the rod manufactured
by the Company was used internally to produce wire and fabricated wire products.
The remainder of Keystone's rod production was sold directly to producers of
construction products, fabricated wire products and industrial wire, including
products similar to those manufactured by the Company.
In January 2001, Keystone's wholly-owned subsidiary, Fox Valley Steel &
Wire ("Fox Valley") sold its sole business which was located in Hortonville,
Wisconsin to a management group. The Company did not record any significant gain
or loss as a result of the sale. Fox Valley manufactured industrial wire and
fabricated wire products (primarily ladder rods and nails). Fox Valley's
revenues in 1999 and 2000 amounted to $11.3 million and $10.3 million,
respectively. During 1999 and 2000, approximately 30% and 32%, respectively of
Fox Valley's sales were to a single customer. That customer is, subsequent to
the sale, being serviced by Keystone's Peoria, Illinois facility. During 1999
and 2000, Fox Valley recorded operating losses of $67,000 and $686,000,
respectively.
Industry and Competition
The fabricated wire products, industrial wire and wire rod businesses in
the United States are highly competitive and are comprised primarily of several
large mini-mill wire rod producers, many small independent wire companies and a
few large diversified wire rod, and wire producers, such as the Company.
Keystone's principal competitors in the fabricated wire products and industrial
wire markets are Leggett and Platt, Deacero, Merchants Metals, Inc. and Davis
Wire Corporation. Competition in the fabricated wire product and industrial wire
markets is based on a variety of factors, including channels of distribution,
price, delivery performance, product quality, service, and brand name
preference. Since wire rod is a commodity steel product, management believes the
domestic wire rod market is more competitive than the fabricated wire products
and industrial wire markets, and price is the primary competitive factor. Among
Keystone's principal domestic wire rod competitors are North Star Steel,
Co-Steel Raritan, GS Industries and Rocky Mountain Steel.
The Company also competes with many small independent wire companies who
purchase rod from domestic and foreign sources. Due to the breadth of Keystone's
fabricated wire products and industrial wire offerings, its ability to service
diverse geographic and product markets, and the low relative cost of its
internal supply of wire rod, the Company believes it is well positioned to
compete effectively with non-diversified wire rod producers and wire companies.
Foreign steel and industrial wire producers also compete with the Company and
other domestic producers.
The domestic steel wire rod industry continues to experience consolidation.
During the last three years, eight of Keystone's nine major competitors have
either filed for protection under federal bankruptcy laws and discontinued
operations or reduced or completely shut-down their operations. The Company
believes these shut-downs or production curtailments represent a decrease of
approximately 3.5 million tons of annual capacity compared to an estimated
domestic annual capacity of 3.8 million tons after the decline. However,
worldwide overcapacity in the steel industry continues to exist and imports of
wire rod and certain fabricated wire products in recent years have increased
significantly. In an effort to stem increasing levels of imported wire rod, in
December 1998, Keystone, joined by six other companies (representing more than
75% of the domestic market), and a labor union petitioned the U.S. International
Trade Commission (the "ITC") seeking relief under Section 201 of the Trade Act
of 1974. In February 2000, President Clinton announced the implementation of a
Tariff-Rate Quota ("TRQ") for three years. The tariff is imposed on wire rod
imports from countries subject to the TRQ once imports initially exceed 1.6
million net tons in 2000 and 2001 and 1.7 million net tons in 2002 and 2003. The
tariff rate is 10% in 2000, 7.5% in 2001 and 5% in 2002. The Company does not
believe the TRQ has had a major impact on the domestic wire rod market and high
levels of imported rod continue. However, in April 2002, the United States
Department of Commerce announced a preliminary determination that wire rod from
seven countries is being sold in the United States below fair value and required
importers to immediately begin posting bonds or cash deposits in the amount of
the preliminary margins. The preliminary duties are subject to verification by
the Department of Commerce. Final anti-dumping duties will go into effect later
this year if the ITC concludes the United States wire rod industry is being
injured by imports. The Company believes it is too early to determine the impact
on the industry of the April 2002 actions by the Department of Commerce.
Keystone believes its facilities are well located to serve markets
throughout the continental United States, with principal markets located in the
Midwestern, Southwestern and Southeastern regions. Close proximity to its
customer base provides the Company with certain advantages over foreign and
certain domestic competition including reduced shipping costs, improved customer
service and shortened delivery times. Keystone believes higher transportation
costs and the lack of local distribution centers tend to limit foreign
producers' penetration of the Company's principal fabricated wire products and
industrial wire markets, but there can be no assurance this will continue to be
the case.
Raw Materials and Energy
The principal raw material used in Keystone's operations is scrap steel.
The Company's steel mill is located close to numerous sources of high density
automobile, industrial and railroad scrap, all of which are currently available
from numerous sources. The purchase of scrap steel is highly competitive and its
price volatility is influenced by periodic shortages, freight costs, weather,
and other conditions beyond the control of the Company. The cost of scrap can
fluctuate significantly and product selling prices cannot always be adjusted,
especially in the short-term, to recover the costs of increases in scrap prices.
The Company has not entered into any long-term contracts for the purchase or
supply of scrap steel and it is, therefore, subject to the price fluctuation of
scrap steel. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Keystone's manufacturing processes consume large amounts of energy in the
form of electricity and natural gas. The Company purchases electrical energy for
its Peoria, Illinois facility from a utility under an interruptible service
contract which provides for more economical electricity rates but allows the
utility to refuse or interrupt power to Keystone's Peoria, Illinois
manufacturing facilities. This utility has in the past, and may in the future,
refuse or interrupt service to the Company resulting in decreased production and
increased costs associated with the related downtime. In addition, in the past
the utility has had the right to pass through certain of its costs to consumers
through fuel adjustment charges. The Company's current agreement with the
utility does not provide for such fuel adjustment charges. During the 1999 third
quarter, Keystone received an unexpected $2.2 million fuel adjustment charge
from the Peoria plant's electricity provider. The $2.2 million charge was paid
during 2000, although during 2001, the Company received a $1.7 million credit on
the 1999 fuel adjustment charge.
Trademarks
The Company has registered the trademark RED BRAND for field fence and
related products. Adopted by Keystone in 1924, the RED BRAND trademark has been
widely advertised and enjoys high levels of market recognition. The Company also
maintains other trademarks for various products which have been promoted in
their respective markets.
Employment
As of December 31, 2001, Keystone employed approximately 1,600 people, of
whom approximately 990 are represented by the Independent Steel Workers'
Alliance ("ISWA") at its Peoria, Illinois facilities, approximately 120 are
represented by the International Association of Machinists and Aerospace Workers
(Local 1570) ("IAMAW") at its Sherman, Texas facilities and approximately 30 are
represented by Local Union #40, An Affiliate to the International Brotherhood of
Teamsters' Chauffeurs Warehousemen And Helpers of America, AFL-CIO ("IBTCWHA")
at its Upper Sandusky, Ohio facility. The current collective bargaining
agreements with the ISWA, IAMAW and IBTCWHA expire in May 2006, March 2003 and
November 2006, respectively. The Company believes its relationship with its
employees are good. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Customers
The Company sells its products to customers in the agricultural,
industrial, construction, commercial, original equipment manufacturer and retail
markets primarily in the Midwestern, Southwestern and Southeastern regions of
the United States. Customers vary considerably by product and management
believes Keystone's ability to offer a broad range of product represents a
competitive advantage in servicing the diverse needs of its customers.
A listing of end-user markets by products follows:
Product Principal Markets Served
Fencing products Agricultural, construction,
do-it-yourself retailers
Wire mesh products Agricultural, construction
Nails Construction, do-it-yourself retailers
Industrial wire Producers of fabricated wire products
Wire rod Producers of industrial wire and
fabricated wire products
Lawn and garden products Do-it-yourself retailers
Keystone's industrial wire customers include manufacturers and producers of
nails, coat hangers, barbecue grills, air conditioners, tools, containers,
refrigerators and other appliances. With few exceptions, these customers are
generally not in competition with the Company. Keystone's wire rod customers
include other downstream industrial wire and fabricated wire products companies
including manufacturers of products similar to those manufactured by the
Company.
The Company's ten largest customers represented approximately one-third of
Keystone's net sales in each of the past three years. No single customer
accounted for more than 9% of the Company's net sales during each of 1999, 2000
or 2001. Keystone's fabricated wire products, industrial wire and rod business
is not dependent upon a single customer or a few customers, the loss of any one,
or a few, of which would have a material adverse effect on its business.
Backlog
The Company's backlog of unfilled cancelable fabricated wire products,
industrial wire and rod purchase orders, for delivery generally within three
months, approximated $22 million at December 31, 2000 and $24 million at
December 31, 2001. Keystone believes backlog is not a significant factor in its
business, and all of the backlog at December 31, 2001 is expected to be shipped
during 2002.
Environmental Matters
Keystone's production facilities are affected by a variety of environmental
laws and regulations, including laws governing the discharge of water pollutants
and air contaminants, the generation, transportation, storage, treatment and
disposal of solid wastes and hazardous substances and the handling of toxic
substances, including certain substances used in, or generated by, the Company's
manufacturing operations. Many of these laws and regulations require permits to
operate the facilities to which they pertain. Denial, revocation, suspension or
expiration of such permits could impair the ability of the affected facility to
continue operations.
The Company records liabilities related to environmental issues at such
time as information becomes available and is sufficient to support a reasonable
estimate of a range of loss. If Keystone is unable to determine that a single
amount in an estimated range is more likely, the minimum amount of the range is
recorded. Costs of future expenditures for environmental remediation obligations
are not discounted to their present value. Recoveries of environmental
remediation costs from other parties are recorded as assets when their receipt
is deemed probable.
Keystone believes its current operating facilities are in material
compliance with all presently applicable federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment. Environmental legislation and
regulations have changed rapidly in recent years and the Company may be subject
to increasingly stringent environmental standards in the future.
Information in Note 12 to the Consolidated Financial Statements is
incorporated herein by reference.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in approximately
1,200 square feet of leased space at 5430 LBJ Freeway, Dallas, Texas 75240-2697.
Keystone's fabricated wire products, industrial wire and wire rod
production facilities utilize approximately 2.5 million square feet for
manufacturing and office space, approximately 79% of which is located at the
Company's Peoria, Illinois facility.
The following table sets forth the location, size and general product types
produced for each of the Company's steel and wire facilities, all of which are
owned by the Company.
Approximate
Size
Facility Name Location (Square Feet) Products Produced
Keystone Steel & Wire Peoria, IL 2,012,000 Fabricated wire products, industrial
wire, wire rod
Sherman Wire Sherman, TX 299,000 Fabricated wire products and industrial
wire
Engineered Wire Products Upper Sandusky, OH 83,000 Fabricated wire products
Keystone Fasteners Springdale, AR 76,000 Fabricated wire products
Sherman Wire of Caldwell Caldwell, TX 73,000 Fabricated wire products and industrial
wire
---------
2,543,000
=========
The Company believes all of its facilities are well maintained and
satisfactory for their intended purposes.
ITEM 3. LEGAL PROCEEDINGS.
Keystone is involved in various legal proceedings. Information required by
this Item is included in Notes 12 and 14 to the Consolidated Financial
Statements, which information is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to December 13, 2001, Keystone's common stock was listed and traded
on the New York Stock Exchange (symbol: KES). Subsequent to December 12, 2001,
Keystone's common stock is traded on the OTC Bulletin Board (Symbol: KESN). The
number of holders of record of the Company's common stock as of April 8, 2002
was 2,232. The following table sets forth the high and low closing sales prices
of the Company's common stock for the calendar years indicated, according to
published sources.
High Low
2001
First quarter .............................. $ 2.50 $ 1.50
Second quarter ............................. $ 2.00 $ 1.20
Third quarter .............................. $ 1.70 $ .96
Fourth quarter ............................. $ 1.40 $ .48
2000
First quarter .............................. $ 7.50 $ 4.50
Second quarter ............................. $ 4.75 $ 3.75
Third quarter .............................. $ 3.88 $ 2.69
Fourth quarter ............................. $ 2.94 $ 1.25
The Company has not paid cash dividends on its common stock since 1977.
Keystone is subject to certain covenants under its commercial revolving credit
facilities that restrict its ability to pay dividends, including a prohibition
against the payment of dividends on its common stock without lender consent.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Item 7 --
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations."
Years ended December 31,
--------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In thousands, except per share and per ton amounts)
Statement of Operations Data:
Net sales $354,073 $370,022 $355,688 $338,321 $308,670
Cost of goods sold 316,599 339,625 332,644 331,167 295,339
-------- -------- -------- -------- --------
Gross profit $ 37,474 $ 30,397 $ 23,044 $ 7,154 $ 13,331
======== ======== ======== ======== ========
Selling expenses $ 4,628 $ 6,042 $ 6,845 $ 6,737 $ 6,378
General and administrative
Expenses 17,918 19,139 20,850 18,388 19,070
Operating income (loss) 23,292 14,021 2,578 (15,415) (4,463)
Interest expense 7,612 10,460 14,058 15,346 14,575
Income (loss) before income taxes $ 16,909 $ 5,006 $(12,238) $(32,436) $(20,395)
Minority interest in after-tax
earnings - - - - 1
Provision (benefit) for income taxes 4,541 1,095 (4,754) (11,370) 5,998
-------- --------- --------- -------- --------
Net income (loss) $ 12,368 $ 3,911 $ (7,484) $(21,066) $(26,394)
======== ======== ======== ======== ========
Net income (loss) available for common
Shares (1) $ 12,088 $ 3,754 $ (7,484) $(21,066) $(26,394)
======== ======== ======== ======== ========
Basic net income (loss) available for
Common shares per share $ 1.30 $ .41 $ (.75) $ (2.10) $ (2.62)
======== ======== ======== ======== ========
Diluted net income (loss) available
for common shares per share $ 1.28 $ .40 $ (.75) $ (2.10) $ (2.62)
======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding :
Basic 9,271 9,544 9,904 10,039 10,062
======== ======== ======== ======== ========
Diluted 9,435 9,669 9,904 10,039 10,062
======== ======== ======== ======== ========
Other Financial Data:
Capital expenditures $ 26,294 $ 64,541 $ 16,873 $ 13,052 $ 3,889
Depreciation and amortization 12,815 20,140 21,051 17,224 16,992
Other Steel and Wire Products Operating
Data:
Shipments (000 tons):
Fabricated wire products 225 327 315 310 281
Industrial wire 175 170 144 128 94
Wire rod 297 212 237 257 291
-------- -------- -------- -------- --------
Total 697 709 696 695 666
======== ======== ======== ======== ========
Average selling prices (per ton):
Fabricated wire products $ 710 $ 662 $ 683 $ 660 $ 649
Industrial wire 478 476 462 449 426
Wire rod 317 288 261 266 264
Steel and wire products in total 484 506 493 475 449
Average total production cost per ton $ 437 $ 464 $ 461 $ 470 $ 434
Average scrap purchase cost per ton 122 112 94 100 85
As of December 31,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital (deficit) (2) $ 52,684 $ 555 $(13,920) $(39,243) $(30,982)
Property, plant and equipment, net 112,754 156,100 150,156 144,696 129,600
Total assets 374,131 405,857 410,918 385,703 366,900
Total debt 106,844 131,764 146,857 146,008 146,455
Redeemable preferred stock 3,500 - - - -
Stockholders' equity (deficit) 44,211 53,077 46,315 26,058 (336)
(1) Includes dividends on preferred stock of $280,000 and $157,000 in 1997 and
1998, respectively.
(2) Working capital (deficit) represents current assets minus current
liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
The Company believes it is a leading manufacturer of fabricated wire
products, industrial wire and wire rod for the agricultural, industrial,
construction, original equipment manufacturer and retail consumer markets and
believes it is the largest manufacturer of fabricated wire products in the
United States based on tons shipped (281,000 in 2001). Keystone's operations
benefit from vertical integration as the Company's mini-mill supplies wire rod
produced from scrap steel to its downstream fabricated wire products and
industrial wire operations. Sales of fabricated wire products and industrial
wire by these downstream fabrication operations accounted for 72% of 2001 net
sales. Keystone's fabricated wire products typically yield higher and less
volatile gross margins compared to wire rod. Management believes Keystone's
fabricated wire businesses help mitigate the adverse effect of wire rod imports
on market prices compared to producers that rely primarily on wire rod sales.
Moreover, historically over time, the Company's wire rod production costs have
generally been below the market price for wire rod providing a significant cost
advantage over wire producers who purchase wire rod as a raw material.
During December 1998, the Company substantially completed a two-year $75
million capital improvements plan to upgrade certain of its plant and equipment
and eliminate production capacity bottlenecks in order to reduce costs and
improve production efficiency. The principal components of Keystone's capital
improvements plan included reconfiguring its electric arc furnace, replacing its
billet caster and upgrading its wire and rod mills. As a result of these capital
improvements, beginning in 2001, the Company increased its annual billet
production capacity to 1 million tons from 655,000 tons. However, despite the
increase in billet production capacity, Keystone's wire rod production is
constrained by the 800,000 ton capacity of its rod mill. The Company anticipates
any excess billet production will be sold externally.
The Company's steel making operations, together with billet purchases of
8,000 tons in 2000 (none in 2001) provided 686,000 tons and 682,000 tons of
billets in 2001 and 2000, respectively. Despite marginally higher billet
production and purchases in 2001, wire rod production decreased 4% from 678,000
tons (85% of estimated capacity) in 2000 to 651,000 tons (81% of estimated
capacity) due primarily to lower sales demand. Keystone's estimated current
fabricated wire products and industrial wire production capacity is 570,000
tons. The Company's fabricated wire products and industrial wire production
facilities operated at about 84%, 78%, and 68% of their annual capacity during
1999, 2000 and 2001, respectively.
In December 1997, Keystone purchased the remaining 80% of Engineered Wire
Products, Inc. ("EWP") not already owned by Keystone. As a result of the
acquisition of EWP, Keystone was able to convert additional volumes of
lower-margin wire rod sales, into higher-margin fabricated wire product sales.
This change in product mix between 1997 and 1998 resulted in a decline in
overall fabricated wire product selling prices as EWP's fabricated wire products
sell for lower prices than do Keystone's other fabricated wire products.
