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, 2004
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:
None.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $1 par value
Indicate by checkmark:
If the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes No X
If the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes No X
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 No X
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. [ ]
Whether the Registrant is a large accelerated filer, an accelerated filer
or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large
accelerated filer Accelerated filer Non-accelerated filer X .
Whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes No X
The aggregate market value of the 5,077,832 shares of voting stock held by
nonaffiliates of the Registrant, as of June 30, 2004 (the last business day of
the Registrant's most-recently completed second fiscal quarter), was
approximately $508,000.
As of February 13, 2006 10,000,000 shares of common stock were outstanding.
Documents incorporated by reference
None.
PART I
ITEM 1. BUSINESS.
Bankruptcy
On February 26, 2004, Keystone Consolidated Industries, Inc. ("Keystone" or
the "Company") and five of its direct and indirect subsidiaries filed for
voluntary protection under Chapter 11 of the Federal Bankruptcy Code. Keystone
and its filing subsidiaries filed their petitions in the U.S. Bankruptcy Court
for the Eastern District of Wisconsin in Milwaukee (the "Court"). The Company is
managing its business as a debtor-in-possession subject to approval by the
Court. Keystone attributed the need to reorganize to weaknesses in product
selling prices over the last several years, unprecedented increases in ferrous
scrap costs, Keystone's primary raw material, and significant liquidity needs to
service employee and retiree medical costs. These problems substantially limited
Keystone's liquidity and undermined its ability to obtain sufficient debt or
equity capital to operate as a going concern.
Under Chapter 11 proceedings, actions by creditors to collect claims in
existence at the filing date ("Pre-petition Claims") are stayed, absent specific
authorization from the Court to pay such claims while the Company manages the
business as a debtor-in-possession. Keystone received approval from the Court to
pay certain of its pre-petition liabilities, including employee wages and
certain employee benefits.
Keystone filed a plan of reorganization on October 4, 2004 and amended that
plan on May 26, 2005, June 21, 2005 and June 27, 2005. Keystone's amended plan
of reorganization was accepted by the impacted constituencies and confirmed by
the Court on August 10, 2005. The Company emerged from bankruptcy protection on
August 31, 2005. Significant provisions of Keystone's amended plan of
reorganization included, among other things:
o Assumption of the previously negotiated amendment to the collective
bargaining agreement with the Independent Steel Workers Alliance (the
"ISWA"), Keystone's largest labor union;
o Assumption of the previously negotiated agreements reached with
certain retiree groups that will provide relief by permanently
reducing healthcare related payments to these retiree groups from
pre-petition levels;
o The Company's obligations due to pre-petition secured lenders other
than its Debtor-In-Possession lenders were reinstated in full against
reorganized Keystone;
o All shares of Keystone's common and preferred stock outstanding at the
petition date (February 26, 2004) were cancelled;
o Pre-petition unsecured creditors with allowed claims against Keystone
will receive, on a pro rata basis, in the aggregate, $5.2 million in
cash, a $4.8 million secured promissory note and 49% of the new common
stock of reorganized Keystone;
o Certain operating assets and existing operations of Sherman Wire
Company ("Sherman Wire"), one of Keystone's pre-petition wholly-owned
subsidiaries, will be sold at fair market value to Keystone, which
will then be used to form and operate a newly created wholly-owned
subsidiary of reorganized Keystone named Keystone Wire Products Inc.;
o Sherman Wire was also reorganized and the proceeds of the operating
asset sale to Keystone and other funds will be distributed, on a pro
rata basis, to Sherman Wire's pre-petition unsecured creditors as
their claims are finally adjudicated;
o Sherman Wire's pre-petition wholly-owned non-operating subsidiaries,
J.L. Prescott Company, and DeSoto Environmental Management, Inc. as
well as Sherman Wire of Caldwell, Inc., a wholly-owned subsidiary of
Keystone, will ultimately be liquidated and the pre-petition unsecured
creditors with allowed claims against these entities will receive
their pro-rata share of the respective entity's net liquidation
proceeds;
o Pre-petition unsecured creditors with allowed claims against FV Steel
& Wire Company, another one of Keystone's wholly-owned subsidiaries,
will receive cash in an amount equal to their allowed claims;
o One of Keystone's Debtor-In-Possession lenders, EWP Financial, LLC (an
affiliate of Contran Corporation ("Contran"), Keystone's largest
pre-petition shareholder) converted $5 million of its DIP credit
facility, certain of its pre-petition unsecured claims and all of its
administrative claims against Keystone into 51% of the new common
stock of reorganized Keystone; and
o The Board of Directors of reorganized Keystone now consists of seven
individuals, two each of which were designated by Contran and the
Official Committee of Unsecured Creditors (the "OCUC"), respectively.
The remaining three directors qualify as independent directors (two of
the independent directors were appointed by Contran with the OCUC's
consent and one was appointed by the OCUC with Contran's consent).
In addition, Keystone has obtained an $80 million secured credit facility from
Wachovia Capital Finance (Central). Proceeds from this credit facility were used
to extinguish Keystone's existing Debtor-In-Possession ("DIP") credit facilities
and to provide working capital for reorganized Keystone. See Note 2 to the
Consolidated Financial Statements.
Unless otherwise indicated or required by applicable rules or regulations,
the information contained in this Form 10-K is as of December 31, 2004, and has
not been updated for events occurring after such date.
General
Keystone believes it is a leading domestic manufacturer of steel fabricated
wire products, nails, industrial wire and wire rod for the agricultural,
industrial, construction, original equipment manufacturer and retail consumer
markets, and believes it is one of the largest manufacturers of fabricated wire
products and nails in the United States based on tons shipped (215,000 tons in
2004). Keystone is vertically integrated, converting substantially all of its
fabricated wire products, nails 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, nails and industrial wire businesses better insulate it from the
effects of wire rod imports as compared to non-integrated wire rod producers. In
2004, Keystone had net sales of $364.3 million. Approximately 69% of the
Company's net sales were generated from sales of fabricated wire products, nails
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 48% of its 2004 net
sales, include agricultural fencing, barbed wire, hardware cloth and welded and
woven wire mesh. 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.
Keystone sells bulk and packaged nails primarily to construction
contractors and building product manufacturers and distributors. The Company
sells approximately 80% of its nails through PrimeSource, Inc., one of the
largest nail distributors in the United States, under PrimeSource's Grip-Rite(R)
label. During 2004, nails accounted for approximately 6% of Company net sales.
Approximately 59% of Keystone's net sales of fabricated wire products and
nails are generated by sales under the RED BRAND trademark, a widely recognized
brand name in the agricultural fencing and construction marketplaces for more
than 80 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 2004, net sales of industrial wire
accounted for 16% 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, nails and industrial wire operations. During 2004,
open market sales of wire rod accounted for 30% of Company net sales.
Prior to July 2003, the Company owned a 51% interest in Garden Zone LLC
("Garden Zone"), a distributor of wire, plastic and wood lawn and garden
products to retailers. In July 2003, Garden Zone purchased Keystone's 51%
ownership in Garden Zone. During 2003, sales by Garden Zone accounted for 4% of
Company net sales. In addition, Keystone is engaged in ferrous scrap recycling
through its unconsolidated 50% interest in Alter Recycling Company, L.L.C.
("ARC"). See Notes 3 and 4 to the Consolidated Financial Statements.
See "Business -- Products, Markets and Distributions" and Notes 3 and 14 to
the Consolidated Financial Statements.
The Company's annual billet production capacity is 1 million tons. However,
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 at December 31, 2004. 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, or is
held by Mr. Simmons or persons or other entities related to Mr. Simmons.
Keystone may be deemed to be controlled by Contran and Mr. Simmons. Contran also
owns 54,956 shares of the 71,899 shares of the Company's Redeemable Series A
Preferred Stock. Each share of Series A Preferred Stock is convertible, at the
option of the holder, into 250 shares of the Company's common stock (equivalent
to a $4.00 per share exchange rate). See Note 2 to the Consolidated Financial
Statements.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the 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 mpact
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 (the "SEC"), including, but not limited to:
o Future supply and demand for the Company's products (including cyclicality
thereof),
o Customer inventory levels,
o Changes in raw material and other operating costs (such as ferrous scrap
and energy),
o The possibility of labor disruptions,
o General global economic and political conditions,
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government regulations and possible changes therein,
o Significant increases in the cost of providing medical coverage to
employees and retirees,
o The ultimate resolution of pending litigation,
o International trade policies of the United States and certain foreign
countries,
o Operating interruptions (including, but not limited to, labor disputes,
fires, explosions, unscheduled or unplanned downtime and transportation
interruptions),
o The ability of the Company to renew or refinance credit facilities,
o Any possible future litigation, and
o 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 three wire and wire product fabrication facilities.
The manufacturing process commences at the Company's Keystone Steel & Wire
("KSW") facility in Peoria, Illinois with ferrous scrap 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 Company believes
it is one of the largest recyclers of ferrous scrap in the State of Illinois.
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, if any, 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 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, nails 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,
2002 2003 2004
---------------- ---------------- -----------
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 31.2% 46.0% 32.7% 48.0% 36.4% 47.7%
Nails 11.0 13.5 8.6 10.0 5.4 5.8
Industrial wire 14.3 13.3 14.9 14.0 16.0 16.1
Wire rod 42.7 27.0 41.0 26.8 38.9 29.6
Billets .8 .2 2.8 1.2 3.3 .8
----- ----- ----- ----- ----- -----
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
KSW and at its Sherman Wire ("Sherman") facilities, in Sherman, Texas. Prior to
July 2003, the Company also manufactured these products at its facility in
Caldwell, Texas. During July 2003, Keystone transferred the operations at the
Caldwell facility to KSW and Sherman and discontinued operations in Caldwell.
The Company's fabricated wire 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 80
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 rebar ty wire, stucco
netting, welded wire mesh, forms and reinforcing building fabric at KSW and
Sherman, and at its Engineered Wire Products, Inc. ("EWP") subsidiary in Upper
Sandusky, Ohio. The primary customers for these products are construction
contractors and building materials manufacturers and distributors. EWP was not
one of the Company's subsidiaries that filed for Chapter 11 on February 26,
2004.
Keystone believes its fabricated wire products are less susceptible to the
cyclical nature of the steel business than nails, industrial wire or wire rod
because the commodity-priced raw materials used in such products, such as
ferrous scrap, represent a lower percentage of the total cost of such
value-added products when compared to wire rod or other less value-added
products.
Nails. Keystone manufacturers bulk and packaged nails at KSW and sells
these nails primarily to construction contractors, building manufacturers and
distributors and do-it-yourself retailers. During 2004, the Company sold
approximately 80% of its nails through PrimeSource, Inc., one of the largest
nail distributors in the United States, under PrimesSource's Grip-Rite(R) label.
Prior to August 2003, the Company also manufactured and distributed collated
nails at its Keystone Fasteners division in Springdale, Arkansas. In August
2003, the Company sold the Keystone Fasteners division and exited the collated
nails business.
Industrial Wire. Keystone is one of the largest manufacturers of industrial
wire in the United States. At KSW and Sherman 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. Prior to
July 2003, the Company also manufactured these products at its facility in
Caldwell, Texas. During July 2003, Keystone transferred the operations at the
Caldwell facility to KSW and Sherman and discontinued operations in Caldwell.
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 primarily low carbon steel wire rod at KSW's
rod mill. 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. High carbon
steel wire rod, with carbon content of up to 0.65%, is used for high tensile
wire applications as well as for furniture and bedding springs. Although Sherman
and EWP on occasion buy wire rod from outside suppliers, during 2004,
approximately 63% of the wire rod manufactured by the Company was used
internally to produce industrial wire, nails and fabricated wire products. The
remainder of Keystone's wire 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.
Billets. KSW's annual billet production capacity is 1 million tons.
However, since KSW's rod production is constrained by the 800,000 ton capacity
of its rod mill, periodic excess billet production is sold externally to
producers of products manufactured from low carbon steel. Keystone sold 5,000
tons of excess billets in 2002 and 17,000 tons of excess billets during each of
2003 and 2004.
Business Dispositions. Prior to July 2003, the Company owned a 51% interest
in Garden Zone. In July 2003, Garden Zone purchased Keystone's 51% ownership in
Garden Zone for approximately $1.1 million. Keystone recorded a gain of
approximately $800,000 as a result of the sale. Garden Zone's revenues during
2002 and 2003 were approximately $9.5 million and $11.2 million, respectively.
Garden Zone recorded operating profit of $100,000 and $700,000 in 2002 and 2003,
respectively.
Prior to August 2003, the Company manufactured and distributed collated
nails at Keystone Fasteners. In August 2003, the Company sold the Keystone
Fasteners division to a third party for approximately $2.2 million. The Company
recorded a gain of approximately $300,000 as a result of the sale. Keystone
Fasteners' revenues during 2002 and 2003 approximated $14.7 million and $7.3
million, respectively. Keystone Fasteners recorded $100,000 of operating profit
during 2002 and an operating loss of $900,000 during 2003.
Industry and Competition
The fabricated wire products, nails, 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 producers. Keystone's principal
competitors in the fabricated wire products, nails and industrial wire markets
are Leggett and Platt, Deacero, Merchants Metals, Inc. and Davis Wire
Corporation. Competition in the fabricated wire products, nails 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, nails and industrial wire markets, and price is the primary
competitive factor. Among Keystone's principal domestic wire rod competitors are
Gerdau Ameristeel 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, nails 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 five years, the majority of Keystone's major domestic
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
significant decrease in estimated domestic annual wire rod capacity. 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"). The tariff was 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 was
10% in 2000, 7.5% in 2001 and 5% in 2002. The Company does not believe the TRQ,
which expired in March 2003, had a major impact on the domestic wire rod market
and high levels of imported rod continue.
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 primary raw material used in Keystone's operations is ferrous scrap.
The Company's steel mill is located close to numerous sources of high density
automobile, industrial and railroad ferrous scrap, all of which are currently
available. The purchase of ferrous scrap is highly competitive and its price
volatility is influenced by periodic shortages, export activity, freight costs,
weather, and other conditions beyond the control of the Company. The cost of
ferrous scrap can fluctuate significantly and product selling prices cannot
always be adjusted, especially in the short-term, to recover the costs of
increases in ferrous scrap prices. The Company has not entered into any
long-term contracts for the purchase or supply of ferrous scrap and Keystone is,
therefore, subject to the price fluctuation of ferrous scrap. 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. However, the Company's current agreement with
the utility does not provide for such fuel adjustment charges.
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, 2004, Keystone employed approximately 1,200 people, of
whom approximately 800 are represented by the Independent Steel Workers'
Alliance ("ISWA") at KSW, approximately 70 are represented by the International
Association of Machinists and Aerospace Workers (Local 1570) ("IAMAW") at
Sherman and approximately 70 are represented by Local Union #40, An Affiliate to
the International Brotherhood of Teamsters' Chauffeurs Warehousemen and Helpers
of America, AFL-CIO ("IBTCWHA") at EWP. The current collective bargaining
agreements with the ISWA, IAMAW and IBTCWHA expire in May 2006, October 2008,
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 products 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
Billets Producers of products manufactured from low carbon
Steel
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, nail and fabricated wire products
companies including manufacturers of products similar to those manufactured by
the Company.
The Company's ten largest customers represented approximately 37%, 35% and
48% of Keystone's net sales in 2002, 2003 and 2004, respectively. No single
customer accounted for more than 9% of the Company's net sales during each of
2002 and 2003. During 2004, a single customer accounted for approximately 12% of
Keystone's net sales. No other single customer accounted for more than 10% of
the Company's net sales during 2004. Keystone's fabricated wire products, nails,
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,
nails, industrial wire and rod purchase orders, for delivery generally within
three months, approximated $22.0 million and $26.4 million at December 31, 2003
and 2004, respectively. Keystone believes backlog is not a significant factor in
its business, and expects all of the backlog at December 31, 2004 will be
shipped during 2005.
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 probable 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 15 to the Consolidated Financial Statements is
incorporated herein by reference.
Acquisition and Restructuring Activities
The Company routinely compares its liquidity requirements against its
estimated future cash flows. As a result of this process, the Company has in the
past and may in the future seek to raise additional capital, refinance or
restructure indebtedness, consider the sale of interests in subsidiaries,
business units or other assets, or take a combination of such steps or other
steps, to increase liquidity, reduce indebtedness and fund future activities.
Such activities have in the past and may in the future involve related
companies. From time to time, the Company and related entities also evaluate the
restructuring of ownership interests among its subsidiaries and related
companies and expects to continue this activity in the future and may in
connection with such activities, consider issuing additional equity securities
and increasing the indebtedness of the Company or its subsidiaries.
Website and Availability of Company Reports Filed with the SEC
The Company does not maintain a website on the internet. The Company will
provide without charge copies of this Annual Report on Form 10-K for the year
ended December 31, 2004, any copies of the Company's Quarterly Reports on Form
10-Q for 2005 and any Current Reports on Form 8-K for 2004 and 2005, and any
amendments thereto, as soon as they are filed with the SEC upon written request
to the Company. Such requests should be directed to the attention of the
Corporate Secretary at the Company's address on the cover page of this Form
10-K.
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549, and may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC, including the Company.
ITEM 1A. RISK FACTORS
Listed below are certain risk factors associated with Keystone and its
businesses. In addition to the potential effect of these risk factors discussed
below, any risk factor which could result in reduced earnings or operating
losses, or reduced liquidity, could in turn adversely affect the Company's
ability to service its liabilities or adversely affect the quoted market prices
for Keystone's publicly-traded securities.
The Company's leverage may impair its financial condition or limit its
ability to operate its businesses. Keystone currently has a significant amount
of debt. As of December 31, 2004, the Company's total consolidated debt was
approximately $68.7 million. Keystone's level of debt could have important
consequences to its stockholders and creditors, including:
o making it more difficult for the Company to satisfy its obligations
with respect to its liabilities;
o increasing Keystone's vulnerability to adverse general economic and
industry conditions;
o requiring that a portion of the Company's cash flow from operations be
used for the payment of interest on its debt, therefore reducing
Keystone's ability to use its cash flow to fund working capital,
capital expenditures, acquisitions and general corporate requirements;
o limiting the Company's ability to obtain additional financing to fund
future working capital, capital expenditures, acquisitions and general
corporate requirements;
o limiting Keystone's flexibility in planning for, or reacting to,
changes in its business and the industry in which it operates; and
o placing the Company at a competitive disadvantage relative to other
less leveraged competitors.
Demand for, and prices of, certain of Keystone's products are cyclical and
the Company may experience prolonged depressed market conditions for its
products, which may result in reduced earnings or operating losses. A
significant portion of the Company's revenues is attributable to sales of
products into the agricultural and construction industries. These two industries
themselves are cyclical and changes in these industries' economic conditions can
significantly impact Keystone's earnings and operating cash flows. This may
result in reduced earnings or operating losses. Events that could adversely
affect the agricultural and construction industries include, among other things,
short and long-term weather patterns, interest rates and embargos placed by
foreign countries on U.S. agricultural products. Such events could significantly
decrease the Company's operating results, and its business and financial
condition could significantly decline.
The Company sells the majority of its products in mature and highly
competitive industries and faces price pressures in the markets in which it
operates, which may result in reduced earnings or operating losses. The markets
in which KSW, KWP and EWP operate their businesses are highly competitive.
Competition is based on a number of factors, such as price, product quality and
service. Some of the Company's competitors may be able to drive down prices for
its products because the competitors' costs are lower than Keystone's costs. In
addition, some of the Company's competitors' financial, technological and other
resources may be greater than Keystone's resources, and such competitors may be
better able to withstand changes in market conditions. The Company's competitors
may be able to respond more quickly than it can to new or emerging technologies
and changes in customer requirements. Further, consolidation of Keystone's
competitors or customers in any of the industries in which it competes may
result in reduced demand for the Company's products. In addition, in some of
Keystone's businesses new competitors could emerge by modifying their existing
production facilities so they could manufacture products that compete with the
Company's products. The occurrence of any of these events could result in
reduced earnings or operating losses.
Many of EWP's products are ultimately used in infrastructure projects by
local, State or Federal governments. Such projects are impacted by the
availability of governmental funding for such projects. A decline in the
availability of governmental funds for such projects could ultimately result in
a decline in demand or selling prices of EWP's products. Such a decline could
result in reduced earnings or operating losses.
Wire rod imported into the U.S. continues at high levels. Global producers
of wire rod are able to import their products into the U.S. with minimal tariffs
and duties. Many of these global wire rod producers are able to produce wire rod
at costs lower than Keystone's. As such, these wire rod imports are often able
to be priced at lower levels than similar products manufactured by Keystone. In
addition, the Company believes certain foreign governments subsidize local wire
rod producers. These events can adversely impact Keystone's shipment levels and
pricing decisions and, as such, could result in reduced earnings or operating
losses.
Higher costs or limited availability of ferrous scrap may decrease the
Company's liquidity. The number of sources for, and availability of, ferrous
scrap, Keystone's primary raw material, is generally limited to the particular
geographical region in which a facility is located. Should Keystone's suppliers
not be able to meet their contractual obligations or should the Company be
otherwise unable to obtain necessary ferrous scrap quantities, Keystone may
incur higher costs for ferrous scrap or may be required to reduce production
levels, either of which may decrease its liquidity as the Company may be unable
to offset such higher costs with increased selling prices for its products.
Keystone is subject to many environmental and safety regulations with
respect to its operating facilities that may result in unanticipated costs or
liabilities. Most of the Company's facilities are subject to extensive laws,
regulations, rules and ordinances relating to the protection of the environment,
including those governing the discharge of pollutants in the air and water and
the generation, management and disposal of hazardous substances and wastes or
other materials. Keystone may incur substantial costs, including fines, damages
and criminal penalties or civil sanctions, or experience interruptions in its
operations for actual or alleged violations or compliance requirements arising
under environmental laws. The Company's operations could result in violations
under environmental laws, including spills or other releases of hazardous
substances to the environment. Some of Keystone's operating facilities are in
densely populated urban areas or in industrial areas adjacent to other operating
facilities. In the event of an accidental release or catastrophic incident, the
Company could incur material costs as a result of addressing such an event and
in implementing measures to prevent such incidents. Given the nature of
Keystone's business, violations of environmental laws may result in restrictions
imposed on its operating activities or substantial fines, penalties, damages or
other costs, including as a result of private litigation. In addition, certain
of the Company's production facilities have been used for a number of years to
manufacture products. Keystone may incur additional costs related to compliance
with environmental laws applicable to its historic operations and these
facilities. In addition, the Company may incur significant expenditures to
comply with existing or future environmental laws. Costs relating to
environmental matters will be subject to evolving regulatory requirements and
will depend on the timing of promulgation and enforcement of specific standards
that impose requirements on Keystone's operations. Costs beyond those currently
anticipated may be required under existing and future environmental laws.
Loss of key personnel or Keystone's ability to attract and retain new
qualified personnel could hurt its businesses and inhibit its ability to operate
and grow successfully. The Company's success in the highly competitive markets
in which it operates will continue to depend to a significant extent on the
leadership teams of its businesses and other key management personnel. Keystone
generally does not have binding employment agreements with any of these
managers. This increases the risks that the Company may not be able to retain
its current management personnel and it may not be able to recruit qualified
individuals to join its management team, including recruiting qualified
individuals to replace any of Keystone's current personnel that may leave in the
future.
Keystone's relationships with its union employees could deteriorate. At
December 31, 2004, the Company employed approximately 1,200 persons in its
various businesses of which approximately 78% were subject to collective
bargaining or similar arrangements. A significant portion of these collective
bargaining agreements are set to expire within the next two years. The Company
may not be able to negotiate labor agreements with respect to these employees on
satisfactory terms or at all. If Keystone's employees were to engage in a
strike, work stoppage or other slowdown, the Company could experience a
significant disruption of its operations or higher ongoing labor costs.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in approximately
1,200 square feet of leased space at 5430 LBJ Freeway, Suite 1740, Dallas, Texas
75240-2697.
Keystone's fabricated wire products, industrial wire and wire rod
production facilities utilize approximately 2.4 million square feet for
manufacturing and office space, approximately 84% 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 operating 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, nails,
industrial wire, wire rod
Sherman Wire Sherman, TX 299,000 Fabricated wire products and
industrial wire
Engineered Wire Products Upper Sandusky, OH 79,000 Fabricated wire products
---------
2,390,000
The Company believes all of its facilities are well maintained and
satisfactory for their intended purposes.
ITEM 3. LEGAL PROCEEDINGS.
On February 26, 2004, Keystone and five of its direct and indirect
subsidiaries filed for voluntary protection under Chapter 11 of the Federal
Bankruptcy Code. Keystone and its filing subsidiaries filed their petitions in
the U.S. Bankruptcy Court for the Eastern District of Wisconsin in Milwaukee.
The Chapter 11 cases were consolidated for procedural purposes only and were
jointly administered under the name FV Steel and Wire Company - Case No.
04-22421-SVK. Each of the filing companies continued to operate its business and
manage its property as a debtor-in-possession. As a result of the Chapter 11
filings, litigation relating to prepetition claims against the filing companies
was stayed during the Chapter 11 proceedings. Keystone emerged from Chapter 11
on August 31, 2005.
Keystone is also involved in various legal proceedings. Information
required by this Item is included in Notes 2 and 15 and 17 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, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Keystone's common stock is traded on the OTC Bulletin Board (Symbol:
KESNQ.PK). The number of holders of record of the Company's common stock as of
February 13, 2006 was 2. 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
Year ended December 31, 2004
First quarter $ .33 $ .05
Second quarter $ .18 $ .05
Third quarter $ .42 $ .09
Fourth quarter $ .31 $ .03
Year ended December 31, 2003
First quarter $ .55 $ .32
Second quarter $ .40 $ .25
Third quarter $ .45 $ .20
Fourth quarter $ .35 $ .10
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.
All of the Company's outstanding common stock at December 31, 2004 was
cancelled in connection with the Keystone's emergence from Chapter 11 on August
31, 2005. See Note 2 to the Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with Keystone's Consolidated Financial Statements and Item 7 --
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations."
Years ended December 31,
------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
(In thousands, except per share and per ton amounts)
Statement of Operations Data:
Net sales $355,795 $325,187 $334,835 $306,671 $364,335
Cost of goods sold 348,241 313,931 315,579 310,881 322,232
-------- -------- -------- -------- --------
Gross profit (loss) $ 7,554 $ 11,256 $ 19,256 $ (4,210) $ 42,103
======== ======== ======== ======== ========
Selling expenses $ 6,733 $ 6,400 $ 7,754 $ 6,934 $ 5,634
General and administrative
expenses 16,374 14,723 16,385 10,689 10,766
Operating income (loss) (15,173) (4,388) (3,279) (28,731) 32,455
Gain on early extinguishment of
debt - - 54,739 - -
Gain on legal settlement - - - - 5,284
Interest expense 15,346 14,575 5,569 3,941 3,705
Restructure costs - - - - 11,158
Income (loss) before income taxes $(32,436) $(20,395) $ 40,045 $(37,218) $ 17,439
Minority interest in after-tax
earnings - 1 1 299 -
Provision for income taxes (benefit) (11,370) 5,998 21,622 - 1,379
-------- -------- -------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle (21,066) (26,394) 18,422 (37,517) 16,060
Cumulative effect of change in
accounting principle - - 19,998 - -
-------- -------- -------- -------- -----
Net income (loss) $(21,066) $(26,394) $ 38,420 $(37,517) $ 16,060
======== ======== ======== ======== ========
Net income (loss) available for
common shares (1) $(21,066) $(26,394) $ 33,737 $(43,457) $ 14,837
======== ======== ======== ======== ========
Basic net income (loss) available
for common shares per share $ (2.10) $ (2.62) $ 3.35 $ (4.32) $ 1.47
======== ======== ======== ======== ========
Diluted net income (loss) available
for common shares per share $ (2.10) $ (2.62) $ 1.76 $ (4.32) $ .57
======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding (3):
Basic 10,039 10,062 10,067 10,068 10,068
======== ======== ======== ======== ========
Diluted 10,039 10,062 21,823 10,068 28,043
======== ======== ======== ======== ========
Other Financial Data:
Capital expenditures $ 13,052 $ 3,889 $ 7,973 $ 2,683 $ 5,080
Depreciation and amortization 17,224 16,992 17,396 16,461 15,812
Other Steel and Wire Products
operating data:
Shipments (000 tons):
Fabricated wire products 223 207 209 201 187
Nails 87 74 74 53 28
Industrial wire 128 94 96 91 82
Wire rod 257 291 287 252 200
Billets - - 5 17 17
-------- -------- -------- -------- --------
Total 695 666 671 614 514
======== ======== ======== ======== ========
Average selling prices (per ton):
Fabricated wire products $ 723 $ 711 $ 712 $ 703 $ 926
Nails 611 589 592 558 759
Industrial wire 474 454 448 452 709
Wire rod 283 283 304 314 539
Billets - - 156 192 176
Steel and wire products in total 501 474 482 479 707
Average ferrous scrap purchase cost
per ton $ 100 $ 85 $ 94 $ 115 $ 205
As of December 31,
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital (deficit) (2) $(39,243) $(30,982) $(41,790) $(90,210) $ 11,910
Property, plant and equipment, net 144,696 129,600 119,984 105,316 94,033
Total assets 385,703 366,900 215,495 282,194 323,282
Total debt 146,008 146,455 97,241 87,675 68,681
Redeemable preferred stock (3) - - 2,112 2,112 2,112
Stockholders' equity (deficit) 26,058 (336) (136,900) (10,050) 4,787
(1) Includes dividends on preferred stock of $4,683,000, $5,940,000 and
$1,223,000 in 2002, 2003 and 2004, respectively.