The Company's profitability is dependent in large part on its ability to
utilize effectively its production capacity, which is affected by the
availability of raw material, plant efficiency and other production factors and
to control its manufacturing costs, which are comprised primarily of raw
materials, energy and labor costs. Keystone's primary raw material is scrap
steel. The price of scrap steel is highly volatile and scrap steel prices are
affected by periodic shortages, freight costs, weather and other conditions
largely beyond the control of the Company. Scrap prices can vary widely from
period to period. The average per-ton price paid for scrap by the Company was
$94 in 1999, $100 in 2000 and $85 in 2001. Keystone's product selling prices
cannot always be adjusted, especially in the short-term, to recover the costs of
any increases in scrap prices.
The domestic steel rod industry continues to experience consolidation.
During the last three years, eight of Keystone's nine major competitors have
either filed for protection under Federal bankruptcy laws and discontinued
operations or reduced or completely shut-down their operations. The Company
believes these shut-downs or production curtailments represent a decrease of
approximately 3.5 million tons of annual capacity compared to an estimated
domestic annual capacity of 3.8 million tons after the decline. However,
worldwide over capacity in the steel industry continues to exist and imports of
wire rod and certain fabricated wire products in recent years have increased
significantly. In an effort to stem increasing levels of imported wire rod, in
December 1998, Keystone, joined by six other companies (representing more than
75% of the domestic market), and a labor union petitioned the U.S. International
Trade Commission (the "ITC") seeking relief under Section 201 of the Trade Act
of 1974. In February 2000, President Clinton announced the implementation of a
Tariff-Rate Quota ("TRQ") for three years. The tariff will be imposed on wire
rod imports from countries subject to the TRQ once imports initially exceed 1.6
million net tons in 2000 and 2001 and 1.7 million net tons in 2002 and 2003. The
tariff rate is 10% in 2000, 7.5% in 2001 and 5% in 2002. The Company does not
believe the TRQ has had a major impact on the domestic wire rod market and high
levels of imported rod continue. However, in April 2002, the United States
Department of Commerce announced a preliminary determination that wire rod from
seven countries is being sold in the United States below fair value and required
importers to immediately begin posting bonds or cash deposits in the amount of
the preliminary margins. The preliminary duties are subject to verification by
the Department of Commerce. Final anti-dumping duties will go into effect later
this year if the ITC concludes the United States wire rod industry is being
injured by imports. The Company believes it is too early to determine the impact
on the industry of the April 2002 actions by the Department of Commerce.
Keystone consumes a significant amount of energy in its manufacturing
operations and, accordingly, its profitability can also be adversely affected by
the volatility in the price of coal, oil and natural gas resulting in increased
energy, transportation, freight, scrap and supply costs. The Company purchases
electrical energy for its Peoria, Illinois facility from a utility under an
interruptible service contract which provides for more economical electricity
rates but allows the utility to refuse or interrupt power to its manufacturing
facilities. The utility has in the past, and may in the future, refuse or
interrupt service to Keystone resulting in decreased production and increased
costs associated with the related downtime. In addition, in the past the utility
has had the right to pass through certain of its costs to consumers through fuel
adjustment charges. The Company's current agreement with the utility does not
provide for such fuel adjustment charges. During the 1999 third quarter, the
Company received an unexpected $2.2 million fuel-adjustment charge from the
Peoria plant's electricity provider. The $2.2 million charge, accrued in 1999,
was paid during 2000, although during 2001 the Company received a $1.7 million
credit with respect to the 1999 fuel-adjustment charge.
In January 2001, Keystone's wholly-owned subsidiary, Fox Valley Steel &
Wire ("Fox Valley") sold its sole business which was located in Hortonville,
Wisconsin to a management group. The Company did not record any significant gain
or loss as a result of the sale. Fox Valley manufactured industrial wire and
fabricated wire products (primarily ladder rods and nails). Fox Valley's
revenues in 1999 and 2000 amounted to $11.3 million and $10.3 million,
respectively. During 1999 and 2000, approximately 30% and 32%, respectively of
Fox Valley's sales were to a single customer. That customer is, subsequent to
the sale, being serviced by Keystone's Peoria facility. During 1999 and 2000,
Fox Valley recorded operating losses of $67,000 and $686,000, respectively.
Keystone is also engaged in the marketing and distribution of wire, wood
and plastic products to the consumer lawn and garden market, and the operation
of a scrap recycling facility. These operations were insignificant when compared
to the consolidated operations of the Company. As such, the results of their
operations are not separately addressed in the discussion that follows.
Results Of Operations
The following table sets forth Keystone's steel and wire production, scrap
costs, sales volume and pricing data, for the periods indicated.
Years Ended December 31,
1999 2000 2001
---- ---- ----
(Tons in thousands)
Production volume (tons):
Billets:
Produced .................................. 683 675 686
Purchased ................................. 45 8 --
Wire rod .................................... 687 678 651
Average per-ton scrap purchase cost ........... $ 94 $100 $ 85
Sales volume (tons):
Fabricated wire products .................... 315 310 281
Industrial wire ............................. 144 128 94
Wire rod .................................... 237 257 291
---- ---- ----
696 695 666
==== ==== ====
Per-ton selling prices:
Fabricated wire products .................... $683 $660 $649
Industrial wire ............................. 462 449 426
Wire rod .................................... 261 266 264
All steel and wire products ................. 493 475 449
1
The following table sets forth the components of the Company's net sales
for the periods indicated.
Years Ended December 31,
1999 2000 2001
---- ---- ----
(In millions)
Steel and wire products:
Fabricated wire products .............. $214.7 $204.7 $182.4
Industrial wire ....................... 66.6 57.4 40.3
Wire rod .............................. 62.0 68.4 76.7
Other ................................. 1.4 1.5 1.3
------ ------ ------
344.7 332.0 300.7
Lawn and garden products ................ 11.0 6.3 8.0
------ ------ ------
$355.7 $338.3 308.7
====== ====== ======
The following table sets forth selected operating data of Keystone as a
percentage of net sales for the periods indicated.
Years Ended December 31,
1999 2000 2001
---- ---- ----
Net sales ..................................... 100.0% 100.0% 100.0%
Cost of goods sold ............................ 93.5 97.9 95.7
----- ----- -----
Gross profit .................................. 6.5% 2.1% 4.3%
===== ===== =====
Selling expenses .............................. 1.9% 2.0% 2.1%
General and administrative expense ............ 5.9 5.4 6.2
Overfunded defined benefit pension credit ..... (1.6) (.1) (1.8)
Loss before income taxes ...................... (3.4)% (9.6)% (6.6)%
Provision for income taxes (benefit) .......... (1.3) (3.4) 1.9
----- ----- -----
Net loss ...................................... (2.1)% (6.2)% (8.5)%
===== ===== =====
Year ended December 31, 2001 compared to year ended December 31, 2000
Net sales declined $29.7 million, or 8.8%, in 2001 from 2000 due primarily
to a 4.2% decline in shipment volume of steel and wire products combined with a
5.5% decline in overall per-ton steel and wire product selling prices. In
addition, the product mix in 2001 was less favorable than in 2000. Fabricated
wire products and industrial wire sell for higher per-ton selling prices and at
higher margins than wire rod. During 2001, fabricated wire products and
industrial wire represented 59% and 13%, respectively of net sales as compared
to 60% and 17% respectively, in 2000. This decline in the percentage of net
sales represented by fabricated wire products and industrial wire sales resulted
in wire rod sales increasing from 20% in 2000 to 25% of net sales in 2001. The
5.5% decline in overall per-ton steel and wire product selling prices ($26
per-ton) adversely impacted net sales by $17.3 million. Lower net sales of the
Company's steel and wire products were offset in part by Garden Zone's net sales
which increased by 26.2% during 2001 from $6.3 million to $8.0 million.
Fabricated wire products per-ton selling prices declined 1.6% and shipments
declined 9.4% in 2001 as compared to 2000. Industrial wire per-ton selling
prices declined 5.0% in 2001 when compared to 2000 while shipments declined
26.1% Per-ton selling price of wire rod declined .9% during 2001 as compared to
2000, while shipments increased 13.2%. The decline in both volume and per-ton
selling prices of fabricated wire products and industrial wire was due to lower
demand. As the demand for these products declined, the Company increased the
volume of rod sold to external customers.
Gross profit of $13.3 million during 2001 increased by $6.1 million over
the 2000 gross profit of $7.2 million as gross margin increased from 2.1% in
2000 to 4.3% in 2001. This increase in gross margin was due primarily to lower
costs in 2001 related to a reduction in unplanned production outages, lower
costs for scrap steel (the Company's primary raw material) and purchased
billets, $1.8 million of business interruption insurance proceeds received in
2001 related to incidents in prior years (as compared to $300,000 in 2000) and a
favorable $1.7 million utility settlement relative to a charge by the utility in
a prior year, all partially offset by higher natural gas and OPEB costs as well
as the lower overall steel and wire product per-ton selling prices. In addition,
during the 2001 fourth quarter, Keystone recorded a $1.3 million benefit as a
result of a favorable legal settlement with an electrode vendor related to
alleged price fixing. During 2000, Keystone recorded a $2.7 million benefit as a
result of similar settlements with electrode vendors. The estimated adverse
impact on gross profit from production outages amounted to approximately
$800,000 during 2001 as compared to $5.3 million in 2000. Keystone's per-ton
scrap costs declined 15% during 2001 as compared to 2000. During 2001, the
Company purchased 788,000 tons of scrap at an average price of $85 per-ton as
compared to 2000 purchases of 658,000 tons at an average price of $100 per-ton.
This decline in per-ton scrap costs favorably impacted gross profit during 2001
by approximately $11.8 million as compared to 2000. Keystone currently expects
average scrap costs in 2002 will approximate 2001 costs. The Company did not
purchase any billets in 2001 as compared to 8,000 tons purchased in 2000 at an
average cost of $215 per-ton. Keystone does not anticipate purchasing any
billets during 2002. Natural gas costs during 2001 were approximately $900,000
higher than 2000's cost.
Selling expense decreased 5.6% to $6.4 million in 2001 from $6.7 million in
2000 but was relatively constant as a percentage of sales.
General and administrative expense of $19.1 million in 2001 increased
$700,000 from $18.4 million in 2000 as the effect of higher legal and
professional and OPEB costs and environmental expenses during 2001 was only
partially offset by the effect of reductions in salaried headcount resulting
from certain salaried employees accepting Keystone's early retirement package
during the last quarter of 2000 and a $650,000 reimbursement of legal fees
received in 2001.
During 2001, Keystone recorded a non-cash pension credit of $5.5 million as
compared to $380,000 in 2000. The lower pension credit in 2000 was primarily the
result of a $3.7 million charge as a result of the implementation of an early
retirement program for certain salaried employees. During the fourth quarter of
2000, in connection with Keystone's cost reduction plans, the Company offered a
group of salaried employees enhanced pension benefits if they would retire by
December 31, 2000, resulting in the $3.7 million charge for termination benefits
for early retirement window. The Company currently estimates, for financial
reporting purposes, that it will recognize a non-cash pension credit of
approximately $3 million in 2002 and does not anticipate cash contributions for
defined benefit pension plan fundings will be required in 2002. However, future
variances from assumed actuarial rates, including the rate of return on pension
plan assets, may result in increases or decreases in pension expense or credit
and future funding requirements. See Note 7 to the Consolidated Financial
Statements.
Interest expense during 2001 was lower than 2000 due principally to lower
interest rates. Average borrowings by the Company under its revolving credit
facilities, EWP term loan and Senior Secured Notes approximated $149.0 million
during 2001 as compared to $150.9 million in 2000. During 2001, the average
interest rate paid by the Company was 8.9% per annum as compared to 9.6% per
annum in 2000.
At December 31, 2001, the Company's financial statements reflected total
accrued liabilities of $15.6 million to cover estimated remediation costs
arising from environmental issues. Although Keystone has established an accrual
for estimated future required environmental remediation costs, there is no
assurance regarding the ultimate cost of remedial measures that might eventually
be required by environmental authorities or that additional environmental
hazards, requiring further remedial expenditures, might not be asserted by such
authorities or private parties. Accordingly, the costs of remedial measures may
exceed the amounts accrued. See Note 12 to the Consolidated Financial
Statements.
During 2001, the Company recorded a provision for income taxes of $6.0
million on a loss before income taxes of $20.4 million compared to an effective
tax rate of 35% in 2000. During the fourth quarter of 2001, the Company
determined a portion of its gross deferred tax assets did not currently meet the
"more-likely-than-not" realizability test, and accordingly provided a deferred
tax asset valuation allowance of approximately $14.5 million resulting in the
$6.0 million provision for income taxes. The principal reasons for the
difference between the U.S. Federal Statutory income tax rate and the Company's
effective income tax rates are explained in Note 5 to the Consolidated Financial
Statements. The Company's deferred tax position at December 31, 2001 is also
explained in Note 5 to the Consolidated Financial Statements and in "Liquidity
and Capital Resources".
As a result of the items discussed above, Keystone incurred a net loss of
$26.4 million during 2001 as compared to a net loss in 2000 of $21.1 million.
Year ended December 31, 2000 compared to year ended December 31, 1999
Net sales declined 4.9% in 2000 from 1999 due primarily to a 3.6% decline
in overall steel and wire product selling prices. During 1999 and 2000,
fabricated wire products represented 60% of net sales while industrial wire
declined to 17% of net sales in 2000 as compared to 19% in 1999. Carbon steel
rod sales increased to 20% of net sales in 2000 from the 1999 level of 17%. The
3.6% decline in overall product selling prices ($18 per ton) adversely impacted
net sales by $12.3 million. In addition, Garden Zone's sales during 2000
declined 42% to $6.3 million from $11.0 million in 1999 primarily due to lower
shipments to a major customer.
Fabricated wire products selling prices declined 3% while shipments
declined 1% in 2000 as compared to 1999. Industrial wire selling prices also
declined 3% in 2000 when compared to 1999 while shipments declined 11%. Carbon
steel rod selling prices increased 2% while shipments increased 8% as compared
to 1999. The decline in both volume and per-ton selling prices of fabricated
wire products and industrial wire was due to lower demand. As the demand for
these products declined, the Company increased the volume of rod sold to
external customers.
Gross profit declined approximately 69% to $7.2 million in 2000 from $23.0
million in 1999. Gross margin declined to 2.1% from 6.5% in 1999 due primarily
to higher scrap costs, lower overall selling prices, and higher production costs
during the second and fourth quarters of 2000. The higher production costs in
the second quarter were due primarily to extended production outages caused by
planned repairs and a furnace break-out. The higher production costs in the 2000
fourth quarter were primarily a result of a two-week production outage due to
the failure of a furnace rocker arm and related repair costs of $1 million and
slower production times due to high accumulations of snow and ice. In addition,
during 1999, Keystone recorded a $2.7 million benefit as a result the favorable
legal settlements with certain electrode vendors. Keystone's scrap costs
increased 6% during 2000 as compared to 1999. During 2000, the Company purchased
658,000 tons of scrap at an average price of $100 per ton as compared to 1999
purchases of 768,000 tons at an average price of $94 per ton. This increase in
per-ton scrap costs adversely impacted gross profit during 2000 by approximately
$3.9 million as compared to 1999. The Company also purchased 8,000 tons of
billets during 2000 at an average cost of $215 per ton as compared to 45,000
tons of billets in 1999 at an average cost of $195 per ton.
Selling expenses decreased 2% to $6.7 million in 2000 from $6.8 million in
1999 but was relatively constant as a percentage of sales.
General and administrative expenses decreased 12% to $18.4 million in 2000
from $20.9 million in 1999 primarily due to higher costs incurred in 1999
associated with the start-up of Garden Zone and unfavorable legal settlements
during 1999.
During 2000, Keystone recorded a non-cash pension credit of $380,000 as
compared to $5.6 million in 1999. The lower pension credit in 2000 was primarily
the result of increased pension benefits included in the Company's May 1999
labor contract with the Peoria facility's union and the $3.7 million charge as a
result of the early retirement program for certain salaried employees.
Interest expense during 2000 was higher than 1999 due principally to higher
borrowing levels and higher interest rates. Average borrowings by the Company
under its revolving credit facilities, EWP term loan and Senior Secured Notes
approximated $150.9 million during 2000 as compared to $142.7 million in 1999.
During 2000, the average interest rate paid by the Company was 9.6% per annum as
compared to 9.3% per annum in 1999.
The effective tax rates in 2000 and 1999 were 35% and 39%, respectively.
The principal reasons for the difference between the U.S. federal statutory
income tax rate and the Company's effective income tax rates are explained in
Note 5 to the Consolidated Financial Statements.
As a result of the items discussed above, Keystone incurred a net loss of
$21.1 million during 2000 as compared to a net loss in 1999 of $7.5 million.
Related party transactions
As further discussed in Note 9 to the Consolidated Financial Statements,
the Company is party to certain transactions with related parties.
Outlook for 2002
Rod imports continue to cause disruption in the marketplace and market
demand has weakened. However, management currently believes, despite the
continued high level of rod imports, capacity utilization and shipment volumes
in 2002 will approximate 2001 levels and per-ton selling prices will approximate
those of the fourth quarter of 2001. In addition, management currently believes
these volumes and per-ton selling prices combined with anticipated higher energy
and OPEB costs, a lower pension credit and lower interest costs due to the
events described in Note 15 to the Consolidated Financial Statements, will
result in Keystone recording a loss before income taxes for calendar 2002.
However, despite recording an anticipated operating loss and loss before income
taxes in 2002, Keystone currently believes both operating loss and pre-tax loss
(exclusive of non-recurring items discussed below) will decline in 2002 as
compared to 2001 levels. As a result of the deferred tax asset valuation
allowance recorded in 2001, the Company does not anticipate recognizing a tax
benefit associated with its pre-tax losses during 2002 will be appropriate.
Keystone will adopt Statement of Financial Accounting Standards ("SFAS")
No. 142, Goodwill and Other Intangible Assets on January 1, 2002. As a result,
negative goodwill at that date of approximately $20.0 million will be eliminated
as a cumulative effect of change in accounting principle. In addition, as a
result of the events described in Note 15 to the Consolidated Financial
Statements Keystone will record a pre-tax extraordinary gain of approximately
$54.7 million for financial reporting purposes during the first quarter of 2002.
As a result of these items, the Company anticipates recording net income for
calendar 2002.
Critical accounting policies and estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, the recoverability of other
long-lived assets (including goodwill and other intangible assets), pension and
other post-retirement benefit obligations and the underlying actuarial
assumptions related thereto, the realization of deferred income tax assets and
accruals for environmental remediation, litigation, income tax and other
contingencies. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the reported amounts of assets, liabilities, revenues and expenses. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
Keystone believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
o The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments and other factors. The Company takes into consideration the
current financial condition of the customers, the age of the
outstanding balance and the current economic environment when
assessing the adequacy of the allowance. If the financial condition of
the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances
may be required.
o Keystone provides reserves for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and
the estimated net realizable value using assumptions about future
demand for its products and market conditions. If actual market
conditions are less favorable than those projected by management,
additional inventory reserves may be required. Keystone provides
reserves for tools and supplies inventory based generally on both
historical and expected future usage requirements.
o The Company recognizes an impairment charge associated with its
long-lived assets, primarily property and equipment, whenever it
determines that recovery of such long-lived asset is not probable.
Such determination is made in accordance with the applicable GAAP
requirements associated with the long-lived asset, and is based upon,
among other things, estimates of the amount of future net cash flows
to be generated by the long-lived asset and estimates of the current
fair value of the asset. Adverse changes in such estimates of future
net cash flows or estimates of fair value could result in an inability
to recover the carrying value of the long-lived asset, thereby
possibly requiring an impairment charge to be recognized in the
future.
o Keystone records a valuation allowance to reduce its deferred income
tax assets to the amount that is believed to be realized under the
"more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance,
it is possible that in the future the Company may change its estimate
of the amount of the deferred income tax assets that would
"more-likely-than-not" be realized in the future, resulting in an
adjustment to the deferred income tax asset valuation allowance that
would either increase or decrease, as applicable, reported net income
in the period such change in estimate was made.
o The Company records an accrual for environmental, legal, income tax
and other contingencies when estimated future expenditures associated
with such contingencies become probable, and the amounts can be
reasonably estimated. However, new information may become available,
or circumstances (such as applicable laws and regulations) may change,
thereby resulting in an increase or decrease in the amount required to
be accrued for such matters (and therefore a decrease or increase in
reported net income in the period of such change).
o Keystone sponsors a defined benefit pension plan covering
substantially all employees who meet certain eligibility requirements.
For financial reporting purposes, the pension plan is currently
overfunded and as such, the Company's financial statements reflect
prepaid pension cost on its balance sheets and an overfunded defined
benefit pension credit in the statements of operations. In addition,
the Company is not required to make cash contributions to the pension
plan. The determination of the pension asset and pension credit is
dependent on the selection of certain actuarial assumptions which
attempt to anticipate future events. These pension actuarial
assumptions, which are described in Note 7 to the Consolidated
Financial Statements, include discount rate, expected return on plan
assets, rate of future compensation increases, and mortality rates.
Actual results that differ from the Company's pension actuarial
assumptions are generally accumulated and amortized over future
periods and therefore, generally affect the pension asset and pension
credit in future periods. While the Company believes its pension
actuarial assumptions are appropriate, future material differences
between the Company's pension actuarial assumptions and actual results
or significant changes in the Company's pension actuarial assumptions,
could result in a material increase or decrease in the amount of the
reported pension asset and credit, and therefore have a material
impact on the Company's reported future results of operations. In
addition, the plan could become underfunded under applicable federal
regulations, which would require the Company to make cash
contributions to the plan.
o The determination of the Company's obligation and expense for OPEB
benefits is dependent on the selection of certain actuarial
assumptions which attempt to anticipate future events. These OPEB
actuarial assumptions, which are also described in Note 7 to the
Consolidated Financial Statements, include discount rate, rate of
future increases in healthcare costs, and mortality rates. Actual
results that differ from the Company's OPEB actuarial assumptions are,
in accordance with GAAP, generally accumulated and amortized over
future periods and therefore, generally affect OPEB obligations and
expense in future periods. While the Company believes its OPEB
actuarial assumptions are appropriate, future differences between the
Company's OPEB actuarial assumptions and actual results or significant
changes in the Company's OPEB actuarial assumptions could materially
affect the reported amount of the Company's future OPEB obligation and
expense, and therefore have a material impact on the Company's
reported future results of operations. In addition, the amount the
Company ultimately pays for future cash OPEB benefits could be
materially different from the amounts inherent in the actuarial
assumptions.
Accounting Principles Not Yet Adopted
See Note 16 to the Consolidated Financial Statements.
Liquidity And Capital Resources
At December 31, 2001, Keystone had negative working capital of $31.0
million, including $.5 million of notes payable and current maturities of
long-term debt as well as outstanding borrowings under the Company's revolving
credit facilities of $45.8 million. The amount of available borrowings under
these revolving credit facilities is based on formula-determined amounts of
trade receivables and inventories, less the amount of outstanding letters of
credit. At December 31, 2001, unused credit available for borrowing under
Keystone's $45 million revolving credit facility (the "Primary Revolver"), which
expires March 31, 2005, EWP's $7 million revolving credit facility (the "EWP
Revolver"), which expires June 30, 2002 and Garden Zone's $4 million revolving
credit facility ("the Garden Zone Revolver"), which expires July 2, 2002 (as
amended in April 2002) were $5.2 million, $3.6 million and $240,000,
respectively. As a result of the events described in Note 15 to the Consolidated
Financial Statements, as of April 9, 2002, unused credit availability under the
Primarily Revolver had increased to $22.5 million. The Company's Primary
Revolver requires daily cash receipts be used to reduce outstanding borrowings,
which results in the Company maintaining zero cash balances when there are
balances outstanding under this credit facility. Accordingly, any outstanding
balances under the Primary Revolver are always classified as a current liability
regardless of the maturity date of the facility. Keystone currently intends to
review or replace both the EWP Revolver and the Garden Zone Revolver upon their
respective maturities in June 2002 and July 2002.
As previously reported, the Company did not make the scheduled interest
payments due August 1, 2001 and February 1, 2002 on its $100 million of Senior
Secured Notes (the "Senior Notes"), and accordingly the Senior Notes and Primary
Revolver were in technical default as of December 31, 2001. As more fully
described in Note 15 to the Consolidated Financial Statements, the liquidity of
the Company was significantly improved during the first four months of 2002 as a
result of the following transactions:
o Holders of $93.9 million principal amount of the Company's Senior
Notes agreed to exchange their Senior Notes for various combinations
of cash and new debt and equity securities of the Company, all
financial and other restrictive covenants included in the indenture
covering the remaining $6.1 million principal amount of the Senior
Notes were eliminated and the collateral was released (making the
remaining Senior Notes unsecured),
o The Company obtained a new $10 million interest-free loan from the
County of Peoria, Illinois with no principal amortization required
prior to its 2007 maturity date,
o The Company obtained a new $5 million three-year term loan from the
same lender that provides the Company with its Primary Revolver,
o The maturity date of the Company's Primarily Revolver was extended to
March 31, 2005, and the size of the facility was reduced from $55
million to $45 million, and
o Two of the Company's major vendors agreed to a five-year non-interest
bearing repayment of their past due balances which aggregate
approximately $16.1 million.
All past due interest amounts on the remaining $6.1 million principal
amount of the Senior Notes (including approximately $24,000 of default interest)
was paid in March 2002, and the remaining Senior Notes and Primary Revolver are
no longer in technical default.
In addition, a wholly-owned subsidiary of Contran has agreed to loan the
Company up to an aggregate of $6 million under the terms of a revolving credit
facility that matures on December 31, 2002. Through April 2002, the Company has
not borrowed any amounts under such facility.
During 2001, the Company's operating activities provided approximately $2.1
million of cash, compared to $13.9 million of cash provided by operating
activities in 2000. Cash flow from operations decreased in 2001 compared to 2000
due primarily to a larger net loss and relative changes in the levels of assets
and liabilities (primarily accounts receivable, inventories and accounts
payable).
During 2001, Keystone made capital expenditures of approximately $3.9
million primarily related to upgrades of production equipment at its facility in
Peoria, Illinois, as compared to $13.1 million in 2000. During 2001, Keystone
deferred capital expenditures, including maintenance items, due to liquidity
constraints, although many of these items cannot be deferred indefinitely.
Capital expenditures for 2002 are currently estimated to be approximately $11.4
million and are related primarily to upgrades of production equipment. Keystone
currently anticipates these capital expenditures will be funded using cash flows
from operations together with borrowing availability under Keystone's credit
facilities.
At December 31, 2001, the Company's financial statements reflected accrued
liabilities of $15.6 million for estimated remediation costs for those
environmental matters which Keystone believes are reasonably estimable. Although
the Company has established an accrual for estimated future required
environmental remediation costs, there is no assurance regarding the ultimate
cost of remedial measures that might eventually be required by environmental
authorities or that additional environmental hazards, requiring further remedial
expenditures, might not be asserted by such authorities or private parties.
Accordingly, the costs of remedial measures may exceed the amounts accrued.
Keystone believes it is not possible to estimate the range of costs for certain
sites. The upper end of range of reasonably possible costs to Keystone for sites
for which the Company believes it is possible to estimate costs is approximately
$22.0 million.
Keystone does not expect to be required to make contributions to its
pension plan during 2002. Future variances from assumed actuarial rates,
including the rate of return on pension plan assets, may result in increases or
decreases to pension expense or credit and funding requirements in future
periods. See Note 7 to the Consolidated Financial Statements.
The Company periodically reviews the recoverability of its deferred tax
assets to determine whether such assets meet the "more-likely-than-not"
recognition criteria. At December 31, 2001, the Company expects that its
long-term profitability should ultimately be sufficient to enable it to realize
full benefit of its future tax deductions. Although, considering all factors
believed to be relevant, including the Company's recent operating results, its
expected future near-term productivity rates; cost of raw materials,
electricity, labor and employee benefits, environmental remediation, and retiree
medical coverage; interest rates; product mix; sales volumes and selling prices;
financial restructuring efforts and the fact that accrued OPEB expenses will
become deductible over an extended period of time and require the Company to
generate significant amounts of future taxable income, the Company believes a
portion of the gross deferred tax assets may not currently meet the
"more-likely-than-not" realizability test. As such, during the fourth quarter of
2001, the Company provided a deferred tax asset valuation allowance of
approximately $14.5 million. The Company will continue to review the
recoverability of its deferred tax assets, and based on such periodic reviews,
the Company could change the valuation allowance related to its deferred tax
assets in the future. At December 31, 2001, the Company has recognized a net
deferred tax asset of $21.6 million, which approximates the tax expense for
financial reporting purposes which will be recorded during the first quarter of
2002 related to the cancellation of indebtedness income resulting from the
events described in Note 15 to the Consolidated Financial Statements.
Keystone incurs significant ongoing costs for plant and equipment and
substantial employee medical benefits for both current and retired employees. As
such, Keystone is vulnerable to business downturns and increases in costs, and
accordingly, routinely compares its liquidity requirements and capital needs
against its estimated future operating cash flows. In addition to the financial
restructuring related items discussed previously, planned reductions in fixed
costs and announced increases in certain product selling prices, Keystone is
taking additional action towards improving its liquidity. These actions include,
but are not limited to, reducing inventory levels through more efficient
production schedules and modifying coverages and participant contribution levels
of medical plans for both employees and retirees. Keystone has also considered,
and may in the future consider, the sale of certain divisions or subsidiaries
that are not necessary to achieve the Company's long-term business objectives.
However, there can be no assurance Keystone will be successful in any of these
or other efforts, or that if successful, they will provide sufficient liquidity
for the Company's operations during the next year.
Management currently believes the cash flows from operations together with
funds available under the Company's credit facilities will be sufficient to fund
the anticipated needs of the Company's operations and capital improvements for
the year ending December 31, 2002. This belief is based upon management's
assessment of various financial and operational factors, including, but not
limited to, assumptions relating to product shipments, product mix and selling
prices, production schedules, productivity rates, raw materials, electricity,
labor, employee benefits and other fixed and variable costs, interest rates,
repayments of long-term debt, capital expenditures, and available borrowings
under the Company's credit facilities. However, there are many factors that
could cause actual future results to differ materially from management's current
assessment. While it is not possible to identify all factors, Keystone continues
to face many risks and uncertainties. Among the factors that could cause actual
future results to differ materially are the risks and uncertainties discussed in
this Annual Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission, including, but not limited
to, future supply and demand for the Company's products (including cyclicality
thereof), customer inventory levels, changes in raw material and other operating
costs (such as scrap and energy), general economic conditions, competitive
products and substitute products, customer and competitor strategies, the impact
of pricing and production decisions, the possibility of labor disruptions,
environmental matters (such as those requiring emission and discharge standards
for existing and new facilities), government regulations and possible changes
therein, any significant increases in the cost of providing medical coverage to
active and retired employees, the ultimate resolution of pending litigation,
international trade policies of the United States and certain foreign countries
and any possible future litigation and other risks and uncertainties as
discussed in this Annual Report. Should one or more of these risks materialize
(or the consequences of such a development worsen), or should the underlying
assumptions prove incorrect, actual results could differ materially from those
forecasted or expected and as a result, could have a material adverse effect on
the future liquidity, financial condition and results of operations of the
Company. Additionally, significant declines in the Company's end-user markets or
market share, the inability to maintain satisfactory billet and wire rod
production levels, or other unanticipated costs, if significant, could result in
a need for funds greater than the Company currently has available. There can be
no assurance the Company would be able to obtain an adequate amount of
additional financing. See Notes 12 and 14 to the Consolidated Financial
Statements.
Summary of debt and other contractual commitments
As more fully described in the notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 4, 13 and 14 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments for the
Company and its consolidated subsidiaries that are unconditional both in terms
of timing and amount by the type and date of payment (as adjusted for the events
described in Note 15 to the Consolidated Financial Statements):
Unconditional payment due date
2007 and
Contractual commitment 2002 2003/2004 2005/2006 after Total
- ---------------------- ---- --------- --------- ------- -----
(In thousands)
Indebtedness ............... $36,111 $ 4,208 $ 3,146 $ 57,638 $101,103
Operating leases ........... 1,899 1,831 175 -- 3,905
Deferred vendor payment
agreements ................ 2,421 6,454 6,454 807 16,136
Product supply agreement ... 1,200 2,400 2,400 5,100 11,100
------- ------- ------- -------- --------
$41,631 $14,893 $12,175 $ 63,545 $132,244
======= ======= ======= ======== ========
Payments under the deferred payment agreements in the above table reflect
the minimum payments required under the agreements. Certain provisions of the
agreements may require acceleration of the timing of the payments, but not an
increase in the total amount to be paid. Payments under the product supply
agreement in the above table reflect the minimum payments required under the
agreement. However, it is probable the Company will make additional payments
under the agreement based on actual consumption.
In addition, the Company is party to an agreement that requires quarterly
contributions of $75,000 to an environmental trust fund. Monies in the trust
fund will be made available to the Company when the related environmental site
is remediated or when the trust fund has a minimum excess of $2.0 million over
the related site's estimated remaining remediation costs. At December 31, 2001,
estimated remaining remediation costs exceeded the amount in the environmental
trust fund.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Keystone's exposure to changes in interest rates relates primarily to
long-term debt obligations. At December 31, 2001, substantially all of the
Company's long-term debt was comprised of 9.6% average fixed rate instruments,
which minimize earnings volatility related to interest expense. Keystone does
not currently participate in interest rate-related derivative financial
instruments.
The table below presents principal amounts and related weighted-average
interest rates by maturity date for Keystone's long-term debt obligations.
Estimated
Contracted Maturity Date Fair Value
-------------------- -------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total December 31, 2001
---- ---- ---- ---- ---- ---------- ----- -----------------
($ In thousands)
Fixed-rate debt -
Principal amount $ 73 $ 57 $ 66 $ - $ - $100,000 $100,196 $25,196
Weighted-average
interest rate 7.8% 6.9% 9.0% - % - % 9.6% 9.6%
Variable-rate debt-
Principal amount $ 46,259 $ - $ - $ $ - $ - $ - $ 46,259 $46,259
Weighted-average
interest rate 5.4% - % - % - % - % - % 5.4%
At December 31, 2000, long-term debt included fixed-rate debt of $100.7
million (fair value - $43.2 million) with a weighted average interest rate of
9.6% and $45.3 million variable-rate debt which approximated fair value, with a
weighted-average interest rate of 9.8%.
The table below presents principal amounts and related weighted-average
interest rates by maturity date for Keystone's long-term debt obligations at
December 31, 2001, as adjusted for the events described in Note 15 to the
Consolidated Financial Statements.
Estimated
Contracted Maturity Date Fair Value
-------------------- -------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total December 31, 2001
---- ---- ---- ---- ---- ---------- ----- -----------------
($ In thousands)
Fixed-rate debt -
Principal amount $ 469 $ 849 $ 858 $ 792 $792 $57,638 $61,398 $61,398
Weighted-average
interest rate 1.2% .5% .6% - % - % 2.1% 2.0%
Variable-rate debt-
Principal amount $35,642 $1,250 $1,250 $1,563 $ - $ - $39,705 $39,705
Weighted-average
interest rate 5.4% 5.5% 5.5% 5.5% - % - % 5.4%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is contained in a separate section
of this report. See Index of Financial Statements and Financial Statement
Schedule on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
disclosure provided under the captions "Election of Directors" and "Executive
Officers" in Keystone's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report (the "Keystone Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
disclosure provided under the caption "Executive Compensation" in the Keystone
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
disclosure provided under the caption "Security Ownership" in the Keystone Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
disclosure provided under the caption "Certain Business Relationships and
Related Transactions" in the Keystone Proxy Statement. See also Note 9 to the
Consolidated Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1), (2) The Index of Consolidated Financial Statements and Financial
Statement Schedule is included on page F-1 of this report.
(a)(3) Exhibits
Included as exhibits are the items listed in the Exhibit Index. The
Company will furnish a copy of any of the exhibits listed below upon
payment of $4.00 per exhibit to cover the costs to the Company in
furnishing the exhibits. The Company agrees to furnish to the
Commission upon request copies of any instruments not included herein
defining the rights of holders of long-term debt of the Company.
Exhibit No. Exhibit
3.1 Certificate of Incorporation, as amended and filed with the
Secretary of State of Delaware (Incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1990).
3.2 Certificate of Designations, Rights and Preferences of the Series
A 10% Cumulative Convertible Pay-In-Kind Preferred Stock of
Registrant dated March 15, 2002.
3.3 Bylaws of the Company, as amended and restated December 30, 1994
(Incorporated by reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994).
4.1 Indenture dated as of August 7, 1997 relating to the Registrant's
9 5/8% Senior Secured Notes due 2007 (Incorporated by reference
to Exhibit 4.1 to the Registrant's Form 8-K filed September 4,
1997).