(2) Working capital (deficit) represents current assets minus current
liabilities.
(3) All of the Company's outstanding common and preferred stock at December 31,
2004 was cancelled in connection with Keystone's emergence from Chapter 11
on August 31, 2005. The Company discontinued accruing dividends on its
preferred stock upon filing for Chapter 11 on February 26, 2004. See Note 2
to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Bankruptcy
On February 26, 2004, Keystone and five of its direct and indirect
subsidiaries filed for voluntary protection under Chapter 11 of the Federal
Bankruptcy Code. Keystone and its subsidiaries filed their petitions in the U.S.
Bankruptcy Court for the Eastern District of Wisconsin in Milwaukee. The Company
is managing its business as a debtor-in possession subject to approval by the
Court. Keystone attributed the need to reorganize to weaknesses in product
selling prices over the last several years, unprecedented increases in ferrous
scrap costs, Keystone's primary raw material, and significant liquidity needs to
service employee and retiree medical costs. These problems substantially limited
Keystone's liquidity and undermined its ability to obtain sufficient debt or
equity capital to operate as a going concern.
Under Chapter 11 proceedings, actions by creditors to collect Pre-petition
Claims are stayed, absent specific authorization from the Court to pay such
claims while the Company manages the business as a debtor-in-possession.
Keystone received approval from the Court to pay certain of its pre-petition
liabilities, including employee wages and certain employee benefits.
Keystone filed a plan of reorganization on October 4, 2004 and amended that
plan on May 26, 2005, June 21, 2005 and June 27, 2005. Keystone's amended plan
of reorganization was accepted by the impacted constituencies and confirmed by
the Court on August 10, 2005. The Company emerged from bankruptcy protection on
August 31, 2005. Significant provisions of Keystone's amended plan of
reorganization included, among other things:
o Assumption of the previously negotiated amendment to the collective
bargaining agreement with the Independent Steel Workers Alliance (the
"ISWA"), Keystone's largest labor union;
o Assumption of the previously negotiated agreements reached with
certain retiree groups that will provide relief by permanently
reducing healthcare related payments to these retiree groups from
pre-petition levels;
o The Company's obligations due to pre-petition secured lenders other
than its Debtor-In-Possession lenders were reinstated in full against
reorganized Keystone;
o All shares of Keystone's common and preferred stock outstanding at the
petition date (February 26, 2004) were cancelled;
o Pre-petition unsecured creditors with allowed claims against Keystone
will receive, on a pro rata basis, in the aggregate, $5.2 million in
cash, a $4.8 million secured promissory note and 49% of the new common
stock of reorganized Keystone;
o Certain operating assets and existing operations of Sherman Wire
Company ("Sherman Wire"), one of Keystone's pre-petition wholly-owned
subsidiaries, will be sold at fair market value to Keystone, which
will then be used to form and operate a newly created wholly-owned
subsidiary of reorganized Keystone named Keystone Wire Products Inc.;
o Sherman Wire was also reorganized and the proceeds of the operating
asset sale to Keystone and other funds will be distributed, on a pro
rata basis, to Sherman Wire's pre-petition unsecured creditors as
their claims are finally adjudicated;
o Sherman Wire's pre-petition wholly-owned non-operating subsidiaries,
J.L. Prescott Company, and DeSoto Environmental Management, Inc. as
well as Sherman Wire of Caldwell, Inc., a wholly-owned subsidiary of
Keystone, will ultimately be liquidated and the pre-petition unsecured
creditors with allowed claims against these entities will receive
their pro-rata share of the respective entity's net liquidation
proceeds;
o Pre-petition unsecured creditors with allowed claims against FV Steel
& Wire Company, another one of Keystone's wholly-owned subsidiaries,
will receive cash in an amount equal to their allowed claims;
o One of Keystone's Debtor-In-Possession lenders, EWP Financial, LLC (an
affiliate of Contran Corporation ("Contran"), Keystone's largest
pre-petition shareholder) converted $5 million of its DIP credit
facility, certain of its pre-petition unsecured claims and all of its
administrative claims against Keystone into 51% of the new common
stock of reorganized Keystone; and
o The Board of Directors of reorganized Keystone now consists of seven
individuals, two each of which were designated by Contran and the
Official Committee of Unsecured Creditors (the "OCUC"), respectively.
The remaining three directors qualify as independent directors (two of
the independent directors were appointed by Contran with the OCUC's
consent and one was appointed by the OCUC with Contran's consent).
In addition, Keystone has obtained an $80 million secured credit facility from
Wachovia Capital Finance (Central). Proceeds from this credit facility were used
to extinguish Keystone's existing Debtor-In-Possession credit facilities and to
provide working capital for reorganized Keystone. See Note 2 to the Consolidated
Financial Statements.
Summary
The Company reported income before cumulative effect of change in
accounting principles of $18.4 million in 2002 and $16.1 million in 2004, and a
loss before cumulative effect of change in accounting principle of $37.5 million
in 2003. The primary reasons for the decline in earnings from 2002 to 2003 were
(i) a $54.7 million gain upon extinguishment of certain indebtedness recognized
in 2002, (ii) higher defined benefit pension expense in 2003 and (iii)
significantly higher cost for ferrous scrap (the Company's primary raw
materials). The primarily reasons for the increase in earnings from 2003 to 2004
were (i) significantly higher per-ton product selling prices partially offset by
higher costs for ferrous scrap, (ii) favorable changes to the Company's medical
plans for both active and retired employees during 2004, (iii) a higher defined
benefit pension credit in 2004, (iv) an $865,000 distribution of collected wire
rod tariffs and duties from the Federal government in 2004 and (v) a $5.3
million gain from a legal settlement with a former supplier relative to
consigned inventory on Keystone's premises at February 26, 2004, offset in part
by $11.2 million of expenses associated with the bankruptcy filing.
General
The Company believes it is a leading domestic manufacturer of steel
fabricated wire products, nails, industrial wire and wire rod for the
agricultural, industrial, construction, original equipment manufacturer and
retail consumer markets and believes it is one of the largest manufacturers of
fabricated wire products and nails in the United States based on tons shipped
(215,000 tons in 2004). Keystone's operations benefit from vertical integration
as the Company's mini-mill supplies wire rod produced from ferrous scrap to its
downstream fabricated wire products, nails and industrial wire operations. Sales
of fabricated wire products, nails and industrial wire by these downstream
fabrication operations accounted for 69% of 2004 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 products
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.
The Company's annual billet production capacity is 1 million tons. However,
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 provided 590,000 tons and 577,000
tons of billets in 2004 and 2003, respectively. Despite the slightly higher
billet production in 2004, wire rod production declined 3% from 559,000 tons
(70% of estimated capacity) in 2003 to 544,000 tons (68% of estimated capacity).
Keystone's estimated current fabricated wire products, nail and industrial wire
production capacity is 577,000 tons. The Company's fabricated wire products,
nail and industrial wire production facilities operated at about 67% of their
annual capacity during 2002 and 55% in each of 2003 and 2004.
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 materials, 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 ferrous
scrap, and during 2004 ferrous scrap costs represented approximately 42% of cost
of goods sold. The price of ferrous scrap is highly volatile and ferrous scrap
prices are affected by periodic shortages, export activity, freight costs,
weather and other conditions largely beyond the control of the Company. Ferrous
scrap prices can vary widely from period to period. The average per-ton price
paid for ferrous scrap by the Company was $94 in 2002, $115 in 2003 and $205 in
2004. Keystone's product selling prices cannot always be adjusted, especially in
the short-term, to recover any increases in ferrous scrap.
The domestic wire rod industry continues to experience consolidation.
During the last five years, the majority of Keystone's major domestic
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
significant decrease in domestic annual capacity. However, worldwide over
capacity in the steel industry continues to exist and imports of wire rod,
certain fabricated wire products and nails 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 was 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 was 10% in 2000, 7.5% in 2001 and 5% in 2002. The Company does not
believe the TRQ, which expired in March 2003, had a major impact on the domestic
wire rod market and high levels of imported rod continue.
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, ferrous scrap and supply costs. During 2004,
energy costs represented approximately 9% of cost of goods sold. 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.
In July 2003, Keystone sold its 51% interest in Garden Zone back to Garden
Zone. The Company recorded a gain of approximately $800,000 as a result of the
sale. Garden Zone distributes wire, plastic and wood lawn and garden products to
retailers. Garden Zone's revenues during 2002 and 2003 were approximately $9.5
million and $11.2 million, respectively. Garden Zone recorded operating profit
of $100,000 and $700,000 in 2002 and 2003, respectively.
In August 2003, the Company sold its Keystone Fasteners division to a third
party. Keystone recorded a gain of approximately $300,000 as a result of the
sale. Keystone Fasteners manufacturers and distributes collated nails. Keystone
Fasteners' revenues during 2002 and 2003 approximated $14.7 million and $7.3
million, respectively. Keystone Fasteners recorded $100,000 of operating profit
during 2002 and an operating loss of $900,000 during 2003.
Keystone is also engaged in the operation of a ferrous scrap recycling
facility. The operations of Garden Zone, Keystone Fasteners and the ferrous
scrap recycling facility 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,
ferrous scrap costs, sales volume and pricing data, for the periods indicated.
Years Ended December 31,
2002 2003 2004
---- ---- ----
(Tons in thousands)
Production volume (tons):
Billets 723 577 590
Wire rod 687 559 544
Average per-ton ferrous scrap purchase cost $ 94 $115 $205
Sales volume (tons):
Fabricated wire products 209 201 187
Nails 74 53 28
Industrial wire 96 91 82
Wire rod 287 252 200
Billets 5 17 17
---- ---- ----
671 614 514
==== ==== ====
Per-ton selling prices:
Fabricated wire products $712 $703 $926
Nails 592 558 759
Industrial wire 448 452 709
Wire rod 304 314 539
Billets 156 192 176
All steel and wire products 482 479 707
The following table sets forth the components of the Company's net sales
for the periods indicated.
Years Ended December 31,
2002 2003 2004
---- ---- ----
(In millions)
Steel and wire products:
Fabricated wire products $148.9 $141.2 $173.2
Nails 43.8 29.5 21.0
Industrial wire 43.1 41.3 58.4
Wire rod 87.4 78.9 107.6
Billets .8 3.4 3.0
Other 1.3 1.2 1.1
---- ---- ----
325.3 295.5 364.3
Lawn and garden products 9.5 11.2 -
---- ----- --
$334.8 $306.7 $364.3
====== ====== ======
The following table sets forth selected operating data of Keystone as a
percentage of net sales for the periods indicated.
Years Ended December 31,
2002 2003 2004
---- ---- ----
Net sales 100.0% 100.0 % 100.0 %
Cost of goods sold 94.2 101.4 88.4
----- ----- -----
Gross margin (loss) 5.8% (1.4)% 11.6 %
===== ===== =====
Selling expense 2.3% 2.3 % 1.5%
General and administrative expense 4.9 3.5 3.0
Defined benefit pension expense (credit) (.5) 2.2 (1.9)
Corporate expense 1.8 1.9 1.7
Gain on early extinguishment of debt (16.3) - -
Gain on legal settlement - - (1.5)
Reorganization costs - - 3.1
Income (loss) before income taxes and
cumulative effect of change in accounting
principle 12.0% (12.2)% 4.8 %
Income tax provision 6.5 - .4
----- ----- -----
Income (loss) before cumulative effect of
change in accounting principle 5.5 (12.2) 4.4
Cumulative effect of change in accounting
principle 6.0 - -
----- ----- ----
Net income (loss) 11.5% (12.2)% 4.4 %
===== ===== =====
Year ended December 31, 2004 compared to year ended December 31, 2003
Discussion of operating results
Despite a 100,000 ton decline in shipment volume of steel and wire products
during 2004, net sales increased by $57.7 million, or 18.8%, from 2003 due
primarily to a 47.6% increase in overall per-ton steel and wire product selling
prices. This increase was partially offset by an $18.5 million decline in net
sales from Garden Zone and Keystone Fasteners due to Keystone's sale of its
interest in Garden Zone and its Keystone Fasteners division during 2003. There
was no significant change in Keystone's steel and wire products mix between 2003
and 2004. The 47.6% increase in overall per-ton steel and wire product selling
prices ($228 per ton) favorably impacted net sales by approximately $117.2
million during 2004.
During 2004, Keystone realized increased per-ton selling prices over those
of 2003 in all product lines except billets. Fabricated wire products per-ton
selling prices increased by 31.7%, nails increased 36.0%, industrial wire
increased 56.9% and wire rod increased 71.7%. The per-ton selling prices of
billets during 2004 declined 8.3% as compared to 2003. During 2004, shipment
volumes declined as compared to 2003 levels in all product lines except billets.
Fabricated wire products shipment volume declined 7.5%, nails declined 47.2%,
industrial wire declined 9.9% and wire rod shipments declined 20.6%. Billet
shipment volume in 2004 remained unchanged from the 2003 level. The Company
believes the lower shipment volumes across the majority of its product lines
during 2004 was due to Keystone's limited production schedules during the period
preceding and immediately following Keystone's Chapter 11 filing combined with a
Company initiative to discontinue sales to its less profitable customers. During
the last portion of 2003 and throughout 2004, the Company implemented several
price increases primarily as a reaction to rapidly increasing ferrous scrap
costs, Keystone's primary raw material. As a result of these efforts, during
2004, the Company was able to realize significant increases in the per-ton
product selling prices of the majority of its product lines.
Billet production during 2004 increased by 23,000 tons to 590,000 tons from
577,000 tons in 2003. Wire rod production during 2004 declined by 15,000 tons to
544,000 tons from 559,000 tons in 2003. The lower wire rod production in 2004
was due primarily to Keystone's limited production schedules during the period
preceding and immediately following Keystone's Chapter 11 filing combined with
lower customer demand resulting from the Company's initiative to discontinue
sales to its less profitable customers.
Despite a 100,000 ton decline (16.3%) in shipment volume in 2004, as
compared to 2003, cost of goods sold increased by 3.7% in 2004 to $322.2 million
from $310.9 million in 2003. However, the cost of goods sold percentage declined
from 101.4% in 2003 to 88.4% of net sales in 2004. This decline in the cost of
goods sold percentage was due primarily to the significantly higher product
per-ton selling prices in 2004, partially offset by increased costs for ferrous
scrap, natural gas costs and electrical power at the Company's Peoria, Illinois
facility. Keystone's per-ton ferrous scrap costs increased 77.7% during 2004 as
compared to 2003. During 2004, the Company purchased 667,000 tons of ferrous
scrap at an average price of $205 per-ton as compared to 2003 purchases of
634,000 tons at an average price of $115 per ton. This increase in per-ton
ferrous scrap costs adversely impacted gross profit during 2004 by approximately
$59.7 million. Keystone's average ferrous scrap costs during the first eight
months of 2005 was approximately $228 per-ton. The cost of natural gas and
electrical power at the Company's Peoria facility in 2004 was approximately
$226,000 and $425,000, respectively, higher than they were in 2003. In addition,
in connection with its restructuring activities during 2004, Keystone modified
its health and welfare benefit plans for active employees. These changes to the
health and welfare benefit plans resulted in a significantly higher
participation by the employees and a correspondingly lower required contribution
by the Company during 2004.
As a result of the above items, the gross margin loss of $4.2 million in
2003 improved to a positive margin of $42.1 million in 2004. As a result, the
gross margin percentage in 2003 of a 1.4% loss increased to a positive 11.6% in
2004.
Selling expense during 2004 declined 18.7% to $5.6 million from $6.9
million during 2003. The primary reason for this decline was the sale of
Keystone's interest in Garden Zone and its Keystone Fasteners division during
2003 partially offset by increased personnel costs at EWP. Through the date of
their respective 2003 sales, Garden Zone and Keystone Fasteners recorded a total
of $2.0 million of selling expenses.
General and administrative expense of $10.8 million in 2004 approximated
the general and administrative expense in 2003 of $10.7 million primarily as a
result of the 2003 sales of Keystone's interest in Garden Zone and its Keystone
Fasteners division as well as the changes to the employee health and welfare
benefit plans for active employees being offset by increased personnel costs at
EWP.
During 2004, Keystone recorded a defined benefit pension credit of $6.8
million as compared to recording pension expense in 2003 of $6.9 million. The
pension expense in 2003 was due primarily to a $46 million decline in plan
assets during 2002 and the resulting lower expected return on plan assets
component of defined benefit pension plan expense. However, as a result of an
$85 million increase in plan assets during 2003, the Company's defined benefit
pension credit was approximately $6.8 million in 2004. In addition, Keystone was
not required to make any cash contributions for defined benefit pension plan
fundings during 2004 or 2003. The Company currently anticipates during 2005 it
will record a defined benefit pension credit in excess of the pension credit
recorded during 2004 and that no plan fundings will be required during 2005.
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 10 to the
Consolidated Financial Statements and the following discussion of Assumptions on
Defined Benefit pension Plans - Defined benefit pension plan.
General corporate expenses during 2004 were approximately $280,000 higher
than general corporate expenses during 2003 due primarily to higher OPEB expense
in 2004 being offset by lower personnel and non-restructuring related legal and
professional costs.
Interest expense during 2004 was slightly lower than 2003 due primarily to
lower overall average borrowings and interest rates. The overall average
interest rates were impacted by the fact the Company discontinued accruing
interest on pre-petition unsecured debt upon filing for Chapter 11 on February
2, 2004. Average borrowings by the Company approximated $98.9 million during
2004 as compared to $101.4 million during 2003. During 2004, the average
interest rate on outstanding indebtedness was 2.2% per annum as compared 2.7%
per annum during 2003. Keystone currently anticipates average interest rates and
debt levels in 2005 will be higher than their respective levels during 2004.
In connection with its Chapter 11 proceedings, during 2004, Keystone
entered into a settlement agreement with its former ferrous scrap supplier
relative to certain disputed ferrous scrap inventories located at Keystone's
Peoria, Illinois facility on February 26, 2004, the date of the Company's
Chapter 11 filing. As Keystone consumed these disputed inventories during 2004,
the Company deposited funds equal to the cost of these disputed inventories into
an escrow account and charged cost of goods sold. However, under the terms of
the settlement agreement, during December 2004, approximately $5.3 million of
the escrowed funds were refunded back to Keystone. Keystone recorded the receipt
of this refund as a gain on legal settlement on its 2004 statement of
operations.
During 2004, Keystone incurred $11.2 million in legal and professional fees
relative to its Chapter 11 proceedings and related reorganization activities.
As a result of the items discussed above, Keystone recorded net income
during 2004 of $16.1 million as compared to recording a net loss of $37.5
million in 2003.
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 8 to the Consolidated Financial Statements. At December 31, 2004, the
Company had net operating loss carryforwards of approximately $7.8 million and
other tax attributes and net deductible temporary differences aggregating into a
gross deferred income tax asset of $30.3 million. Because the Company does not
currently believe the benefit of such net operating loss carryforward and other
net deductible temporary differences meets the "more-likely-than-not"
recognition criteria of GAAP, the Company had recorded a deferred tax asset
valuation allowance of $30.3 million at December 31, 2004, resulting in no net
deferred tax assets. Keystone periodically reviews the recoverability of its
deferred tax assets to determine whether such assets meet the
"more-likely-than-not" recognition criteria. The Company will continue to review
the recoverability of its deferred tax assets, and based on such periodic
reviews, Keystone could recognize a change in the recorded valuation allowance
related to its deferred tax assets in the future. While the Company currently
expects to report a pre-tax loss before gains arising from cancellation of
indebtedness for financial reporting purposes during 2005, the Company does not
believe it will have sufficient positive evidence to conclude that its net
deferred income tax assets will meet the "more-likely-than-not" recognition
criteria anytime during 2005. As a result of the deferred tax asset valuation
allowance, the Company does not anticipate recognizing a tax provision
associated with its expected pre-tax income during 2005 will be appropriate.
At December 31, 2004, the Company's financial statements reflected total
accrued liabilities of $19.4 million (all of which is reflected in liabilities
subject to compromise on the Company's December 31, 2004 balance sheet) to cover
estimated remediation costs arising from environmental issues. Although Keystone
has established an accrual for future required environmental remediation costs
that are probable and reasonably estimable, 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 15 to the Consolidated Financial Statements.
Year ended December 31, 2003 compared to year ended December 31, 2002
Discussion of operating results
Net sales declined $28.2 million, or 8.4%, in 2003 from 2002 due primarily
to an 8.5% decline in shipment volume of steel and wire products and a .6%
decline in overall per-ton steel and wire product selling prices partially
offset by a $1.7 million increase, or 17.9%, in Garden Zone's net sales from
$9.5 million in 2002 to $11.2 million in 2003. There was no significant change
in Keystone's steel and wire products mix between 2002 and 2003. The .6% decline
in overall per-ton steel and wire product selling prices ($3 per ton) adversely
impacted net sales by approximately $1.8 million.
Fabricated wire products per-ton selling prices declined by 1.3% and
shipment volume declined by 3.8% in 2003 as compared to 2002. Per-ton selling
prices of nails declined by 5.7% and shipments declined by 28.4% in 2003 as
compared to 2002. However, per-ton selling prices of industrial wire and wire
rod increased by .9% and 3.3%, respectively in 2003 as compared to 2002 while
shipment volume of industrial wire and wire rod declined by 5.2% and 12.2%,
respectively. The Company believes the lower shipment volumes across all product
lines and lower per-ton selling prices of fabricated wire products and nails
were due primarily to increased imports and lower demand. Despite these market
conditions, the Company was able to slightly increase the per-ton product
selling prices of its industrial wire and wire rod product lines.
Billet production during 2003 declined by 146,000 tons to 577,000 tons from
723,000 tons in 2002. The primary reason for the lower billet production levels
in 2003 was intentional production curtailments as a result of weakening demand
and excess inventory levels. Wire rod production during 2003 declined by 128,000
tons to 559,000 tons from 687,000 tons in 2002. The lower wire rod production in
2003 was due primarily to the lower billet production and unplanned production
outages during the 2003 first quarter to effect repairs to the Company's rod
mill.
Despite a 57,000 ton decline (8.5%) in shipment volume in 2003, as compared
to 2002, cost of goods sold only declined by 1.5% in 2003 to $310.9 million from
$315.6 million in 2002. As a result, the cost of goods sold percentage increased
from 94.2% in 2002 to 101.4% of net sales in 2003. This increase in the cost of
goods sold percentage was due primarily to increased costs for ferrous scrap and
natural gas costs at the Company's Peoria, Illinois facility partially offset by
lower costs for electricity at the Peoria facility. In addition, during 2002,
Keystone received $900,000 in business interruption insurance proceeds related
to incidents in prior years. The Company did not receive any such insurance
proceeds in 2003. Keystone's per-ton ferrous scrap costs increased 22% during
2003 as compared to 2002. During 2003, the Company purchased 634,000 tons of
ferrous scrap at an average price of $115 per-ton as compared to 2002 purchases
of 810,000 tons at an average price of $94 per ton. This increase in per-ton
ferrous scrap costs adversely impacted gross profit during 2003 by approximately
$13.3 million. The cost of natural gas at the Company's Peoria facility in 2003
was approximately $3.9 million higher than 2002 although prices for electrical
power in 2003 were approximately $2.5 million lower than in 2002.
As a result of increased costs and lower per-ton product selling prices,
gross margin of $19.3 million in 2002 declined to a loss in 2003 of $4.2
million. As a result, the gross margin percentage in 2002 of 5.8% declined to a
1.4% loss in 2003.
During the first nine months of 2003, selling expense was higher than the
same period in 2002 due primarily to increased advertising costs and employee
related expenses. However, during the last 3 months of 2003, due to declining
liquidity, the Company dramatically reduced all non-essential expenses,
including selling expense. As a result, selling expense for the entire year in
2003 declined 10.6% to $6.9 million from $7.8 million in 2002.
General and administrative expense of $10.7 million in 2003 was $5.7
million lower than general and administrative expense in 2002 of $16.4 million.
The primary reason for this decline was due to lower employee related and travel
costs.
During 2003, Keystone recorded defined benefit pension expense of $6.9
million as compared to recording a pension credit in 2002 of $1.6 million. The
higher pension expense in 2003 is due primarily to a $46 million decline in plan
assets during 2002 and the resulting lower expected return on plan assets
component of defined benefit pension plan expense. See Note 10 to the
Consolidated Financial Statements and following discussion of Assumptions on
Defined Benefit pension Plans - Defined benefit pension plan.
General corporate expenses during 2003 of $6.0 million approximated general
corporate expenses during 2002.
Interest expense during 2003 was lower than 2002 due principally to
slightly lower debt levels and lower interest rates. Average borrowings by the
Company approximated $101.4 million during 2003 as compared to $106.5 million
during 2002. During 2003, the average interest rate on outstanding indebtedness
was 2.7% per annum as compared to 4.5% per annum in 2002.
In the first quarter of 2002, the Company completed an exchange offer
related to its 9 5/8% Notes whereby 94% of the holders of the 9 5/8% Notes
exchanged their notes for either a discounted cash amount and common stock, new
preferred equity and subordinated secured debt securities, or subordinated
unsecured debt securities (the "Exchange Offer"). As a result of the Exchange
Offer, for financial reporting purposes the Company reported a $54.7 million
pre-tax gain ($33.1 million net of income taxes). See Note 6 to the Consolidated
Financial Statements.
In July 2003, Garden Zone purchased Keystone's 51% ownership in Garden Zone
for approximately $1.1 million in cash. In addition, Garden Zone repaid a
$493,000 advance that had been made in a prior year, and Keystone was released
from its guarantee of 51% of Garden Zone's revolving credit facility. Keystone
reported a pre-tax gain of approximately $786,000 in the third quarter of 2003
as a result of this transaction.
In August 2003, Keystone sold substantially all of the assets of Keystone
Fasteners for $2.2 million in cash. Keystone reported a pre-tax gain of
approximately $287,000 in the third quarter of 2003 as a result of this
transaction.
As a result of the deferred tax asset valuation allowance, other than the
$21.6 million tax provision recorded in connection with the Exchange Offer in
2002, the Company did not record a tax benefit during 2002 or 2003 associated
with its remaining pre-tax losses.
During the 2002 first quarter, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. As
a result of adopting SFAS No. 142, negative goodwill of approximately $20.0
million recorded at January 1, 2002 was eliminated as a cumulative effect of
change in accounting principle at that date.
As a result of the items discussed above, Keystone recorded a net loss
during 2003 of $37.5 million as compared to recording net income of $38.4
million in 2002.
SEGMENT RESULTS OF OPERATIONS:
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, President and Chief Executive Officer of
Keystone. Each operating segment is separately managed, and each operating
segment represents a strategic business unit offering different products. During
2003, the Company expanded the composition of its reportable segments. The
corresponding segment information for prior periods has been restated to conform
to the current year presentation. See Note 3 to the Consolidated Financial
Statements.
The Company's operating segments are organized along its manufacturing
facilities and include two reportable segments: (i) Keystone Steel and Wire
("KSW") which manufacturers and sells wire rod, industrial wire and fabricated
wire products for agricultural, industrial, construction, commercial, original
equipment manufacturers and retail consumer markets and, (ii) Engineered Wire
Products ("EWP") which manufactures and sells welded wire reinforcement in both
roll and sheet form that is utilized in concrete construction products including
pipe, pre-cast boxes and applications for use in roadways, buildings and
bridges. EWP is not included in the Company's February 2004 bankruptcy
proceedings.
Prior to July 2003, the Company owned a 51% interest in Garden Zone, a
distributor of wire, plastic and wood lawn and garden products to retailers. In
July 2003, Keystone sold its 51% ownership in Garden Zone.
In addition, prior to July 2003, Keystone also operated three businesses
that did not constitute reportable business segments. These businesses sell
industrial wire and fabricated wire products for agricultural, industrial,
construction, commercial, original manufacturers and retail consumer markets.
The results of operations of these businesses are aggregated and included under
the "All Other" heading in the following tables. During July 2003, Keystone
transferred its operations at one of these three businesses to other Keystone
facilities, and during August 2003 Keystone sold another of the businesses. As a
result, as of August 2003, the "All Other" heading in the following tables only
includes Sherman Wire.
The net proceeds from the sale of Garden Zone and Keystone Fasteners
aggregated $3.3 million. The gain on the sale of these businesses, as well as
the results of operations of each of Garden Zone and Keystone Fasteners are not
significant, individually and in the aggregate. Accordingly, the Company has
elected not to present their results of operations as discontinued operations
for all periods presented due to their immateriality.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that (i) defined benefit
pension expense for each segment is recognized and measured on the basis of
estimated current service cost of each segment, with the remainder of the
Company's net defined benefit pension expense or credit not allocated to each
segment but still is reported as part of operating profit or loss, (ii) segment
OPEB expense is recognized and measured based on the basis of the estimated
expense of each segment, with the remainder of the Company's actual OPEB expense
not allocated to each segment but still is reported as part of operating profit
or loss, (iii) elimination of intercompany profit or loss on ending inventory
balances is not allocated to each segment but still is reported as part of
operating profit or loss, (iv) LIFO inventory reserve adjustments are not
allocated to each segment but still are reported as a part of operating profit
or loss, and (v) amortization of goodwill and negative goodwill are included in
general corporate expenses and are not allocated to any segment and are not
included in total reported operating profit or loss. General corporate expense
also includes OPEB and environmental expense relative to facilities no longer
owned by the Company. Intercompany sales between reportable segments are
generally recorded at prices that approximate market prices to third-party
customers.