4.2 First Supplemental Indenture Dated as of March 15, 2002 to
Indenture Dated as of August 7, 1997 Between Registrant as Issuer
and the Bank of New York, as Trustee.
4.3 Second Supplemental Indenture Dated as of March 15, 2002 to
Indenture Dated as of August 7, 1997 Between Registrant as Issuer
and the Bank of New York, as Trustee.
4.4 Amended and Restated Revolving Loan And Security Agreement dated
as of December 29, 1995 between the Company and Congress
Financial Corporation (Central). (Incorporated by reference to
Exhibit 4.1 to Registrant's Form 10-K for the year ended December
31, 1995).
4.5 First Amendment to Amended and Restated Revolving Loan And
Security Agreement dated as of September 27, 1996 between
Registrant and Congress Financial Corporation (Central).
(Incorporated by reference to Exhibit 4.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996).
4.6 Second Amendment to Amended and Restated Revolving Loan And
Security Agreement dated as of August 4, 1997 between Registrant
and Congress Financial Corporation (Central).
Exhibit No. Exhibit
4.7 Third Amendment to Amended and Restated Revolving Loan And
Security Agreement dated as of May 14, 1999 between Registrant
and Congress Financial Corporation (Central).
4.8 Fourth Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of December 31, 1999 between
Registrant and Congress Financial Corporation (Central)
(Incorporated by reference to Exhibit 4.4 to the Registrant's
Form 10-K for the year ended December 31, 1999).
4.9 Fifth Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of February 3, 2000 between
Registrant and Congress Financial Corporation (Central).
(Incorporated by reference to Exhibit 4.6 to the Registrant's
Form 10-K for the year ended December 31, 1999).
4.10 Sixth Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of January 17, 2001 between
Registrant and Congress Financial Corporation (Central).
4.11 Seventh Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of November 1, 2001 between
Registrant and Congress Financial Corporation (Central).
4.12 Eighth Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of December 31, 2001 between
Registrant and Congress Financial Corporation (Central).
4.13 Ninth Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of January 31, 2002 between
Registrant and Congress Financial Corporation (Central).
4.14 Tenth Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of February 28, 2002 between
Registrant and Congress Financial Corporation (Central).
4.15 Eleventh Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of March 15, 2002 between Registrant
and Congress Financial Corporation (Central).
4.16 Twelfth Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of March 15, 2002 between Registrant
and Congress Financial Corporation (Central).
4.17 Loan Agreement dated as of March 13, 2002 between Registrant and
the County of Peoria, Illinois.
4.18 Subordinate Security Agreement dated as of March 13, 2002 made by
Registrant in favor of the County of Peoria, Illinois.
4.19 Amended and Restated EWP Bridge Loan Agreement dated as of
November 21, 2001, by and between Registrant and EWP Financial
LLC.
4.20 First Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of March 18, 2002, by and between Registrant and EWP
Financial LLC.
4.21 Stock Pledge Agreement dated as of November 21, 2001, by and
between Registrant and EWP Financial LLC.
Exhibit No. Exhibit
4.22 Form of Registrant's 6% Subordinated Unsecured Note dated as of
March 15, 2002.
4.23 Form of Registrant's 8% Subordinated Secured Note dated as of
March 15, 2002.
4.24 Indenture Dated as of March 15, 2002, related to Registrant's 8%
Subordinated Secured Notes Between Registrant as Issuer, and U.S.
Bank National Association, as Trustee.
10.1 Intercorporate Services Agreement with Contran Corporation dated
as of January 1, 2001.
10.2 The Combined Master Retirement Trust between Valhi, Inc. and
Harold C. Simmons as restated effective July 1, 1995
(Incorporated by reference to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-35955)).
10.3* Keystone Consolidated Industries, Inc. 1992 Incentive
Compensation Plan. (Incorporated by reference to Exhibit 99.1 to
Registrant's Registration Statement on Form S-8 (Registration No.
33-63086)).
10.4* Keystone Consolidated Industries, Inc. 1992 Non-Employee Director
Stock Option Plan. (Incorporated by reference to Exhibit 99.2 to
Registrant's Registration Statement on Form S-8 (Registration No.
33-63086)).
10.5* Keystone Consolidated Industries, Inc. 1997 Long-Term Incentive
Plan. (Incorporated by reference to Appendix A to Registrant's
Schedule 14A filed April 25, 1997).
10.6* Amendment to the Keystone Consolidated Industries, Inc. 1997
Long-Term Incentive Plan. (Incorporated by reference to
Registrant's Schedule 14A filed April 24, 1998.)
10.7* Form of Deferred Compensation Agreement between the Registrant
and certain executive officers. (Incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
(File No. 1-3919) for the quarter ended March 31, 1999).
10.8 Account Reconciliation Agreement dated as of March 12, 2002
between Registrant and Central Illinois Light Company.
10.9 Account Reconciliation Agreement dated as of March 11, 2002
between Registrant and PSC Metals, Inc.
21 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP
99 Annual report of the Keystone Consolidated Industries, Inc.
Deferred Incentive Plan (Form 11-K) to be filed under Form 10-K/A
to this Annual Report on Form 10-K within 180 days after December
31, 2001.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
2001.
*Management contract, compensatory plan or agreement.
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 and dated April 15, 2002, thereunto duly
authorized.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
(Registrant)
/s/ GLENN R. SIMMONS
-----------------------------------
Glenn R. Simmons
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below and dated as of April 15, 2002 by the following
persons on behalf of the registrant and in the capacities indicated:
/s/ GLENN R. SIMMONS /s/ WILLIAM SPIER
- ----------------------------------- -----------------------------------
Glenn R. Simmons William Spier
Chairman of the Board Director
/s/ J. WALTER TUCKER, JR. /s/ STEVEN L. WATSON
- --------------------------- -----------------------------------
J. Walter Tucker, Jr. Steven L. Watson
Vice Chairman of the Board Director
/s/ THOMAS E. BARRY /s/ DAVID L. CHEEK
- ------------------------------------ -----------------------------------
Thomas E. Barry David L. Cheek
Director President and
Chief Operating Officer
/s/ PAUL M. BASS, JR. /s/ BERT E. DOWNING, JR.
- ------------------------------------ --------------------------
Paul M. Bass, Jr. Bert E. Downing, Jr.
Director Vice President and
Corporate Controller and
Principal Accounting and
Financial Officer
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Items 8, 14(a) and 14(d)
Index of Consolidated Financial Statements and Financial Statement Schedule
Page
Financial Statements
Report of Independent Accountants F-2
Consolidated Balance Sheets -
December 31, 2000 and 2001 F-3
Consolidated Statements of Operations -
Years ended December 31, 1999, 2000 and 2001 F-5
Consolidated Statements of Stockholders' Equity (Deficit) -
Years ended December 31, 1999, 2000 and 2001 F-6
Consolidated Statements of Cash Flows -
Years ended December 31, 1999, 2000 and 2001 F-7
Notes to Consolidated Financial Statements F-9
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts S-1
Schedules I, III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Keystone Consolidated Industries, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Keystone Consolidated Industries, Inc. and Subsidiaries at December
31, 2000 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
March 29, 2002
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(In thousands, except share data)
ASSETS 2000 2001
------ ------
Current assets:
Notes and accounts receivable, net of allowances
of $1,681 and $2,858 ......................... $ 21,813 $ 29,411
Inventories .................................... 52,004 40,912
Deferred income taxes .......................... 16,828 9,778
Prepaid expenses and other ..................... 786 3,211
-------- --------
Total current assets ....................... 91,431 83,312
-------- --------
Property, plant and equipment:
Land, buildings and improvements ............... 55,297 55,520
Machinery and equipment ........................ 311,063 311,336
Construction in progress ....................... 1,335 700
-------- --------
367,695 367,556
Less accumulated depreciation .................. 222,999 237,956
-------- --------
Net property, plant and equipment .......... 144,696 129,600
-------- --------
Other assets:
Restricted investments ......................... 5,969 5,675
Prepaid pension cost ........................... 126,506 131,985
Deferred income taxes .......................... 10,696 11,844
Deferred financing costs ....................... 2,685 2,295
Goodwill ....................................... 877 752
Other .......................................... 2,843 1,437
-------- --------
Total other assets ......................... 149,576 153,988
-------- --------
$385,703 $366,900
======== ========
See accompanying notes to consolidated financial statements.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2000 and 2001
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
2000 2001
------ ------
Current liabilities:
Notes payable and current maturities of
long-term debt ................................. $ 45,728 $ 46,332
Accounts payable ................................. 34,614 23,014
Payables to affiliates ........................... -- 633
Accrued OPEB cost ................................ 8,767 7,215
Other accrued liabilities ........................ 41,565 37,100
--------- ---------
Total current liabilities .................... 130,674 114,294
--------- ---------
Noncurrent liabilities:
Long-term debt ................................... 100,280 100,123
Accrued OPEB cost ................................ 98,015 101,810
Negative goodwill ................................ 21,353 19,998
Other ............................................ 9,323 31,010
--------- ---------
Total noncurrent liabilities ................. 228,971 252,941
--------- ---------
Minority interest .................................. -- 1
--------- ---------
Stockholders' equity (deficit):
Common stock, $1 par value, 12,000,000 shares
authorized; 10,063,103 shares issued at
stated value ................................... 10,792 10,792
Additional paid-in capital ....................... 53,071 53,071
Accumulated deficit .............................. (37,793) (64,187)
Treasury stock - 1,134 shares, at cost ........... (12) (12)
--------- ---------
Total stockholders' equity (deficit) ......... 26,058 (336)
--------- ---------
$ 385,703 $ 366,900
========= =========
Commitments and contingencies (Notes 12, 13 and 14).
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 2000 and 2001
(In thousands, except per share data)
1999 2000 2001
------ -------- ------
Revenues and other income:
Net sales ............................... $ 355,688 $ 338,321 $ 308,670
Interest ................................ 452 599 253
Other, net .............................. 463 183 565
--------- --------- ---------
356,603 339,103 309,488
--------- --------- ---------
Costs and expenses:
Cost of goods sold ...................... 332,644 331,167 295,339
Selling ................................. 6,845 6,737 6,378
General and administrative .............. 20,850 18,388 19,070
Overfunded defined benefit pension credit (5,610) (380) (5,479)
Interest ................................ 14,058 15,346 14,575
--------- --------- ---------
368,787 371,258 329,883
--------- --------- ---------
(12,184) (32,155) (20,395)
Equity in losses of Alter Recycling
Company L.L.C ....................... (54) (281) --
--------- --------- ---------
Loss before income taxes ............ (12,238) (32,436) (20,395)
Provision for income taxes (benefit) ...... (4,754) (11,370) 5,998
Minority interest in after-tax earnings ... -- -- 1
--------- --------- ---------
Net loss ............................ $ (7,484) $ (21,066) $ (26,394)
========= ========= =========
Basic and diluted net loss per share ...... $ (.75) $ (2.10) $ (2.62)
========= ========= =========
Basic and diluted weighted average common
and common equivalent shares outstanding . 9,904 10,039 10,062
========= ========= =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1999, 2000 and 2001
(In thousands)
Additional
Common stock paid-in Accumulated Treasury
Shares Amount capital (deficit) stock Total
Balance - December 31, 1998 9,839 $10,569 $51,763 $ (9,243) $(12) $ 53,077
Net loss .................. -- -- -- (7,484) -- (7,484)
Issuance of stock ......... 87 87 635 -- -- 722
------ ------- ------- -------- ---- --------
Balance - December 31, 1999 9,926 10,656 52,398 (16,727) (12) 46,315
Net loss .................. -- -- -- (21,066) -- (21,066)
Issuance of stock ......... 136 136 673 -- -- 809
------ ------- ------- -------- ---- --------
Balance - December 31, 2000 10,062 10,792 53,071 (37,793) (12) 26,058
Net loss .................. -- -- -- (26,394) -- (26,394)
------ ------- ------- -------- ---- --------
Balance - December 31, 2001 10,062 $10,792 $53,071 $(64,187) $(12) $ (336)
====== ======= ======= ======== ==== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
------- ------- ------
Cash flows from operating activities:
Net loss ................................. $ (7,484) $(21,066) $(26,394)
Depreciation and amortization ............ 21,051 17,224 16,992
Amortization of deferred financing costs . 519 479 540
Deferred income taxes .................... (3,363) (11,229) 5,902
Other, net ............................... (3,089) (1,883) 3,780
Change in assets and liabilities:
Notes and accounts receivable .......... 4,323 11,605 (8,310)
Inventories ............................ (14,685) 14,080 10,354
Prepaid pension cost ................... (5,610) (380) (5,479)
Accounts payable ....................... (1,923) 3,855 (10,616)
Other, net ............................. 11,312 1,236 15,329
-------- -------- --------
Net cash provided by operating
activities ......................... 1,051 13,921 2,098
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ..................... (16,873) (13,052) (3,889)
Proceeds from sale of business unit ...... -- -- 757
Other, net ............................... 729 (20) 587
-------- -------- --------
Net cash used by investing activities (16,144) (13,072) (2,545)
-------- -------- --------
Cash flows from financing activities:
Revolving credit facilities, net ......... $ 15,437 $ 777 $ 992
Other notes payable and long-term debt:
Additions .............................. 1,125 26 56
Principal payments ..................... (1,469) (1,652) (601)
-------- -------- --------
Net cash provided (used) by financing
activities .......................... 15,093 (849) 447
-------- -------- --------
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
------- ------- ------
Cash and cash equivalents:
Net change from operations, investing
and financing activities ................. -- -- --
Balance at beginning of year .............. -- -- --
-------- -------- -------
Balance at end of year .................... $ -- $ -- $ --
======== ======== =======
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized .... $ 13,887 $ 14,867 $ 9,189
Income taxes paid (refund), net ......... (3,575) (807) (194)
Common stock contributed to employee
Benefit plan ............................ $ 722 $ 809 $ --
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
Keystone Consolidated Industries, Inc. ("Keystone" or the "Company") is 50%
owned by Contran Corporation ("Contran") and other entities related to Mr.
Harold C. Simmons. Substantially all of Contran's outstanding voting stock is
held by trusts established for the benefit of certain children and grandchildren
of Mr. Simmons, of which Mr. Simmons is sole trustee. The Company may be deemed
to be controlled by Contran and Mr. Simmons.
Principles of consolidation and management's estimates. The consolidated
financial statements include the accounts of the Company and its majority-owned
subsidiaries. All material intercompany accounts and balances have been
eliminated. Certain prior year amounts have been reclassified to conform with
the 2001 presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amount of revenues and
expenses during the reporting period. Actual results may differ from previously
estimated amounts under different assumptions or conditions.
Primarily as a result of a $54.7 million pre-tax extraordinary gain from
cancellation of indebtedness (See Note 15), management expects to report net
income for the year ending December 31, 2002. Keystone management also currently
expects to report positive cash flow from operations during 2002. In addition,
as a result of the events discussed in Note 15, Keystone's management believes
the Company's liquidity in 2002 will be substantially improved over that
experienced in 2001. As such, Keystone's management believes its available
credit facilities and cash flows from operating activities will be sufficient to
fund the anticipated needs of the Company's operations and capital expenditures
for the year ending December 31, 2002. However, such expectation is based on
various operating assumptions and goals. Failure to achieve these goals could
have a material adverse effect on the Company's ability to achieve its intended
business objectives and may result in cash flow needs in excess of its current
borrowing availability under existing credit facilities.
Fiscal year. The Company's fiscal year is 52 or 53 weeks and ends on the
last Sunday in December. Each of fiscal 1999 and 2001 were 52-week years, and
2000 was a 53 week year.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer. In general, sales
from Keystone's steel and wire products segment include prepaid freight to the
customer with the resulting freight cost absorbed by the Company. Keystone's
reported sales in 1999, 2000 and 2001 are stated net of shipping and handling
costs of $20.6 million, $19.9 million and $19.2 million, respectively. In
general, sales from Keystone's lawn and garden products segment are also shipped
freight prepaid to the customer with the resulting freight cost absorbed by the
Company. Shipping and handling costs of the Company's lawn and garden products
segment are included in cost of goods sold and were approximately $345,000,
$169,000 and $208,000 in 1999, 2000 and 2001, respectively. The Company adopted
Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101, as
amended in 2000. SAB No. 101 provides guidance on the recognition, presentation
and disclosure of revenue. The impact of adopting SAB No. 101 was not material.
Inventories. Inventories are stated at the lower of cost or market. The
last-in, first-out ("LIFO") method is used to determine the cost of
approximately 75% and 74% of the inventories held at December 31, 2000 and 2001,
respectively. The first-in, first-out or average cost methods are used to
determine the cost of all other inventories.
Property, plant, equipment and depreciation. Property, plant and equipment
are stated at cost. Interest cost capitalized in 1999, 2000 and 2001 amounted to
$50,000, $124,000 and $17,000 respectively. Expenditures for maintenance,
repairs and minor renewals are expensed; expenditures for major improvements are
capitalized. Keystone will perform certain planned major maintenance activities
during the year (generally during the fourth quarter). Repair and maintenance
costs estimated to be incurred in connection with such planned major maintenance
activities are accrued in advance and are included in cost of goods sold.
Depreciation for financial reporting purposes is computed using principally
the straight-line method over the estimated useful lives of 10 to 30 years for
buildings and improvements and three to 12 years for machinery and equipment.
Accelerated depreciation methods are used for income tax purposes, as permitted.
Depreciation expense amounted to $21,741,000, $18,252,000 and $18,184,000 during
the years ended December 31, 1999, 2000 and 2001, respectively. Upon the sale or
retirement of an asset, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is recognized in income
currently.
When events or changes in circumstances indicate assets may be impaired, an
evaluation is performed to determine if an impairment exists. Such events or
changes in circumstances include, among other things, (i) significant current
and prior periods or current and projected periods with operating losses, (ii) a
significant decrease in the market value of an asset or (iii) a significant
change in the extent or manner in which an asset is used. All relevant factors
are considered. The test for impairment is performed by comparing the estimated
future undiscounted cash flows (exclusive of interest expense) associated with
the asset to the asset's net carrying value to determine if a write-down to
market value or discounted cash flow value is required. If the asset being
tested for impairment was acquired in a business combination accounted for by
the purchase method, any goodwill which arose out of that business combination
may also be considered in the impairment test if the goodwill related
specifically to the acquired asset and not to other aspects of the acquired
business, such as the customer base or product lines. See Note 16.