Principal
Business Segment entities Location Products
Keystone Steel & Wire Keystone Steel & Wire Peoria, IL Billets, wire rod, industrial
wire, nails and fabricated wire
products
Engineered Wire Products Engineered Wire Products Upper Sandusky, Fabricated wire products
OH
Garden Zone Garden Zone (1) Charleston, SC Wire, wood and plastic lawn and
garden products
All Other Sherman Wire Sherman, TX Industrial wire and fabricated
wire products
Sherman Wire of Caldwell(2) Caldwell, TX Industrial wire and fabricated
wire products
Keystone Fasteners(3) Springdale, AR Nails
(1) 51.0% subsidiary - interest sold in July 2003.
(2) Transferred operations in July 2003 to Sherman and KSW.
(3) Business sold in August 2003.
2002 2003 2004
---- ---- ----
Revenues:
Keystone Steel and Wire $290,818 $274,284 $346,703
Engineered Wire Products 32,935 35,260 58,982
Garden Zone 10,744 12,082 -
All other 45,485 28,127 16,193
Elimination of intersegment
Revenues (45,147) (43,082) (57,543)
-------- -------- --------
$334,835 $306,671 $364,335
======== ======== ========
Operating profit (loss):
Keystone Steel and Wire $ (3,921) $(21,388) $ 10,126
Engineered Wire Products 2,743 2,721 10,598
Garden Zone 85 700 -
All Other (2,971) (4,579) (422)
GAAP adjustments and eliminations 785 (6,185) 12,153
-------- -------- --------
$ (3,279) $(28,731) $ 32,455
======== ======== ========
Keystone Steel & Wire
KSW's net sales in 2004 increased by $72.4 million or 26.4% to $346.7
million from $274.3 million in 2003 due primarily to higher overall per-ton
product selling prices partially offset by lower shipment volumes. KSW sold
approximately 79,000 less tons of products in 2004 as compared to 2003 at
selling prices $197 per-ton higher than per-ton product selling prices in 2003.
KSW believes the lower shipment volume during 2004 was due to its limited
production schedules during the period preceding and immediately following
Keystone's Chapter 11 filing combined with an initiative to discontinue sales to
KSW's less profitable customers. During the last portion of 2003 and throughout
2004, KSW implemented several price increases primarily as a reaction to rapidly
increasing ferrous scrap costs, KSW's primary raw material. As a result of these
efforts, during 2004, KSW was able to realize significant increases in its
per-ton product selling prices. During 2004 and 2003, approximately 14% and 11%,
respectively of KSW's net sales were made to other Keystone entities.
Significantly all of the sales to other Keystone entities were sales of wire
rod.
During 2004, KSW recorded operating income of $10.1 million as compared to
recording a $21.4 million operating loss in 2003. The primary reason for the
increased operating profit in 2004 was the significantly higher per-ton product
selling prices in 2004, partially offset by increased costs for ferrous scrap,
natural gas costs and electrical power. In addition, changes to KSW's health and
welfare benefit plans resulted in a significantly higher participation by the
employees and a correspondingly lower required contribution by KSW during 2004.
KSW's net sales in 2003 declined by $16.5 million or 5.7% to $274.3 million
from $290.8 million in 2002 due primarily to lower shipment volumes partially
offset by higher overall per-ton product selling prices. KSW sold approximately
14,000 less tons of products in 2003 as compared to 2002 at selling prices $13
per-ton higher than per-ton product selling prices in 2002. The primary reason
for the decline in shipment volume during 2003 at KSW was a 50,000 ton decline
in wire rod shipments that were in turn due to lower demand and an unplanned
production outage during the first quarter of 2003. During 2003 and 2002,
approximately 11% and 12%, respectively of KSW's net sales were made to other
Keystone entities. Significantly all of the sales to other Keystone entities
were sales of wire rod.
During 2003, KSW recorded a $21.4 million operating loss as compared to
recording a $3.9 million operating loss in 2002. The primary reasons for the
increased operating loss in 2003 were increased costs for ferrous scrap, natural
gas, and OPEB expense partially offset by higher per-ton product selling prices
and lower costs for electricity. In addition, during 2002, KSW received $900,000
of business interruption insurance proceeds related to incidents in prior years.
No such settlements were received by KSW during 2003.
Engineered Wire Products
EWP's net sales of $59.0 million during 2004 were approximately $23.7
million or 67.3% higher than during 2003 due primarily to both increased
shipment volume and higher overall per-ton product selling prices. During 2004,
EWP sold 5,700 more tons of products than during 2003 at per-ton product selling
prices approximately $291 per-ton higher than per-ton selling prices in 2003.
During 2004, EWP implemented several price increases primarily as a reaction to
rapidly increasing wire rod costs, EWP's primary raw material. As a result of
these efforts, during 2004, EWP was able to realize significant increases in its
per-ton product selling prices. EWP sources the majority of its wire rod
requirements from KSW.
As a result of significantly higher per-ton product selling prices during
2004, partially offset by increased wire rod and personnel costs as compared to
2003, EWP recorded a $7.9 million increase in operating income to $10.6 million.
EWP's net sales of $35.3 million during 2003 were approximately $2.3
million or 7% higher than during 2002 due primarily to both increased shipment
volume and higher overall per-ton product selling prices. During 2003, EWP sold
3,000 more tons of product than during 2002 at per-ton product selling prices
approximately $13 per ton higher than per-ton selling prices in 2002.
Despite higher net sales in 2003 as compared to 2002, EWP recorded
operating income of $2.7 million in each year due primarily to increased wire
rod costs, EWP's primary raw material.
Garden Zone
Keystone sold its 51% interest in Garden Zone in July 2003. Despite only
recording a partial year of sales in 2003, Garden Zone's net sales during 2003
of $12.1 million increased $1.3 million or 12% from Garden Zone's net sales in
2002 of $10.7 million. Garden Zone's increased sales level during 2003 as
compared to 2002 was due primarily to increased market penetration by Garden
Zone during 2003. As a result of increased net sales in 2003, Garden Zone's
operating income in 2003 prior to the disposition by Keystone, increased to
$700,000 from $85,000 in 2002.
All Other
As a result of the disposition in August 2003 and the transfer to other
Keystone segments in July 2003 of two of the businesses within this segment,
Sherman Wire was the only remaining business in this segment during the last
portion of 2003 and throughout 2004. Tons shipped by Sherman Wire during 2004
declined by 26,000 tons from shipment levels by the three businesses in this
segment during 2003. On a stand alone basis, Sherman Wire's shipment volume
declined by 7,000 tons from 2003 to 2004. Sherman Wire believes its lower
shipment volume during 2004 was due to its limited production schedules during
the period preceding and immediately following Keystone's Chapter 11 filing
combined with an initiative to discontinue sales to Sherman Wire's less
profitable customers. Sherman Wire recorded net sales of $16.2 million in 2004,
as compared to net sales of $28.1 million recorded by the three businesses in
this segment during 2003. This $11.9 million decline was due primarily to the
sale and transfer of two of the businesses in this segment during 2003 partially
offset by a significant increase in Sherman Wire's per-ton product selling
prices during 2004. On a stand alone basis, Sherman Wire's net sales during 2004
approximated its net sales in 2003 as increased per-ton product selling prices
offset the decline in shipment volume. Sherman Wire's overall per-ton product
selling price increased by approximately $224 per-ton during 2004 as compared to
the per-ton product selling prices achieved by the businesses in this segment
during 2003. On a stand alone basis, Sherman Wire's per-ton product selling
prices increased $216 per-ton from 2003 to 2004. During 2004, Sherman Wire
implemented several price increases primarily as a reaction to rapidly
increasing wire rod costs, Sherman Wire's primary raw material. As a result of
these efforts, during 2004, Sherman Wire was able to realize significant
increases in its per-ton product selling prices. Sherman Wire sources the
majority of its wire rod requirements from KSW. During 2004 and 2003,
approximately 62% and 36%, respectively, of this segment's net sales were made
to other Keystone entities. These sales to other Keystone entities were sales of
industrial wire and fabricated wire products. On a stand alone basis, during
2004 and 2003, approximately 62% and 55%, respectively, of Sherman Wire's net
sales were made to other Keystone entities, primarily KSW. The majority of these
sales were fabricated wire products.
During 2004, Sherman Wire recorded a $422,000 operating loss as compared to
a $4.6 million operating loss recorded by the businesses in this segment in
2003. On a stand alone basis, during 2004, Sherman Wire recorded a $422,000
operating loss as compared to an operating loss of $2.5 million in 2003. The
primary reason for this improved operating performance in 2004 was the higher
overall per-ton product selling prices partially offset by the increased costs
for wire rod. In addition, changes to Sherman Wire's health and welfare benefit
plans resulted in a significantly higher participation by the employees and a
correspondingly lower required contribution by Sherman Wire during 2004.
The three businesses in this segment recorded net sales of $28.1 million in
2003, as compared to net sales of $45.5 million during 2002. This $17.4 million
decline was due primarily to the sale and transfer of two of the businesses in
this segment during 2003. As a result, tons shipped by the businesses in this
segment during 2003 declined by 25,000 tons from 2002 shipment levels. In
addition, the overall per-ton product selling price for this segment declined by
approximately $31 per-ton during 2003 as compared to 2002. Sherman Wire was the
only remaining business in this segment at December 31, 2003. Sherman Wire
shipments in 2003 approximated 2002 shipment levels. However, Sherman Wire's
per-ton product selling prices declined by approximately $134 per-ton in 2003.
During 2003 and 2002, approximately 43% and 21%, respectively of this segment's
net sales were made to other Keystone entities. These sales to other Keystone
entities were sales of industrial wire and fabricated wire products. During 2003
and 2002, approximately 55% and 10%, respectively of Sherman Wire's net sales
were made to other Keystone entities, primarily KSW. The majority of these sales
were fabricated wire products.
During 2003, these facilities recorded a $4.6 million operating loss as
compared to a $3.0 million operating loss in 2002. The primary reason for this
increased operating loss in 2003 was the lower overall per-ton product selling
prices and increased costs for wire rod. During 2003, Sherman Wire recorded an
operating loss of $2.5 million as compared to an operating loss of $2.1 million
in 2002.
GAAP adjustments and eliminations in the above table consisted primarily of
adjustments to reflect the difference between the defined benefit pension
expense or credit and OPEB expense allocated to the segments and the actual
expense or credit included in the determination of operating profit or loss.
GAAP adjustments and eliminations included a defined benefit pension credit of
$4.9 million and $10.3 million during 2002 and 2004, respectively and defined
benefit pension expense of $3.8 million during 2003. During 2002 and 2003 GAAP
adjustments and eliminations included OPEB expense of $3.7 million, and $3.3
million, respectively. During 2004, GAAP adjustments and eliminations included
OPEB income of $6.1 million.
Related Party Transactions
As further discussed in Note 13 to the Consolidated Financial Statements,
the Company is party to certain transactions with related parties.
Outlook for 2005
During 2005, rod imports continued at high levels. These high import levels
combined with increased production from domestic mills has resulted in a decline
in per-ton sales prices of the Company's products. In addition, the late winter
and inclement weather during the spring and summer of 2005 has adversely
impacted sales. As a result, management believes these factors will result in
lower shipment volume in 2005 as compared to 2004. The Company's 2005
performance will also be adversely impacted by higher costs for ferrous scrap
and the cost of legal and professional fees associated with the Company's
bankruptcy and related restructuring efforts. However, the effects of the
Company's restructuring efforts in 2004 and 2005 will partially mitigate these
factors. As a result, Keystone expects it will report net income for financial
reporting purposes before gains arising from cancellation of indebtedness as a
result of the Company's emergence from Chapter 11 for 2005. Keystone expects to
report positive cash flows from operating activities in 2005, in part because no
contribution to the Company's defined benefit pension plan will be required. In
addition, as a result of significant accumulated net operating losses, the
benefit of which has not been previously recognized for financial reporting
purposes as the Company does not currently believe meets the
"more-likely-than-not" recognition criteria, the Company does not expect to
record significant net tax expense associated with its pre-tax income during
2005.
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 it believes 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. During 2002, 2003 and 2004, the net amount
written off against the allowance for doubtful accounts as a percentage of
the balance of the allowance for doubtful accounts as of the beginning of
the year ranged from approximately 3% to 57%.
o Keystone provides reserves for estimated obsolescence or unmarketable
inventories equal to the difference between the cost of inventories 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, goodwill and other intangible
assets 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.
Under applicable GAAP (SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are present.
During 2004, impairment indicators were present with respect to the
property and equipment associated with the Company's KSW and Sherman
segments, which represented a significant portion of the Company's
consolidated net property and equipment as of such date. Keystone completed
an impairment review of KSW's net property and equipment and related net
assets as of December 31, 2004. Such analysis indicated no impairment was
present as KSW's estimated future undiscounted cash flows exceeded the
carrying value of its net assets by approximately 16%. Significant judgment
is required in estimating such undiscounted cash flows. Such estimated cash
flows are inherently uncertain, and there can be no assurance that the
future cash flows reflected in these projections will be achieved. Keystone
completed an impairment review of Sherman's net property and equipment and
related net assets as of December 31, 2004. Although Sherman's estimated
future undiscounted cash flows may not exceed the carrying value of its net
assets, such analysis indicated no impairment was present as the appraised
market value of Sherman's property and equipment and related net assets
exceeded the carrying value of its net assets by approximately 33%.
Significant judgment is required in determining appraised market values.
Such appraisals are inherently uncertain, and there can be no assurance
that the appraised values could be achieved.
Under applicable GAAP (SFAS No. 142, Goodwill and Other Intangible Assets,)
goodwill is required to be reviewed for impairment at least on an annual
basis. Goodwill will also be reviewed for impairment at other times during
each year when impairment indicators, as defined, are present. As discussed
in Notes 1 and 19 to the Consolidated Financial Statements, the Company has
assigned its goodwill to the EWP reporting unit (as that term is defined in
SFAS No. 142). No goodwill impairment was deemed to exist as a result of
the Company's annual impairment review completed during the third quarter
of 2004, as the estimated fair value of the EWP reporting unit exceeded the
net carrying value by over 400%. The estimated fair value of the EWP
reporting unit was determined based on discounted cash flow projections.
Significant judgment is required in estimating the discounted cash flows
for the EWP reporting unit. Such estimated cash flows are inherently
uncertain, and there can be no assurance that EWP will achieve the future
cash flows reflected in its projections.
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 or loss in the period such
change in estimate was made. At December 31, 2004, the Company believes its
gross deferred tax assets do not currently meet the "more-likely-than-not"
realizability test and accordingly has provided a valuation allowance for
the total gross deferred tax assets.
o The Company records accruals 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. The Company was not
required to make cash contributions to the pension plan during 2004 and is
not expected to be required to make cash contributions to its pension plan
during 2005. The determination of additional minimum liability, intangible
asset, charge to stockholders' equity and pension expense is dependent on
the selection of certain actuarial assumptions which attempt to anticipate
future events. These pension actuarial assumptions, which are described in
Note 10 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 or liability and
pension expense or 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 or liability and expense or 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. See also the following discussion of Assumptions on Defined
Benefit Pension Plans and OPEB Plans - Defined Benefit Pension 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 10 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. See also the following discussion of Assumptions on Defined
Benefit Pension Plans and OPEB Plans - OPEB plans.
Accounting Principles Newly Adopted in 2004
See Note 19 to the Consolidated Financial Statements.
Accounting Principles Not Yet Adopted
See Note 20 to the Consolidated Financial Statements.
Assumptions on Defined Benefit Pension Plans and OPEB Plans
Defined benefit pension plan. The Company accounts for its defined benefit
pension plan using SFAS No. 87, Employer's Accounting for Pensions. Under SFAS
No. 87, defined benefit pension plan expense or credit and prepaid or accrued
pension costs are each recognized based on certain actuarial assumptions,
principally the assumed discount rate, the assumed long-term rate of return on
plan assets and the assumed increase in future compensation levels. The Company
recognized a consolidated defined benefit pension plan credit of $1.6 million in
2002 and $6.8 million in 2004 and a consolidated defined benefit pension expense
of $6.9 million in 2003. The amount of funding requirements for the defined
benefit pension plan is based upon applicable regulations, and will generally
differ from pension expense or credit recognized under SFAS No. 87 for financial
reporting purposes. No contributions were required to be made to the Company's
defined benefit pension plan during the past three years.
The discount rates the Company utilizes for determining defined benefit
pension expense or credit and the related pension obligations are based on
current interest rates earned on long-term bonds that receive one of the two
highest ratings given by recognized rating agencies. In addition, the Company
receives advice about appropriate discount rates from the Company's third-party
actuaries, who may in some cases utilize their own market indices. The discount
rates are adjusted as of each valuation date (December 31st) to reflect
then-current interest rates on such long-term bonds. Such discount rates are
used to determine the actuarial present value of the pension obligations as of
December 31st of that year, and such discount rates are also used to determine
the interest component of defined benefit pension expense or credit for the
following year.
The Company used the following discount rates for its defined benefit
pension plan during the last three years:
Discount rates used for:
- ---------------------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2002 and expense December 31, 2003 and expense December 31, 2004 and
in 2003 in 2004 expense in 2005
- ------------------------------- -------------------------------- --------------------------
6.5% 6.00% 5.65%
The assumed long-term rate of return on plan assets represents the
estimated average rate of earnings expected to be earned on the funds invested
or to be invested in the plans' assets provided to fund the benefit payments
inherent in the projected benefit obligations. Unlike the discount rate, which
is adjusted each year based on changes in current long-term interest rates, the
assumed long-term rate of return on plan assets will not necessarily change
based upon the actual, short-term performance of the plan assets in any given
year. Defined benefit pension expense or credit each year is based upon the
assumed long-term rate of return on plan assets for the plan and the actual fair
value of the plan assets as of the beginning of the year. Differences between
the expected return on plan assets for a given year and the actual return are
deferred and amortized over future periods based upon the expected average
remaining service life of the active plan participants.
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets of its plan and the expected long-term rates of
return for such asset components. In addition, the Company receives advice about
appropriate long-term rates of return from the Company's third-party actuaries.
Substantially all of Keystone's plan assets are invested in the Combined Master
Retirement Trust ("CMRT"), a collective investment 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 benefits plans
sponsored by Contran and certain of its affiliates. Harold Simmons is the sole
trustee of the CMRT. The CMRT's long-term investment objective is to provide a
rate of return exceeding a composite of broad market equity and fixed income
indices (including the S&P 500 and certain Russell indicies) utilizing both
third-party investment managers as well as investments directed by Mr. Simmons.
During the 17-year history of the CMRT through December 31, 2004, the average
annual rate of return has been 12.7%. For 2002, 2003 and 2004, the assumed
long-term rate of return utilized for plan assets invested in the CMRT was 10%.
In determining the appropriateness of such long-term rate of return assumption,
the Company considered, among other things, the historical rate of return for
the CMRT, the current and projected asset mix of the CMRT and the investment
objectives of the CMRT's managers. In addition, the Company receives advice
about appropriate long-term rates of return from the Company's third-party
actuaries. At December 31, 2004, the asset mix of the CMRT was 77% in U.S.
equity securities, 14% in U.S. fixed income securities, 7% in international
equity securities and 2% in cash and other investments.
The Company regularly reviews its actual asset allocation for its defined
benefit pension plan, and will periodically rebalance the investments in the
plan to more accurately reflect the targeted allocation when considered
appropriate.
As noted above, the Company's assumed long-term rate of return on plan
assets was 10% for each of 2002, 2003 and 2004. The Company currently expects to
utilize the same long-term rate of return on plan assets assumption in 2005 as
it used in 2004 for purposes of determining the 2005 defined benefit pension
plan expense or credit.
To the extent the defined benefit pension plan's particular pension benefit
formula calculates the pension benefit in whole or in part based upon future
compensation levels, the projected benefit obligations and the pension expense
will be based in part upon expected increases in future compensation levels. For
pension benefits which are so calculated, the Company generally bases the
assumed expected increase in future compensation levels upon average long-term
inflation rates.
Based on the actuarial assumptions described above, Keystone expects its
defined benefit pension credit will approximate $12.9 million in 2005 compared
to $6.8 million in 2004. Keystone was not required to make contributions to the
defined benefit pension plan during 2002, 2003 or 2004 and does not expect to be
required to make any contributions during 2005.
As noted above, defined benefit pension expense or credit and the amounts
recognized as prepaid or accrued pension costs are based upon the actuarial
assumptions discussed above. The Company believes all of the actuarial
assumptions used are reasonable and appropriate. If Keystone had lowered the
assumed discount rate by 25 basis points as of December 31, 2004, the Company's
projected and accumulated benefit obligations would have increased by
approximately $10.5 million and $10.2 million, respectively at that date, and
the defined benefit pension credit would be expected to decrease by
approximately $400,000 during 2005. Similarly, if Keystone lowered the assumed
long-term rate of return on plan assets by 25 basis points for its defined
benefit pension plan, the defined benefit pension credit would be expected to
decrease by approximately $900,000 during 2005.
OPEB plans. The Company currently provides certain health care and life
insurance benefits for eligible retired employees. See Note 10 to the
Consolidated Financial Statements. The Company accounts for such OPEB costs
under SFAS No. 106, Employers Accounting for Postretirement Benefits other than
Pensions. Under SFAS No. 106, OPEB expense and accrued OPEB costs are based on
certain actuarial assumptions, principally the assumed discount rate and the
assumed rate of increases in future health care costs. The Company recognized
consolidated OPEB expense of $14.3 million in 2002, $17.5 million in 2003 and
$20.9 million in 2004. Similar to defined benefit pension benefits, the amount
of funding will differ from the expense recognized for financial reporting
purposes, and contributions to the plans to cover benefit payments aggregated
$9.2 million in 2002, $10.3 million in 2003 and $5.3 million in 2004. The amount
of OPEB contributions made by the Company in 2004, which was lower than the
Company's contributions in 2003 of $10.3 million, reflects in part certain
interim relief related to the Company's retiree medical plans that were approved
by the Bankruptcy Court in connection with the Company's Chapter 11 filing.
The assumed discount rates the Company utilizes for determining OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company utilizes for its defined benefit pension plan.
In estimating the health care cost trend rate, the Company considers its
actual health care cost experience, future benefit structures, industry trends
and advice from its third-party actuaries. During each of the past three years,
the Company has assumed the relative increase in health care costs will
generally trend downward over the next several years, reflecting, among other
things, assumed increases in efficiency in the health care system and
industry-wide cost containment initiatives. For example, at December 31, 2004,
the expected rate of increase in future health care costs was 10% in 2005,
declining to 5% in 2010 and thereafter.
Based on the actuarial assumptions described above and changes to the
Company's post retirement benefit plans during 2004 and in connection with
Keystone's Chapter 11 filings, the Company expects it will record a consolidated
$6.6 million OPEB credit in 2005. In comparison, the Company expects to make
$7.9 million of contributions to such plans during 2005.
As noted above, OPEB expense and the amount recognized as accrued OPEB
costs are based upon the actuarial assumptions discussed above. The Company
believes all of the actuarial assumptions used are reasonable and appropriate.
If the Company had lowered the assumed discount rate by 25 basis points for all
of its OPEB plans as of December 31, 2004, the Company's aggregate accumulated
OPEB obligations would have increased by approximately $8.1 million at that
date, and the Company's OPEB expense would be expected to increase by $800,000
during 2005. Similarly, if the assumed future health care cost trend rate had
been increased by 100 basis points, the Company's accumulated OPEB obligations
would have increased by approximately $37.2 million at December 31, 2004, and
OPEB expense would have increased by $5.6 million in 2004.
Liquidity and Capital Resources
The amount of available borrowings under Keystone's revolving credit and
DIP facilities is based on formula-determined amounts of trade receivables and
inventories, less the amount of outstanding letters of credit. At December 31,
2004, unused credit available for borrowing under Keystone's DIP facility and
EWP's $7 million revolving credit facility (the "EWP Revolver"), were $25.1
million and $5.3 million, respectively. The Congress DIP Facility, as defined
below, 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 Congress DIP Facility are always classified as a current
liability regardless of the maturity date of the facility.
On March 15, 2004, the Court approved two new debtor-in-possession
financing facilities (the "DIP Order). The first debtor-in-possession financing
facility consists of an Assumption Agreement whereby the pre-petition lender on
the Keystone Revolver and a term note (the "Keystone Term Note") agreed to
convert those credit facilities to a debtor-in-possession facility
(collectively, the "Congress DIP Facility"). The terms of the respective
facilities comprising the Congress DIP Facility are relatively unchanged from
the respective pre-petition facilities with the exception of the elimination of
the existing financial covenants and the granting of a second lien on the stock
of EWP owned by Keystone. In connection with the approval of the Congress DIP
Facility, the Keystone Term Note was increased by $4.0 million. Approximately
$2.0 million of these proceeds were applied to the Keystone Revolver portion of
the Congress DIP Facility and the remainder was used to fund Keystone's working
capital needs. However, the Congress DIP Facility lender also applied an
availability reserve of approximately $2.0 million to the borrowing base of the
Keystone Revolver in connection with the increase in Keystone Term Note
resulting in no net increase in availability under the Keystone Revolver at that
time. The Keystone Term Note required monthly principal payments of $100,000.
The second debtor-in-possession financing facility comprising the DIP Order
is a $5 million revolving credit facility with EWPFLLC (the "EWP DIP Facility").
Advances under the EWP DIP Facility bear interest at the prime rate plus 3.0%
per annum and are collateralized by the common stock of EWP owned by Keystone.
Proceeds from the EWP DIP Facility were used to fund Keystone's working capital
needs. The EWP DIP Facility requires Keystone to abide by specified cash
budgets. In addition, the EWP DIP Facility requires EWPFLLC to fund an
additional $2 million through a participation in the Congress DIP Facility upon
the Company's realization of certain milestones. The Company met such milestones
and in April 2004, this additional funding was made. The EWP DIP Facility, as
amended, matures upon confirmation of a plan of reorganization of Keystone,
closing of a sale of EWP, an event of default under the EWP Term Note, an event
of default under the Congress DIP Facility or upon certain other events.
On August 31, 2005, in connection with its emergence from Chapter 11,
Keystone entered into a new $80.0 million secured credit facility. Proceeds from
this credit facility were used to extinguish Keystone's existing DIP credit
facilities, the EWP Term Loan, the EWP Revolver and to provide working capital
for reorganized Keystone. The facility includes a term loan in the amount of up
to $25.0 million, subject to a borrowing base calculation based on the market
value of the Company's real property and equipment. To the extent there is
sufficient borrowing base, the term loan portion of this credit facility can be
reloaded in the amount of $10.0 million. The portion of the credit facility in
excess of the term loan balance is available to the Company as a revolving
credit facility subject to a borrowing base calculation based on eligible
receivables and inventory balances. Interest rates on the credit facility range
from the prime rate to the prime rate plus .5% depending on Keystone's excess
availability, as defined in the credit agreement. The facility also provides for
a LIBOR interest rate option. Under the terms of the credit facility, the
Company is required to annually pay down the term loan portion of the facility
in the amount of 25% of excess cash flow, as defined in the agreement, subject
to a $2.0 million annual and a $5.0 million aggregate limit. The facility also
includes performance covenants related to minimum levels of cash flow and fixed
charge coverage ratio. Keystone paid the lender approximately $400,000 of
diligence, commitment and closing fees in connection with this facility.
Despite a $53.6 million increase in earnings between 2003 and 2004, cash
flow from operating activities in 2004 increased only $2.0 million to $7.9
million from $5.9 million during 2003 due primarily to increases in accounts
receivable and inventory levels during 2004. Due to Keystone's limited liquidity
during the last half of 2003, the Company was not able to operate on a
continuous basis. As such, production levels declined and Keystone was forced to
substantially reduce its normal inventory levels over the last half of 2003 in
order to meet customer shipment demand. In addition, as the Company's liquidity
deteriorated throughout 2003, Keystone liquidated as many of its accounts
receivable as possible. As such, at the end of 2003, the Company's accounts
receivable and inventory balances were both at abnormally low levels. As
Keystone's operations returned to normal levels during 2004, the Company used
$40.1 million of cash to return both accounts receivable and inventories to more
normalized levels. In addition, during 2003 many vendors and suppliers
discontinued trade terms and required Keystone to pay cash in advance for all
goods as well as pay down old trade payables prior to shipment of new goods. As
a result of securing DIP financing during 2004, certain vendors established
limited trade terms, and as such, trade accounts payable increased during 2004.
During 2004, Keystone made capital expenditures of approximately $5.1
million primarily related to upgrades of production equipment at its facility in
Peoria, Illinois, as compared to $2.7 million in 2003. Capital expenditures for
2005 are expected to be approximately $7.0 million and are related primarily to
upgrades of production equipment at EWP. Such capital expenditures are expected
to be funded using cash flows from operations together with borrowing
availability under Keystone's credit facilities.