Investment in joint ventures. Investments in 20% but less than
majority-owned companies are accounted for by the equity method. Differences
between the cost of the investments and Keystone's pro rata share of
separately-reported net assets if any, are not significant.
Retirement plans and post-retirement benefits other than pensions.
Accounting and funding policies for retirement plans and post retirement
benefits other than pensions ("OPEB") are described in Note 7.
Environmental liabilities. Keystone records liabilities related to
environmental issues at such time as information becomes available and is
sufficient to support a reasonable estimate of range of probable loss. If the
Company is unable to determine that a single amount in an estimated range is
more likely, the minimum amount of the range is recorded. Costs of future
expenditures for environmental remediation obligations are not discounted to
their present value. Recoveries of environmental remediation costs from other
parties are recorded as assets when their receipt is deemed probable. At both
December 31, 2000 and 2001 Keystone had such assets recorded of approximately
$323,000.
Income taxes. Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between the income
tax and financial reporting carrying amounts of assets and liabilities. Keystone
periodically evaluates its deferred tax assets and adjusts any related valuation
allowance based on the estimate of the amount of such deferred tax assets which
the Company believes does not meet the "more-likely-than-not" recognition
criteria.
Advertising costs. Advertising costs, expensed as incurred, were $.5
million in 1999, $.9 million in 2000 and $.6 million in 2001.
Loss per share. Basic and diluted loss per share is based upon the weighted
average number of common shares actually outstanding during each year. The
impact of outstanding stock options was antidilutive. The weighted average
number of shares of outstanding stock options which were excluded from the
calculation of diluted earnings per share because their impact would have been
antidilutive approximated 725,000, 795,000 and 651,000 in 1999, 2000 and 2001,
respectively.
Deferred financing costs. Deferred financing costs relate primarily to the
issuance of Keystone's 9 5/8% Senior Secured Notes (the "Senior Notes") and are
amortized by the interest method over 10 years (term of the Senior Notes).
Deferred financing costs are stated net of accumulated amortization of
$1,962,000 and $2,501,000 at December 31, 2000 and 2001, respectively.
Goodwill. Goodwill, representing the excess of cost over the fair value of
the net assets of Engineered Wire Products, Inc., ("EWP") acquired in a business
combination accounted for by the purchase method, was amortized by the
straight-line method over 10 years through December 31, 2001 and is stated net
of accumulated amortization of approximately $352,000 at December 31, 2000 and
$477,000 at December 31, 2001. Amortization of goodwill amounted to $113,000 in
1999, and $125,000 in each of 2000 and 2001. Upon adoption of SFAS No. 142,
effective January 1, 2002, goodwill will no longer be subject to periodic
amortization. See Note 16.
Negative goodwill. Negative goodwill, representing the excess of fair value
over cost of individual net assets acquired in business combinations accounted
for by the purchase method, was amortized by the straight-line method over 20
years through December 31, 2001, and is stated net of accumulated amortization
of approximately $5,762,000 and $7,118,000 at December 31, 2000 and 2001,
respectively. Amortization of negative goodwill in each of 1999, 2000 and 2001
amounted to $1,356,000. Upon adoption of SFAS No. 142, effective January 1,
2002, negative goodwill will be eliminated as a cumulative effect of change in
accounting principle. See Note 16.
Employee stock options. Keystone accounts for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and its various interpretations. Under APBO No. 25, no
compensation cost is generally recognized for fixed stock options in which the
exercise price is not less than the market price on the grant date. Compensation
cost recognized by the Company in accordance with APBO No. 25 has not been
significant in each of the past three years.
Business interruption insurance recoveries. Business interruption insurance
recoveries related to production outages due primarily to equipment failures or
malfunctions are recorded as a reduction of cost of good sold when the recovery
is received. During 1999, 2000 and 2001 Keystone received such business
interruption insurance recoveries of approximately $1.6 million, $300,000 and
$1.8 million, respectively.
Derivative activities. Effective January 1, 2001, the Company adopted SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended. Under SFAS No. 133, all derivatives are recognized as either assets or
liabilities and measured at fair value. The accounting for changes in fair value
of derivatives will depend upon the intended use of the derivative, and such
changes are recognized either in net income or other comprehensive income. As
permitted by the transition requirements of SFAS No. 133, as amended, Keystone
has exempted from the scope of SFAS No. 133 all host contracts containing
embedded derivatives which were acquired or issued prior to January 1, 1999.
Keystone is not a party to any significant derivative or hedging instrument
covered by SFAS No. 133 and therefore the Company's financial statements were
not impacted by adopting SFAS No. 133.
Business combinations. Effective July 1, 2001 the Company adopted SFAS No.
141, Business Combinations, for all business combinations initiated on or after
July 1, 2001, and all purchase business combinations completed on or after July
1, 2001. Under SFAS No. 141, all business combinations initiated on or after
July 1, 2001 will be accounted for by the purchase method, and the
pooling-of-interests method is prohibited.
Note 2 - Joint ventures
In January 1999, Keystone and two unrelated parties formed Garden Zone LLC
("Garden Zone") to supply wire, wood and plastic products to the consumer lawn
and garden market. Keystone owns 51% of Garden Zone and, as such, Keystone's
consolidated financial statements include the accounts of Garden Zone. Neither
Keystone nor the other owners contributed capital or assets to the Garden Zone
joint venture, but Keystone did guarantee 51% of Garden Zone's $4 million
revolving credit agreement. See Note 4. Garden Zone commenced operations in
February 1999 and its earnings since that date, of which 51% accrue to Keystone
for financial reporting purposes, have been insignificant.
In July 1999, Keystone formed Alter Recycling Company, L.L.C. ("ARC"), a
joint venture with Alter Peoria, Inc., to operate a scrap recycling operation at
Keystone's facility in Peoria, Illinois. ARC sells scrap steel to Keystone and
others. Upon formation, Keystone contributed the property and equipment of its
Peoria scrap facility (net book value of approximately $335,000) to the joint
venture in return for its 50% ownership interest. Keystone is not required to,
nor does it currently anticipate it will, make any other contributions to fund
or operate this joint venture. Keystone has not guaranteed any debt or other
liability of the joint venture. Keystone recognized no gain or loss upon
formation of ARC and the investment in ARC is accounted for by the equity
method. In addition, Keystone sold its scrap facility's existing inventory to
ARC upon commencement of ARC's operations. At December 31, 2000 and 2001, due to
operating losses incurred by ARC, Keystone had reduced its investment in ARC to
zero. ARC commenced operations in August 1999 and through December 31, 1999,
Keystone purchased approximately $2.7 million of scrap from ARC. During 2000 and
2001, Keystone purchased approximately $7.2 million and $6.0 million,
respectively of scrap from ARC. At December 31, 2000 and 2001, ARC owed Keystone
approximately $818,000 and $1.0 million respectively, primarily for the scrap
inventory purchased by ARC from Keystone at formation, and such amounts are
included in notes and accounts receivable. However, during the fourth quarter of
2001, Keystone recorded a $1.0 million charge to provide an allowance for the
full amount of the net receivable from ARC. Such allowance is included in
allowance for notes and accounts receivable on the December 31, 2001 balance
sheet. At December 31, 2000, Keystone owed ARC approximately $171,000 primarily
for scrap purchases by Keystone from ARC.
2
Note 3 - Inventories
December 31,
2000 2001
---- ----
(In thousands)
Steel and wire products:
Raw materials ...................................... $11,101 $ 9,818
Work in process .................................... 9,492 9,912
Finished products .................................. 23,954 16,132
Supplies ........................................... 15,520 13,446
------- -------
60,067 49,308
Less LIFO reserve .................................. 11,083 10,768
------- -------
48,984 38,540
Lawn and garden products - finished products ......... 3,020 2,372
------- -------
$52,004 $40,912
======= =======
Note 4 - Notes payable and long-term debt
December 31,
2000 2001
---- ----
(In thousands)
9 5/8% Senior Secured Notes,
due August 2007 ............................. $100,000 $100,000
Commercial credit agreements:
Revolving credit facilities:
Keystone ................................. 37,772 40,823
EWP ...................................... 4,203 3,225
Garden Zone .............................. 2,819 1,738
Term loan - EWP ............................ 164 --
Other ........................................ 1,050 669
-------- --------
146,008 146,455
Less current maturities .................... 45,728 46,332
-------- --------
$100,280 $100,123
The Company did not make the scheduled interest payments due August 1, 2001
and February 1, 2002 on its Senior Notes, and accordingly the Senior Notes and
the Company's primary revolving credit facility ("the Keystone Revolver") were
in technical default as of December 31, 2001. During the first quarter of 2002,
$93.9 million principal amount of the Senior Notes and the related accrued and
unpaid interest were retired in exchange for various combinations of cash and
new debt and equity securities of the Company, and all past due interest amounts
on the remaining $6.1 million principal amount of the Senior Notes (including
approximately $24,000 of default interest) were paid. See Note 15. After such
exchanges and payment of accrued interest, the remaining Senior Notes and the
Keystone Revolver are no longer in technical default. Accordingly, the Senior
Notes and a portion of the related accrued interest as of December 31, 2001 have
been classified as noncurrent liabilities. A portion of the accrued interest
related to the Senior Notes as of December 31, 2001 has been classified as a
current liability at such date to the extent that such accrued interest was
subsequently paid or is expected to be paid during 2002, either under the terms
of the existing Senior Notes (for those Senior Notes which remain outstanding),
or as part of the consideration received by the Senior note holders (for those
Senior Notes which were exchanged, in part, for cash). See Note 8.
The Keystone Revolver, as amended in April 2002, provides for revolving
borrowings of up to $45 million based upon formula-determined amounts of trade
receivables and inventories. Borrowings bear interest, at the Company's option,
at prime rate plus .5% or LIBOR plus 2.5%, mature no later than March, 2005 and
are collateralized by certain of the Company's trade receivables and
inventories. In addition, the Keystone Revolver is cross-collateralized with
junior liens on certain of the Company's property, plant and equipment. The
effective interest rate on outstanding borrowings under the Keystone Revolver
was 10.0% and 5.5% at December 31, 2000 and 2001, respectively. At December 31,
2001, $1.2 million of letters of credit were outstanding, and $3.0 million was
available for additional borrowings based upon April 2002 amended size of the
facility. The Keystone Revolver requires the Company's daily net cash receipts
to be used to reduce the outstanding borrowings, which results in the Company
maintaining zero cash balances so long as there is an outstanding balance under
the Keystone Revolver. Accordingly, any outstanding balances under the Keystone
Revolver are always classified as a current liability, regardless of the
maturity date of the facility. The Keystone Revolver contains restrictive
covenants, including certain minimum working capital and net worth requirements,
maintenance of financial ratios requirements and other customary provisions
relative to payment of dividends on Keystone's common stock and on the Company's
new 10% Pay-In-Kind Preferred Stock (See Note 15).
EWP's $7 million revolving credit facility (the "EWP Revolver") expires in
June 2002. Borrowings under the EWP Revolver bear interest at either the prime
rate or LIBOR plus 2.25% (8.7% and 4.2% at December 31, 2000 and 2001,
respectively). At December 31, 2001, $3.6 million was available for additional
borrowings under the EWP revolver. EWP's accounts receivable, inventories and
property, plant and equipment collateralize the EWP Revolver. The EWP Revolver
Agreement contains covenants with respect to working capital, additional
borrowings, payment of dividends and certain other matters. Keystone currently
intends to renew or replace the EWP Revolver upon its maturity in June 2002.
Garden Zone has a $4.0 million revolving credit facility (the "Garden Zone
Revolver") which, as amended in April 2002, matures on July 2, 2002 and bears
interest at the LIBOR rate plus 2.4%. During 2000 and 2001 the Garden Zone
Revolver bore interest at the LIBOR rate plus 2% (8.7% and 4.6% at December 31,
2000 and 2001, respectively). Garden Zone's accounts receivable and inventories
collateralize the Garden Zone Revolver. At December 31, 2001, approximately
$240,000 was available for additional borrowings under the Garden Zone Revolver.
Keystone has guaranteed 51% of the outstanding borrowings under the Garden Zone
revolver. The Company currently intends to renew or replace the Garden Zone
Revolver upon its maturity in July 2002.
At December 31, 2000 and 2001, other notes payable and long-term debt
included $474,000 advanced to Garden Zone by one of its other owners. The
advance bears interest at the prime rate. Interest paid on this advance during
1999, 2000 and 2001 amounted to approximately $33,000, $64,000 and $34,000,
respectively. Aggregate future maturities of other notes payable and long-term
debt at December 31, 2001 amounted to $546,000, $57,000 and $66,000 in 2002,
2003 and 2004, respectively.
Excluding the Senior Notes, substantially all of the Company's notes
payable and long-term debt reprice with changes in interest rates. The aggregate
fair value of the Senior Notes, based on quoted market prices at December 31,
2000 and management's estimate of fair value at December 31, 2001, approximated
$42.5 million and $25.0 million, respectively. The book value of all other
indebtedness is deemed to approximate market value.
Note 5 - Income taxes
At December 31, 2001, the Company expects that its long-term profitability
should ultimately be sufficient to enable it to realize full benefit of its
future tax attributes. However, considering all factors believed to be relevant,
including the Company's recent operating results, its expected future near-term
productivity rates; cost of raw materials, electricity, labor and employee
benefits, environmental remediation, and retiree medical coverage; interest
rates; product mix; sales volumes and selling prices; financial restructuring
efforts and the fact that accrued OPEB expenses will become deductible over an
extended period of time and require the Company to generate significant amounts
of future taxable income, the Company believes a portion of the gross deferred
tax assets may not currently meet the "more-likely-than-not" realizability test.
As such, during the fourth quarter of 2001, the Company provided a deferred tax
asset valuation allowance of approximately $14.5 million. The resulting net
deferred tax asset of approximately $21.6 million at December 31, 2001
approximates the tax expense for financial reporting purposes which will be
recorded during the first quarter of 2002 related to the cancellation of
indebtedness income resulting from the events described in Note 15.
Summarized below are (i) the differences between the provision (benefit)
for income taxes and the amounts that would be expected using the U. S. federal
statutory income tax rate of 35%, and (ii) the components of the comprehensive
provision (benefit) for income taxes.
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Expected tax benefit, at statutory rate ...... $ (4,283) $(11,353) $ (7,138)
U.S. state income taxes (benefit), net ....... (157) 157 (399)
Amortization of goodwill and negative goodwill (435) (431) (431)
Deferred tax asset valuation allowance ....... -- -- 14,510
Other, net ................................... 121 257 (544)
-------- -------- --------
Provision (benefit) for income taxes ......... $ (4,754) $(11,370) $ 5,998
======== ======== ========
Provision (benefit) for income taxes:
Currently payable (refundable):
U.S. federal ............................. $ (930) $ (278) $ (37)
U.S. state ............................... (461) 137 133
-------- -------- --------
Net currently payable (refundable) ..... (1,391) (141) 96
Deferred income taxes, net ................. (3,363) (11,229) 5,902
-------- -------- --------
$ (4,754) $(11,370) $ 5,998
======== ======== ========
At December 31, 2001, Keystone had approximately $6.3 million of
alternative minimum tax credit carryforwards which have no expiration date.
At December 31, 2001, the Company had $24.7 million of net operating loss
carryforwards expiring in 2003 through 2010 which may only be used to reduce
future taxable income of an acquired subsidiary and which are limited in
utilization to approximately $1.9 million per year. At December 31, 2001
Keystone has other net operating loss carryforwards of approximately $64.7
million which expire in 2019 through 2021, and which may be used to reduce
future taxable income of the entire Company.
The components of the net deferred tax asset are summarized below.
December 31,
----------------------
2000 2001
---------------------------------------------
Assets Liabilities Assets Liabilities
(In thousands)
Tax effect of temporary differences relating to:
Inventories ....................................... $ 2,639 $ -- $ 2,453 $ --
Property and equipment ............................ -- (5,738) -- (5,513)
Prepaid pension ................................... -- (49,337) -- (51,474)
Accrued OPEB cost ................................. 41,633 -- 42,507
Accrued liabilities and other deductible
Differences ...................................... 14,811 -- 14,130 --
Other taxable differences ......................... -- (6,298) -- (6,260)
Net operating loss carryforwards .................. 23,554 -- 34,029 --
Alternative minimum tax credit carryforwards ...... 6,260 -- 6,260 --
Deferred tax asset valuation allowance ............ -- -- (14,510) --
-------- -------- -------- --------
Gross deferred tax assets ....................... 88,897 (61,373) 84,869 (63,247)
Reclassification, principally netting by tax
jurisdiction ....................................... (61,373) 61,373 (63,247) 63,247
-------- -------- -------- --------
Net deferred tax asset .......................... 27,524 -- 21,622 --
Less current deferred tax asset, net of pro rata
allocation of deferred tax asset valuation allowance 16,828 -- 9,778 --
-------- -------- -------- --------
Noncurrent net deferred tax asset ............... $ 10,696 $ -- $ 11,844 $ --
======== ======== ======== ========
Note 6 - Stock options, warrants and stock appreciation rights plan
In 1997, Keystone adopted its 1997 Long-Term Incentive Plan (the "1997
Plan"). Under the 1997 Plan, the Company may make awards that include, but need
not be limited to, one or more of the following types: stock options, stock
appreciation rights, restricted stock, performance grants and any other type of
award deemed consistent with the purposes of the plan. Subject to certain
adjustments, an aggregate of not more than 500,000 shares of Keystone's common
stock may be issued under the 1997 Plan. Stock options granted under the 1997
Plan may include options that qualify as incentive stock options as well as
options which are not so qualified. Incentive stock options are granted at a
price not less than 100%, or in certain instances, 110% of a fair market value
of such stock on the date of the grant. Stock options granted under the 1997
Plan may be exercised over a period of ten, or in certain instances, five years.
The vesting period, exercise price, length of period during which awards can be
exercised, and restriction periods of all awards are determined by the Incentive
Compensation Committee of the Board of Directors. At December 31, 2001, there
were 432,000 options outstanding under this plan.
During 1997, the Company granted all remaining options available under
Keystone's 1992 Option Plan. At December 31, 2001, there were 206,300 options
outstanding under this plan. Also during 1997, the Company terminated its 1992
Non-Employee Director Stock Option Plan (the "Director Plan"). At December 31,
2001, there were 3,000 options outstanding under this plan.
Changes in outstanding options, including options outstanding under the
former 1992 Option Plan, the Director Plan and 15,000 options outstanding under
another plan which was terminated in a prior year, all pursuant to which no
further grants can be made are summarized in the table below.
Price per Amount payable
Options share upon exercise
Outstanding at December 31, 1998 402,066 $8.13 -$13.94 $3,653,724
Granted 342,000 7.63 - 9.19 3,124,938
Canceled (16,000) 8.38 - 13.94 (191,438)
------- ------------- ----------
Outstanding at December 31, 1999 728,066 7.63 - 13.94 6,587,224
Granted 146,000 4.25 - 5.50 765,500
Canceled (116,000) 5.13 - 13.38 (1,035,594)
-------- ------------- -----------
Outstanding at December 31, 2000 758,066 4.25 - 13.94 6,317,130
Canceled (101,766) 5.13 - 13.94 (863,624)
-------- ------------- -----------
Outstanding at December 31, 2001 656,300 $4.25 -$13.94 $ 5,453,506
======== ============= ===========
The following table summarizes weighted average information about fixed
stock options outstanding at December 31, 2001.
Outstanding Exercisable
Weighted Average Weighted Average
Range of Remaining Remaining
Exercise Contractual Exercise Contractual Exercise
Prices Options Life Price Options Life Price
---------- ------- ----------- -------- ------- ----------- -------
$ 4.25-$ 5.50 114,500 8.2 years $ 5.24 37,785 8.2 years $ 5.24
$ 7.63-$10.25 506,800 5.7 years $ 8.65 428,425 5.4 years $ 8.56
$12.86-$13.94 35,000 3.5 years $13.48 35,000 3.5 years $13.48
------- -------
656,300 6.0 years $ 8.31 501,210 5.5 years $ 8.65
======= =======
At December 31, 2001, options to purchase 501,210 shares were exercisable
(none at prices lower than the December 31, 2001 quoted market price of $.65 per
share) and options to purchase an additional 117,305 shares will become
exercisable in 2002. At December 31, 2001, an aggregate of 68,000 shares were
available for future grants under the 1997 Plan.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options granted subsequent to 1994 in accordance with
the fair value based accounting method of SFAS No. 123. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for options granted in
1999 and 2000. There were no options granted in 2001.
Years ended December 31,
1999 2000
---- ----
Risk-free interest rate ......................... 5.5% 6.66%
Dividend yield .................................. -- --
Volatility factor ............................... 43% 45%
Weighted average expected life .................. 10 years 10 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the stock price volatility.
Because Keystone's options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in the Company's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of the granted options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net loss and basic and diluted net loss per common share were as
follows:
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands except per
share amounts)
Net loss - as reported $(7,484) $(21,066) $(26,394)
Net loss - pro forma $(8,228) $(21,639) $(26,892)
Basic and diluted net loss per share
- as reported $ (.75) $ (2.10) $ (2.62)
Basic and diluted net loss per share
- pro forma $ (.83) $ (2.16) $ (2.67)
Weighted average fair value per share of
options granted during the year $ 5.66 $ 3.52 $ -
Note 7 - Pensions and other post retirement benefits plans
Keystone sponsors several pension plans and other post retirement benefit
plans for its employees and certain retirees. Under plans currently in effect,
most active employees would be entitled to receive OPEB upon retirement. The
following tables provide a reconciliation of the changes in the plans' benefit
obligations and fair value of assets for the years ended December 31, 2000 and
2001:
Pension Benefits Other Benefits
----------------- -----------------
2000 2001 2000 2001
---- ---- ---- ----
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 298,130 $ 308,494 $ 101,523 $ 106,703
Service cost ........................... 2,915 2,954 1,623 1,506
Interest cost .......................... 21,333 21,419 7,427 9,739
Plan participants' contributions ....... -- -- 587 933
Actuarial loss ......................... 4,765 6,702 6,357 44,146
Termination benefits for early
retirement window ..................... 4,367 -- -- --
Benefits paid .......................... (23,016) (25,463) (10,814) (10,729)
--------- --------- --------- ---------
Benefit obligation at end of year ...... 308,494 314,106 106,703 152,298
--------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets at beginning
of year .............................. 336,673 343,501 -- --
Actual return on plan assets ........... 29,844 14,952 -- --
Company contributions .................. -- -- 10,227 9,796
Plan participants' contributions ....... -- -- 587 933
Benefits paid .......................... (23,016) (25,463) (10,814) (10,729)
--------- --------- --------- ---------
Fair value of plan assets at end of year 343,501 332,990 -- --
--------- --------- --------- ---------
Funded status ............................ 35,007 18,884 (106,703) (152,298)
Unrecognized net loss .................... 77,883 100,367 3,100 46,109
Unrecognized prior service cost (credit) . 13,616 12,734 (3,179) (2,836)
--------- --------- --------- ---------
Prepaid (accrued) benefit cost ........... 126,506 131,985 (106,782) (109,025)
Less current portion ..................... -- -- (8,767) (7,215)
--------- --------- --------- ---------
Noncurrent portion ....................... $ 126,506 $ 131,985 $ (98,015) $(101,810)
========= ========= ========= =========
The assumptions used in the measurement of the Company's benefit
obligations at December 31, are shown in the following table:
Pension Benefits Other Benefits
--------------------- -------------------
1999 2000 2001 1999 2000 2001
---- ---- ---- ---- ---- ----
Discount rate ................... 7.5% 7.25% 7.0% 7.5% 7.25% 7.0%
Expected return on plan assets .. 10.0% 10.0% 10.0% -- -- --
Rate of compensation increase ... 3.0% 3.0% 3.0% -- -- --
The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31,:
Pension Benefits Other Benefits
--------------------------- ---------------------------
1999 2000 2001 1999 2000 2001
---- ---- ---- ---- ---- ----
(In thousands)
Service cost ..................... $ 3,074 $ 2,915 $ 2,954 $ 1,986 $ 1,623 $ 1,506
Interest cost .................... 21,008 21,333 21,419 7,030 7,427 9,739
Expected return on plan assets ... (34,219) (32,544) (33,142) -- -- --
Amortization of unrecognized:
Net obligation as of
January 1, 1987 .............. 1,810 1,199 -- -- --
Prior service cost ............. 511 882 882 (343) (343) (343)
Net loss ....................... 2,206 2,112 2,408 -- -- 1,137
-------- -------- -------- ------- ------- --------
Net periodic benefit cost (credit) (5,610) (4,103) (5,479) $ 8,673 $ 8,707 $ 12,039
======== ======== ======== ======= ======= ========
Termination benefits for early
retirement window - 3,723 -
-------- -------- -------
Total pension cost (credit) $ (5,610) $ (380) $ (5,479)
======== ======== ========
During the fourth quarter of 2000, in connection with Keystone's cost
reduction plans, the Company offered a group of salaried employees enhanced
pension benefits if they would retire by December 31, 2000, resulting in the
$3.7 million charge for termination benefits for early retirement window.
During the fourth quarter of 2001, based on an actuarial valuation, the
Company recorded an increase in 2001 OPEB expense and liability of approximately
$2.9 million resulting in OPEB expense for the year 2001 of approximately $12.0
million. The Company had previously estimated OPEB expense for 2001 would
approximate $9.1 million.
At December 31, 2001, substantially all of Keystone's defined benefit
pension plan's (the "Plan") net assets were invested in a collective investment
trust (the "Collective Trust") established by Valhi, Inc. ("Valhi"), a
majority-owned subsidiary of Contran, to permit the collective investment by
certain master trusts which fund certain employee benefit plans maintained by
Contran, Valhi and related companies, including the Company. The remainder of
the Plan's assets at December 31, 2001 were invested in investment partnerships,
mortgages and other short-term investments. Harold C. Simmons is the sole
trustee of the Collective Trust. Mr. Simmons and two members of Keystone's board
of directors and Master Trust Investment Committee comprise the Trust Investment
Committee for the Collective Trust. Neither Mr. Simmons nor the Keystone
directors receive any compensation for serving in such capacities.
With certain exceptions, the trustee of the Collective Trust has exclusive
authority to manage and control the assets of the Collective Trust.
Administrators of the employee benefit plans participating in the Collective
Trust, however, have the authority to direct distributions and transfers of plan
benefits under such participating plans. The Trust Investment Committee of the
Collective Trust has the authority to direct the trustee to establish investment
funds, transfer assets between investment funds and appoint investment managers
and custodians. Except as otherwise provided by law, the trustee is not
responsible for the investment of any assets of the Collective Trust that are
subject to the management of an investment manager.
The Company may withdraw all or part of the Plan's investment in the
Collective Trust at the end of any calendar month without penalty.
For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2001. The rate was assumed
to decrease gradually to 5% in 2005 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
3
Change in Health Care Cost Trend
1% Increase 1% Decrease
(In thousands)
Increase (decrease):
Effect on total of service and interest
cost components for the year ended
December 31, 2001 ............................ $ 2,370 $ (1,949)
Effect on postretirement benefit
obligation at December 31, 2001 .............. $31,343 $(25,956)
The Company also maintains several defined contribution pension plans.
Expense related to these plans was $2.9 million in 1999, $2.8 million in 2000
and $1.6 million in 2001.
Note 8 - Other accrued liabilities
December 31,
2000 2001
---- ----
Current:
Employee benefits .............................. $12,137 $11,168
Self insurance ................................. 7,993 8,906
Environmental .................................. 8,398 8,068
Deferred vendor payments ....................... -- 2,488
Interest ....................................... 4,160 1,287
Legal and professional ......................... 836 887
Disposition of former facilities ............... 384 530
Unearned revenue ............................... 3,008 6
Other .......................................... 4,649 3,760
------- -------
$41,565 $37,100
======= =======
Noncurrent:
Deferred vendor payments ....................... $ -- $13,648
Interest ....................................... -- 7,735
Environmental .................................. 8,395 7,508
Workers compensation payments .................. 593 1,762
Other .......................................... 335 357
------- -------
$ 9,323 $31,010
======= =======
Noncurrent accrued interest is discussed in Note 15.
As further discussed in Note 15, during March 2002, the Company entered
into agreements with certain vendors whereby the Company agreed that it would
repay the vendors approximately $16.1 million owed to the vendors at December
31, 2001, over a five-year period with no interest. Accordingly, the Company
reclassified this amount from accounts payable to current and noncurrent accrued
liabilities.
Note 9 - Related party transactions
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
J. Walter Tucker, Jr., Vice Chairman of the Company, is a principal
stockholder of Tucker & Branham, Inc., Orlando, Florida. Although the Company
does not pay Mr. Tucker a salary, the Company has contracted with Tucker &
Branham, Inc. for management consulting services by Mr. Tucker. Fees paid to
Tucker & Branham, Inc. were $66,000 in 1999, $87,000 in 2000 and $52,000 in
2001.
Under the terms of an intercorporate services agreement ("ISA") entered
into between the Company and Contran, employees of Contran will provide certain
management, tax planning, financial and administrative services to the Company
on a fee basis. Such charges are based upon estimates of the time devoted by the
employees of Contran to the affairs of the Company, and the compensation of such
persons. Because of the large number of companies affiliated with Contran, the
Company believes it benefits from cost savings and economies of scale gained by
not having certain management, financial and administrative staffs duplicated at
each entity, thus allowing certain individuals to provide services to multiple
companies but only be compensated by one entity. The ISA agreement is reviewed
and approved by the applicable independent directors of the Company. The ISA
fees charged by Contran to the Company aggregated approximately $656,000 in
1999, $750,000 in 2000 and $1,005,000 in 2001. At December 31, 2001, the Company
owed Contran approximately $633,000, primarily for ISA fees. Such amount is
included in payables to affiliates on the Company's balance sheet. In addition,
Keystone purchased certain aircraft services from Valhi in the amount of
$175,000 in 1999, $111,000 in 2000 and $124,000 in 2001.
Tall Pines Insurance Company ("Tall Pines"), Valmont Insurance Company
("Valmont") and EWI RE, Inc. ("EWI") provide for or broker certain of Keystone's
insurance policies. Tall Pines is a wholly-owned captive insurance company of
Tremont Corporation ("Tremont"), a company controlled by Contran. Valmont is a
wholly-owned captive insurance company of Valhi. Parties related to Contran own
all of the outstanding common stock of EWI. Through December 31, 2000, a
son-in-law of Harold C. Simmons managed the operations of EWI. Subsequent to
December 31, 2000, such son-in-law provides advisory services to EWI as
requested by EWI. Consistent with insurance industry practices, Tall Pines,
Valmont and EWI receive commissions from the insurance and reinsurance
underwriters for the policies that they provide or broker. During 1999, 2000 and
2001, the Company and it subsidiaries paid approximately $2.7 million, $2.0
million and $2.2 million, respectively, for policies provided or brokered by
Tall Pines, Valmont and/or EWI. These amounts principally include payments for
reinsurance and insurance premiums paid to unrelated third parties, but also
include commissions paid to Tall Pines, Valmont and EWI. In the Company's
opinion, the amounts that Keystone and its subsidiaries paid for these insurance
policies are reasonable and similar to those they could have obtained through
unrelated insurance companies and/or brokers. The Company expects that these
relationships with Tall Pines, Valmont and EWI will continue in 2002.
Dallas Compressor Company, a wholly-owned subsidiary of Contran sells
compressors and related services to Keystone. During 1999, 2000 and 2001
Keystone purchased products and services from Dallas Compressor Company in the
amount of $170,000, $67,000 and $31,000, respectively.
During 2001, Garden Zone paid approximately $60,000 to one of its other
owners for accounting and financial services.
EWP Financial, LLC, a wholly-owned subsidiary of Contran, has agreed to
loan the Company up to an aggregate of $6 million through December 31, 2002.
Borrowings bear interest at the prime rate plus 3%, and are collateralized by
the stock of EWP. In addition, the Company pays a commitment fee of .375% on the
unutilized portion of the facility. At December 31, 2001, no amounts were
outstanding under the facility, and $6 million was available for borrowing by
the Company. During 2001, the Company paid Contran an up-front facility fee of
$120,000 related to this facility. The terms of this loan were approved by the
independent directors of the Company.
Note 10 - Quarterly financial data (unaudited)
March 31, June 30, September 30, December 31,
--------- -------- --------- ---------
(In thousands, except per share data)
Year ended December 31, 2001:
Net sales .......................... $ 77,763 $ 86,294 $ 82,329 $ 62,284
Gross profit (loss) ................ 1,406 5,833 6,636 (544)
Net loss ........................... $ (3,706) $ (1,628) $ (1,250) $(19,810)
======== ======== ======== ========
Basic and diluted net loss per share $ (.37) $ (.16) $ (.12) $ (1.97)
======== ======== ======== ========
Year ended December 31, 2000:
Net sales .......................... $ 96,422 $ 95,382 $ 82,787 $ 63,730
Gross profit ....................... 6,441 3,867 3,943 (7,097)
Net loss ........................... $ (1,932) $ (3,395) $ (3,093) $(12,646)
======== ======== ======== ========
Basic and diluted net loss per share $ (.19) $ (.34) $ (.31) $ (1.26)
======== ======== ======== ========
During the fourth quarter of 2000, the Company offered a group of salaried
employees enhanced pension benefits if they could retire by December 31, 2000,
resulting in a $3.7 million charge for termination benefits for early retirement
window.
During the fourth quarter of 2001, the Company recorded a (i) $1.0 million
charge to provide an allowance for the full amount of the net receivable from
ARC, and (ii) a $14.5 million charge to provide a deferred tax asset valuation
allowance for the portion of the Company's deferred tax asset that the Company
believes does not currently meet the "more-likely-than-not" realizability test.
During the fourth quarter of 2001, based on an actuarial valuation, the
Company recorded an increase in 2001 OPEB expense and liability of approximately
$2.9 million resulting in OPEB expense for the year 2001 of approximately $12.0
million. The Company had previously estimated OPEB expense for 2001 would
approximate $9.1 million.
During the fourth quarter of 2001, Keystone recorded a $1.3 million benefit
as a result of a favorable legal settlement with an electrode vendor related to
alleged price fixing.
See Notes 2, 5 and 7.
Note 11 - Operations
Keystone's operations are comprised of two segments; the manufacture and
sale of carbon steel rod, wire and wire products for agricultural, industrial,
construction, commercial, original equipment manufacturers and retail consumer
markets and the distribution of wire, wood and plastic products to the consumer
lawn and garden markets through Garden Zone. Keystone owns 51% of Garden Zone.
The Company's steel and wire products are distributed primarily in the
Midwestern and Southwestern United States. Garden Zone's products are
distributed primarily in the Southeastern United States.
In January 2001, Keystone's wholly-owned subsidiary, Fox Valley Steel &
Wire ("Fox Valley") sold its business which was located in Hortonville,
Wisconsin. The Company did not record any significant gain or loss as a result
of the sale. Fox Valley manufactured industrial wire and fabricated wire
products (primarily ladder rods and nails). Fox Valley's revenues, in 1999 and
2000 amounted to $11.3 million and $10.3 million, respectively. During 1999 and
2000 Fox Valley recorded operating losses of $67,000 and $686,000, respectively.
Business Segment Principal entities Location
Steel and wire products Keystone Steel & Wire Peoria, Illinois
Sherman Wire Sherman, Texas
Sherman Wire
of Caldwell, Inc. Caldwell, Texas
Keystone Fasteners Springdale, Arkansas
Engineered Wire Products Upper Sandusky, Ohio
Lawn and garden products Garden Zone LLC (1) Charleston, South
Carolina
(1) 51.0% subsidiary.
Keystone evaluates segment performance based on segment operating income,
which is defined as income before income taxes and interest expense, exclusive
of certain non-recurring items (such as gains or losses on disposition of
business units) and certain general corporate income and expense items
(including interest income) which are not attributable to the operations of the
reportable operating segments.
Keystone's operating segments are defined as components of consolidated
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. David L. Cheek. Each operating segment is separately
managed, and each operating segment represents a strategic business unit
offering different products.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that pension expense for
each segment is recognized and measured on the basis of estimated current
service cost of each segment. The remainder of the Company's net overfunded
defined benefit pension credit is included in net general corporate expenses. In
addition, amortization of goodwill and negative goodwill are included in general
corporate expenses and are not allocated to each segment. General corporate
expenses also includes OPEB and environmental expenses relative to facilities no
longer owned by the Company.
Segment assets are comprised of all assets attributable to each reportable
operating segment. Corporate assets consist principally of pension related
assets, restricted investments, deferred tax assets and corporate property,
plant and equipment.