At December 31, 2004, the Company's financial statements reflected accrued
liabilities of $19.4 million (all of which is included in liabilities subject to
compromise on the Company's balance sheet) for estimated remediation costs for
those environmental matters which Keystone believes are probable and 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 $21.4 million.
Keystone is not expected to be required to make contributions to its
pension plan during 2005. 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 10 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, 2004, 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 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 its gross deferred tax assets do not currently meet the
"more-likely-than-not" realizability test. As such, the Company has provided a
deferred tax asset valuation allowance of approximately $30.3 million at
December 31, 2004, or all of the Company's deferred tax asset. Keystone 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. The Company does not currently expect
it will be appropriate to recognize a tax provision associated with its expected
pre-tax income during 2005.
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. Despite reductions in fixed
costs and increases in certain product selling prices, Keystone was unable to
maintain sufficient operating liquidity during 2004 and as a result, on February
26, 2004 Keystone and five of its direct and indirect subsidiaries filed for
voluntary protection under Chapter 11 of the Federal Bankruptcy Code. Subsequent
to filing for Chapter 11, the Company negotiated a favorable amendment to the
collective bargaining agreement with its largest labor union and received
interim relief with respect to certain OPEB payments to retirees. Keystone
incurred legal and professional fees of approximately $11.2 million during 2004
with respect to its reorganization efforts, including related to the Chapter 11
filing. In addition, Keystone currently anticipates incurring legal and
professional fees of approximately $10.0 million during 2005 related to its
reorganization efforts. Keystone is also 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. See Note 2 to the Consolidated Financial
Statements.
Under Chapter 11 proceedings, actions by creditors to collect pre-petition
claims are stayed, absent specific authorization from the Court to pay such
claims while the Company manages the business as a debtor-in-possession.
Keystone received approval from the Court to pay certain of its pre-petition
Claims, including employee wages and certain employee benefits.
Keystone filed a plan of reorganization on October 4, 2004 and amended that
plan on May 26, 2005, June 21, 2005 and June 27, 2005. Keystone's amended plan
of reorganization was accepted by the impacted constituencies and confirmed by
the Court on August 10, 2005. The Company emerged from bankruptcy protection on
August 31, 2005. Significant provisions of Keystone's amended plan of
reorganization included, among other things:
o Assumption of the previously negotiated amendment to the collective
bargaining agreement with the Independent Steel Workers Alliance (the
"ISWA"), Keystone's largest labor union;
o Assumption of the previously negotiated agreements reached with
certain retiree groups that will provide relief by permanently
reducing healthcare related payments to these retiree groups from
pre-petition levels;
o The Company's obligations due to pre-petition secured lenders other
than its Debtor-In-Possession lenders were reinstated in full against
reorganized Keystone;
o All shares of Keystone's common and preferred stock outstanding at the
petition date (February 26, 2004) were cancelled;
o Pre-petition unsecured creditors with allowed claims against Keystone
will receive, on a pro rata basis, in the aggregate, $5.2 million in
cash, a $4.8 million secured promissory note and 49% of the new common
stock of reorganized Keystone;
o Certain operating assets and existing operations of Sherman Wire
Company ("Sherman Wire"), one of Keystone's pre-petition wholly-owned
subsidiaries, will be sold at fair market value to Keystone, which
will then be used to form and operate a newly created wholly-owned
subsidiary of reorganized Keystone named Keystone Wire Products Inc.;
o Sherman Wire was also reorganized and the proceeds of the operating
asset sale to Keystone and other funds will be distributed, on a pro
rata basis, to Sherman Wire's pre-petition unsecured creditors as
their claims are finally adjudicated;
o Sherman Wire's pre-petition wholly-owned non-operating subsidiaries,
J.L. Prescott Company, and DeSoto Environmental Management, Inc. as
well as Sherman Wire of Caldwell, Inc., a wholly-owned subsidiary of
Keystone, will ultimately be liquidated and the pre-petition unsecured
creditors with allowed claims against these entities will receive
their pro-rata share of the respective entity's net liquidation
proceeds;
o Pre-petition unsecured creditors with allowed claims against FV Steel
& Wire Company, another one of Keystone's wholly-owned subsidiaries,
will receive cash in an amount equal to their allowed claims;
o One of Keystone's Debtor-In-Possession lenders, EWP Financial, LLC (an
affiliate of Contran Corporation ("Contran"), Keystone's largest
pre-petition shareholder) converted $5 million of its DIP credit
facility, certain of its pre-petition unsecured claims and all of its
administrative claims against Keystone into 51% of the new common
stock of reorganized Keystone; and
o The Board of Directors of reorganized Keystone now consists of seven
individuals, two each of which were designated by Contran and the
Official Committee of Unsecured Creditors (the "OCUC"), respectively.
The remaining three directors qualify as independent directors (two of
the independent directors were appointed by Contran with the OCUC's
consent and one was appointed by the OCUC with Contran's consent).
In addition, Keystone has obtained an $80 million secured credit facility
from Wachovia Capital Finance (Central). Proceeds from this credit facility were
used to extinguish Keystone's existing Debtor-In-Possession credit facilities
and to provide working capital for reorganized Keystone. See Note 2 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 2, 6, 16 and 17 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments of the
Company and its consolidated subsidiaries that are unconditional both in terms
of timing and amount by the type and date of payment:
Payment due date
2010 and
Contractual commitment 2005 2006/2007 2008/2009 after Total
- ---------------------- ---- --------- --------- ------- -----
(In thousands)
Indebtedness:
Principal $27,804 $28,342 $22,722 $11,994 $90,862
Interest 4,091 1,601 1,170 3,323 10,185
Operating leases 836 402 130 143 1,511
Deferred vendor payment
agreements 3,227 6,454 807 - 10,488
Product supply agreement 1,200 2,400 2,400 2,700 8,700
------ ------ ------ ------ ------
$37,158 $39,199 $27,229 $18,160 $121,746
======= ======= ======= ======= ========
The timing and amounts shown in the above table for the Company's
commitments related to indebtedness (both principal and interest), operating
leases, deferred vendor payment agreements and product supply agreements are
based upon the contractual payment amount and the contractual payment date for
such commitments. Therefore, such timing and amounts shown in the above table do
not reflect any effect on such commitments that arise from the Company's
emergence from Chapter 11 proceedings. Due to the Chapter 11 filings, Keystone
was not permitted to make principal or interest payments on its pre-petition
unsecured debt or deferred vendor payments. As discussed in Note 6 to the
Consolidated Financial Statements, certain indebtedness of the Company
aggregating $28.1 million has been classified as a current liability at December
31, 2004 because such indebtedness is in default. However, such $28.1 million
has been classified in the above table based on the contractual maturity date of
such indebtedness because the lender has not accelerated payment of such
indebtedness, and because payment on such indebtedness was stayed as a result of
the Chapter 11 proceedings. In addition, balances due under the Company's
revolving credit facilities are shown as current maturities in the Company's
Consolidated Financial Statements at December 31, 2004. However, the above table
reflects maturities of these facilities only upon the contracted expiration of
the respective facility.
The Company has many executory contracts, including the operating leases
and product supply agreement included in the above table that were rejected
during the Chapter 11 proceedings.
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.
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 $2.0 million over
the related site's estimated remaining remediation costs. At December 31, 2004,
estimated remaining remediation costs exceeded the amount in the environmental
trust fund.
The above table does not reflect any amounts that the Company might pay to
fund its defined benefit pension plans and OPEB plans, as the timing and amount
of any such future fundings are unknown and dependent on, among other things,
the future performance of defined benefit pension plan assets, interest rate
assumptions and actual future retiree medical costs. Such defined benefit
pension plans and OPEB plans are discussed above in greater detail.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Keystone's exposure to changes in interest rates relates primarily to
long-term debt obligations. At December 31, 2004, approximately 75% of the
Company's long-term debt was comprised of fixed rate instruments, which minimize
earnings volatility related to interest expense. Keystone does not currently
participate in interest rate-related derivative financial instruments.
The table below presents principal amounts and related weighted-average
interest rates by maturity date for Keystone's long-term debt obligations.
Contracted Maturity Date Estimated
----------------- ---------------------------------------- Fair Value
2005 2006 2007 2008 2009 Thereafter Total December 31, 2004
---- ---- ---- ---- ---- ---------- ----- -----------------
($ In thousands)
Fixed-rate debt -
Principal amount $ 1,653 $ 852 $24,779 $8,091 $13,168 $11,994 $60,537 (1)
Weighted-average
interest rate .1% .1% 2.4% 0.0% 1.2% 3.8% 2.0%
Variable-rate debt-
Principal amount $26,151 $1,359 $ 1,352 $1,463 $ - $ - $30,325 $30,325
Weighted-average
interest rate 5.8% 4.9% 4.9% 4.8% -% -% 5.7%
At December 31, 2003, long-term debt included fixed-rate debt of $60.5
million with a weighted average interest rate of 2.0% and $27.2 of million
variable-rate debt which approximated fair value, with a weighted-average
interest rate of 4.8%.
(1) Due to the significant uncertainties surrounding the Company's Chapter
11 filings, management is unable to estimate the aggregate fair value
of Keystone's fixed rate notes at December 31, 2003 and 2004.
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.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, as appropriate
to allow timely decisions to be made regarding required disclosure. Each of
David L. Cheek, the Company's President and Chief Executive Officer, and Bert E.
Downing, Jr., the Company's Vice President, Chief Financial Officer, Corporate
Controller and Treasurer, have evaluated the Company's disclosure controls and
procedures as of December 31, 2004. Based upon their evaluation, these executive
officers have concluded that the Company's disclosure controls and procedures
are effective as of the date of such evaluation.
Internal Control Over Financial Reporting. The Company also maintains a
system of internal controls over financial reporting. The term "internal control
over financial reporting," as defined by regulations of the SEC, means a process
designed by, or under the supervision of, the Company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the Company's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP, and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company,
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company, and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's consolidated
financial statements.
The Company currently expects that Section 404 of the Sarbanes-Oxley Act of
2002 will require the Company to annually include a management report on
internal control over financial reporting starting with the Company's Annual
Report on Form 10-K for the year ended December 31, 2007. The Company's
independent registered public accounting firm will also be required to annually
audit the Company's internal control over financial reporting. In order to
achieve compliance with Section 404, the Company will have to document, test and
evaluate its internal control over financial reporting, using a combination of
internal and external resources. The process of documenting, testing and
evaluating the Company's internal control over financial reporting under the
applicable guidelines is expected to be complex and time consuming, and
available internal and external resources necessary to assist the Company in the
documentation and testing required to comply with Section 404 could be limited.
While the Company currently believes it will be able to dedicate the appropriate
resources, and that it will be able to fully comply with Section 404 in its
Annual Report on Form 10-K for the year ended December 31, 2007 and be in a
position to conclude that the Company's internal control over financial
reporting is effective as of December 31, 2007, because the applicable
requirements are complex and time consuming, and because currently unforeseen
events or circumstances beyond the Company's control could arise, there can be
no assurance that the Company will ultimately be able to fully comply with
Section 404 in its Annual Report on Form 10-K for the year ended December 31,
2007 or whether it will be able to conclude that the Company's internal control
over financial reporting is effective as of December 31, 2007.
Changes in Internal Control Over Financial Reporting. There has been no
change to the Company's system of internal controls over financial reporting
during the quarter ended December 31, 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's system of internal
controls over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The bylaws of Keystone provide that the Board of Directors shall consist of
not less than five and not more than nine persons, as determined by the Board of
Directors from time to time. The Board of Directors has currently set the number
of directors at six. The directors elected at the Annual Meeting held October 2,
2003, will hold office until the next annual meeting of shareholders and until
their successors are duly elected and qualified or their earlier removal,
resignation or death.
Set forth below is certain information concerning the directors of Keystone
as of December 31, 2004. Biographical information, including ages, is as of
December 31, 2004.
THOMAS E. BARRY Director since 1989
Dr. Barry, age 61, is vice president for executive affairs at Southern
Methodist University and has been a professor of marketing in the Edwin L. Cox
School of Business at Southern Methodist University since prior to 2000. Dr.
Barry is also a director of Valhi, Inc. ("Valhi"), a publicly held diversified
holding company related to Keystone. Dr. Barry ceased being a director upon the
Company's emergence from Chapter 11 on August 31, 2005.
WILLIAM SPIER Director since 1996
Mr. Spier, age 70, is chairman of the board of Empire Resources, Inc. and
has served in such capacity since prior to 2000. Mr. Spier resigned as a
director in January 2005.
PAUL M. BASS, JR. Director since 1989
Mr. Bass, age 69, is vice chairman of First Southwest Company, a privately
owned investment banking firm, and has served in such capacity since prior to
2000. Mr. Bass is also a director of CompX International Inc. ("CompX"), a
manufacturer of ergonomic computer support systems, precision ball bearing
slides and security products that is related to Valhi, and a director of MACC
Private Equities Inc., a business development company. Mr. Bass is currently
serving as chairman of the board of trustees of Southwestern Medical Foundation,
a foundation that supports and promotes The University of Texas Southwestern
Medical Center.
KEITH R. COOGAN Director since 2003
Mr. Coogan, age 52, is chief executive officer of Software Spectrum, Inc.,
a global business-to-business software services provider that is currently a
wholly owned subsidiary of Level 3 Communications, but from 1991 to June 2002
was a publicly traded corporation. From 1990 to October 2002, Mr. Coogan served
in various other executive officer positions of Software Spectrum, including
vice president of finance and operations and chief operating officer. Mr. Coogan
is also a director of CompX. Mr. Coogan serves as chairman of Keystone's audit
committee and the Board of Directors has determined that he is an "audit
committee financial expert" as defined by the U.S. Securities and Exchange
Commission and is an independent director under the corporate governance rules
of the New York Stock Exchange. Mr. Coogan ceased being a director upon the
Company's emergence from Chapter 11 on August 31, 2005.
GLENN R. SIMMONS Director since 1986
Mr. Simmons, age 76, is chairman of the board of Keystone and has served in
such capacity since prior to 1999. Since prior to 2000, Mr. Simmons has served
as vice chairman of the board of directors of Valhi and Contran. Mr. Simmons has
been a director of Contran and an executive officer and/or director of various
companies related to Contran since prior to 1999. He is chairman of the board of
CompX, a director of NL Industries, Inc. ("NL"), and Kronos Worldwide, Inc.
("Kronos Worldwide"), both engaged in the maufacture of titanium dioxide
pigments and are related to Valhi; and a director of Titanium Metals Corporation
("TIMET"), a company engaged in the titanium metals industry that is related to
Valhi. Mr. Simmons is a brother of Harold C. Simmons, the chairman of the board
of Valhi and Contran.
J. WALTER TUCKER, JR. Director since 1971
Mr. Tucker, age 79, is vice chairman of the board of Keystone and has
served in such capacity since prior to 2000. Mr. Tucker has served as a
director, president and chief executive officer of Tucker & Branham, Inc., a
privately owned real estate, mortgage banking and insurance firm since prior to
2000. Mr. Tucker is also a director of Valhi. Since prior to 2000, he has also
been an executive officer and/or director of various companies related to Valhi
and Contran. Mr. Tucker ceased being a director upon the Company's emergence
from Chapter 11 on August 31, 2005.
STEVEN L. WATSON Director since 2000
Mr. Watson, age 53, has been president and a director of Valhi and Contran
since 1998 and chief executive officer of Valhi since 2002. He is also a
director of CompX, NL, Kronos Worldwide and TIMET. Mr. Watson has served as an
executive officer and/or director of various companies related to Valhi and
Contran since 1980.
EXECUTIVE OFFICERS
In addition to Glenn R. Simmons as chairman of the board and J. Walter
Tucker, Jr. as vice chairman, the following are currently executive officers of
Keystone. Each executive officer serves at the pleasure of the Board of
Directors. Biographical information, including ages, is as of December 31, 2004:
DAVID L. CHEEK, age 55, is president and chief executive officer of
Keystone and has served in such capacities since April 2003. He was president
and chief operating officer from October 2001 to April 2003. Mr. Cheek has
served as president, Keystone Steel & Wire, a division of Keystone, since March
2000 and was vice president of manufacturing, Keystone Steel & Wire, from March
1999 to March 2000. He was vice president of operations, Atlantic Steel,
Atlanta, Georgia from 1996 to 1999.
BERT E. DOWNING, JR., age 48, is vice president, chief financial officer,
corporate controller and treasurer of Keystone and has served in such capacities
since December 2002. He served as vice president - corporate controller and
treasurer since May 2001, as vice president and corporate controller since March
2000, and as corporate controller since prior to 2000.
SANDRA K. MYERS, age 61, has served as corporate secretary of Keystone and
as executive secretary of Contran since prior to 2000.
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION OF DIRECTORS
Directors of Keystone receive an annual retainer of $15,000, a fee of $750
per day for each Board of Directors meeting and/or committee meeting attended,
and reimbursement for reasonable expenses incurred in attending Board of
Directors and/or committee meetings. Messrs. Glenn R. Simmons and Steven L.
Watson ceased receiving fees for serving as directors in November 2003. The
Keystone Consolidated Industries, Inc. 1997 Long-Term Incentive Plan provides
for awards or grants of stock options, stock appreciation rights, restricted
stock, performance grants and other awards to key individuals, including
directors, performing services for Keystone or its subsidiaries. Under the 1997
Long-Term Incentive Plan, directors are annually granted stock options
exercisable for 1,000 shares of Keystone common stock, par value $1.00 per share
(the "Common Stock"). These options have an exercise price equal to the closing
sales price per share of Common Stock on the date of grant, have a term of ten
years and fully vest on the first anniversary of the date of grant. The
directors waived their rights to their 2003 and 2004 annual grant of stock
options, and, accordingly, no annual grants were made in 2003 or 2004. In
addition to serving as directors, Messrs. Simmons, Watson and Tucker provide
consulting services to Keystone. Keystone pays Contran for the consulting
services provided by Messrs. Simmons and Watson pursuant to Intercorporate
Services Agreements approved periodically between Contran and Keystone (each an
"Intercorporate Services Agreement"). See Item 13 - Certain Relationships and
Related Transactions.
EXECUTIVE COMPENSATION
The Summary Compensation Table set forth below provides information
concerning annual and long-term compensation paid by Keystone for services
rendered in all capacities to Keystone and its subsidiaries during 2004, 2003
and 2002 by each of the most highly compensated individuals who were executive
officers of Keystone at December 31, 2004 (the "named executive officers"). For
amounts Keystone incurred that were attributable to the services Glenn R.
Simmons provided Keystone in 2004, 2003 and 2002 under Intercorporate Services
Agreements, see Item 13 - Certain Relationships and Related Transactions.
SUMMARY COMPENSATION TABLE (1)
Annual
Compensation (2)
----------------
Name and All Other
Principal Position Year Salary Compensation
-------------------------- ------ ----------------- ---------------
David L. Cheek 2004 $300,000 $22,113 (3)
President and Chief 2003 286,540 5,431 (3)
Executive Officer 2002 250,000 2,709 (3)
Bert E. Downing, Jr....... 2004 $210,000 $10,842 (3)
Vice President, Chief 2003 210,000 523 (3)
Financial Officer, 2002 200,000 35 (3)
Corporate Controller
and Treasurer
- --------------
(1) For the periods presented for the named executive officers, no stock option
or shares of restricted stock were granted nor payouts made pursuant to
long-term incentive plans. Therefore, the columns for such compensation
have been omitted.
(2) No bonuses were paid to the executive officers for the periods presented.
An amount for other annual compensation is disclosed only if the amount for
other annual compensation exceeds the level required for reporting pursuant
to Securities and Exchange Commission (the "SEC") rules. Therefore, the
columns for such compensation have been omitted.
(3) All other compensation for the last three years for each of the following
named executive officers consisted of employer's 401(k) matching
contributions and accruals to unfunded reserve accounts attributable to
certain limits under the Internal Revenue Code of 1986, as amended (the
"Code"), with respect to the 401(k) Plan and Keystone's pension plan, which
amounts are payable upon the named executive officer's retirement, the
termination of his employment with Keystone or to his beneficiaries upon
his death; as follows:
Unfunded Reserve Account Accruals
---------------------------
Account Accruals Related Interest Accruals
to 401(k) and Pension Above 120% of the
Named Executive Officer Employer's Plan Limitations AFR Rate (b)
Year 401(k)
Contributions Total
- --------------------- ---- ------------- --------------- ----------- --------
David L. Cheek 2004 $10,250 $ 11,815 $48 $22,113
2003 -0- 5,431 -0- 5,431
2002 -0- 2,697 12 2,709
Bert E. Downing, Jr. 2004 $10,250 564 28 10,842
2003 -0- 523 -0- 523
2002 -0- -0- 35 35
- --------------
(a) Keystone did not make a matching contribution to the 401(k) plan for 2002
or 2003. Keystone's matching contribution to the 401(k) plan for 2004 was
made in cash during 2005.
(b) The agreements for these unfunded reserve accounts provide that the balance
of such accounts accrue credits in lieu of interest compounded quarterly.
Pursuant to SEC rules, the amounts shown represent the portion of the
credit accruals to the unfunded reserve accounts that exceeds 120% of the
applicable federal long-term rate as prescribed by the Code (the "AFR
Rate"). The AFR Rate used for such computations was the AFR Rate in effect
on December 31, 2004, 2003 and 2002, for the date that the credit accruals
for 2004, 2003 and 2002, respectively, were credited to the unfunded
reserve account.
No Grants of Stock Options or Stock Appreciation Rights. Keystone did not
grant any stock options or stock appreciation rights ("SARs") during 2004.
Stock Option Exercises and Holdings. The following table provides
information, with respect to the named executive officers, concerning the value
of unexercised stock options for Common Stock held as of December 31, 2004. In
2004, no named executive officer exercised any stock options. Keystone has not
granted any SARs. The underlying Common Stock related to these options was
cancelled in connection with Keystone's emergence from Chapter 11 on August 31,
2005. See Note 9 to the Consolidated Financial Statements.
DECEMBER 31, 2004 OPTION VALUES
Number of Shares Underlying
Unexercised Options at Value of Unexercised
December 31, 2004 (#) In-the-Money Options
Name at December 31, 2004 (1)
-------------------- -------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
David L. Cheek 42,000 -0- $ -0- $ -0-
Bert E. Downing, Jr. 40,000 -0- -0- -0-
- ----------
(1) The values shown in the table are based on the $.07 per share closing price
of the Common Stock on December 31, 2004, as reported by the OTC Bulletin
Board, less the exercise price of the options.
Pension Plan. Keystone maintains a qualified, noncontributory defined
benefit plan which provides defined retirement benefits to various groups of
eligible employees including executive officers. Normal retirement age under
Keystone's pension plan is age 65. The defined benefit for salaried employees,
including officers, is based on a straight life annuity. An individual's monthly
benefit is the sum of the following: (a) for credited service prior to January
1, 1981, the amount determined by his or her average monthly cash compensation
for the five years of his or her highest earnings prior to January 1, 1981,
multiplied by 1.1%, multiplied by the years of credited service, plus (b) for
each year of service between 1980 and 1989, the amount determined by the sum of
1.2% multiplied by his or her average monthly cash compensation that year up to
the social security wage base and 1.75% multiplied by his or her average monthly
cash compensation that year in excess of the social security wage base, plus (c)
for each year subsequent to 1989, the amount determined by 1.2% multiplied by
his or her average monthly cash compensation that year, but not less than $14.00
per month.
The estimated annual benefits payable upon retirement at normal retirement
age for each of the named executive officers, assuming continued employment with
Keystone until normal retirement age at current salary levels are: David L.
Cheek, $37,499; and Bert E. Downing, Jr., $60,963.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is or has been an officer or
employee of Keystone or any of its subsidiaries. No executive officer of
Keystone has served on the compensation committee, similar committee, or board
of directors of another entity, one of whose executive officers served on
Keystone's compensation committee or Board of Directors.
CODE OF ETHICS
Keystone has not adopted a code of ethics applicable to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. Keystone has not adopted
such code because of the limitations on its staff, its severely limited
financial resources and other significant additional burdens that its Chapter 11
filing have imposed on its available human and financial resources.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Keystone's executive officers, directors and persons who own more than 10% of a
registered class of Keystone's equity securities to file reports of ownership
with the SEC and Keystone. Based solely on the review of the copies of such
reports filed with the SEC, Keystone believes that for 2003 its executive
officers, directors and 10% stockholders complied with all applicable filing
requirements under Section 16(a).
SECURITY OWNERSHIP OF MANAGEMENT
As of December 31, 2004, Keystone's directors, the named executive officers
and the directors and executive officers as a group, beneficially owned, as
defined by the rules of the SEC, the shares of Common Stock shown in the
following table. All of the Company's outstanding Common Stock at December 31,
2004 was cancelled in connection with Keystone's emergence from Chapter 11 on
August 31, 2005.
Common Stock
------------------------------
Amount and Nature of Percent of
Beneficial Ownership (1) Class (1)(2)
Name of Beneficial Owner
- --------------------------------------------- ------------------- -----------
Thomas E. Barry..................................................... 9,000 (3)(4) *
Paul M. Bass, Jr.................................................... 14,000 (3)(4) *
David L. Cheek...................................................... 42,000 (3)(4) *
Keith R. Coogan..................................................... -0- *
Bert E. Downing, Jr................................................. 42,007 (3)(4) *
Glenn R. Simmons.................................................... 242,650 (3)(4)(5) 2.4%
William Spier....................................................... 149,559 (3) 1.5%
J. Walter Tucker, Jr................................................ 160,450 (3)(4) 1.6%
Steven L. Watson.................................................... 3,250 (3)(4) *
All directors and executive officers as a group (10 persons) ..... 686,516 (3)(4)(5) 6.7%
- --------------------
* Less than 1%.
(1) All beneficial ownership is sole and direct except as otherwise set forth
herein. Information as to the beneficial ownership of Common Stock has
either been furnished to Keystone by or on behalf of the indicated persons
or is taken from reports on file with the SEC. The number of shares and
percentage of ownership of Common Stock for each person or group assumes
the exercise by such person or group (exclusive of the exercise by others)
of stock options that such person or group may exercise within 60 days
subsequent to December 31, 2004.
(2) The percentages are based on 10,068,450 shares of Common Stock outstanding
as of December 31, 2004.
(3) The shares of Common Stock shown as beneficially owned by such person or
group include the following number of shares such person or group has the
right to acquire upon the exercise of stock options granted pursuant to
Keystone's various stock option plans that such person or group may
exercise within 60 days subsequent to December 31, 2004:
Shares of Common Stock
Issuable Upon the Exercise
of Stock Options On or Before
March 31, 2005
Name of Beneficial Owner
------------------------------------------------- -------------------
Thomas E. Barry........................................................... 7,000
Paul M. Bass, Jr.......................................................... 7,000
David L. Cheek............................................................ 42,000
Keith R. Coogan........................................................... -0-
Bert E. Downing, Jr....................................................... 40,000
Glenn R. Simmons.......................................................... 127,000
William Spier............................................................. 7,000
J. Walter Tucker, Jr...................................................... 7,000
Steven L. Watson.......................................................... 1,000
All other executive officers of Keystone as a group (1 person)............ 20,000
(4) Excludes certain shares that such individual may be deemed to indirectly
and beneficially own as to which such individual disclaims beneficial
ownership. See footnote (2) to the "Security Ownership of Certain
Beneficial Owners" table for a description of such excluded shares.
(5) Glenn R. Simmons is a brother of Harold C. Simmons. See footnote (2) to the
"Security Ownership of Certain Beneficial Owners" table.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table and footnotes set forth the stockholders known to
Keystone to be beneficial owners, as defined by regulations of the SEC, of more
than 5% of the outstanding shares of Common Stock as of December 31, 2004. The
table and footnotes also set forth the shares of Keystone's Series A 10%
Cumulative Convertible Pay-In-Kind Preferred Stock, stated value $1,000 and no
par value per share (the "Series A Preferred Stock"), Contran and its
subsidiaries beneficially owned as of December 31, 2004. See footnote (2) below
for information concerning individuals and entities that may be deemed to own
indirectly and beneficially those shares of Common Stock that Contran, Valhi and
NL directly and indirectly hold.
Common and
Series A
Common Stock Series A Preferred Stock Preferred
-------------------------- ------------------------ Stock
Amount and Amount and Combined
Nature of Nature of Percent
Beneficial Percent of Beneficial Percent of of
Beneficial Owner Ownership (1) Class (1) Owneship (1) Class (1) Class (1)
- ---------------------------- -------------- ---------- ------------- ---------- -----------
Harold C. Simmons:
Contran Corporation (2) 4,109,159 (3) 40.8% 54,956 (3) 76.4% 75.0%
Valhi, Inc. (2) 326,364 (3) 3.2% -0- (3) -0-% 1.4%
NL Industries, Inc. (2) 326,050 (3) 3.2% -0- (3) -0-% 1.4%
Harold Simmons
Foundation, Inc. 188,400 1.9% -0- (3) -0-% *
The Combined Master
Retirement Trust 30,000 * -0- (3) -0-% *
Annette C. Simmons 10,645 * -0- (3) -0-% *
--------- ------
4,990,618 49.6% 54,956 (3) 76.4% 78.7%
All of the Company's outstanding Common Stock and Series A Preferred Stock
at December 31, 2004 was cancelled in connection with Keystone's emergence from
Chapter 11 on August 31, 2005.