Steel and Lawn and Corporate
Wire Garden Segment and
Products Products Total Eliminations Total
(In thousands)
Year ended December 31, 2001:
Net sales ...................... $ 300,659 $ 8,483 $ 309,142 $ (472) $ 308,670
Depreciation and amortization .. 18,215 -- 18,215 (1,223) 16,992
Operating profit (loss) ........ (4,673) 210 (4,463) -- (4,463)
Identifiable segment assets .... 203,060 2,812 205,872 161,028 366,900
Capital expenditures ........... 3,888 -- 3,888 1 3,889
Year ended December 31, 2000:
Net sales ...................... $ 331,975 $ 6,760 $ 338,735 $ (414) $ 338,321
Depreciation and amortization .. 18,446 -- 18,446 (1,222) 17,224
Equity in loss of unconsolidated
affiliate ..................... (281) -- (281) -- (281)
Operating profit (loss) ........ (15,760) 345 (15,415) -- (15,415)
Identifiable segment assets .... 219,662 3,990 223,652 162,051 385,703
Capital expenditures ........... 13,045 -- 13,045 7 13,052
Year ended December 31, 1999:
Net sales ...................... $ 344,738 $13,968 $ 358,706 $ (3,018) $ 355,688
Depreciation and amortization .. 22,282 -- 22,282 (1,231) 21,051
Equity in loss of unconsolidated
affiliate ..................... (54) -- (54) -- (54)
Operating profit ............... 2,311 267 2,578 -- 2,578
Identifiable segment assets .... 249,165 6,894 256,059 154,859 410,918
Capital expenditures ........... 16,857 -- 16,857 16 16,873
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Operating profit (loss) .................... $ 2,578 $(15,415) $ (4,463)
Equity in loss of unconsolidated affiliate . (54) (281) --
General corporate items:
Interest income .......................... 452 599 253
General income (expenses), net ........... (1,156) (1,993) (1,610)
Interest expense ........................... (14,058) (15,346) (14,575)
-------- -------- --------
Loss before income taxes ................. $(12,238) $(32,436) $(20,395)
======== ======== ========
All of the Company's assets are located in the United States. Information
concerning geographic concentration of net sales based on location of customer
is as follows:
Year ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
United States ............... $353,151 $336,288 $307,064
Canada ...................... 2,449 1,949 1,217
Mexico ...................... -- 7 189
Great Britain ............... 88 77 100
Japan ....................... -- -- 100
-------- -------- --------
$355,688 $338,321 $308,670
======== ======== ========
Note 12 - Environmental matters
At December 31, 2001, Keystone's financial statements reflected total
accrued liabilities of $15.6 million to cover estimated remediation costs for
those environmental matters which Keystone believes are reasonably estimable,
including those discussed below. Although the Company has established an accrual
for estimated future required environmental remediation costs, there is no
assurance regarding the ultimate cost of remedial measures that might eventually
be required by environmental authorities or that additional environmental
hazards, requiring further remedial expenditures, might not be asserted by such
authorities or private parties. Accordingly, the costs of remedial measures may
exceed the amounts accrued. Keystone believes it is not possible to estimate the
range of costs for certain sites. The upper end of range of reasonably possible
costs to Keystone for sites for which the Company believes it is possible to
estimate costs is approximately $22.0 million.
The Company is currently involved in the closure of inactive waste disposal
units at its Peoria facility pursuant to a closure plan approved by the Illinois
Environmental Protection Agency ("IEPA") in September 1992. The original closure
plan provides for the in-place treatment of seven hazardous waste surface
impoundments and two waste piles to be disposed of as special wastes. The
Company recorded an estimated liability for remediation of the impoundments and
waste piles based on a six-phase remediation plan. The Company adjusts the
recorded liability for each Phase as actual remediation costs become known.
During 1995, the Company began remediation of Phases II and III and completed
these Phases, as well as Phase IV during 1996. During 1998 and 1999 the Company
did not have any significant remediation efforts relative to Phases V and VI.
During 2000, Keystone began preliminary efforts relative to Phase V. Pursuant to
agreements with the IEPA and Illinois Attorney General's office, the Company is
depositing $75,000 per quarter into a trust fund. The Company must continue
these quarterly deposits and cannot withdraw funds from the trust fund until the
fund balance exceeds the sum of the estimated remaining remediation costs plus
$2 million. At December 31, 2000 and 2001 the trust fund had balances of $4.4
million and $4.8 million, respectively, which amounts are included in other
noncurrent assets because the Company does not expect to have access to any of
these funds until after 2002.
In February 2000, Keystone received a notice from the United States
Environmental Protection Agency ("U.S. EPA") giving formal notice of the U.S.
EPA's intent to issue a unilateral administrative order to Keystone pursuant to
section 3008(h) of the Resource Conservation and Recovery Act ("RCRA"). The
draft order enclosed with this notice would require Keystone to: (1) investigate
the nature and extent of hazardous constituents present at and released from
five alleged solid waste management units at the Peoria facility; (2)
investigate hazardous constituent releases from "any other past or present
locations at the Peoria facility where past waste treatment, storage or disposal
may pose an unacceptable risk to human health and the environment"; (3) complete
by June 30, 2001 an "environmental indicators report" demonstrating the
containment of hazardous substances that could pose a risk to "human receptors"
and further demonstrating that Keystone "has stabilized the migration of
contaminated groundwater at or from the facility;" (4) submit by January 30,
2002 proposed "final corrective measures necessary to protect human health and
the environment from all current and future unacceptable risks of releases of
hazardous waste or hazardous constituents at or from the Peoria facility; and
(5) complete by June 30, 2001 the closure of the sites discussed in the
preceding paragraph now undergoing RCRA closure under the supervision of the
IEPA. Keystone has complied with deadlines in the draft order. During the fourth
quarter of 2000, Keystone entered into a modified Administrative Order on
Consent, which may require the Company to conduct cleanup activities at certain
solid waste management units at its Peoria facility depending on the results of
soil and groundwater sampling and risk assessment to be conducted by Keystone
during future periods pursuant to the order.
In March 2000, the Illinois Attorney General (the "IAG") filed and served a
seven-count complaint against Keystone for alleged violations of the Illinois
Environmental Protection Act, 415 ILCS 5/31, and regulations implementing RCRA
at Keystone's Peoria facility. The complaint alleges Keystone violated RCRA in
failing to prevent spills of an alleged hazardous waste on four separate
occasions during the period from June 1995 through January 1999. The complaint
also alleges the Company illegally "stored", "disposed of" and manifested the
same allegedly hazardous waste on some or all of those occasions. In addition,
the complaint alleges these hazardous waste spills resulted in groundwater
pollution in violation of the Illinois Environmental Protection Act. The
complaint further alleges Keystone improperly disposed of hazardous waste on two
occasions at a landfill not permitted to receive such wastes. The complaint
seeks the maximum statutory penalties allowed which ranges up to $50,000 for
each violation and additional amounts up to $25,000 for each day of violation.
Keystone has answered the complaint and proceedings in the case have been stayed
pending the outcome of settlement negotiations between Keystone and the IAG's
office.
In June 2000, the IAG filed a Complaint For Injunction And Civil Penalties
against Keystone. The complaint alleges the Company's Peoria facility violated
its National Pollutant Discharge Elimination System ("NPDES") permit limits for
ammonia and zinc discharges from the facility's wastewater treatment facility
into the Illinois River. The complaint alleges specific violations of the 30-day
average ammonia limit in the NPDES permit for three months in 1996, 11 months in
1997, 12 months in 1998, 11 months in 1999 and the first two months of 2000. The
complaint further alleges two violations of the daily maximum limit for zinc in
October and December of 1999. Keystone has answered the complaint and
proceedings in the case have been stayed pending the outcome of settlement
negotiations between the Company and the IAG's office.
"Superfund" sites
The Company is subject to federal and state "Superfund" legislation that
imposes cleanup and remediation responsibility upon present and former owners
and operators of, and persons that generated hazardous substances deposited
upon, sites determined by state or federal regulators to contain hazardous
substances. Keystone has been notified by U.S. EPA that the Company is a
potentially responsible party ("PRP") under the federal "Superfund" legislation
for the alleged release or threat of release of hazardous substances into the
environment at eight sites. These situations involve cleanup of landfills and
disposal facilities which allegedly received hazardous substances generated by
discontinued operations of the Company. Although Keystone believes its
comprehensive general liability insurance policies provide indemnification for
certain costs the Company incurs at the "Superfund" sites discussed below, it
has only recorded receivables for the estimated insurance recoveries at three of
those sites. During 1999, 2000 and 2001, the Company received approximately
$725,000, $140,000 and $88,000, respectively, from certain of its insurers in
exchange for releasing such insurers from coverage for certain years of
environmental related liabilities. Such amounts are included in Keystone's self
insurance accruals.
In July 1991, the United States filed an action against a former division
of the Company and four other PRPs in the United States District Court for the
Northern District of Illinois (Civil Action No. 91C4482) seeking to recover
investigation and remediation costs incurred by U.S. EPA at the Byron Salvage
Yard, located in Byron, Illinois. In April 1992, Keystone filed a third-party
complaint in this civil action against 15 additional parties seeking
contribution in the event the Company is held liable for any response costs at
the Byron site. Neither the Company nor the other designated PRPs are performing
any investigation of the nature and extent of the contamination. In December
1996, Keystone, U.S. EPA and the Department of Justice entered into the Fifth
Partial Consent Decree to settle Keystone's liability for EPA response costs
incurred at the site through April 1994 for a payment of $690,000. Under the
agreement Keystone is precluded from recovering any portion of the $690,000
settlement payment from other parties to the lawsuit. In January 1997, Keystone
paid the $690,000 settlement. Keystone will remain potentially liable for EPA
response costs incurred after April 30, 1994, and natural resource damage
claims, if any, that may be asserted in the future. Keystone recovered a portion
of the $690,000 payment from its insurer. In March 1997, U.S. EPA issued a
Proposed Remedial Action Plan ("PRAP") recommending that a limited excavation of
contaminated soils be performed at an estimated cost of $63,000, that a soil
cover be placed over the site, an on-site groundwater pump and treat system be
installed and operated for an estimated period of 15 years, and that both
on-site and off-site groundwater monitoring be conducted for an indefinite
period. U.S. EPA's cost estimate for the recommended plan is $5.1 million. U.S.
EPA's estimate of the highest cost alternatives evaluated but not recommended in
the PRAP is approximately $6 million. The Company filed public comments on May
1, 1997, objecting to the PRAP. In March 1999, Keystone and other PRP's received
a Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") special notice letter notifying them for the first time of a
September 1998 Record of Decision ("ROD") and requesting a commitment on or
before May 19, 1999 to perform soils work required by that ROD that was
estimated to cost approximately $300,000. In addition, the special notice letter
also requested the PRPs to reimburse U.S. EPA for costs incurred at the site
since May 1994 in the amount of $1.1 million, as well as for all future costs
the U.S. EPA will incur at the site in overseeing the implementation of the
selected soils remedy and any future groundwater remedy. Keystone refused to
agree to the U.S. EPA's past and future cost demand. In August 1999, U.S. EPA
issued a groundwater PRAP with an estimated present value cost of $3 million.
Keystone filed public comments opposing the PRAP in September 1999. Keystone and
the other remaining PRPs are now in the final stages of negotiating another
Consent Decree with the U.S. EPA, in order to resolve their liability for
performance of the U.S. EPA's September 1998 ROD for a soils remedy at the site,
for the performance of the U.S. EPA's December 1999 ROD for remedial action
regarding the groundwater component of Operable Unit No. 4 at the site, for
payment of U.S. EPA's site costs incurred since May 1994 as well as future U.S.
EPA oversight costs, and for the transfer of certain funds that may be made
available to the PRPs as a result of a consent decree reached between U.S. EPA
and another site PRP. Under the proposed terms of that Consent Decree, and the
draft PRP Agreement that would be executed to implement the PRPs' performance
under that decree, Keystone would be required to pay approximately $700,000, and
would remain liable for 18.57% of future U.S. EPA oversight costs as well as a
similar share of any unanticipated cost increases in the soils remedial action
work. (Under the proposed agreements, the City of Byron, Illinois, would assume
responsibility for any cost overruns associated with the municipal water supply
components of the groundwater contamination remedy.) Verbal agreement of all of
the parties has been reached as to the terms of this agreement, subject to
approval by the City Council of the City of Byron, the U.S. EPA Regional
Administrator, and the Department of Justice. Until the proposed consent decree
is signed by all of the responsible parties and approved by the court, it is
possible that the negotiations could fail and that Keystone's ultimate liability
could increase in a subsequent settlement agreement or as a result of
litigation.
In September 1991, the Company along with 53 other PRPs, executed a consent
decree to undertake the immediate removal of hazardous wastes and initiate a
Remedial Investigation/Feasibility Study ("RI/FS") of the Interstate Pollution
Control site located in Rockford, Illinois. The Company's percentage allocation
within the group of PRPs agreeing to fund this project is currently 2.14%.
However, the Company's ultimate allocation, and the ultimate costs of the RI/FS
and any remedial action, are subject to change depending, for example, upon: the
number and financial condition of the other participating PRPs, field conditions
and sampling results, results of the risk assessment and feasibility study,
additional regulatory requirements, and the success of a contribution action
seeking to compel additional parties to contribute to the costs of the RI/FS and
any remedial action. The RI/FS began in 1993, was completed in 1997 and approved
by IEPA in 1998. In the summer of 1999, IEPA selected a capping and soil vapor
extraction remedy estimated by the PRP group to have a present value cost of
approximately $2.5 million. IEPA is also demanding reimbursement of $460,000 in
past costs for prior oversight costs and may also demand reimbursement of future
oversight costs.
In August 1987, Keystone was notified by U.S. EPA that it is a PRP
responsible for the alleged hazardous substance contamination of a site
previously owned by the Company in Cortland, New York. Four other PRPs
participated in the RI/FS and a contribution action is pending against eleven
additional viable companies which contributed wastes to the site. Following
completion of the RI/FS, U.S. EPA published in November 1997, a PRAP for the
site that recommends the excavation and disposal of contaminated soil,
installation of an impervious cap over a portion of the site, placement of a
surface cover over the remainder of the site and semi-annual groundwater
monitoring until drinking water standards are met by natural attenuation. U.S.
EPA estimates the costs of this recommended plan to be $3.1 million. The highest
cost remedy evaluated by U.S. EPA but not recommended in the PRAP is estimated
by U.S. EPA to have a cost of $19.8 million. In September 1998, Keystone and
four other PRPs who had funded the prior remedial actions and RI/FS signed a
proposed Consent Decree with U.S. EPA calling for them to be "nonperforming
parties" for the implementation of a March 1998 Record of Decision. Under this
proposed Consent Decree, Keystone is responsible for an unspecified share of
U.S. EPA's past site costs of $686,000.
Prior to its acquisition by Keystone, DeSoto, Inc. ("DeSoto") was notified
by U.S. EPA that it is one of approximately 50 PRPs at the Chemical Recyclers,
Inc. site in Wylie, Texas. In January 1999, DeSoto changed its name to Sherman
Wire Company ("Sherman"). Under a consent order with the U.S. EPA, the PRP group
has performed a removal action and an investigation of soil and groundwater
contamination. Such investigation revealed certain environmental contamination.
It is anticipated U.S. EPA will order further remedial action, the exact extent
of which is not currently known. Sherman is paying on a non-binding interim
basis, approximately 10% of the costs for this site. Remediation costs, at
Sherman's present allocation level, are estimated at a range of from $1.5
million to $4 million.
In 1984, U.S. EPA filed suit against DeSoto by amending a complaint against
Midwest Solvent Recovery, Inc. et al ("Midco"). DeSoto was a defendant based
upon alleged shipments to an industrial waste recycling storage and disposal
operation site located in Gary, Indiana. The amended complaint sought relief
under CERCLA to force the defendants to clean up the site, pay non-compliance
penalties and reimburse the government for past clean up costs. In June 1992,
DeSoto settled its portion of the case by entering into a partial consent
decree, and all but one of the eight remaining primary defendants and 93 third
party defendants entered into a main consent decree. Under the terms of the
partial consent decree, DeSoto agreed to pay its pro rata share (13.47%) of all
costs under the main consent decree. In addition to certain amounts included in
the trust fund discussed below, Sherman also has certain funds available in
other trust funds due it under the partial consent decree. These credits can be
used by Sherman (with certain limitations) to fund its future liabilities under
the partial consent decree.
In 1995, DeSoto was notified by the Texas Natural Resource Conservation
Commission ("TNRCC") that there were certain deficiencies in prior reports to
TNRCC relative to one of its non-operating facilities located in Gainesville,
Texas. During 1999, Sherman entered into TNRCC's Voluntary Cleanup Program.
Remediation costs are presently estimated to be between $1.2 million and $2
million. Investigation activities are on-going including additional soil and
groundwater sampling.
In December 1991, DeSoto and approximately 600 other PRPs were named in a
complaint alleging DeSoto and the PRPs generated wastes that were disposed of at
a Pennsauken, New Jersey municipal landfill. The plaintiffs in the complaint
were ordered by the court to show in what manner the defendants were connected
to the site. The plaintiffs provided an alleged nexus indicating garbage and
construction materials from DeSoto's former Pennsauken facility were disposed of
at the site and such waste allegedly contained hazardous material to which
DeSoto objected. The claim was dismissed without prejudice in August 1993. In
1996, DeSoto received an amended complaint containing the same allegations. This
matter is in discovery stage at December 31, 2001. Sherman has denied any
liability with regard to this matter and expects to vigorously defend the
action.
Sherman has received notification from the TNRCC stating that DeSoto is a
PRP at the Material Recovery Enterprises Site near Ovalo, Texas, with
approximately 3% of the total liability. The matter has been tendered to the
Valspar Corporation ("Valspar") pursuant to a 1990 agreement whereby Valspar
purchased certain assets of DeSoto. Valspar has been handling the matter under
reservation of rights. At the request of Valspar, Sherman has signed a
participation agreement which would require Sherman to pay no less than 3% of
the remediation costs. Valspar continues to pay for legal fees in this matter
and has reimbursed Sherman for all assessments.
In addition to the sites discussed above, Sherman is allegedly involved at
various other sites and in related toxic tort lawsuits which it does not
currently expect to incur significant liability.