- --------------------
*Less than 1%
(1) The percentages are based on 10,068,450 shares of Common Stock and 71,899
shares of Series A Preferred Stock outstanding as of December 31, 2004.
Subject to Keystone's Restated Certificate of Incorporation, each share of
Series A Preferred Stock entitles its holder to convert such share into 250
shares of Common Stock (a conversion price equivalent to $4.00 per share of
the stated value). Except as otherwise provided by law, a share of Series A
Preferred Stock does not entitle its holder to voting rights. The combined
percent of class assumes the full conversion of only Contran's shares of
Series A Preferred Stock. The terms of the Series A Preferred Stock are set
forth in Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002. All information is taken from or based upon
ownership filings made by such persons with the SEC or upon information
provided by such persons.
(2) The business address of Contran, Valhi and NL is Three Lincoln Centre, 5430
LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697.
Contran, Valhi, NL, the Harold Simmons Foundation, Inc. (the "Foundation"),
The Combined Master Retirement Trust (the "Master Trust") and Annette C.
Simmons, the spouse of Harold C. Simmons, are the direct holders of
approximately 40.8%, 3.2%, 3.2%, 1.9%, 0.3% and 0.1%, respectively, of the
outstanding Common Stock. Contran is also the direct holder of
approximately 76.4% of the outstanding Series A Preferred Stock, which is
convertible into approximately 57.7% of the outstanding Common Stock
assuming only Contran's conversion of all of its Series A Preferred Stock.
Valhi, Tremont LLC ("Tremont") and Ms. Simmons are the direct holders of
approximately 63.1%, 21.4% and 0.1%, respectively, of the outstanding
common stock of NL. Valhi is the sole member of Tremont.
Valhi Group, Inc. ("VGI"), National City Lines, Inc. ("National"), Contran,
the Foundation, the Contran Deferred Compensation Trust No. 2 (the "CDCT
No. 2") and the Master Trust are the direct holders of 77.6%, 9.1%, 3.1%,
0.9%, 0.4% and 0.1%, respectively, of the outstanding common stock of
Valhi. National, NOA, Inc. ("NOA") and Dixie Holding Company ("Dixie
Holding") are the direct holders of approximately 73.3%, 11.4% and 15.3%,
respectively, of the outstanding common stock of VGI. Contran and NOA are
the direct holders of approximately 85.7% and 14.3%, respectively, of the
outstanding common stock of National. Contran and Southwest Louisiana Land
Company, Inc. ("Southwest") are the direct holders of approximately 49.9%
and 50.1%, respectively, of the outstanding common stock of NOA. Dixie Rice
Agricultural Corporation, Inc. ("Dixie Rice") is the direct holder of 100%
of the outstanding common stock of Dixie Holding. Contran is the holder of
100% of the outstanding common stock of Dixie Rice and approximately 88.9%
of the outstanding common stock of Southwest.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold
C. Simmons (the "Trusts"), of which Mr. Simmons is the sole trustee or held
by Mr. Simmons or persons or other entities related to Mr. Simmons. As sole
trustee of the Trusts, Mr. Simmons has the power to vote and direct the
disposition of the shares of Contran stock held by the Trusts. Mr. Simmons,
however, disclaims beneficial ownership of any Contran shares that the
Trusts hold.
The Foundation directly holds approximately 1.9% of the outstanding shares
of Common Stock and 0.9% of the outstanding shares of Valhi common stock.
The Foundation is a tax-exempt foundation organized for charitable
purposes.
The Master Trust directly holds approximately 0.3% of the outstanding
shares of Common Stock and 0.1% of the outstanding shares of Valhi common
stock. Valhi established the Master Trust as a trust to permit the
collective investment by master trusts that maintain the assets of certain
employee benefit plans Valhi and related companies adopt. Mr. Simmons is
the sole trustee of the Master Trust and a member of the trust investment
committee for the Master Trust. Mr. Simmons is a participant in one or more
of the employee benefit plans that invest through the Master Trust.
Harold C. Simmons is the chairman of the board and chief executive officer
of NL, and chairman of the board of Tremont, Valhi, VGI, National, NOA,
Dixie Holding, Dixie Rice, Southwest, Contran and the Foundation.
By virtue of the holding of the offices, the stock ownership and his
services as trustee, all as described above, Mr. Simmons may be deemed to
control such entities, and Mr. Simmons and certain of such entities may be
deemed to possess indirect beneficial ownership of the shares of Common
Stock or Series A Preferred Stock directly held by certain of such other
entities. Mr. Simmons, however, disclaims beneficial ownership of the
shares of Common Stock or Series A Preferred Stock beneficially owned,
directly or indirectly, by any of such entities, except to the extent of
his vested beneficial interest, if any, in any shares of Common Stock the
Master Trust directly holds.
Harold C. Simmons' spouse is the direct owner of 10,645 shares of Common
Stock and 69,475 shares of NL common stock. Mr. Simmons may be deemed to
share indirect beneficial ownership of such shares. Mr. Simmons disclaims
all such beneficial ownership.
Messrs. Barry and Tucker are directors of Valhi. Messrs. Glenn Simmons and
Watson are directors and executive officers of Valhi and Contran and
directors of NL. Messrs. Bass and Tucker are members of the trust
investment committee of the Master Trust. Messrs. David L. Cheek, Bert E.
Downing, Jr., Glenn Simmons, Harold Simmons and Watson are participants in
one or more of the employee benefit plans that invest through the Master
Trust. Each of such persons disclaims beneficial ownership of any shares of
Common Stock directly or indirectly owned by any of such entities, except
to the extent of such person's vested beneficial interest, if any, in any
shares of Common Stock the Master Trust directly holds.
The CDCT No. 2 directly holds approximately 0.4% of the outstanding Valhi
common stock. U.S. Bank National Association serves as the trustee of the
CDCT No. 2. Contran established the CDCT No. 2 as an irrevocable "rabbi
trust" to assist Contran in meeting certain deferred compensation
obligations that it owes to Harold C. Simmons. If the CDCT No. 2 assets are
insufficient to satisfy such obligations, Contran must satisfy the balance
of such obligations. Pursuant to the terms of the CDCT No. 2, Contran (i)
retains the power to vote the shares of Valhi common stock held directly by
the CDCT No. 2, (ii) retains dispositive power over such shares and (iii)
may be deemed the indirect beneficial owner of such shares.
For purposes of calculating the outstanding shares of Valhi common stock as
of December 31, 2004, 1,000,000, 3,522,967 and 1,186,200 shares of Valhi
common stock held by Valmont Insurance Company, a wholly owned subsidiary
of Valhi ("Valmont"), NL and a subsidiary of NL, respectively, are excluded
from the amount of Valhi common stock outstanding. Pursuant to Delaware
corporate law, Valhi treats these excluded shares held by these majority
owned subsidiaries as treasury stock for voting purposes.
The business address of Tremont, VGI, National, NOA, Dixie Holding, the
Master Trust and the Foundation is Three Lincoln Centre, 5430 LBJ Freeway,
Suite 1700, Dallas, Texas 75240-2697. The business address of Dixie Rice is
600 Pasquiere Street, Gueydan, Louisiana 70542. The business address of
Southwest is 402 Canal Street, Houma, Louisiana 70360.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides summary information required by SEC rules as
of December 31, 2004 with respect to Keystone's equity compensation plans under
which Keystone's equity securities may be issued to employees or nonemployees
(such as directors, consultants, advisers, vendors, customers, suppliers and
lenders) in exchange for goods or services. The Keystone Consolidated
Industries, Inc. 1992 Incentive Compensation Plan and the Keystone Consolidated
Industries, Inc. 1997 Long-Term Incentive Plan, both of which have been approved
by Keystone's stockholders, are the only such Keystone equity compensation
plans. The underlying Common Stock related to these options was cancelled in
connection with Keystone's emergence from Chapter 11 on August 31, 2005.
Column (A) Column (B) Column (C)
------------------ ------------------ ------------------
Number of
Securities
Remaining
Number of Available for
Securities to be Future Issuance
Issued Upon Weighted-Average Under Equity
Exercise of Exercise Price of Compensation Plans
Outstanding Outstanding (Excluding
Options, Options, Securities
Warrants and Warrants and Reflected in
Plan Category Rights Rights Column (A))
- ---------------- ------------------ ------------------ ------------------
Equity compensation plans
approved by security
holders.................... 369,000 $8.07 275,000
Equity compensation plans
not approved by security
holders.................... -0- -0- -0-
Total...................... 369,000 $8.07 275,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As set forth in Item 12 under the caption "Security Ownership of Certain
Beneficial Owners," Harold C. Simmons, through Contran and other entities or
persons, may be deemed to beneficially own approximately 49.6% of the
outstanding Common Stock as of December 31, 2004 (78.7% assuming the full
conversion of only Contran's shares of Series A Preferred Stock) and, therefore,
may be deemed to control Keystone. Keystone and other entities 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. Keystone continuously considers, reviews and evaluates
and understands that Contran and related entities continuously consider, review
and evaluate such transactions. Depending upon the business, tax and other
objectives then relevant, it is possible that Keystone might be a party to one
or more of such transactions in the future. In connection with these activities,
Keystone may consider issuing additional equity securities or incurring
additional indebtedness. Keystone's acquisition activities have in the past and
may in the future include participation in the acquisition or restructuring
activities conducted by other companies that may be deemed to be controlled by
Harold C. Simmons. It is the policy of Keystone to engage in transactions with
related parties on terms, in the opinion of Keystone, no less favorable to
Keystone than could be obtained from unrelated parties.
No specific procedures are in place that govern the treatment of
transactions among Keystone and its related entities, although such entities may
implement specific procedures as appropriate for particular transactions. In
addition, under applicable principles of law, in the absence of stockholder
ratification or approval by directors who may be deemed disinterested,
transactions involving contracts among companies under common control must be
fair to all companies involved. Furthermore, directors owe fiduciary duties of
good faith and fair dealing to all stockholders of the companies for which they
serve.
Glenn R. Simmons, J. Walter Tucker, Jr. and Sandra K. Myers are not
salaried employees of Keystone. Keystone has contracted with Contran, on a fee
basis payable in quarterly installments, to provide certain administrative and
other services to Keystone in addition to the services of Mr. Simmons and Ms.
Myers, including consulting services of Contran executive officers pursuant to
the Intercorporate Services Agreement between Contran and Keystone, a copy of
which is included as Exhibit 10.1 in the Annual Report on Form 10-K for the
fiscal year ended December 31, 2001. The fee incurred during 2004 was
$1,005,000. During 2004, the portion of the amount Keystone incurred pursuant to
the Intercorporate Services Agreements attributable to the services Mr. Glenn R.
Simmons provided Keystone was $151,800.
Tall Pines Insurance Company ("Tall Pines") and its predecessor company,
Valmont Insurance Company and EWI RE, Inc. ("EWI") provide for or broker certain
insurance policies for Contran and certain of its subsidiaries and affiliates,
including the Company. Tall Pines is a wholly-owned subsidiary of Valhi and EWI
is a wholly-owned subsidiary of NL. Prior to January 2002, an entity controlled
by one of Harold C. Simmons' daughters owned a majority of EWI, and Contran
owned the remainder of EWI. In January 2002, NL purchased EWI from its previous
owners. 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 2004, Keystone and its subsidiaries
paid approximately $2.1 million for policies provided or brokered by Tall Pines
and/or EWI. These amounts principally included payments for reinsurance and
insurance premiums paid to unrelated third parties, but also included
commissions paid to Tall Pines and EWI. In Keystone's opinion, the amounts that
Keystone and its subsidiaries paid for these insurance policies and the
allocation among the company and its affiliates of relative insurance premiums
are reasonable and similar to those they could have obtained through unrelated
insurance companies and/or brokers. Keystone expects that these relationships
with Tall Pines and EWI will continue in 2005.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for any uninsured loss.
Dallas Compressor Company, a subsidiary of Contran, sells compressors and
related services to Keystone. During 2004, Keystone purchased products and
services from Dallas Compressor Company in the amount of $20,000.
Aircraft services were purchased from Valhi in the amount of $17,000 for
the year ended December 31, 2004.
EWPFLLC had agreed to loan the Company up to an aggregate of $6 million
through February 29, 2004. Borrowings bore interest at the prime rate plus 3%,
and are collateralized by the stock of EWP. In addition, the Company paid a
commitment fee of .375% on the unutilized portion of the facility. The Company
never drew on this facility. However, EWPFLLC has issued a $250,000 letter of
credit for the benefit of the Company under this facility. The terms of this
loan were approved by the independent directors of the Company. The loan matured
in February 2004. During each of 2002 and 2003, Keystone paid EWPFLLC unused
line fees of $23,000, related to this facility. During 2004, Keystone paid
EWPFLLC a $100,000 facility fee in connection with the EWP DIP Facility. In
addition, the Company also paid EWPFLLC $305,000 in interest on the EWP DIP
facility during 2004. See Note 2.
Keystone has a 50% interest in a joint venture, Alter Recycling Company
L.L.C. ("ARC"), to operate a ferrous scrap recycling operation at Keystone's
facility in Peoria, Illinois. During 2004, Keystone purchased approximately $4.3
million of ferrous scrap from ARC.
During 2004, Keystone entered into a scrap supply agreement with Alter
Trading Corporation ("ATC"). The Company sources the majority of its ferrous
scrap supply from ATC under this agreement. ATC owns the 50% interest in ARC
that is not owned by Keystone. During 2004, Keystone purchased approximately
$99.9 million of ferrous scrap from ATC.
Keystone believes the terms of the transactions described above were no
less favorable to Keystone than those that could have been obtained from an
unrelated entity.
See also Notes 4 and 13 to the Consolidated Financial Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Independent Auditors. The firm of PricewaterhouseCoopers LLP ("PwC") served
as Keystone's independent registered public accounting firm for the year ended
December 31, 2004. Keystone expects PwC will be considered for appointment to
audit Keystone's annual consolidated financial statements for the year ending
December 31, 2005.
Pre-approval Policies and Procedures. Keystone's audit committee has
implemented pre-approval policies and procedures that require the audit
committee to pre-approve any services Keystone's independent registered public
accounting firm provides to Keystone or its subsidiaries.
Fees Paid to PwC. The following table shows the aggregate fees PwC has
billed or is expected to bill to Keystone and its subsidiaries for services
rendered for 2003 and 2004.
Type of Fees 2003 2004
---------------- ---- ----
Audit Fees (1) $647,821 $412,386
Audit-Related Fees (2) 90,610 134,267
Tax Fees (3) - -
All Other Fees (4) 9,100 -
-------- --------
Total $747,531 $546,653
======== ========
- -----------------------
(1) Fees for the following services:
(a) audits of Keystone's consolidated year-end financial statements for
each year ($629,821 and $392,386 in 2003 and 2004, respectively);
(b) reviews of the unaudited quarterly financial statements appearing in
Keystone's Form 10-Q for each of the first three quarters of 2003;
(c) normally provided statutory or regulatory filings or engagements for
each year; and
(d) the estimated out-of-pocket costs PwC incurred in providing all of
such services for which Keystone reimburses PwC.
(e) accounting consultations concerning comment letters received from the
United States Securities and Exchange Commission ($18,000 and $20,000
in 2003 and 2004, respectively)
(2) Fees for employee benefit plan audits ($90,610 and $134,267 in 2003 and
2004, respectively).
(3) Fees for tax compliance, tax advice and tax planning services.
(4) Fees for actuarial valuation services related to Keystone's post retirement
benefit plans.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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.
Exhibit No. Exhibit
3.1 Restated Certificate of Incorporation dated September 15, 1995, as 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, 2003).
3.2 Certificate of Amendment of the Restated Certificate of Incorporation dated
October 9, 2003, as filed with the Secretary of State of Delaware.
(Incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2003).
3.3 Amended and Restated Certificate of Incorporation of the Registrant dated
August 31, 2005, as filed with the Secretary of State of Delaware.
(Incorporated by reference to Exhibit 3.3 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2003).
3.4 Amended and Restated Certificate of Designations, Rights and Preferences of
the Series A 10% Cumulative Convertible Pay-In-Kind Preferred Stock of
Registrant dated March 12, 2003. (Incorporated by reference to Exhibit 3.2
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2002).
3.5 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).
3.6 Amended and Restated Bylaws of the Registrant dated August 31, 2005.
(Incorporated by reference to Exhibit 3.6 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2003).
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. (Incorporated by reference to Exhibit 4.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001).
Exhibit No. Exhibit
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. (Incorporated by reference to Exhibit 4.3 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001).
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). (Incorporated by reference to Exhibit 4.6
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
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). (Incorporated by reference to Exhibit 4.7
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
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). (Incorporated by reference to Exhibit 4.10
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
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). (Incorporated by reference to Exhibit 4.11
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
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). (Incorporated by reference to Exhibit 4.12
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
Exhibit No. Exhibit
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). (Incorporated by reference to Exhibit 4.13
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
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). (Incorporated by reference to Exhibit 4.14
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
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). (Incorporated by reference to Exhibit 4.15
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
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). (Incorporated by reference to Exhibit 4.16
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
4.17 Thirteenth Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of November 17,2003 between Registrant and Congress
Financial Corporation (Central). (Incorporated by reference to Exhibit 4.17
of the Registrant's Annual Report on Form 10-K for the year ended December
31, 2003).
4.18 Loan Agreement dated as of March 13, 2002 between Registrant and the County
of Peoria, Illinois. (Incorporated by reference to Exhibit 4.17 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2001).
4.19 Subordinate Security Agreement dated as of March 13, 2002 made by
Registrant in favor of the County of Peoria, Illinois. (Incorporated by
reference to Exhibit 4.18 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001).
4.20 Amended and Restated EWP Bridge Loan Agreement dated as of November 21,
2001, by and between Registrant and EWP Financial LLC. (Incorporated by
reference to Exhibit 4.19 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001).
4.21 First Amendment to Amended and Restated EWP Bridge Loan Agreement dated as
of March 18, 2002, by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.20 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001).
4.22 Second Amendment to Amended and Restated EWP Bridge Loan Agreement dated as
of December 31, 2002, by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.21 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002).
Exhibit No. Exhibit
4.23 Third Amendment to Amended and Restated EWP Bridge Loan Agreement dated as
of June 30, 2003, by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003).
4.24 Fourth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as
of July 31, 2003, by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.2 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003).
4.25 Fifth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as
of August 31, 2003, by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003).
4.26 Sixth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as
of September 30, 2003, by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.2 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003).
4.27 Seventh Amendment to Amended and Restated EWP Bridge Loan Agreement dated
as of October 31, 2003, by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.3 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003).
4.28 Eighth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as
of November 25, 2003 by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.28 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.29 Ninth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as
of December 15, 2003, by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.29 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.30 Tenth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as
of January 15, 2004, by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.30 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.31 Assumption Agreement and Amendment to Financing Agreements dated February
27, 2004 by and between Registrant and Congress Financial Corporation
(Central). (Incorporated by reference to Exhibit 4.31 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2003).
4.32 First Amendment to Post-Petition Credit Agreement dated December 10, 2004
by and between Registrant and Congress Financial Corporation (Central).
(Incorporated by reference to Exhibit 4.32 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
Exhibit No. Exhibit
4.33 Second Amendment to Post-Petition Credit Agreement dated March 31, 2005 by
and between Registrant and Congress Financial Corporation (Central).
(Incorporated by reference to Exhibit 4.33 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.34 Debtor-in-Possession Credit Agreement dated February 27, 2004 by and
between Registrant and EWP Financial LLC. (Incorporated by reference to
Exhibit 4.34 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2003).
4.35 First Amendment to Debtor-In-Possession Credit Agreement dated August 25,
2004 by and between Registrant and EWP Financial LLC. (Incorporated by
reference to Exhibit 4.35 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
4.36 Second Amendment to Debtor-In-Possession Credit Agreement dated December
31, 2004 by and between Registrant and EWP Financial LLC. (Incorporated by
reference to Exhibit 4.36 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
4.37 Stock Pledge Agreement dated as of November 21, 2001, by and between
Registrant and EWP Financial LLC. (Incorporated by reference to Exhibit
4.21 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.38 Form of Registrant's 6% Subordinated Unsecured Note dated as of March 15,
2002. (Incorporated by reference to Exhibit 4.22 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001).
4.39 Form of Registrant's 8% Subordinated Secured Note dated as of March 15,
2002. (Incorporated by reference to Exhibit 4.23 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001).
4.40 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. (Incorporated by reference to Exhibit
4.24 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.41 Revolving credit Facility Promissory Note dated as of January 5, 2004, by
and between Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated
by reference to Exhibit 4.41 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
4.42 Business Loan Agreement (Asset Based) dated as of January 5, 2004, by and
between Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.42 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
4.43 Term Promissory Note dated as of January 5, 2004, by and between Engineered
Wire Products, Inc. and Bank One, N.A. (Incorporated by reference to
Exhibit 4.43 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2003).
4.44 Commercial Security Agreement dated as of January 5, 2004, by and between
Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.44 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
Exhibit No. Exhibit
4.45 Amendment to Loan Agreement dated May 17, 2004 by and between Engineered
Wire Products, Inc. and Bank One, N.A. (Incorporated by reference to
Exhibit 4.45 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2003).
4.46 Business Loan Extension Agreement dated June 18, 2004 by and between
Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.46 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
4.47 Business Loan Extension Agreement dated September 30, 2004 by and between
Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.47 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
4.48 Business Loan Extension Agreement dated December 22, 2004 by and between
Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.48 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
4.49 Business Loan Extension Agreement dated March 30, 2005 by and between
Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.49 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
4.50 Business Loan Extension Agreement dated June 27, 2005, by and between
Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.50 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
4.51 Loan and Security Agreement dated August 31, 2005 by and between the
Registrant and Wachovia Capital Finance Corporation (Central).
(Incorporated by reference to Exhibit 4.51 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
10.1 Agreement Regarding Shared Insurance between Registrant, CompX
International, Inc., Contran Corporation, Kronos Worldwide, Inc., NL
Industries, Inc., Titanium Metals Corp. and Valhi, Inc. dated as of October
30, 2003. (Incorporated by reference to Exhibit 10.1 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2003).
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.)
Exhibit No. Exhibit
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. (Incorporated by reference
to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2001).
10.9 Account Reconciliation Agreement dated as of March 11, 2002 between
Registrant and PSC Metals, Inc. (Incorporated by reference to Exhibit 10.9
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
21 Subsidiaries of the Company.
31.1 Certification
31.2 Certification
32.1 Certification
*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 February 13, 2006, 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 February 13, 2006 by the following
persons on behalf of the registrant and in the capacities indicated:
/s/ GLENN R. SIMMONS /s/ STEVEN L. WATSON
- ------------------------------------ -----------------------------------
Glenn R. Simmons Steven L. Watson
Chairman of the Board Director
/s/ PAUL M. BASS, JR. /s/ DONALD P. ZIMA
- ------------------------------------ -----------------------------------
Paul M. Bass, Jr. Donald P. Zima
Director Director
/s/ RICHARD R. BURKHART /s/ DAVID L. CHEEK
- ------------------------------------ -----------------------------------
Richard R. Burkhart David L. Cheek
Director President and
Chief Executive Officer
/s/ JOHN R. PARKER /s/ BERT E. DOWNING, JR.
- ------------------------------------ --------------------------
John R. Parker Bert E. Downing, Jr.
Director Vice President, Chief
Financial Officer, Corporate
Controller and Treasurer
/s/ TROY T. TAYLOR (Principal Accounting and
- ------------------------------------ Financial Officer)
Troy T. Taylor
Director
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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 Registered Public Accounting Firm F-2
Consolidated Balance Sheets -
December 31, 2003 and 2004 F-3
Consolidated Statements of Operations -
Years ended December 31, 2002, 2003 and 2004 F-5
Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2002, 2003 and 2004 F-7
Consolidated Statements of Stockholders' Equity (Deficit) -
Years ended December 31, 2002, 2003 and 2004 F-8
Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2003 and 2004 F-9
Notes to Consolidated Financial Statements F-11
Financial Statement Schedule
Report of Independent Registered Public Accounting Firm S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Keystone Consolidated Industries,
Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the consolidated
financial position of Keystone Consolidated Industries, Inc. and its
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 our opinion.
As discussed in Note 2 to the consolidated financial statements, on February 26,
2004 the Company filed voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court (the
"Court"). The Company's Plan of Reorganization was substantially consummated on
August 31, 2005 and the Company emerged from bankruptcy. The matters discussed
above and the recurring losses from operations and the substantial deficiency in
stockholders' equity raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern
and do not include any adjustments relating to the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Dallas, Texas
December 23, 2005
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2004
(In thousands, except share data)
ASSETS 2003 2004
-------- --------
Current assets:
Notes and accounts receivable, net of allowances
of $347 and $448 $ 15,781 $ 26,729
Inventories 24,005 53,017
Prepaid expenses and other 1,253 2,017
Restricted investments - 5,373
-------- --------
Total current assets 41,039 87,136
-------- --------
Property, plant and equipment:
Land, buildings and improvements 56,066 56,252
Machinery and equipment 311,353 311,226
Construction in progress 1,375 1,558
-------- --------
368,794 369,036
Less accumulated depreciation 263,478 275,003
-------- --------
Net property, plant and equipment 105,316 94,033
-------- --------
Other assets:
Restricted investments 5,871 5,965
Prepaid pension cost 126,691 133,443
Deferred financing costs 1,607 1,226
Goodwill 752 752
Other 918 727
-------- --------
Total other assets 135,839 142,113
-------- --------
$282,194 $323,282
======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2003 and 2004
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
2003 2004
-------- --------
Current liabilities not subject to compromise:
Notes payable and current maturities of
long-term debt $ 55,451 $ 54,336
Accounts payable 13,784 1,105
Accounts payable to affiliates 2,992 821
Accrued OPEB cost 11,255 -
Accrued preferred stock dividends 10,623 -
Other accrued liabilities 37,144 18,964
--------- ---------
Total current liabilities not subject to
compromise 131,249 75,226
--------- ---------
Noncurrent liabilities not subject to compromise:
Long-term debt 32,224 14,345
Accrued OPEB cost 109,993 13,478
Other 16,666 988
--------- ---------
Total noncurrent liabilities not subject to
compromise 158,883 28,811
--------- ---------
Liabilities subject to compromise - 212,346
--------- ---------
Series A preferred stock, $1,000 stated
value; 250,000 shares authorized; 71,899
shares issued 2,112 2,112
--------- ---------
Stockholders' equity (deficit):
Common stock, $1 par value, 27,000,000 shares
authorized; 10,069,584 shares issued at
stated value 10,798 10,798
Additional paid-in capital 42,448 41,225
Accumulated deficit (63,284) (47,224)
Treasury stock - 1,134 shares, at cost (12) (12)
--------- ---------
Total stockholders' equity (deficit) (10,050) 4,787
--------- ---------
$ 282,194 $ 323,282
========= =========
Commitments and contingencies (Notes 15, 16 and 17).
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002, 2003 and 2004
(In thousands, except per share data)
2002 2003 2004
-------- -------- ------
Net sales $334,835 $306,671 $364,335
Cost of goods sold 315,579 310,881 322,232
-------- -------- --------
Gross margin (loss) 19,256 (4,210) 42,103
-------- -------- --------
Selling expense 7,754 6,934 5,634
General and administrative expense 16,385 10,689 10,766
Defined benefit pension expense (credit) (1,604) 6,898 (6,752)
-------- -------- --------
22,535 24,521 9,648
-------- -------- --------
Operating income (loss) (3,279) (28,731) 32,455
-------- -------- --------
General corporate income (expense):
Corporate expense (5,946) (5,973) (6,253)
Interest expense (5,569) (3,941) (3,705)
Interest income 66 41 132
Gain on early extinguishment of debt 54,739 - -
Gain on legal settlement - - 5,284
Gain on sale of business units - 1,073 -
Other income (expense), net 34 313 684
-------- -------- --------
43,324 (8,487) (3,858)
-------- -------- --------
Income (loss) before income taxes
and reorganization costs 40,045 (37,218) 28,597
Reorganization costs - - 11,158
-------- -------- --------
Income (loss) before income taxes 40,045 (37,218) 17,439
Provision for income taxes 21,622 - 1,379
Minority interest in after-tax earnings 1 299 -
-------- -------- -----
Income (loss) before cumulative effect of
change in accounting principle 18,422 (37,517) 16,060
Cumulative effect of change in accounting
principle 19,998 - -
-------- -------- -----
Net income (loss) 38,420 (37,517) 16,060
Dividends on preferred stock 4,683 5,940 1,223
-------- -------- --------
Net income (loss) available for
common shares $ 33,737 $(43,457) $ 14,837
======== ======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands, except per share data)
2002 2003 2004
---- ---- ----
Basic earnings (loss) per share available for common shares:
Income (loss) before cumulative effect
Of change in accounting principle $ 1.36 $ (4.32) $ 1.47
Cumulative effect of change in
accounting principle 1.99 - -
-------- ------- -------
Net income (loss) $ 3.35 $ (4.32) $ 1.47
======== ======= =======
Basic shares outstanding 10,067 10,068 10,068
======== ======= =======
Diluted earnings (loss) per share available for common shares:
Income (loss) before cumulative effect
Of change in accounting principle $ .84 $ (4.32) $ .57
Cumulative effect of change in
accounting principle .92 - -
-------- ------- ----
Net income (loss) $ 1.76 $ (4.32) $ .57
======== ======= =======
Diluted shares outstanding 21,823 10,068 28,043
======== ======= =======
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Net income (loss) $ 38,420 $(37,517) $ 16,060
Other comprehensive income (loss), net
of tax -
Pension liabilities adjustment (170,307) 170,307 -
--------- -------- -----
Comprehensive income (loss) $(131,887) $132,790 $ 16,060
========= ======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DEBTOR-IN-POSSESSION)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
Accumulated
other
comprehensive
Additional loss -
Common stock paid-in Pension Accumulated Treasury
Shares Amount capital Liabilities (deficit) stock Total
------ ------ ------- ----------- --------- ----------- --------
Balance - December 31, 2001 10,062 $10,792 $53,071 $ - $(64,187) $(12) $ (336)
Net income - - - - 38,420 - 38,420
Issuance of common stock 6 6 - - - - 6
Preferred stock dividends - - (4,683) - - - (4,683)
Other comprehensive loss - - - (170,307) - - (170,307)
------- ------- ------- --------- -------- ---- ---------
Balance - December 31, 2002 10,068 10,798 48,388 (170,307) (25,767) (12) (136,900)
Net loss - - - - (37,517) - (37,517)
Preferred stock dividends - - (5,940) - - - (5,940)
Other comprehensive income - - - 170,307 - - 170,307
------- ------- ------- --------- -------- ---- ---------
Balance - December 31, 2003 10,068 10,798 42,448 - (63,284) (12) (10,050)
Net income - - - - 16,060 - 16,060
Preferred stock dividends - - (1,223) - - - (1,223)
------- ------- ------- --------- -------- ---- ---------
Balance - December 31, 2004 10,068 $10,798 $41,225 $ - $(47,224) $(12) $ 4,787
======= ======= ======= ========= ======== ==== =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
-------- ------- -------
Cash flows from operating activities:
Net income (loss) $ 38,420 $(37,517) $ 16,060
Depreciation and amortization 17,396 16,461 15,812
Amortization of deferred financing costs 747 742 1,108
Deferred income taxes 21,622 - -
Non-cash OPEB expense 5,064 7,158 15,655
Non-cash defined benefit pension
expense (credit) (1,604) 6,898 (6,752)
Gain on early extinguishment of debt (54,739) - -
Gain on legal settlement - - (5,284)
Cumulative effect of change in accounting
principle (19,998) - -
Reorganization costs accrued - - 11,158
Reorganization costs paid - - (8,275)
Other, net (882) (1,440) 576
Change in assets and liabilities:
Notes and accounts receivable 6,901 5,887 (11,049)
Inventories (9,177) 20,097 (29,012)
Accounts payable 1,497 (6,412) 4,237
Other, net 4,868 (5,875) 3,702
-------- -------- --------
Net cash provided by operating
activities 10,115 5,999 7,936
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (7,973) (2,683) (5,080)
Proceeds from sale of business units - 3,344 -
Collection of notes receivable 1,127 75 75
Restricted investments (55) (141) (5,467)
Other, net 1 (619) 76
-------- -------- --------
Net cash used by investing
activities (6,900) (24) (10,396)
-------- -------- --------
Cash flows from financing activities:
Revolving credit facilities, net (14,446) (7,087) (10,304)
Other notes payable and long-term debt:
Additions 15,065 3,588 16,028
Principal payments (1,354) (2,446) (2,537)
Deferred financing costs paid (2,480) (30) (727)
-------- -------- --------
Net cash provided (used) by financing
activities (3,215) (5,975) 2,460
-------- -------- --------
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
------ ------ ------
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 $ 4,669 $ 2,789 $ 2,306
Income taxes paid (refund), net 74 18 (27)
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
At December 31, 2004, 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.
At December 31, 2004, Contran owned 54,956 shares of the 71,899 shares of the
Company's Redeemable Series A Preferred Stock. See Notes 6 and 7. Each share of
Series A Preferred Stock is convertible, at the option of the holder, into 250
shares of the Company's common stock, (equivalent to a $4.00 per share exchange
rate).
The accompanying financial statements have been prepared under the
assumption the Company will continue to operate on a going concern basis, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the ordinary course of business and do not reflect adjustments
that might result if Keystone is unable to continue as a going concern. However,
on February 26, 2004, Keystone and five of its direct and indirect subsidiaries
filed for voluntary protection under Chapter 11 of the Federal Bankruptcy Code.
Keystone and its subsidiaries filed their petitions in the U.S. Bankruptcy Court
for the Eastern District of Wisconsin in Milwaukee (the "Court"). Keystone's
amended plan of reorganization was accepted by the impacted constitutencies and
confirmed by the Court on August 10, 2005. The Company emerged from bankruptcy
protection on August 31, 2005. See Note 2.
Under Chapter 11 proceedings, actions by creditors to collect claims in
existence at the filing date ("Pre-petition Claims") are stayed, absent specific
authorization by the Court to pay such claims, while the Company continues to
manage the business as a debtor-in-possession. Keystone received approval from
the Court to pay certain of its Pre-petition Claims including employee wages and
certain employee benefits. All of the Company's liabilities at December 31, 2003
(other than liabilities of one of the Company's subsidiaries that was not a
party to the bankruptcy filing), to the extent they were not extinguished before
February 26, 2004, are considered Pre-petition Claims.
Management's Estimates. 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.
Principles of consolidation. The consolidated financial statements include
the accounts of Keystone 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 2004 presentation.
Fiscal year. The Company's fiscal year is 52 or 53 weeks and ends on the
last Sunday in December. Each of fiscal 2002, 2003 and 2004 were 52-week years.
Inventories and cost of sales. 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 66% and 84% of the inventories held at December 31, 2003 and
2004, respectively. The first-in, first-out or average cost methods are used to
determine the cost of all other inventories. Cost of sales include costs for
materials, packing and finishing, utilities, salaries and benefits, maintenance,
shipping and handling costs and depreciation.
Property, plant and equipment and depreciation expense. Property, plant and
equipment are stated at cost. 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 for financial reporting
purposes amounted to $17,376,000, $16,459,000 and $15,812,000 during the years
ended December 31, 2002, 2003 and 2004, respectively. Upon 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.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. Keystone performs certain
planned major maintenance activities during the year (generally during the
fourth quarter). The costs estimated to be incurred in connection with these
maintenance activities are accrued in advance on a straight-line basis and are
included in cost of goods sold.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized in
2002 amounted to $79,000. Interest costs capitalized in each of 2003 and 2004
amounted to $3,000.
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. The Company assesses
impairment of goodwill in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, and the
Company commenced assessing impairment of other long-lived assets (such as
property and equipment) in accordance with SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets. The effects of the Company's
Chapter 11 proceedings and reorganization or liquidation could cause management
to reassess its present estimate of future cash flows currently used in its
impairment analysis. See Note 2.
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.
Deferred financing costs. Deferred financing costs relate primarily to the
issuance of substantially all of Keystone's long-term debt as well as its
primary revolving credit facility and are amortized by the interest method over
the respective terms of these debt facilities. Deferred financing costs are
stated net of accumulated amortization of $5,699,000 and $6,808,000 at December
31, 2003 and 2004, respectively.
Goodwill and negative goodwill. Goodwill represents the excess of cost over
fair value of individual net assets acquired in business combinations accounted
for by the purchase method. Under SFAS No. 142 goodwill is not subject to
periodic amortization.
The Company assesses impairment of goodwill in accordance with SFAS No.
142. The Company's recorded goodwill relates to a business segment that was not
included in the Chapter 11 petitions filed in February 2004. See Note 2.
Negative goodwill represented the excess of fair value over cost of
individual net assets acquired in business combinations accounted for by the
purchase method and was amortized by the straight-line method over 20 years
through December 31, 2001. Upon adoption of SFAS No. 142, effective January 1,
2002, negative goodwill with a net book value of $20.0 million was eliminated as
a cumulative effect of change in accounting principle.
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 10.
Environmental liabilities. Keystone records liabilities related to
environmental remediation when estimated future expenditures are probable and
reasonably estimable. 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. Such accruals are adjusted as further information becomes available or
circumstances change. Estimated future expenditures 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, 2003 and 2004 Keystone had such assets recorded of approximately $323,000.
See Note 11.
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.
Net sales. Sales are recorded when products are shipped because title and
other risks and rewards of ownership have passed to the customer. Shipping terms
of products shipped are generally FOB shipping point, although in some instances
shipping terms are FOB destination point (for which sales are not recognized
until the product is received by the customer). Amounts charged to customers for
shipping and handling are included in net sales. Sales are stated net of price,
early payment and distributor discounts and volume rebates.
Selling, general and administrative expenses. Selling, general and
administrative expenses include costs related to marketing, sales, distribution,
and administrative functions such as accounting, treasury and finance, and
includes costs for salaries and benefits, travel and entertainment, promotional
materials and professional fees. Advertising costs, expensed as incurred, were
$.8 million in 2002, $1.0 million in 2003 and $.6 million in 2004.
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 goods sold when the recovery
is received. During 2002 Keystone received such business interruption insurance
recoveries of approximately $934,000. Keystone did not receive any such
recoveries during 2003 or 2004.
Income (loss) per share. Basic and diluted income (loss) per share is based
upon the weighted average number of common shares actually outstanding during
each year. Diluted earnings per share includes the diluted impact, if any, of
the Company's convertible preferred stock. The impact of outstanding stock
options was antidilutive for all periods presented. The weighted average number
of outstanding stock options which were excluded from the calculation of diluted
earnings per share because their impact would have been antidilutive
approximated 606,000, 462,000 and 374,000 in 2002, 2003 and 2004, respectively.
Employee stock options. Keystone accounts for stock-based employee
compensation in accordance with Accounting Principles Board Opinion ("APBO") No.
25, Accounting for Stock Issued to Employees, and its various interpretations.
See Notes 9 and 19. Under APBO No. 25, no compensation cost is generally
recognized for fixed stock options in which the exercise price is equal to or
greater than the market price on the grant date. Compensation cost related to
stock options recognized by the Company in accordance with APBO No. 25 has not
been significant in each of the past three years.
The following table presents what the Company's consolidated net income
(loss), and related per share amounts, would have been in 2002, 2003 and 2004 if
Keystone would have elected to account for its stock-based employee compensation
related to stock options in accordance with the fair value-based recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all
awards granted subsequent to January 1, 1995.
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands except per
share amounts)
Net income (loss) available for common
Shares as reported $38,420 $(37,517) $16,060
Adjustments, net of applicable income
tax effects:
Stock-based employee compensation
expense under APBO No. 25 - - -
Stock-based employee compensation
expense under SFAS No. 123 (185) (25) -
------- -------- --------
Pro forma net income (loss) available for
Common shares $38,235 $(37,542) $16,060
======= ======== =======
Basic net income (loss) available for common shares per share:
As reported $ 3.35 $ (4.32) $ 1.47
Pro forma $ 3.33 $ (4.32) $ 1.47
Diluted net income (loss) available for common shares per share:
As reported $ 1.76 $ (4.32) $ .57
Pro forma $ 1.75 $ (4.32) $ .57
Derivative activities. The Company has 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 and was not a party to
any significant derivative or hedging instrument covered by SFAS No. 133 and
therefore the Company's financial statements are not impacted by SFAS No. 133.
Chapter 11. Legal and professional fees incurred in connection with the
Company's Chapter 11 filing have been expensed as incurred. These fees relate
primarily to fees paid to lawyers and financial advisors representing Keystone
as well as the other impacted constituencies. During 2004, such reorganization
costs amounted to approximately $11.2 million.
The Company has determined there is insufficient collateral to cover the
interest portion of scheduled payments on its pre-petition unsecured debt. As
such, the Company discontinued accruing interest on its unsecured 6% Notes and
unsecured 9 5/8% Notes as of February 26, 2004, the filing date. Contractual
interest on those obligations subsequent to February 26, 2004 was approximately
$1.0 million, and as such, actual interest expense during 2004 exceeded recorded
interest expense by the same amount. In addition, the Company also discontinued
accruing dividends on its preferred stock at the filing date.
Note 2 - Bankruptcy
On February 26, 2004, Keystone and five of its direct and indirect
subsidiaries filed for voluntary protection under Chapter 11 of the Federal
Bankruptcy Code. Keystone and its subsidiaries filed their petitions in the U.S.
Bankruptcy Court for the Eastern District of Wisconsin in Milwaukee. The Company
is managing its business as a debtor-in possession subject to approval by the
Court. Keystone attributed the need to reorganize to weaknesses in product
selling prices over the last several years, unprecedented increases in ferrous
scrap costs, Keystone's primary raw material, and significant liquidity needs to
service retiree medical costs. These problems substantially limited Keystone's
liquidity and undermined its ability to obtain sufficient debt or equity capital
to operate as a going concern.
Under Chapter 11 proceedings, actions by creditors to collect pre-petition
Claims in existence at the filing date are stayed, absent specific authorization
from the Court to pay such claims while the Company manages the business as a
debtor-in-possession. Keystone received approval from the Court to pay certain
of its pre-petition liabilities, including employee wages and certain employee
benefits. See Note 12.
Keystone filed a plan of reorganization on October 4, 2004 and amended that
plan on May 26, 2005, June 21, 2005 and June 27, 2005. Keystone's amended plan
of reorganization was accepted by the impacted constituencies and confirmed by
the Court on August 10, 2005. The Company emerged from bankruptcy protection on
August 31, 2005. Significant provisions of Keystone's amended plan of
reorganization included, among other things:
o Assumption of the previously negotiated amendment to the collective
bargaining agreement with the Independent Steel Workers Alliance (the
"ISWA"), Keystone's largest labor union; o Assumption of the previously
negotiated agreements reached with certain retiree groups that will provide
relief by permanently reducing healthcare related payments to these retiree
groups from pre-petition levels;
o The Company's obligations due to pre-petition secured lenders other than
its Debtor-In-Possession lenders were reinstated in full against
reorganized Keystone;
o All shares of Keystone's common and preferred stock outstanding at the
petition date (February 26, 2004) were cancelled;
o Pre-petition unsecured creditors with allowed claims against Keystone will
receive, on a pro rata basis, in the aggregate, $5.2 million in cash, a
$4.8 million secured promissory note and 49% of the new common stock of
reorganized Keystone;
o Certain operating assets and existing operations of Sherman Wire Company
("Sherman Wire"), one of Keystone's pre-petition wholly-owned subsidiaries,
will be sold at fair market value to Keystone, which will then be used to
form and operate a newly created wholly-owned subsidiary of reorganized
Keystone named Keystone Wire Products Inc.;
o Sherman Wire was also reorganized and the proceeds of the operating asset
sale to Keystone and other funds will be distributed, on a pro rata basis,
to Sherman Wire's pre-petition unsecured creditors as their claims are
finally adjudicated;
o Sherman Wire's pre-petition wholly-owned non-operating subsidiaries, J.L.
Prescott Company, and DeSoto Environmental Management, Inc. as well as
Sherman Wire of Caldwell, Inc., a wholly-owned subsidiary of Keystone, will
ultimately be liquidated and the pre-petition unsecured creditors with
allowed claims against these entities will receive their pro-rata share of
the respective entity's net liquidation proceeds; o Pre-petition unsecured
creditors with allowed claims against FV Steel & Wire Company, another one
of Keystone's wholly-owned subsidiaries, will receive cash in an amount
equal to their allowed claims;
o One of Keystone's Debtor-In-Possession lenders, EWP Financial, LLC (an
affiliate of Contran) converted $5 million of its DIP credit facility,
certain of its pre-petition unsecured claims and all of its administrative
claims against Keystone into 51% of the new common stock of reorganized
Keystone; and
o The Board of Directors of reorganized Keystone now consists of seven
individuals, two each of which were designated by Contran and the Official
Committee of Unsecured Creditors (the "OCUC"), respectively. The remaining
three directors qualify as independent directors (two of the independent
directors were appointed by Contran with the OCUC's consent and one was
appointed by the OCUC with Contran's consent).
In addition, Keystone has obtained an $80 million secured credit facility
from Wachovia Capital Finance (Central). Proceeds from this credit facility were
used to extinguish Keystone's existing Debtor-In-Possession ("DIP") credit
facilities, the EWP Term Loan and the EWP Revolver and to provide working
capital for reorganized Keystone. The facility includes a term loan in the
amount of up to $25.0 million, subject to a borrowing base calculation based on
the market value of the Company's real property and equipment. To the extent
there is sufficient borrowing base, the term loan portion of this credit
facility can be reloaded in the amount of $10.0 million. The portion of the
credit facility in excess of the term loan balance is available to the Company
as a revolving credit facility subject to a borrowing base calculation based on
eligible receivables and inventory balances. Interest rates on the credit
facility range from the prime rate to the prime rate plus .5% depending on
Keystone's excess availability, as defined in the credit agreement. The facility
also provides for a LIBOR interest rate option. Under the terms of the credit
facility, the Company is required to annually pay down the term loan portion of
the facility in the amount of 25% of excess cash flow, as defined in the
agreement, subject to a $2.0 million annual and a $5.0 million aggregate limit.
The facility also includes performance covenants related to minimum levels of
cash flow and fixed charge coverage ratio. Keystone paid the lender
approximately $400,000 of diligence, commitment and closing fees in connection
with this facility.
At December 31, 2004, the net assets of the one subsidiary of Keystone
which was not party to the bankruptcy proceeding, included in the Company's
consolidated net assets, was approximately $14.2 million, consisting of current
assets of $20.4 million, noncurrent assets (primarily net property and
equipment) of $6.3 million, current liabilities of $8.3 million and noncurrent
liabilities (primarily long-term debt) of $4.2 million.
Note 3 - Business Segment Information:
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, President and Chief Executive Officer of
Keystone. Each operating segment is separately managed, and each operating
segment represents a strategic business unit offering different products.
The Company's operating segments are organized along its manufacturing
facilities and include two reportable segments: (i) Keystone Steel and Wire
("KSW") which manufacturers and sells wire rod, wire and wire products for
agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer markets and, (ii) Engineered Wire Products
("EWP") which manufactures and sells welded wire reinforcement in both roll and
sheet form that is utilized in concrete construction products including pipe,
pre-cast boxes and applications for use in roadways, buildings and bridges. EWP
is not included in the Company's February 2004 bankruptcy proceedings. See Note
2.
Prior to July 2003, the Company owned a 51% interest in Garden Zone LLC
("Garden Zone"), a distributor of wire, plastic and wood lawn and garden
products to retailers. In July 2003, Garden Zone purchased Keystone's 51%
ownership in Garden Zone.
In addition, prior to July 2003, Keystone also operated three businesses
that did not constitute reportable business segments. These businesses sold
wire, nails and wire products for agricultural, industrial, construction,
commercial, original manufacturers and retail consumer markets. The results of
operations of these businesses are aggregated and included under the "All Other"
heading in the following tables. During July 2003, Keystone transferred its
operations at one of these three businesses to other Keystone facilities, and
during August 2003 Keystone sold another of the businesses. As a result, as of
August 2003, the "All Other" heading in the following tables only includes
Sherman Wire ("Sherman").
Keystone is also engaged in a scrap recycling joint venture through its 50%
interest in Alter Recycling Company, L.L.C. ("ARC"), an unconsolidated equity
affiliate.
KSW's products and EWP's products are distributed primarily in the
Midwestern, Southwestern and Southeastern United States. Garden Zone's products
were distributed primarily in the Southeastern United States.
Business Segment Principal entities Location
Keystone Steel & Wire Keystone Steel & Wire Peoria, Illinois
Engineered Wire Products Engineered Wire Products Upper Sandusky, Ohio
Garden Zone Garden Zone (1) Charleston, South
Carolina
All other Sherman Wire Sherman, Texas
Sherman Wire
of Caldwell, Inc. (2) Caldwell, Texas
Keystone Fasteners (3) Springdale, Arkansas
(1) 51.0% subsidiary - interest sold in July 2003.
(2) Transferred operations in July 2003 to Sherman Wire and Keystone Steel &
Wire.
(3) Business sold in August 2003.
The net proceeds from the sale of Garden Zone and Keystone Fasteners
aggregated $3.3 million. The gain on the sale of these businesses, as well as
the results of operations of each of Garden Zone and Keystone Fasteners are not
significant, individually and in the aggregate. Accordingly, the Company has
elected not to present their results of operations as discontinued operations
for all periods presented due to their immateriality.
Keystone evaluates segment performance based on segment operating income,
which is defined as income before income taxes and interest expense, exclusive
of certain items (such as gains or losses on disposition of business units or
sale of fixed assets) and certain general corporate income and expense items
(including interest income) which are not attributable to the operations of the
reportable operating segments.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that (i) defined benefit
pension expense for each segment is recognized and measured on the basis of
estimated current service cost of each segment, with the remainder of the
Company's net defined benefit pension expense or credit not allocated to each
segment but still is reported as part of operating profit or loss, (ii) segment
OPEB expense is recognized and measured based on the basis of the estimated
expense of each segment with the remainder of the Company's actual OPEB expense
not allocated to each segment but still is reported as part of operating profit
or loss, (iii) elimination of intercompany profit or loss on ending inventory
balances is not allocated to each segment but still is reported as part of
operating profit or loss, (iv) LIFO inventory reserve adjustments are not
allocated to each segment but still are reported as part of operating profit or
loss, and (v) amortization of goodwill and negative goodwill are included in
general corporate expenses and are not allocated to any segment and are not
included in total reporting operating profit or loss. General corporate expenses
also includes OPEB and environmental expenses relative to facilities no longer
owned by the Company. Intercompany sales between reportable segments are
generally recorded at prices that approximate market prices to third-party
customers.
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.
GAAP
Adjustments,
Corporate
Items
Garden All Segment and
KSW EWP Zone Other Total Eliminations Total
--- --- ------ ----- ------- ------------ -----
(In thousands)
Year ended December 31, 2004:
Third party net sales $299,117 $58,982 $ - $ 6,187 $364,286 $ 49 $364,335
Intercompany sales 47,586 - - 10,006 57,592 (57,592) -
-------- ------- ------- -------- -------- -------- -----
$346,703 $58,982 $ - $ 16,193 $421,878 $(57,543) $364,335
======== ======= ======= ======== ======== ======== ========
Depreciation and $ -
amortization $ 13,418 $ 1,037 $ 1,171 $ 15,626 $ 186 $ 15,812
Operating profit (loss) 10,126 10,598 - (422) 20,302 12,153 32,455
Identifiable segment assets 146,869 26,708 - 7,891 181,468 141,814 323,282
Capital expenditures 4,727 274 - 77 5,078 2 5,080
Year ended December 31, 2003:
Third party net sales $244,069 $35,260 $11,203 $ 16,139 $306,671 $ - $306,671
Intercompany sales 30,215 - 879 11,988 43,082 (43,082) -
-------- ------- ------- -------- -------- -------- -----
$274,284 $35,260 $12,082 $ 28,127 $349,753 $(43,082) $306,671
======== ======= ======= ======== ======== ======== ========
Depreciation and
amortization $ 13,905 $ 1,014 $ - $ 1,491 $ 16,410 $ 51 $ 16,461
Operating profit (loss) (21,388) 2,721 700 (4,579) (22,546) (6,185) (28,731)
Identifiable segment assets 121,826 20,635 - 7,765 150,226 131,968 282,194
Capital expenditures 2,197 380 32 74 2,683 - 2,683
Year ended December 31, 2002:
Third party net sales $256,290 $32,935 $ 9,523 $ 36,087 $334,835 $ - $334,835
Intercompany sales 34,528 - 1,221 9,398 45,147 (45,147) -
-------- ------- ------- -------- -------- -------- -----
$290,818 $32,935 $10,744 $ 45,485 $379,982 $(45,147) $334,835
======== ======= ======= ======== ======== ======== ========
Depreciation and $ -
amortization $ 14,693 $ 1,006 $ 1,646 $ 17,345 $ 51 $ 17,396
Operating profit (loss) (3,921) 2,743 85 (2,971) (4,064) 785 (3,279)
Identifiable segment assets 157,321 18,130 4,186 18,537 198,174 17,321 215,495
Capital expenditures 7,597 164 - 208 7,969 4 7,973
In the above tables, GAAP adjustments relate to operating profit (loss),
Corporate items relate to depreciation and amortization, segment assets and
capital expenditures and eliminations relate to net sales. GAAP adjustments are
principally (i) the difference between the defined benefit pension expense or
credit and OPEB expense allocated to the segments and the actual expense or
credit included in the determination of operating profit or loss, (ii) the
elimination of intercompany profit or loss on ending inventory balances and
(iii) LIFO inventory reserve adjustments.
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Operating income (loss) $(3,279) $(28,731) $ 32,455
General corporate items:
Interest income 66 41 132
Other income 34 1,386 684
General income (expenses), net (5,946) (5,973) (6,253)
Gain on early extinguishment of debt 54,739 - -
Gain on legal settlement - - 5,284
Interest expense (5,569) (3,941) (3,705)
------- -------- --------
Income (loss) before income taxes and
reorganization costs $40,045 $(37,218) $ 28,597
======= ======== ========
Substantially 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,
2002 2003 2004
---- ---- ----
(In thousands)
United States $316,361 $303,668 $359,575
Canada 1,400 2,876 4,437
Great Britain 214 125 180
Ireland - - 80
Australia 5 - 63
Japan - 2 -
-------- -------- --------
$317,980 $306,671 $364,335
======== ======== ========
Note 4 - Joint ventures
In January 1999, Keystone and two unrelated parties formed Garden Zone to
supply wire, wood and plastic products to the consumer lawn and garden market.
Prior to July 2003, Keystone owned 51% of Garden Zone and, as such, Keystone's
consolidated financial statements included 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 6. Garden Zone commenced operations in
February 1999 and its net income since that date, of which 51% accrued to
Keystone for financial reporting purposes, has been insignificant. In July 2003,
Garden Zone purchased Keystone's 51% ownership in Garden Zone.
In July 1999, Keystone formed ARC, a joint venture with Alter Peoria, Inc.,
to operate a ferrous scrap recycling operation at Keystone's facility in Peoria,
Illinois. ARC sells ferrous scrap to Keystone and others. Upon formation,
Keystone contributed the property and equipment of its Peoria ferrous 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 ferrous scrap facility's existing inventory to ARC upon
commencement of ARC's operations. Prior to 2001, Keystone had reduced its
investment in ARC to zero due to operating losses incurred by ARC. During 2002,
2003 and 2004, Keystone purchased approximately $5.2 million, $5.5 million and
$4.3 million respectively of ferrous scrap from ARC.
Note 5 - Inventories
December 31,
2003 2004
---- ----
(In thousands)
Steel and wire products:
Raw materials $ 5,937 $15,142
Work in process 5,694 21,305
Finished products 12,818 28,941
Supplies 12,693 14,844
------- -------
37,142 80,232
Less LIFO reserve 13,137 27,215
------- -------
$24,005 $53,017
Note 6 - Notes payable and long-term debt
Substantially all of the indebtedness at December 31, 2003, described below
other than EWP's revolving credit facility and term note, is a Pre-petition
Claim under the Chapter 11 filing. Of such Pre-petition Claim indebtedness, the
unsecured 6% Notes and the unsecured 9 5/8% Notes are classified as liabilities
subject to compromise at December 31, 2004, and Keystone ceased to accrue
interest on such indebtedness upon filing for Chapter 11 on February 26, 2004.
See Note 12.
December 31,
2003 2004
---- ----
(In thousands)
Revolving credit facilities:
Keystone $ 16,863 $ -
EWP 3,997 1,989
DIP facilities:
Congress - 17,804
EWP - 5,000
8% Notes 28,116 28,116
6% Notes 16,031 -
9 5/8% Notes 6,150 -
Term loans:
Keystone 6,365 -
County 10,000 10,000
EWP - 5,513
Other 153 259
------- -------
87,675 68,681
Less current maturities 55,451 54,336
------- -------
$32,224 $14,345
During March 2002, Keystone completed an exchange offer (the "Exchange
Offer") with respect to the 9 5/8% Notes pursuant to which, among other things,
holders of $93.9 million principal amount of the 9 5/8% Notes exchanged their 9
5/8% 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 9 5/8% Notes
were retired:
o $79.2 million principal amount of 9 5/8% Notes were exchanged for (i) $19.8
million principal amount of 8% Subordinated Secured Notes due 2009 (the "8%
Notes") 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 9 5/8% Notes were exchanged for $14.5
million principal amount of 6% Subordinated Unsecured Notes due 2011 (the
"6% Notes"), and
o $175,000 principal amount of 9 5/8% 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 9
5/8% Notes was released, and the 9 5/8% Note indenture was amended to eliminate
substantially all covenants related to the 9 5/8% Notes, including all
financial-related covenants.
The 8% 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 8% Notes are collateralized by a second-priority lien
on substantially all of the existing fixed and intangible assets of the Company
and its subsidiaries (excluding EWP), other than the real property and other
fixed assets comprising Keystone's steel mill in Peoria, Illinois, on which
there is a third-priority lien. Keystone may redeem the 8% Notes, at its option,
in whole or in part at any time with no prepayment penalty. The 8% Notes are
subordinated to all existing senior indebtedness of Keystone, including, without
limitation, the revolving credit facilities of Keystone and EWP, the Keystone
Term Loan (as defined below) and, to the extent of the Company's steel mill in
Peoria, Illinois, the County Term Loan (as defined below). The 8% Notes rank
senior to any expressly subordinated indebtedness of Keystone, including the 6%
Notes. In October 2002, Contran purchased $18.3 million of the total $19.8
million principal amount at maturity of the 8% Notes. As such, approximately
$26.0 million of the recorded $28.1 million liability for the 8% Notes at both
December 31, 2003 and 2004 was payable to Contran.