Under the terms of a 1990 asset sale agreement, DeSoto established two
trust funds totaling $6 million to fund potential clean-up liabilities relating
to the assets sold. Sherman has access to the trust funds for any expenses or
liabilities it incurs relative to environmental claims relating to the sites
identified in the trust agreements. The trust funds are primarily invested in
United States Treasury securities and are classified as restricted investments
on the balance sheet. In October 2000, one of the trust's term expired and the
$3.6 million trust balance was returned to Sherman. As of December 31, 2000 and
2001, the balance in the trust funds were approximately $1.5 million and
$900,000, respectively.
Note 13 - Lease commitments
During years prior to its acquisition by Keystone, DeSoto sold four of its
real properties to a real property trust created by DeSoto's pension plan. This
trust entered into ten-year leases of the properties to DeSoto. The amount paid
to DeSoto by the trust and DeSoto's annual rental obligation were based upon
independent appraisals and approved by DeSoto's Board of Directors. During 1998,
the Plan sold two of the locations and, as part of the terms of the sale of one
of the locations, DeSoto leased back the property for a period of two years. The
Plan sold the third and fourth locations during 1999 and 2000, respectively, and
Sherman was released from the leases. Payments, net of subtenant rent payments,
under these leases during 1999 and 2000 amounted to approximately $324,000, and
$24,000, respectively. There were no payments under these leases in 2001 and
there are no required payments under these leases in subsequent years.
In addition, the Company is obligated under certain other operating leases
through 2006. Future commitments under these leases are summarized below.
Lease commitment
(In thousands)
2002 $1,899
2003 1,371
2004 460
2005 137
2006 38
------
$3,905
======
Note 14 - Other commitments and contingencies
Current litigation
During 1996, DeSoto and more than 60 others were named as defendants in
litigation in which the estates of four individuals who died of leukemia allege
their deaths were a result of exposure to benzene during the individuals'
maritime careers. Subsequently, the cases were dismissed although appeals are
pending. DeSoto has denied any liability and will continue to vigorously defend
these actions.
In July 2001, Sherman received a letter from a law firm advising them that
Sears Roebuck & Co. ("Sears") had been named as a defendant in a lead paint
personal injury case. Sears claimed contractual indemnity against Sherman and
demanded that Sherman defend and indemnify Sears with regard to any losses or
damages Sears may sustain in the case. Sears was named as an additional insured
on insurance policies, in which DeSoto, the manufacturer of the paint, was the
named insured. DeSoto's insurance carriers were notified of the action and asked
to indemnify Sherman with respect to the complaint. Sherman has not indemnified
Sears and is unaware if the insurors have agreed to indemnify Sears.
The Company is also engaged in various legal proceedings incidental to its
normal business activities. In the opinion of the Company, none of such
proceedings is material in relation to the Company's consolidated financial
position, results of operations or liquidity.
Product supply agreement
In 1996, Keystone entered into a fifteen-year product supply agreement (the
"Supply Agreement") with a vendor. The Supply Agreement provides, among other
things, that the vendor will construct a plant at the Company's Peoria facility
and, after completion of the plant, provide Keystone with all, subject to
certain limitations, of its gaseous oxygen and nitrogen needs for a 15-year
period ending in 2011. In addition to specifying rates to be paid by the
Company, including a minimum facility fee of approximately $1.2 million per
year, the Supply Agreement also specifies provisions for adjustments to the
rates and term of the Supply Agreement. Purchases made pursuant to the Supply
Agreement during 1999, 2000 and 2001 amounted to $2.1 million, $2.7 million and
$2.2 million, respectively.
Concentration of credit risk
Steel and Wire Products. The Company sells its products to agricultural,
industrial, construction, commercial, original equipment manufacturers and
retail distributors primarily in the Midwestern and Southwestern regions of the
United States. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
The Company's ten largest steel and wire customers accounted for approximately
34% of steel and wire product sales in 1999, 2000 and 2001. These customers
accounted for approximately 20% of steel and wire products notes and accounts
receivable at December 31, 2000 and 34% at December 31, 2001.
Lawn and garden products. The Company sells its products primarily to
retailers in the Southeastern United States. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company's ten largest lawn and garden
customers accounted for significantly all of lawn and garden product sales in
1999, 2000 and 2001 and lawn and garden products notes and accounts receivable
at December 31, 2000 and 2001.
Note 15 - Subsequent Events
During March 2002, Keystone completed an exchange offer with respect to the
Senior Notes pursuant to which, among other things, holders of $93.9 million
principal amount of the Senior Notes agreed to exchange their Senior Notes
(along with accrued interest of approximately $10.1 million through the date of
exchange, including $2.1 million which accrued during the first quarter of 2002)
for various forms of consideration, including newly-issued debt and equity
securities of the Company, as described below, and such Senior Notes were
retired:
o $79.2 million principal amount of Senior Notes were exchanged for (i)
$19.8 million principal amount of 8% Subordinated Secured Notes due
2009 and (ii) 59,399 shares of the Company's Series A 10% Convertible
Pay-In-Kind Preferred Stock,
o $14.5 million principal amount of Senior Notes were exchanged for
$14.5 million principal amount of 6% Subordinated Unsecured Notes due
2011, and
o $175,000 principal amount of Senior Notes were exchanged for $36,000
in cash and 6,481 shares of Keystone common stock.
As a result of the exchange offer, the collateral previously securing the
Senior Notes was released, and the Senior Note indenture was amended to
eliminate substantially all covenants related to the Senior Notes, including all
financial-related covenants.
The 8% Subordinated Secured Notes bear simple interest at 8% per annum,
one-half of which will be paid in cash on a semi-annual basis and one-half will
be deferred and be paid together with the principal in three installments,
one-third in each of March 2007, 2008 and 2009. The Subordinated Secured Notes
are collateralized by a second-priority lien on substantially all of the
existing fixed and intangible assets of the Company and its wholly-owned
subsidiaries (excluding EWP and Garden Zone), other than the real property and
other fixed assets comprising Keystone's steel mill in Peoria, Illinois, on
which there will be a third-priority lien. Keystone may redeem the New Secured
Notes, at its option, in whole or in part at any time with no prepayment
penalty. The Subordinated Secured Notes are subordinated to all existing senior
indebtedness of Keystone, including, without limitation, the Keystone, EWP and
Garden Zone Revolvers, the new Term Loan (as defined below) and, to the extent
of the Company's steel mill in Peoria, Illinois, the County Loan (as defined
below). The Subordinated Secured Notes rank senior to any expressly subordinated
indebtedness of Keystone, including the new 6% Subordinated Unsecured Notes.
The 6% Subordinated Unsecured Notes bear simple interest at 6% per annum,
of which one-fourth will be paid in cash on a semi-annual basis and
three-fourths will accrue and be paid together with the principal in four
installments, one-fourth in each of May 2008, 2009, 2010 and 2011. Keystone may
redeem the Subordinated Unsecured Notes, at its option, in whole or in part at
any time with no prepayment penalty. The Subordinated Unsecured Notes are
subordinated to all existing and future senior or secured indebtedness of the
Company, including, without limitation, the Keystone, EWP and Garden Zone
Revolvers, the new Term Loan, the new County Loan, the Subordinated Secured
Notes and any other future indebtedness of the Company which is expressly
subordinated to the Subordinated Unsecured Notes.
The Series A 10% Convertible Pay-In-Kind Preferred Stock has a stated value
of $1,000 per share and has a liquidation preference of $1,000 per share plus
accrued and unpaid dividends. The Series A preferred shares have an annual
dividend of $100 per share, and such dividends may be paid in cash or, at the
Company's option, in whole or in part in new Series A preferred shares based on
their stated value. After March 2003, the Series A preferred shares may be
converted into shares of Keystone common stock at the exchange rate of $4.00 per
share, and holders of the Series A preferred shares will be entitled to vote on
any matter brought before Keystone shareholders on an as-converted basis, voting
together with Keystone common shareholders as a single class. The Company may
redeem the Series A shares at any time, in whole or in part, at a redemption
price of $1,000 per share plus accrued and unpaid dividends. In addition, in the
event of certain sales of the Company's assets outside the ordinary course of
business, the Company will be required to offer to purchase a specified portion
of the Series A shares, at a purchase price of $1,000 per share plus accrued and
unpaid dividends, based upon the proceeds to the Company from such asset sale.
Otherwise, holders of the Series A shares have no mandatory redemption rights.
Keystone will account for the Senior Notes retired in the exchange offer in
accordance with SFAS No. 15, Accounting by Debtors and Creditors for Troubled
Debt Restructurings. In accordance with SFAS No. 15:
o The 6,481 shares of Keystone common stock will be recorded at their
fair value at issuance of $7,000 based on the quoted market price for
Keystone common stock on the date of exchange,
o The 59,399 shares of Series A preferred stock will be recorded at
their estimated fair value at issuance of $2.1 million,
o The 8% Subordinated Secured Notes will initially be recorded at their
aggregate undiscounted future cash flows (both principal and interest)
of $29.3 million, and thereafter both principal and interest payments
will be accounted for as a reduction of the carrying amount of the
debt, and no interest expense will be recognized, and
o The 6% Subordinated Unsecured Notes will initially be recorded at the
$16.0 million carrying amount of the associated Senior Notes (both
principal and interest), and future interest expense on such debt will
be recognized on the effective interest method at a rate of 3.8%.
As a result, for financial reporting purposes the Company expects to report
a $54.7 million pre-tax extraordinary gain ($33.1 million net of income taxes)
in the first quarter of 2002 related to the exchange of the Senior Notes.
Because of differences between the income tax treatment and the financial
reporting treatment of the exchange, the Company expects to report $65.8 million
of income for federal income tax purposes resulting from the exchange. However,
all of the taxable income generated from the exchange is expected to be offset
by utilization of the Company's net operating loss carryforwards, and no
significant cash income tax payments are expected to be required to be paid as a
result of the exchange.
As part of its efforts to restructure the Senior Notes, in April 2002
Keystone received a new $10 million term loan from the County of Peoria,
Illinois (the "County Loan") and a new $5 million term loan (the "Term Loan")
from the same lender providing the Keystone Revolver. The County Loan does not
bear interest, requires no amortization of principal and is due in 2007. The
Term Loan bears interest at prime plus .5% or LIBOR plus 2.5% at the Company's
option, with principal payments amortized over a four-year period and due in
March 2005. The County Loan is collateralized by a second primary lien on the
real property and other fixed assets comprising Keystone's Steel mill in Peoria,
Illinois. The Term Loan is collateralized by a first-priority lien on all of the
fixed assets of the Company and its subsidiaries, other than EWP and Garden
Zone.
In addition, two of the Company's major vendors, representing approximately
$16.1 million of trade payables, have agreed to be paid over a five-year period
ending in March 2007 with no interest. The repayment of a portion of such
deferred vendor payments could be accelerated if the Company achieves specified
levels of future earnings.
The following table sets forth the capitalization of the Company (i) on an
actual basis as of December 31, 2001 and (ii) on an as adjusted basis after
giving effect to the exchange of the Senior Notes and other transactions
described above, as if such transactions had occurred on December 31, 2001 The
aggregate $15 million proceeds from the new County and Term loans are assumed to
(i) pay expenses associated with the exchange offer and related transactions of
$3.1 million, (ii) pay $309,000 of accrued interest related to Senior Notes that
remain outstanding and (iii) reduce the outstanding balance of the Keystone
Revolver by $11.6 million. The actual carrying amounts of the Secured
Subordinated Notes and Unsecured Subordinated Notes at their date of issuance
will differ slightly from the amounts shown below because they will reflect the
effect of accrued interest on the associated Senior Notes during the first
quarter of 2002 up to the date of exchange.
December 31, 2001
Actual As Adjusted
(Unaudited)
(In thousands)
Notes payable and long-term debt:
9 5/8% Senior Notes, due August 2007 ........... $ 100,000 $ 6,150
Commercial credit agreements:
Revolving credit facilities:
Keystone ................................... 40,823 29,269
EWP ........................................ 3,225 3,225
Garden Zone ................................ 1,738 1,738
Term loan .................................... -- 5,000
8% Subordinated Secured Notes .................. -- 29,304
6% Subordinated Unsecured Notes ................ -- 15,748
County Loan .................................... -- 10,000
Accrued interest on exchanged
Senior Notes .................................. 8,255 --
Other indebtedness ............................. 669 669
--------- ---------
Total ...................................... 154,710 101,103
--------- ---------
Preferred stock .................................. -- 2,112
--------- ---------
Stockholders' equity (deficit):
Common stock ................................. 10,792 10,798
Additional paid-in-capital ................... 53,071 53,071
Accumulated deficit .......................... (64,187) (32,055)
Treasury stock ............................... (12) (12)
--------- ---------
Total stockholders' equity (deficit) ....... (336) 31,802
--------- ---------
Total capitalization ....................... $ 154,374 $ 135,017
========= =========
The following table sets forth the aggregate maturities of notes payable
and long-term debt of the Company as adjusted after giving effect to the
Exchange Offer and related transactions as if such transactions had occurred on
December 31, 2001.
Year ending December 31, As Adjusted
2002 $ 36,111
2003 2,099
2004 2,108
2005 2,355
2006 792
Thereafter 57,638
--------
$101,103
========
Note 16 - Accounting principles not yet adopted
Goodwill. The Company will adopt SFAS No. 142, effective January 1, 2002.
Under SFAS No. 142, goodwill, including goodwill arising from the difference
between the cost of an investment accounted for by the equity method and the
amount of the underlying equity in net assets of such equity method investee
("equity method goodwill"), will not be amortized on a periodic basis. Instead,
goodwill (other than equity method goodwill) will be subject to an impairment
test to be performed at least on an annual basis, and impairment reviews may
result in future periodic write-downs charged to earnings. Equity method
goodwill will not be tested for impairment in accordance with SFAS No. 142;
rather, the overall carrying amount of an equity method investee will continue
to be reviewed for impairment in accordance with existing GAAP. There is
currently no equity method goodwill associated with any of the Company's equity
method investees. Under the transition provisions of SFAS No. 142, all goodwill
existing as of June 30, 2001 will cease to be periodically amortized as of
January 1, 2002, but any goodwill arising in a purchase business combination
(including step acquisitions) completed on or after July 1, 2001 would not be
periodically amortized from the date of such combination. In addition, negative
goodwill of approximately $20.0 million recorded at January 1, 2002 will be
eliminated as a cumulative effect of change in accounting principle at that
date. The Company would have reported a net loss of $8.7 million or $.88 per
share; $22.3 million or $2.22 per share and $27.6 million or $2.75 per share in
1999, 2000 and 2001, respectively if the goodwill and negative goodwill
amortization included in the Company's net loss, as reported, had not been
recognized.
As discussed in Note 1, the Company has assigned its goodwill to the
reporting unit (as that term is defined in SFAS No. 142) consisting of EWP.
Under SFAS No. 142, such goodwill will deemed to not be impaired if the
estimated fair value of EWP exceeds the net carrying value of EWP, including the
allocated goodwill. If the fair value of EWP is less than the carrying value,
then a goodwill impairment loss would be recognized equal to the excess, if any,
of the net carrying value of the reporting unit goodwill over its implied fair
value (up to a maximum impairment equal to the carrying of goodwill). The
implied fair value of EWP goodwill would be the amount equal to the excess of
the estimated fair value of EWP over the amount that would be allocated to the
tangible and intangible net assets of EWP (including unrecognized intangible
assets) as if such reporting unit had been acquired in a purchase business
combination accounted for in accordance with SFAS No. 141.
The Company will use appropriate valuation techniques, such as discounted
cash flows, to estimate the fair value of EWP.
The Company has completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairment
was deemed to exist. In accordance with requirements of SFAS No. 142, the
Company will review goodwill for impairment during the third quarter of each
year starting in 2002. Goodwill will also be reviewed for impairment at other
times during each year when events or changes in circumstances indicate an
impairment might be present.
Impairment of long-lived assets. The Company will adopt SFAS No. 144,
effective January 1, 2002. SFAS No. 144 retains the fundamental provisions of
existing GAAP with respect to the recognition and measurement of long-lived
asset impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS
No. 144 provides new guidance intended to address certain implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used to determine whether recognition of any
long-lived asset impairment is required, and if required how to measure the
amount of the impairment. SFAS No. 144 also requires that any net assets to be
disposed of by sale to be reported at the lower of carrying value or fair value
less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. Adoption of SFAS No. 144 will
not have a significant effect on the Company as of January 1, 2002.
Asset retirement obligations. The Company will adopt SFAS No. 143,
Accounting for Asset Retirement Obligations, no later than January 1, 2003.
Under SFAS No. 143, the fair value of a liability for an asset retirement
obligation covered under the scope of SFAS No. 143 would be recognized in the
period in which the liability is incurred, with an offsetting increase in the
carrying amount of the related long-lived asset. Over time, the liability would
be accreted to its present value, and the capitalized cost would be depreciated
over the useful life of the related asset. Upon settlement of the liability, an
entity would either settle the obligation for its recorded amount or incur a
gain or loss upon settlement. The Company is still studying this standard to
determine, among other things, whether it has any asset retirement obligations
which are covered under the scope of SFAS No. 143, and the effect, if any, to
the Company of adopting SFAS No. 143 has not yet been determined.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND
QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at Charged to Deductions Balance at
beginning costs and (net of end of
Description of period expenses recoveries) period
Year ended December 31, 1999:
Allowance for doubtful accounts and
notes receivable $4,915 $ 523 $3,141 $2,297
====== ======= ====== ======
Year ended December 31, 2000:
Allowance for doubtful accounts and
Notes receivable $2,297 $ 200 $ 816 $1,681
====== ====== ====== ======
Year ended December 31, 2001:
Allowance for doubtful accounts and
notes receivable $1,681 $1,589 $ 412 $2,858
====== ====== ====== ======
Deferred tax asset valuation allowance $ - $14,510 $ - $14,510
====== ======= ====== =======
EXHIBIT 21
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of Percent of
Incorporation Voting Securities
Name of Corporation or Organization Held (1)
Sherman Wire of Caldwell, Inc. Nevada 100.0%
FV Steel and Wire Company (3) Wisconsin 100.0%
Sherman Wire Company (2) Delaware 100.0%
J.L. Prescott Company New Jersey 100.0%
DeSoto Environmental
Management, Inc. Delaware 100.0%
Engineered Wire Products, Inc. Ohio 100.0%
Garden Zone LLC Delaware 51.0%
(1) Held by the Registrant or the indicated subsidiary of the Registrant.
(2) Formerly DeSoto, Inc.
(3) Formerly Fox Valley Steel and Wire Company.