The 6% 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 March
2009, 2010, 2011 and May 2011. Keystone may redeem the 6% Notes, at its option,
in whole or in part at any time with no prepayment penalty. The 6% Notes are
subordinated to all existing and future senior or secured indebtedness of the
Company, including, without limitation, the revolving credit facilities of
Keystone, EWP and Garden Zone, the Keystone Term Loan (as defined below), the
County Term Loan (as defined below), the 8% Notes and any other future
indebtedness of the Company which is not expressly subordinated to the 6% Notes.
Keystone accounted for the 9 5/8% 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 were recorded at their aggregate
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 were recorded at their
aggregate estimated fair value at issuance of $2.1 million,
o The 8% Notes were 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% Notes were recorded at the $16.0 million carrying amount of the
associated 9 5/8% 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 reported a $54.7
million pre-tax gain ($33.1 million net of income taxes) in the first quarter of
2002 related to the exchange of the 9 5/8% Notes. Because of differences between
the income tax treatment and the financial reporting treatment of the exchange,
the Company reported $65.8 million of income for federal income tax purposes
resulting from the exchange. However, all of the taxable income generated from
the exchange was offset by utilization of the Company's net operating loss
carryforwards, and no cash income tax payments were required to be paid as a
result of the exchange.
As part of its efforts to restructure the 9 5/8% Notes, in April 2002
Keystone received a new $10 million term loan from the County of Peoria,
Illinois (the "County Term Loan"). The County Term Loan does not bear interest,
requires no amortization of principal, is due in 2007 and is collateralized by a
second priority lien on the real property and other fixed assets comprising
KSW's steel mill in Peoria, Illinois. Proceeds from the County Term Loan were
used by Keystone to reduce the outstanding balance of Keystone's revolving
credit facility.
Also as a part of its efforts to restructure the 9 5/8% Notes, in April
2002, Keystone received a new $5 million term loan (the "Keystone Term Loan")
from the same lender providing the Keystone revolving credit facility. The
Keystone Term Loan bears interest at prime plus 1.0% (5.5% at December 31,
2004). The Keystone Term Loan is collateralized by a first-priority lien on all
of the fixed assets of the Company and its subsidiaries, other than EWP.
Proceeds from the Keystone Term Loan were used by Keystone to reduce the
outstanding balance of Keystone's revolving credit facility. In November 2003,
Keystone increased the then $3.0 million outstanding balance on the Keystone
Term Loan by $3.5 million. Principal payments on the amended Keystone Term Loan
are due in 48 monthly installments through December 2007. Proceeds from the
amended Keystone Term Loan were used by Keystone to reduce the outstanding
balance of Keystone's revolving credit facility. The Keystone Term Loan
comprises a portion of the Congress DIP Facility discussed below.
Keystone's primary revolving credit facility ("the Keystone Revolver"), as
amended in November 2003, provides for revolving borrowings of up to $45 million
based upon formula-determined amounts of trade receivables and inventories.
Borrowings bear interest at the prime rate plus 1.0%, 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 5.5% at December 31,
2004. At December 31, 2004, $3.8 million of letters of credit were outstanding,
and $25.1 million was available for additional borrowings. 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 Redeemable Series A
Preferred Stock. Due to the Chapter 11 filings, the Company is no longer
required to adhere to these covenants. The Keystone Revolver comprises a portion
of the Congress DIP Facility discussed below.
EWP's $7 million revolving credit facility (the "EWP Revolver") as amended
expires in September 2005. Borrowings under the EWP Revolver, as amended in
March 2005, bear interest at LIBOR plus 2.45% (4.8% at December 31, 2004). Prior
to January 2004, borrowings under the EWP Revolver bore interest at either the
prime rate or LIBOR plus 2.25%. At December 31, 2004, $5.3 million was available
for additional borrowings under the EWP revolver. EWP's accounts receivable and
inventories collateralize the EWP Revolver. The EWP Revolver Agreement contains
covenants with respect to working capital, additional borrowings, payment of
dividends and certain other matters.
In January 2004, EWP received a new $6.75 million term loan ("the EWP Term
Loan") from the same lender providing the EWP Revolver. The EWP Term Loan bears
interest at LIBOR plus 2.5%, is due in monthly installments of $112,500 plus
accrued interest and a balloon payment upon the maturity date, as amended, on
March 31, 2005. In addition, the EWP Term Loan, is collateralized by a lien on
all of the fixed assets of EWP and cross-collateralized with the EWP Revolver.
Proceeds from the EWP Term Loan were used to repay intercompany indebtedness to
Keystone. Keystone used the proceeds to reduce the outstanding balance of the
Keystone Revolver.
During 2002 the Garden Zone Revolver bore interest at the LIBOR rate plus
2%. Garden Zone's accounts receivable and inventories collateralized the Garden
Zone Revolver.
In addition, EWP Financial LLC ("EWPFLLC"), a wholly-owned subsidiary of
Contran had agreed to loan the Company up to an aggregate of $6 million under
the terms of a revolving credit facility that matured on February 29, 2004. This
facility was collateralized by the common stock of EWP owned by Keystone. The
Company did not borrow any amounts under such facility. However, EWPFLLC issued
a $250,000 letter of credit for the benefit of the Company under this revolving
credit facility which is outstanding at December 31, 2004.
During 2002 and 2003, Garden Zone paid interest on a $474,000 advance from
one of its other owners of approximately $23,000 and $11,000, respectively. The
advance bore interest at the prime rate.
At December 31, 2003, Keystone was not in compliance with certain financial
covenants included in the Keystone Revolver. Under the terms of the Keystone
Revolver, failure to comply with these covenants is considered an event of
default and gives the lender the right to accelerate the maturity of both the
Keystone Revolver and the Keystone Term Loan. As such, the Keystone Term Loan
was classified as a current liability at December 31, 2003. In addition, the
indenture governing Keystone's 8% Notes provides the holders of such Notes with
the right to accelerate the maturity of the Notes in the event of a default by
Keystone resulting in an acceleration of the maturity of any of the Company's
other secured debt. As such, the 8% Notes were also classified as a current
liability at December 31, 2003 and 2004.
On March 15, 2004, the Court approved two new debtor-in-possession
financing facilities (the "DIP Order). The first debtor-in-possession financing
facility consists of an Assumption Agreement whereby the pre-petition lender on
the Keystone Revolver and Keystone Term Note agreed to convert those credit
facilities to a debtor-in-possession facility (collectively, the "Congress DIP
Facility"). The terms of the respective facilities comprising the Congress DIP
Facility are relatively unchanged from the respective pre-petition facilities
with the exception of the elimination of the existing financial covenants and
the granting of a second lien on the stock of EWP owned by Keystone. In
connection with the approval of the Congress DIP Facility, the Keystone Term
Note was increased by $4.0 million. Approximately $2.0 million of these proceeds
were applied to the Keystone Revolver portion of the Congress DIP Facility and
the remainder was used to fund Keystone's working capital needs. However, the
Congress DIP Facility lender applied an availability reserve of approximately
$2.0 million to the borrowing base of the Keystone Revolver in connection with
the increase in Keystone Term Note resulting in no net increase in availability
under the Keystone Revolver at that time. The Keystone Term Note requires
monthly principal payments of $100,000. The Congress DIP Facility matures the
earliest to occur of September 30, 2005, payment in full of the Congress DIP
Facility, confirmation of a plan of reorganization of Keystone, an event of
default or upon certain other events. The Congress DIP Facility required a
facility fee of $375,000, half of which was paid at inception and half of which
was paid in August 2004. In addition, EWPFLLC has a $2.0 million participation
in the Congress DIP Facility. Upon emergence from bankruptcy in August 2005,
Keystone's new $80 million secured credit facility from Wachovia Capital Finance
(Central) was used to extinguish the Congress DIP facility. See Note 2.
The second debtor-in-possession financing facility comprising the DIP Order
is a $5 million revolving credit facility with EWPFLLC, (the "EWP DIP
Facility"). Advances under the EWP DIP Facility bear interest at the prime rate
plus 3.0% per annum and are collateralized by the common stock of EWP owned by
Keystone. Proceeds from the EWP DIP Facility were used to fund Keystone's
working capital needs. The EWP DIP Facility requires Keystone to abide by
specified cash budgets. In addition, the EWP DIP Facility requires EWPFLLC to
fund up to an additional $2 million through a participation in the Congress DIP
Facility upon the Company's realization of certain milestones. The Company met
such milestones and in April 2004, this additional funding was made. The EWP DIP
Facility, as amended, matures upon confirmation of a plan of reorganization of
Keystone, closing of a sale of EWP, an event of default under the EWP Term Note,
an event of default under the Congress DIP Facility or upon certain other
events. The EWP DIP Facility required a facility fee of $100,000, half of which
was paid at inception and half of which was paid in August 2004. In addition,
during 2004, Keystone paid EWPFLLC approximately $238,000 of interest under this
facility. Upon emergence from bankruptcy in August 2005, Keystone's new $80
million secured credit facility from Wachovia Capital Finance (Central) was used
to extinguish the EWP DIP facility. See Note 2.
Certain of the Company's indebtedness was cancelled or restructured in
connection with the Company's Chapter 11 filing and Keystone's emergence
therefrom. See Note 2. Accordingly, the Company has not presented a table of
aggregate future maturities of indebtedness, as such table is not meaningful.
The Company's revolving credit facilities, DIP facilities and the Keystone
and EWP Term Loans reprice with changes in interest rates. Due to the
significant uncertainties surrounding the Company's Chapter 11 filings,
management is unable to estimate the aggregate fair value of Keystone's fixed
rate notes ($60.5 million book value at both December 31, 2003 and 2004). The
book value of all other indebtedness at December 31, 2003 and 2004 is deemed to
approximate market value.
Note 7 - Series A Preferred Stock:
In connection with the Exchange Offer, Keystone issued 59,399 shares of
Series A 10% Cumulative Convertible Pay-In-Kind Preferred Stock (the "Series A
Preferred Stock"). The Series A 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 Stock has an annual dividend commencing
in December 2002 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 Stock
based on their stated value. The amount of dividends accrued at December 31,
2003 ($10.6 million) and December 31, 2004 ($11.8 million, all of which was
included in Liabilities Subject to Compromise, see Note 12.) has been determined
based on the assumption such dividends will be paid in cash rather than in the
form of additional shares of Series A Preferred Stock.Each share of Series A
Preferred Stock may be converted into 250 shares of Keystone common stock at the
exchange rate of $4.00 per share based on the stated value of each Series A
share. The Company may redeem the Series A Preferred Stock 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 Preferred Stock, 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
Preferred Stock have no mandatory redemption rights.
In connection with the Company's restructuring activities in December 2003,
the Company issued 12,500 additional Shares of Series A Preferred Stock to the
employees of KSW's primary labor union. Based on the Company's financial
position at the issuance date and subsequent Chapter 11 filing, management
believes the fair value of the 12,500 additional shares issued in December 2003
was deminimis and as such, did not assign a value to the newly issued shares.
The Company does not currently believe it is probable that holders of the
Series A Preferred Stock will be able to require the Company to purchase any of
their stock, and accordingly the Company is not accreting the Series A Preferred
Stock up to its redemption value. In October 2002, Contran purchased 54,956
shares of the original 59,399 shares of the Company's Redeemable Series A
Preferred Stock.
The Company discontinued accruing dividends on its Series A Preferred Stock
upon filing for Chapter 11 on February 26, 2004.
All of the Company's Series A Preferred Stock was cancelled in connection
with Keystone's emergence from Chapter 11 on August 31, 2005. See Note 2.
Note 8 - Income taxes
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,
2002 2003 2004
---- ---- ----
(In thousands)
Expected tax provision (benefit), at
statutory rate $14,016 $(13,026) $ 6,104
U.S. state income taxes (benefit), net 2,022 (1,093) 559
Deferred tax asset valuation allowance 5,536 19,088 (8,808)
Capitalize reorganization costs - - 3,840
Release of contingency reserve - (5,292) -
Other, net 48 323 (316)
------- -------- --------
Provision for income taxes $21,622 $ - $ 1,379
======= ======== ========
Provision (benefit) for income taxes:
Currently payable (refundable):
U.S. federal $ (34) $ (27) $ 914
U.S. state 34 27 465
------- -------- --------
Net currently payable - - 1,379
Deferred income taxes, net 21,622 - -
------- -------- --------
$21,622 $ - $ 1,379
======= ======== ========
Comprehensive provision for income taxes allocable to:
Income before cumulative effect
of change in accounting principle $21,622 $ - $ 1,379
Other comprehensive loss -
Pension liability - - -
------- -------- --------
$21,622 $ - $ 1,379
======= ======== ========
The components of the net deferred tax asset are summarized below.
December 31,
2003 2004
--------------------------------------------------------
Assets Liabilities Assets Liabilities
(In thousands)
Tax effect of temporary differences relating to:
Inventories $ 3,524 $ - $ 6,008 $ -
Property and equipment - (5,218) - (4,445)
Pensions - (49,409) - (52,043)
Accrued OPEB cost 46,172 - 53,401 -
Accrued liabilities and other deductible
differences 14,322 - 13,396 -
Other taxable differences 2,607 - 3,315 -
Net operating loss carryforwards 20,876 - 3,493 -
Alternative minimum tax credit carryforwards 6,260 - 7,201 -
Deferred tax asset valuation allowance (39,134) - (30,326) -
-------- -------- -------- -----
Gross deferred tax assets 54,627 (54,627) 56,488 (56,488)
Reclassification, principally netting by tax
jurisdiction (54,627) 54,627 (56,488) 56,488
-------- -------- -------- --------
Net deferred tax asset - - - -
Less current deferred tax asset, net of pro rata
allocation of deferred tax asset valuation
allowance - - - -
------- ------- -------- -----
Noncurrent net deferred tax asset $ - $ - $ - $ -
======= ======= ======== =====
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Increase (decrease) in valuation allowance:
Increase in certain deductible temporary
differences which the Company believes do
not meet the "more-likely-than-not"
recognition criteria:
Recognized in net income (loss) $ 5,536 $ 21,995 $ (8,808)
Offset to the change in gross deferred
income tax assets due principally to
redetermination of certain tax attributes - (2,907) -
Recognized in other comprehensive loss -
pension liabilities 66,420 (66,420) -
------- -------- -----
$71,956 $(47,332) $ (8,808)
======= ======== ========
At December 31, 2004, Keystone had (i) approximately $7.2 million of
alternative minimum tax credit carryforwards which have no expiration date and
(ii) net operating loss carryforwards of approximately $7.8 million which expire
in 2023 through 2024, and which may be used to reduce future taxable income of
the entire Company. See Note 2.
The Company's emergence from Chapter 11 on August 31, 2005 did not result
in an ownership change within the meaning of Section 382 of the Internal Revenue
Code.
At December 31, 2004, 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 its gross deferred tax assets do
not currently meet the "more-likely-than-not" realizability test. As such, the
Company has provided a deferred tax asset valuation allowance to offset its
gross deferred income tax asset. Keystone will continue to review the
recoverability of its deferred tax assets, and based on such periodic reviews,
Keystone could recognize a change in the valuation allowance related to its
deferred tax assets in the future.
Note 9 - 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, 2004, there
were 225,000 options outstanding under this plan.
During 1997, the Company granted all remaining options available under
Keystone's 1992 Option Plan. At December 31, 2004, there were 144,000 options
outstanding under this plan.
Changes in outstanding options, including options outstanding under the
former 1992 Option Plan, 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, 2001 656,300 $4.25 -$13.94 $5,453,506
Canceled (169,000) 5.50 - 9.19 (1,465,838)
-------- ------------- -----------
Outstanding at December 31, 2002 487,300 4.25 - 13.94 3,987,668
Canceled (61,300) 5.13 - 10.25 (522,824)
-------- ------------- -----------
Outstanding at December 31, 2003 426,000 4.25 - 13.94 3,464,844
Canceled (57,000) 8.13 - 10.25 488,625
-------- ------------- -----------
Outstanding at December 31, 2004 369,000 $4.25 -$13.94 $2,976,219
======== ============= ==========
The following table summarizes weighted average information about fixed
stock options outstanding at December 31, 2004.
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 82,500 5.2 years $ 5.17 82,500 5.2 years $ 5.17
$ 7.63-$ 9.19 266,500 2.8 years $ 8.52 266,500 2.8 years $ 8.52
$13.94 20,000 2.8 years $13.94 20,000 2.8 years $13.94
------- -------
369,000 3.3 years $ 8.07 369,000 3.3 years $ 8.07
======= =======
At December 31, 2004, options to purchase all 369,000 shares outstanding
were exercisable (none at prices lower than the December 31, 2004 quoted market
price of $.07 per share). At December 31, 2004, an aggregate of 275,000 shares
were available for future grants under the 1997 Plan.
The pro forma information included in Note 1, required by SFAS No. 123, as
amended, is based on an estimation of the fair value of options issued
subsequent to January 1, 1995. There were no options granted in 2002, 2003 or
2004. The fair values of the options granted subsequent to January 1, 1995 and
prior to January 1, 2001 were calculated using the Black-Scholes stock option
valuation model. The Black-Scholes model was not developed for use in valuing
employee stock options, but was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, it requires the use of subjective assumptions including
expectations of future dividends and stock price volatility. Such assumptions
are only used for making the required fair value estimate and should not be
considered as indicators of future dividend policy or stock price appreciation.
Because changes in the subjective assumptions can materially affect the fair
value estimate, and because employee stock options have characteristics
significantly different from those of traded options, the use of the
Black-Scholes option-pricing model may not provide a reliable estimate of the
fair value of employee stock options. The pro forma impact on net income (loss)
per share disclosed in Note 1 is not necessarily indicative of future effects on
net income (loss) or earnings (loss) per share.
All of the Company's outstanding common stock and stock options were
cancelled in connection with Keystone's emergence from Chapter 11 on August 31,
2005. See Note 2.
Note 10 - 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
Company uses a December 31st measurement date for its defined benefit pension
and OPEB plans. The following tables provide a reconciliation of the changes in
the plans' projected benefit obligations and fair value of assets for the years
ended December 31, 2003 and 2004:
Pension Benefits Other Benefits
----------------------- ---------------------
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)
Change in projected benefit Obligations ("PBO"):
Benefit obligations at beginning of year $ 341,388 $362,064 $ 171,252 $ 233,042
Service cost 3,456 3,335 2,826 2,866
Interest cost 21,586 20,902 11,849 11,033
Participant contributions - - 1,734 929
Plan amendment - - - (39,014)
Settlement - - - (9,115)
Actuarial loss 21,914 25,659 57,460 12,751
Benefits paid (26,280) (27,259) (12,079) (6,183)
--------- -------- --------- ---------
Benefit obligations at end of year $ 362,064 $384,701 $ 233,042 $ 206,309
========= ======== ========= =========
Change in plan assets:
Fair value of plan assets at beginning
of year $286,992 $372,218 $ - $ -
Actual return (loss) on plan assets 111,506 79,421 - -
Employer contributions - - 10,345 5,254
Participant contributions - - 1,734 929
Benefits paid (26,280) (27,259) (12,079) (6,183)
--------- -------- --------- ---------
Fair value of plan assets at end
of year $ 372,218 $424,380 $ - $ -
========= ======== ========= =========
Funded status at end of the year:
Plan assets greater (less) than PBO $ 10,154 $ 39,679 $(233,042) $(206,309)
Unrecognized actuarial losses 105,566 83,674 113,944 107,546
Unrecognized prior service credit
due to plan amendment - - - (36,333)
Unrecognized prior service cost
(credit) 10,971 10,090 (2,150) (1,807)
--------- -------- --------- ---------
$ 126,691 $133,443 $(121,248) $(136,903)
========= ======== ========= =========
Amounts recognized in the balance sheet:
Prepaid pension cost $ 126,691 $133,443 $ - $ -
Accrued benefit costs:
Current - - (11,255) -
Noncurrent - - (109,993) (13,478)
Liabilities subject to compromise - - - (123,425)
--------- -------- --------- ---------
$ 126,691 $133,443 $(121,248) $(136,903)
========= ======== ========= =========
The rate assumptions used in determining the actuarial present value of
benefit obligations as of December 31, 2003 and 2004 are shown in the following
table:
Pension Benefits Other Benefits
2003 2004 2003 2004
Discount rate 6.0% 5.65% 6.0% 5.65%
Rate of compensation increase 3.0% 3.00% - -
The rate assumptions used in determining the net periodic pension and other
retiree benefit expense during 2002, 2003 and 2004 are shown in the following
table:
Pension Benefits Other Benefits
----------------------------- ----------------------------
2002 2003 2004 2002 2003 2004
---- ---- ---- ---- ---- ----
Discount rate 7.0% 6.5% 6.0% 7.0% 6.5% 6.0%
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, 2002, 2003 and 2004:
Pension Benefits Other Benefits
---------------------------- -----------------------------
2002 2003 2004 2002 2003 2004
---- ---- ---- ---- ---- ----
(In thousands)
Service cost $ 3,041 $ 3,456 $ 3,335 $ 1,890 $ 2,826 $ 2,866
Interest cost 21,938 21,586 20,902 10,722 11,849 11,033
Expected return on plan assets (31,983) (27,376) (35,860) - - -
Amortization of unrecognized:
Prior service cost 882 882 882 (343) (343) (343)
Prior service cost due to
plan amendment - - - - - (2,681)
Actuarial losses 4,518 8,350 3,989 1,991 3,171 4,879
-------- -------- -------- ------- ------- -------
Net periodic benefit cost (credit) (1,604) 6,898 (6,752) 14,260 17,503 15,754
Settlement loss - - - - - 5,155
-------- -------- -------- ------- ------- -------
Total benefit cost (credit) $ (1,604) $ 6,898 $ (6,752) $14,260 $17,503 $20,909
======== ======== ======== ======= ======= =======
At December 31, 2004, the accumulated benefit obligation for the Company's
pension and OPEB plans was approximately $379.2 million and $206.3 million,
respectively (2003 - $354.9 million and $232.0 million, respectively).
At December 31, 2002, the accumulated benefit obligation for Keystone's
defined benefit pension plan (the "Plan") approximated $335.6 million. Due to a
decline in the value of the Plan's assets during 2002, and a decrease in the
discount rate from December 31, 2001 to 2002, the Plan's accumulated benefit
obligation at December 31, 2002 exceeded the Plan's assets at that date. As a
result, SFAS No. 87, Employers' Accounting for Pensions, provides that the
Company is required to record an additional minimum liability that is at least
equal to the amount by which the Plan's accumulated benefit obligation exceeds
the Plan's assets (or $182.2 million at December 31, 2002), eliminate any
recorded prepaid pension cost, record an intangible asset equal to the amount of
any unrecognized prior service cost and charge a separate component of
stockholders' equity for the difference. As such, during the fourth quarter of
2002, Keystone recorded an additional minimum pension liability of $182.2
million, an intangible pension asset of $11.9 million and charged a separate
component of stockholders' equity for $170.3 million. During 2003, the Plan's
assets exceeded the accumulated benefit obligation. As such, the previously
recorded additional minimum liability, intangible pension asset were eliminated
through the separate component of stockholders' equity.
At December 31, 2004, substantially all of the plan's net assets were
invested in the Combined Master Retirement Trust ("CMRT"), a collective
investment 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, 2004 were primarily invested in real estate. Harold C. Simmons
is the sole trustee of the CMRT. Mr. Simmons and two members of Keystone's board
of directors and Master Trust Investment Committee comprise the Trust Investment
Committee for the CMRT. Neither Mr. Simmons nor the Keystone directors receive
any compensation for serving in such capacities.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indicies) utilizing both third-party investment
managers as well as investments directed by Mr. Simmons. The trustee of the CMRT
and the CMRT's Trust Investment Committee actively manage the investments of the
CMRT. Such parties have in the past, and may in the future, change the asset mix
of the CMRT based upon, among other factors, advice they receive from
third-party advisors and their expectations as to what asset mix will generate
the greatest overall long-term rate of return. For 2002, 2003 and 2004, the
assumed long-term rate of return for plan assets invested in the CMRT was 10%.
In determining the appropriateness of such long-term rate of return assumption,
the Company considered, among other things, the historical rate of return for
the CMRT, the current and projected asset mix of the CMRT and the investment
objectives of the CMRT's managers. In addition, the Company receives advice
about appropriate long-term rates of return from the Company's third-party
actuaries. During the 17-year history of the CMRT through December 31, 2004, the
average annual rate of return has been 12.7%. At December 31, 2003, the asset
mix of the CMRT was 63% in U.S. equity securities, 24% in U.S. fixed income
securities, 7% in international equity securities and 6% in cash and other
investments. At December 31, 2004, the asset mix of the CMRT was 77% in U.S.
equity securities, 14% in U.S. fixed income securities, 7% in international
equity securities and 2% in cash and other investments.
With certain exceptions, the trustee of the CMRT has exclusive authority to
manage and control the assets of the CMRT. Administrators of the employee
benefit plans participating in the CMRT, however, have the authority to direct
distributions and transfers of plan benefits under such participating plans. The
Trust Investment Committee of the CMRT 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 CMRT that
are subject to the management of an investment manager.
The Company may withdraw all or part of the Plan's investment in the CMRT
at the end of any calendar month without penalty.
In general, prior to February 1, 2004, Keystone's post retirement benefit
plans provided certain life insurance, Medicare Part B and medical benefits to
eligible retirees. Effective February 1, 2004, the Company's OPEB plans were
amended to permanently and unilaterally terminate all future medical benefits to
retirees that were not covered under a union contract or an otherwise court
ordered plan. However, these current and future retirees will retain their
existing post-retirement life insurance and Medicare Part B reimbursement
benefits (as only the medical and prescription drug benefits were terminated).
For the groups that did not have Medicare Part B reimbursement, this change
resulted in a settlement of liabilities from the plan. The net loss of $5.2
million due to this settlement is reflected in the 2004 OPEB expense.
At December 31, 2004, the expected increase in future health care costs was
10% for 2005, declining gradually to 5% in 2010 and 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:
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, 2004 $ 2,796 $ (2,193)
Effect on postretirement benefit
obligation at December 31, 2004 $37,187 $(29,527)
Keystone's post retirement benefit plans were altered in connection with
the Company's Chapter 11 filing and emergence therefrom . See Note 2.
The Company does not anticipate it will be required to make any
contributions to its defined benefit pension plan during 2005. As a result of
the changes made to the Company's post retirement benefit plans in connection
with Keystone's Chapter 11 filing and emergence therefrom, Keystone anticipates
it will contribute approximately $7.9 million to its post retirement benefit
plans during 2005.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid during the years ended December 31,:
Pension Other
Benefits Benefits
(In thousands)
2005 $ 26,944 $ 7,917
2006 $ 26,774 $ 4,254
2007 $ 26,635 $ 4,453
2008 $ 26,547 $ 4,500
2009 $ 26,587 $ 4,500
2010 - 2014 $136,541 $22,500
The Company also maintains several defined contribution pension plans.
Expense related to these plans was $2.5 million in 2002, $1.5 million in 2003
and $1.3 million in 2004.
Note 11 - Other accrued liabilities
December 31,
2003 2004
---- ----
(In thousands)
Current:
Employee benefits $10,320 $12,019
Reorganization costs - 2,883
Income taxes - 1,405
Self insurance 4,937 1,064
Legal and professional 964 358
Interest 326 26
Disposition of former facilities 680 13
Environmental 13,044 -
Deferred vendor payments 3,477 -
Other 3,396 1,196
------- -------
$37,144 $18,964
======= =======
Noncurrent:
Workers compensation payments $ 1,941 $ 988
Deferred vendor payments 7,193 -
Environmental 6,722 -
Interest 709 -
Other 101 -
------- -------
$16,666 $ 988
======= =======
During the fourth quarter of 2004, Keystone received a $5.2 million Court
ordered settlement from a former vendor relative to the Company's Chapter 11
filing and consigned inventory and related balances due to that vendor. The $5.2
million is shown as gain from legal settlement on the Company's 2004 statement
of operations. In connection with negotiations with its unsecured creditors
relative to Keystone's emergence from Chapter 11, the Company agreed to deposit
the $5.2 million into a restricted cash account. The funds in this account were
released to the unsecured creditors upon Keystone's emergence from Chapter 11 on
August 31, 2005. The balance in this account is shown as a restricted investment
in current assets on the Company's December 31, 2004 balance sheet.
During the first quarter of 2002, two of the Company's major vendors
representing approximately $16.1 million of trade payables, 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. As a result of the Company's
Chapter 11 filings, payments under these agreements were discontinued upon
February 26, 2004. The balances due under these agreements at December 31, 2004,
are shown in liabilities subject to compromise. See Notes 2 and 12.
Keystone generally undertakes planned major maintenance activities on an
annual basis, usually in the fourth quarter of each year. These major
maintenance activities are conducted during a shut-down of the Company's steel
and wire rod mills. Repair and maintenance costs incurred in connection with
these major maintenance activities are accrued in advance on a straight-line
basis throughout the year and are included in cost of goods sold.
See Note 15.
Note 12 - Liabilities subject to compromise
December 31,
2004
(In thousands)
Accrued OPEB cost $123,425
Environmental 19,432
6% Notes 16,031
Accrued preferred stock dividends 11,846
Accounts payable 10,776
Deferred vendor payments 10,518
9 5/8% Notes 6,150
Self insurance 4,549
Accounts payable to affiliates 3,027
Workers compensation 1,847
Accrued and deferred interest 1,237
Legal and professional 726
Disposition of former facilities 665
Other 2,117
--------
$212,346
Note 13 - 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 in the past contracted with
Tucker & Branham, Inc. for management consulting services by Mr. Tucker. Fees
paid to Tucker & Branham, Inc. under this arrangement were $5,100 in 2002. The
Company did not make any such payments to Mr. Tucker in 2003 or 2004.
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 fees charged by Contran
to the Company aggregated approximately $1,025,000 in 2002 and $1,005,000 in
each of 2003 and 2004. At December 31, 2003 the Company owed Contran
approximately $2.8 million primarily for ISA fees. Such amount is included in
payables to affiliates on the Company's balance sheet. At December 31, 2004, the
Company owed Contran approximately $3.8 million, primarily for ISA fees. Such
amount is included in payables to affiliates ($821,000) and liabilities subject
to compromise ($3.0 million) on the Company's balance sheet. In addition,
Keystone purchased certain aircraft services from Valhi in the amount of $74,000
in 2002, $52,000 in 2003 and $17,000 in 2004.
Tall Pines Insurance Company ("Tall Pines") and a predecessor company
Valmont Insurance Company ("Valmont"), and EWI RE, Inc. provide for or broker
certain insurance policies for Contran and certain of its subsidiaries and
affiliates, including the Company. Tall Pines is a wholly-owned subsidiary of
Valhi, and EWI is a wholly-owned subsidiary of NL. Prior to January 2002, an
entity controlled by one of Harold C. Simmons' daughters owned a majority of
EWI, and Contran owned the remainder of EWI. In January 2002, NL purchased EWI
from its previous owners. 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. The aggregate
premiums paid to Tall Pines, Valmont and EWI were $2.2 million in each of 2002
and 2003 and $2.1 million in 2004. These amounts principally included payments
for insurance and reinsurance premiums paid to third parties, but also included
commissions paid to Tall Pines, Valmont and EWI. At December 31, 2003, the
Company owed Tall Pines $236,000 for insurance premiums which was paid during
2004. In the Company's opinion, the amounts that the Company paid for these
insurance policies and the allocation among the Company and its affiliates of
relative insurance premiums are reasonable and similar to those they could have
obtained through unrelated insurance companies and/or brokers. These
relationships with Tall Pines and EWI continued in 2005.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for any uninsured loss.
Dallas Compressor Company, a subsidiary of Contran, sells compressors and
related services to Keystone. During 2002, 2003 and 2004 Keystone purchased
products and services from Dallas Compressor Company in the amount of $267,
$1,000 and $20,000, respectively.
During 2002, Garden Zone paid approximately $60,000 to one of its other
owners for accounting and financial services. In addition, during 2003, Garden
Zone paid approximately $35,000 to such owner for these services.
EWPFLLC had agreed to loan the Company up to an aggregate of $6 million
through February 29, 2004. Borrowings bore interest at the prime rate plus 3%,
and are collateralized by the stock of EWP. In addition, the Company paid a
commitment fee of .375% on the unutilized portion of the facility. The Company
never drew on this facility. However, EWPFLLC has issued a $250,000 letter of
credit for the benefit of the Company under this facility. The terms of this
loan were approved by the independent directors of the Company. The loan matured
in February 2004. During each of 2002 and 2003, Keystone paid EWPFLLC unused
line fees of $23,000, related to this facility. During 2004, Keystone paid
EWPFLLC a $100,000 facility fee in connection with the EWP DIP Facility. In
addition, the Company also paid EWPFLLC $305,000 in interest on the EWP DIP
facility. See Note 2.
During 2004, Keystone entered into a scrap supply agreement with Alter
Trading Corporation ("ATC"). The Company sources the majority of its ferrous
scrap supply from ATC under this agreement. ATC owns the 50% interest in ARC
that is not owned by Keystone. During 2004, Keystone purchased approximately
$99.9 million of ferrous scrap from ATC.
Note 14 - Quarterly financial data (unaudited)
March 31, June 30, September 30, December 31,
(In thousands, except per share data)
Year ended December 31, 2004:
Net sales $67,177 $101,827 $112,505 $82,826
Gross profit (loss) (1,433) 18,709 19,965 4,862
Reorganization costs 1,927 3,092 3,257 2,882
Net gain on legal settlement - - - 5,284
Net (income) loss $(7,638) $ 10,993 $ 10,887 $ 1,818
======= ======== ======== =======
Basic net income (loss)
per share available for common shares $ (.88) $ 1.09 $ 1.08 $ .18
======= ======== ======== =======
Diluted net income (loss) per share
available for common shares $ (.88) $ .39 $ .39 $ .06
======= ======== ======== =======
Year ended December 31, 2003:
Net sales $81,089 $ 96,749 $80,452 $ 48,381
Gross profit (loss) 1,438 3,825 (3,260) (6,213)
Net loss $(9,006) $ (6,162) $(11,836) $(10,513)
======= ======== ======== ========
Basic and diluted net loss per share $ (1.04) $ (.76) $ (1.32) $ (1.20)
======= ======== ======== ========
As a result of a significant decline in value of the assets of Keystone's
defined benefit pension plan during 2002, the plan's accumulated benefit
obligation at December 31, 2002 exceeded the plan's assets. Accordingly, during
the fourth quarter of 2002, the Company recorded an additional minimum pension
liability of $182.2 million and an intangible pension asset of $11.9 million.
During 2003, the pension plan experienced better than expected performance and
at December 31, 2003, the pension plan's assets exceeded the accumulated benefit
obligation. As such, during the fourth quarter of 2003 the previously recorded
additional minimum pension liability and intangible asset were eliminated
through the separate component of stockholders' equity.
During the fourth quarter of 2004, based on an actuarial valuation, the
Company recorded a decrease in 2004 OPEB expense and liability of approximately
$2.2 million resulting in OPEB expense for the year 2004 of $20.9 million. The
Company had previously estimated OPEB expense for 2004 would approximate $23.1
million.
During the fourth quarter of 2004, Keystone received a $5.2 million
settlement from a former vendor relative to the Company's Chapter 11 filing and
consigned inventory and related balances due to that vendor. The $5.2 million is
shown as gain from legal settlement on the Company's 2004 statement of
operations. In connection with negotiations with its unsecured creditors
relative to Keystone's emergence from Chapter 11, the Company agreed to deposit
the $5.2 million into a restricted cash account. The funds in this account were
released to the unsecured creditors upon Keystone's emergence from Chapter 11 on
August 31, 2005. The balance in this account is shown as a restricted investment
in current assets on the Company's December 31, 2004 balance sheet.
See Notes 2, 4, 8 and 10.
Note 15 - Environmental matters
As a result of the Chapter 11 filings on February 26, 2004, litigation
relating to prepetition claims against the filing companies, including Keystone
and Sherman Wire Company ("Sherman"), has been stayed.
Keystone has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") or similar state laws in approximately
25 governmental and private actions associated with environmental matters,
including waste disposal sites and facilities currently or previously owned,
operated or used by Keystone, certain of which are on the United States
Environmental Protection Agency's (the "U.S. EPA") Superfund National Priorities
List or similar state lists. These proceedings seek cleanup costs, damages for
personal injury or property damage and/or damages for injury to natural
resources. Certain of these proceedings involve claims for substantial amounts.
Although Keystone may be jointly and severally liable for such costs, in most
cases, it is only one of a number of PRPs who may also be jointly and severally
liable.
On a quarterly basis, Keystone evaluates the potential range of its
liability at sites where it has been named as a PRP or defendant by analyzing
and estimating the range of reasonably possible costs to Keystone. Such costs
include, among other things, expenditures for remedial investigations,
monitoring, managing, studies, certain legal fees, clean-up, removal and
remediation. Keystone believes it has provided adequate accruals ($19.4 million
at December 31, 2004, all of which is reflected in liabilities subject to
compromise on the Company's December 31, 2004 balance sheet) for these matters
at 13 sites for which Keystone believes its liability is probable and reasonably
estimable, but Keystone's ultimate liability may be affected by a number of
factors, including the imposition of more stringent standards or requirements
under environmental laws or regulations, new developments or changes in remedial
alternatives and costs, the allocation of such costs among PRPs, the solvency of
other PRPs or a determination that Keystone is potentially responsible for the
release of hazardous substances at other sites, any of which could result in
expenditures in excess of amounts currently estimated by Keystone to be required
for such matters. With respect to other PRPs and the fact that the Company may
be jointly and severally liable for the total remediation cost at certain sites,
the Company could ultimately be liable for amounts in excess of its accruals due
to, among other things, reallocation of costs among PRPs or the insolvency of
one or more PRPs. In addition, the actual timeframe for payments by Keystone for
these matters may be substantially in the future.
Keystone believes it is not possible to estimate the range of costs for
seven sites. For these sites, generally the investigation is in the early
stages, and it is either unknown as to whether or not the Company actually had
any association with the site, or if the Company had association with the site,
the nature of its responsibility, if any, for the contamination at the site and
the extent of contamination. The timing on when information would become
available to the Company to allow the Company to estimate a range of loss is
unknown and dependent on events outside the control of the Company, such as when
the party alleging liability provides information to the Company.
The upper end of the range of reasonably possible costs to Keystone for
sites for which it is possible to estimate costs (17 sites) is approximately
$21.4 million. Keystone's estimates of such liabilities have not been discounted
to present value, and other than certain previously-reported settlements with
respect to certain of Keystone's former insurance carriers, Keystone has not
recognized any material insurance recoveries. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to the eight sites as to which no
estimate of liability can presently be made because the respective
investigations are in early stages. The extent of CERCLA liability cannot be
determined until the Remedial Investigation/Feasibility Study ("RI/FS") is
complete, the U.S. EPA issues a Record of Decision ("ROD") and costs are
allocated among PRPs. The extent of liability under analogous state cleanup
statutes and for common law equivalents is subject to similar uncertainties.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process which in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs which
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
are classified as a noncurrent liability.
More detailed descriptions of certain legal proceedings relating to
environmental matters are set forth below. A summary of activity in the
Company's environmental accruals for the three years ended December 31, 2004 is
as follows:
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Balance at beginning of period $20,552 $20,209 $19,766
Expense 394 - -
Payments (780) (475) (334)
Reclassification 43 32 -
------- ------- -------
Balance at end of period $20,209 $19,766 $19,432
======= ======= =======
The Company's $19.4 million recorded environmental accrual at December 31,
2004 is included in liabilities subject to compromise on the Company's balance
sheet. Approximately $10.5 million of the recorded environmental liability
relates to sites that are owned by Keystone. Significantly all of the remainder
of the recorded $19.4 million environmental liability relates to sites involving
Sherman Wire or one of its predecessors. Sherman Wire's environmental
liabilities continue to be negotiated and adjudicated subsequent to Keystone's
emergence from Chapter 11 on August 31, 2005. See Note 12.
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, 2003 and 2004, the trust fund had a balance of $5.5
million and $5.7 million, respectively, which amounts were included in other
noncurrent assets because the Company did not expect to have access to any of
these funds until after 2005.
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 2002 and 2003, the Company received approximately $43,000
and $32,000, 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.
Keystone did not receive any such insurance recoveries during 2004.
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. In October
2002, Keystone and the other remaining PRPs entered into a second 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 terms of the second Consent Decree, and the PRP
Agreement was executed to implement the PRPs' performance under that decree,
Keystone is required to pay approximately $700,000 (of which approximately
$600,000 has already been paid into a PRP Group trust fund), 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 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.) The U.S. EPA served the PRP Group in February
2003 with its first oversight cost claim under the second Consent Decree, in the
amount of $186,000 for the period from March 1, 2000 to November 25, 2002.
Keystone's share of that claim is approximately $35,000. The U.S. EPA has also
requested changes to the groundwater monitoring program at the site that may
require future increases in the PRP Group's groundwater monitoring reserves. In
September 2002, the IAG served a demand letter on Keystone and 3 other PRP's
seeking recovery of approximately $1.3 million in state cleanup costs incurred
at the Byron Salvage Yard site. The PRP's are currently negotiating with the IAG
in an attempt to settle this claim. The four PRP's named in the demand letter
are also attempting to include other site PRP's in the negotiations. It remains
possible that these negotiations could fail and that Keystone's ultimate
liability for the Byron Salvage Yard site 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 may also demand reimbursement of future
oversight costs. The three largest PRPs at the site are negotiating a consent
order with IEPA for the performance of the site remedy. Keystone expects to
participate with the larger PRPs in the performance of that remedy based on its
RI/FS allocation percentage.
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
Consent Decree, Keystone could be responsible for an unspecified share of U.S.
EPA's future costs in the event that changes to the existing ROD are required.
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.
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 Wire'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 Wire (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 Wire 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, 2004. Sherman Wire has denied any
liability with regard to this matter and expects to vigorously defend the
action.
Sherman Wire 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 Wire has signed a
participation agreement which would require Sherman Wire to pay no less than 3%
of the remediation costs. Valspar continues to pay for legal fees in this matter
and has reimbursed Sherman Wire for all assessments.
In November 2003, Sherman Wire received a General Notice of Potential
Liability from the U.S. EPA advising them that the U.S. EPA believe Sherman Wire
is a PRP at the Lake Calumet Cluster Site in Chicago, Illinois. The U.S. EPA
advises the 200 acre site consists of areas of both ground water and surface
water contamination located in a remnant wetland area. The U.S. EPA's effort at
this site is part of a larger effort undertaken along with the State of
Illinois, the City of Chicago, the U.S. Army Corps of Engineers, and the U.S.
Department of Energy to cleanup contamination in the Lake Calumet basin. The
U.S. EPA alleges the original wetland area has been partially filed by various
waste handling and disposal activities which started as early as the 1940's.
Incineration of hazardous waste including paints, thinners, varnishes,
chlorinated solvents, styrene, ink, adhesives, and antifreeze occurred on the
site from 1977 until 1982. In addition, several landfills operated in and near
the site from 1967 into the 1990s. Approximately 1,600 ruptured drums have been
discovered buried on the site. The U.S. EPA has undertaken or overseen various
response actions at the site to mitigate remaining above ground contamination in
the site vicinity. The U.S. EPA advises these activities have led to the
formation of an extensive ground water contamination plume and contamination in
the remaining wetland. The origin of the contamination cannot be associated with
any single prior activity. The ground water is in direct contact with the
wetland waters, and the same contaminants of concern, certain of which are known
to bioaccumulate, and their concentrations are above human health and
environmental standards. Sherman did not respond to the November 2003 Notice,
however, Sherman Wire notified their insurance carriers and asked them to
indemnify and defend Sherman with respect to the Notice. At present, no carrier
has agreed to either indemnify or defend. In addition, in November, 2003,
Sherman Wire requested the U.S. EPA to provide any documentation that allegedly
connects Sherman Wire to the site. Subsequently, the U.S. EPA produced documents
that may show that Sherman Wire wastes were sent to the site. It is not possible
at this time to determine if Sherman has any future liability with respect to
this site.
In addition to the sites discussed above, Sherman Wire 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 a trust
fund to fund potential clean-up liabilities relating to the assets sold. Sherman
Wire had access to the trust fund for any expenses or liabilities it incurs
relative to environmental claims relating to the site identified in the trust
agreement. The trust fund was primarily invested in United States Treasury
securities and was classified as restricted investments on the balance sheet. As
of December 31, 2003, the balance in the trust fund was approximately $135,000.
During 2004, under its terms, the trust fund was liquidated.
Sherman Wire also has access to a trust fund relative to another
environmental site for any expenses or liabilities it incurs relative to
environmental claims at that site. The trust fund is included in restricted
investments on the balance sheet. As of December 31, 2003 and 2004, the balance
in this trust fund was approximately $267,000 and $248,000, respectively.
See Note 11.
Note 16 - Lease commitments
At December 31, 2004, the Company is obligated under certain other
operating leases through 2010. Future commitments under these leases are
summarized below.
Lease commitment
(In thousands)
2005 $ 836
2006 320
2007 82
2008 65
2009 65
Thereafter 143
------
$1,511
The Company has many executory contracts, including the above leases that
were rejected during the Chapter 11 proceedings. See Note 2.
Note 17 - Other commitments and contingencies
Current litigation
As a result of the Chapter 11 filings on February 26, 2004, litigation
relating to prepetition claims against the filing companies, including Keystone
and Sherman has been stayed. These liabilities that relate to Sherman continue
to be negotiated and adjudicated subsequent to Keystone's emergence from Chapter
11 on August 31, 2005.
In July 2001, Sherman Wire 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. Additional demands were made by Sears in 2002 with regard to
additional lead paint cases. 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.
In May 2002, the Company was notified by an insurance company of a
declaratory complaint filed in Cook County Illinois by Sears against the
insurance company and a second insurance company (collectively the "Insurance
Companies") relative to a certain lead paint personal injury litigation against
Sears. It is the Company's understanding that the declaratory complaint has
since been amended to include all lead paint cases where Sears has been named as
a defendant as a result of paint sold by Sears that was manufactured by DeSoto
(now Sherman Wire). Sears was allegedly named as an additional insured on
insurance policies issued by the Insurance Companies, in which DeSoto, the
manufacturer of the paint, was the named insured. Sears has demanded
indemnification from the Insurance Companies. One of the Insurance Companies has
demanded indemnification and defense from Sherman Wire. Sherman Wire believes
the request for indemnification is invalid. However, such Insurance Company has
refused to accept Sherman Wire's response and has demanded that Sherman Wire
participate in mediation in accordance with the terms of a prior settlement
agreement. Sherman Wire may be sued by the Insurance Companies and, as a result,
could be held responsible for all costs incurred by the Insurance Companies in
defending Sears and paying for any claims against Sears as well as for the cost
of any litigation against Sherman Wire. The total amount of these lead paint
litigation related costs and claims could be significant. However, the Company
does not have a liability recorded with respect to these matters because the
liability that may result, if any, cannot be reasonably estimated at this time.
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 2002, 2003 and 2004 amounted to $1.9 million, $1.4 million and
$1.9 million, respectively.
Concentration of credit risk
All of the Company's segments perform ongoing credit evaluations of their
customers' financial condition and, generally, require no collateral from their
customers.
Keystone Steel & Wire. KSW sells its products to agricultural, industrial,
construction, commercial, original equipment manufacturers and retail
distributors primarily in the Midwestern, Southwestern and Southeastern regions
of the United States. KSW's ten largest external customers accounted for
approximately 45% of its sales in 2002, 41% in 2003 and 47% in 2004. These
customers accounted for approximately 44% of KSW's notes and accounts receivable
at December 31, 2003 and 51% at December 31, 2004. KSW's sales to other Keystone
segments accounted for approximately 12% of its sales in 2002 and 11% in 2003
and 14% in 2004. These intercompany customers accounted for less than 1% of
KSW's notes and accounts receivable at December 31, 2003 and 4% at December 31,
2004. No single external customer accounted for more than 10% of KSW's sales
during each of 2002, 2003 or 2004.
Engineered Wire Products. EWP sells its products to concrete pipe
manufacturers and retail distributors primarily in the Midwest and East Coast
regions of the United States. EWP's ten largest customers accounted for
approximately 53% of its sales in 2002, 52% in 2003 and 49% in 2004. These
customers accounted for approximately 61% of EWP's notes and accounts receivable
at December 31, 2003 and 40% at December 31, 2004. An external single customer
accounted for 10% of EWP's sales during each of 2002 and 2003. Another single
external customer accounted for 11% of EWP's sales in 2003. No other single
customer accounted for more than 10% of EWP's net sales during 2002, 2003 or
2004. EWP does not sell products to other Keystone segments.
Lawn and garden products. Garden Zone sold its products primarily to
retailers in the Southeastern United States. Garden Zone's ten largest customers
accounted for 86% of its sales in 2002 and 94% in 2003. Garden Zone did not sell
significant levels of product to other Keystone segments during 2002 or 2003. A
single external customer accounted for 34% and 50% of Garden Zone's sales during
2002 and 2003, respectively. Another single customer accounted for 12% of Garden
Zone's sales during 2002. A third external customer also accounted for 10% of
Garden Zone's sales during 2003.
All Other. The Company's businesses in this segment sell their products to
agricultural, industrial, construction, commercial, original equipment
manufacturers and retail distributors primarily in the Midwestern, Southwestern
and Southeastern regions of the United States. This segment's ten largest
external customers accounted for approximately 39% of its sales in 2002, 40% in
2003 and 28% in 2004. These customers accounted for approximately 64% of this
segment's notes and accounts receivable at December 31, 2003 and 85% at December
31, 2004. This segments' sales to other Keystone segments accounted for
approximately 6% of its sales in 2002, 36% in 2003 and 62% in 2004. These
intercompany customers accounted for approximately 6% of this segment's notes
and accounts receivable at December 31, 2004 and none of this segment's notes
and accounts receivable at December 31, 2003. No single external customer
accounted for more than 10% of this segment's sales during 2002 and 2003. During
2004, a single customer accounted for 19% of this segment's net sales. No other
single customer accounted for more than 10% of this segment's net sales during
2004.
Note 18 - Earnings per share:
Net income (loss) per share is based upon the weighted average number of
common shares and dilutive securities. A reconciliation of the numerators and
denominators used in the calculations of basic and diluted earnings per share
computations of income (loss) before cumulative effect of change in accounting
principle is presented below. The dilutive effect of the assumed conversion of
the Series A Preferred Stock in the 2002 period is calculated from its issuance
in March 2002. The Company discontinued accruing dividends on its preferred
stock upon filing for Chapter 11 on February 26, 2004. Keystone stock options
were omitted from the calculation because they were antidilutive in all periods
presented.
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Numerator:
Net income (loss) before cumulative
effect of change in accounting
principle $18,422 $(37,517) $16,060
Less Series A Preferred Stock
dividends (4,683) (5,940) (1,223)
------- -------- -------
Basic net income (loss) before
cumulative effect of change in
accounting principle 13,739 (43,457) 14,837
Series A Preferred Stock dividends 4,683 5,940 1,223
------- -------- -------
Diluted net income (loss) before
cumulative effect of change in
accounting principle $18,422 $(37,517) $16,060
======= ======== =======
Denominator:
Average common shares outstanding 10,067 10,068 10,068
Dilutive effect of Series A Preferred
Stock 11,756 - 17,975
------- -------- -------
Diluted shares 21,823 10,068 28,043
======= ========= =======
Note 19 - Accounting principles newly adopted in 2002, 2003 and 2004:
Goodwill. Effective January 1, 2002, the Company adopted SFAS No. 142.
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"), is no longer amortized on a periodic basis. Goodwill
(other than equity method goodwill) is 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 is not
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
ceased to be periodically amortized as of January 1, 2002. Also, in connection
with the adoption of SFAS No. 142, negative goodwill of approximately $20.0
million recorded at December 31, 2001 was eliminated as a cumulative effect of
change in accounting principle as of January 1, 2002.
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 be 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 EWP
goodwill over its implied fair value (up to a maximum impairment equal to the
carrying of the 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
GAAP as of the date of the impairment testing.
The Company will use appropriate valuation techniques, such as discounted
cash flows, to estimate the fair value of EWP.
The Company completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairment
was deemed to exist as of such date. In accordance with requirements of SFAS No.
142, the Company will review goodwill of EWP 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. Based on the Company's
2003 and 2004 third quarter reviews, no impairment of goodwill were deemed to
exist at September 30, 2003 and 2004.
Impairment of long-lived assets. The Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, 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 did
not have a significant effect on the Company as of January 1, 2002.
Gain or loss on early extinguishment of debt. The Company adopted SFAS No.
145 effective April 1, 2002. SFAS No. 145, among other things, eliminated the
prior requirement that all gains and losses from the early extinguishment of
debt be classified as an extraordinary item. Upon adoption of SFAS No. 145,
gains and losses from the early extinguishment of debt are now classified as an
extraordinary item only if they meet the "unusual and infrequent" criteria
contained in Accounting Principles Bulletin ("APBO") No. 30. In addition, upon
adoption of SFAS No. 145, all gains and losses from the early extinguishment of
debt that had been classified as an extraordinary item are to be reassessed to
determine if they would have met the "unusual and infrequent" criteria of APBO
No. 30; any such gain or loss that would not have met the APBO No. 30 criteria
are retroactively reclassified and reported as a component of income before
extraordinary item. The Company has concluded that its 2002 first quarter $54.7
million pre-tax extraordinary gain ($33.1 million, or $3.29 per basic share, net
of income taxes) discussed in Note 5 would not have met the APBO No. 30 criteria
for classification as an extraordinary item, and accordingly such gain has been
retroactively reclassified and is now reported as a component of income before
extraordinary item.
Guarantees. The Company has complied with the disclosure requirements of
FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, as of December 31,
2002. As required by the transition provisions of FIN No. 45, beginning in 2003,
the Company will adopt the recognition and initial measurement provisions of
this FIN on a prospective basis for any guarantees issued or modified after
December 31, 2002.
Asset retirement obligations. The Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations, 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 is 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 is accreted to its future value, and the
capitalized cost is depreciated over the useful life of the related asset.
Future revisions in the estimated fair value of the asset retirement obligation,
due to changes in the amount and/or timing of the expected future cash flows to
settle the retirement obligation, are accounted for prospectively as an
adjustment to the previously-recognized asset retirement cost. Upon settlement
of the liability, an entity will either settle the obligation for its recorded
amount or incur a gain or loss upon settlement. The Company does not have any
asset retirement obligations which are covered under the scope of SFAS No. 143,
and as such, the effect, to the Company of adopting SFAS No. 143 was not
material.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost was recognized at the date an exit plan was adopted, which
may or may not have been the date at which the liability was incurred. The
effect to the Company of adopting SFAS No. 146 as of January 1, 2003 was not
material as the Company was not involved in any exit or disposal activities
covered by the scope of the new standards as of such date.
Variable interest entities. The Company began complying with the
consolidation requirements of FASB Interpretation ("FIN") No. 46R, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51, as amended, at
March 31, 2004. The Company does not believe it has any material involvement
with any variable interest entity (as that term is defined in FIN No. 46R)
covered by the scope of FIN No. 46R, and therefore the impact of adopting the
consolidation requirements of FIN No. 46R did not have a significant effect on
the Company's consolidated financial statements.
Note 20 - Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. Based on guidance issued by the U.S. Securities and Exchange
Commission, the Company will adopt SFAS No. 123R, "Share-Based Payment," as of
January 1, 2006. SFAS No. 123R, among other things, eliminates the alternative
in existing GAAP to use the intrinsic value method of accounting for stock-based
employee compensation under APBO No. 25. Upon adoption of SFAS No. 123R, the
Company will generally be required to recognize the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award, with the cost recognized over the period during which
an employee is required to provide services in exchange for the award
(generally, if the vesting period of the award). No compensation cost will be
recognized in the aggregate for equity instruments for which the employee does
not render the requisite service (generally, the instrument is forfeited before
it has vested). The grant-date fair value will be estimated using option-pricing
models (e.g. Black-Scholes or a lattice model). Under the transition
alternatives permitted under SFAS No. 123R, the Company will apply the new
standard to all new awards granted on or after January 1, 2006, and to all
awards existing as of December 31, 2005 which are subsequently modified,
repurchased or cancelled. Additionally, as of January 1, 2006, the Company will
be required to recognize compensation cost for the portion of any non-vested
award existing as of December 31, 2005 over the remaining vesting period.
Because the Company is not expected to grant any options prior to January 1,
2006 and because the number of non-vested awards as of December 31, 2005 with
respect to options previously granted by the Company is not expected to be
material, the effect of adopting SFAS No. 123R is not expected to be significant
in so far as it relates to existing stock options. Should the Company, however,
grant a significant number of options in the future, the effect on the Company's
consolidated financial statements could be material.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Keystone Consolidated Industries, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated December 23, 2005, which contains an explanatory paragraph relating to the
Company's ability to continue as a going concern as described in Note 2 to the
financial statements, appearing in the 2004 Annual Report to Shareholders of
Keystone Consolidated Industries, Inc. (which report and consolidated financial
statements are included in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in the index on page F-1 of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
December 23, 2005
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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, 2002:
Allowance for doubtful accounts and
notes receivable $ 2,858 $ 197 $1,293 $ 1,762
======= ======= ====== =======
Deferred tax asset valuation allowance $14,510 $ 5,536 $ - $20,046
======= ======= ====== =======
Year ended December 31, 2003:
Allowance for doubtful accounts and
notes receivable $ 1,762 $ (406) $1,009 $ 347
======= ======= ====== =======
Deferred tax asset valuation allowance $20,046 $19,088 $ - $39,134
======= ======= ====== =======
Year ended December 31, 2004:
Allowance for doubtful accounts and
notes receivable $ 347 $ 111 $ 10 $ 448
======= ======= ====== =======
Deferred tax asset valuation allowance $39,134 $(8,808) $ - $30,326
======= ======= ====== =======
EXHIBIT 21
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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%
(1) Held by the Registrant or the indicated subsidiary of the Registrant.
(2) Formerly DeSoto, Inc.
(3) Formerly Fox Valley Steel and Wire Company.