SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period September 30, 2005
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 I.R.S. 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
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
Indicate by a check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
Number of shares of common stock outstanding at March 31, 2006: 10,000,000
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2004;
and September 30, 2005 (Unaudited) 3-4
Consolidated Statements of Operations - Three months
and nine months ended September 30, 2004 and 2005 (Unaudited) 5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 2004 and 2005 (Unaudited) 6
Consolidated Statement of Stockholders' Equity
- Nine months ended September 30, 2005 (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 8-29
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 30-44
Item 4. Controls and Procedures 45-46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 47
Item 6. Exhibits 47
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
December 31, September 30,
ASSETS 2004 2005
------------ --------------
(Restated)
Current assets:
Notes and accounts receivable $ 26,729 $ 42,216
Inventories 53,017 60,454
Restricted investments 5,373 5,470
Prepaid expenses and other 2,017 3,384
-------- --------
Total current assets 87,136 111,524
-------- --------
Property, plant and equipment 369,036 370,220
Less accumulated depreciation 275,003 283,131
-------- --------
Net property, plant and equipment 94,033 87,089
-------- --------
Other assets:
Restricted investments 5,965 6,283
Prepaid pension cost 133,443 143,119
Deferred financing costs 1,226 985
Goodwill 752 752
Other 727 277
-------- --------
Total other assets 142,113 151,416
-------- --------
$323,282 $350,029
======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
2004 2005
------------ -------------
(Restated)
Current liabilities:
Notes payable and current maturities of
long-term debt $ 51,640 $ 30,691
Accounts payable 3,801 6,053
Accounts payable to affiliates 821 -
Accrued OPEB cost - 7,254
Other accrued liabilities 18,964 37,751
--------- --------
Total current liabilities 75,226 81,749
--------- --------
Noncurrent liabilities:
Long-term debt 14,345 59,094
Accrued OPEB cost 13,478 136,466
Other 988 4,603
--------- --------
Total noncurrent liabilities 28,811 200,163
--------- --------
Liabilities subject to compromise 212,346 10,649
--------- --------
Redeemable Series A preferred stock 2,112 -
--------- --------
Stockholders' equity:
Common stock 10,798 100
Additional paid-in capital 41,225 75,423
Accumulated deficit (47,224) (18,055)
Treasury stock, at cost (12) -
--------- --------
Total stockholders' equity 4,787 57,468
--------- --------
$ 323,282 $350,029
========= ========
Commitments and contingencies (Notes 11 and 12).
See accompanying notes to consolidated financial statements.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------ -----------------------
2004 2005 2004 2005
-------- -------- ------ -------
Net sales $112,505 $ 84,770 $281,509 $263,299
Cost of goods sold 92,540 75,854 244,268 247,370
-------- -------- -------- --------
Gross margin 19,965 8,916 37,241 15,929
-------- -------- -------- --------
Selling expense 1,638 1,630 4,347 4,647
General and administrative
expense 2,881 3,050 8,305 8,460
Defined benefit pension credit (1,500) (3,226) (4,500) (9,675)
-------- -------- -------- --------
3,019 1,454 8,152 3,432
-------- -------- -------- --------
Operating income 16,946 7,462 29,089 12,497
-------- -------- -------- --------
General corporate income
(expense):
Corporate expense (1,134) (566) (2,639) (2,757)
Interest expense (874) (1,040) (2,899) (2,816)
Interest income 85 138 117 220
Other income, net 56 167 73 271
-------- -------- -------- --------
(1,867) (1,301) (5,348) (5,082)
-------- -------- -------- --------
Income before income taxes
and reorganization items 15,079 6,161 23,741 7,415
-------- -------- -------- --------
Reorganization items:
Reorganization costs (3,257) (4,342) (8,276) (10,323)
Gain on cancellation of debt - 32,349 - 32,349
-------- -------- -------- --------
(3,257) 28,007 (8,276) 22,026
-------- -------- -------- --------
Income before income taxes 11,822 34,168 15,465 29,441
Provision for income taxes 935 64 1,223 272
-------- -------- -------- --------
Net income 10,887 34,104 14,242 29,169
Dividends on preferred stock - - 1,223 -
-------- -------- -------- --------
Net income available for
common shares $ 10,887 $ 34,104 $ 13,019 $ 29,169
======== ======== ======== ========
Basic income per share available
for common shares $ 1.08 $ 3.61 $ 1.29 $ 3.11
======== ======== ======== ========
Basic shares outstanding 10,068 10,046 10,068 10,061
======== ======== ======== ========
Diluted income per share available
for common shares $ .39 $ 1.64 $ .51 $ 1.20
======== ======== ======== ========
Diluted shares outstanding 28,043 22,029 28,043 26,039
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
September 30,
------------------------
2004 2005
-------- -------
Cash flows from operating activities:
Net income $ 14,242 $ 29,169
Depreciation and amortization 11,840 11,775
Amortization of deferred financing costs 640 604
Non-cash defined benefit pension credit (4,500) (9,675)
Non-cash OPEB expense 13,641 6,817
Reorganization costs accrued 8,276 10,322
Reorganization costs paid (4,589) (7,639)
Gain on cancellation of debt - (32,349)
Other, net 108 19
Change in assets and liabilities:
Notes and accounts receivable (31,603) (15,541)
Inventories (21,348) (7,437)
Accounts payable 12,807 720
Other, net 5,604 (5,126)
-------- --------
Net cash provided (used) by operating activities 5,118 (18,341)
-------- --------
Cash flows from investing activities:
Capital expenditures (1,902) (6,057)
Collection of notes receivable 75 75
Restricted investments (10,686) (415)
Other, net 75 1,261
-------- --------
Net cash used by investing activities (12,438) (5,136)
-------- --------
Cash flows from financing activities:
Revolving credit facilities, net (6,268) 17,451
Other notes payable and long-term debt:
Additions 16,028 22,553
Principal payments (1,876) (16,004)
Deferred financing costs paid (564) (523)
-------- --------
Net cash provided by financing activities 7,320 23,477
-------- --------
Net change in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
-------- --------
Cash and cash equivalents, end of period $ - $ -
======== ========
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized $ 1,834 $ 2,255
Income taxes, net $ - $ 680
Common stock issued in exchange for extinguishment
of certain prepetition unsecured and DIP claims $ - $ 21,400
Note issued in exchange for extinguishment of
certain prepetition unsecured claims $ - $ 4,800
See accompanying notes to consolidated financial statements.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 2005
(In thousands)
(Unaudited)
Additional
Common paid-in Accumulated Treasury
stock capital deficit stock Total
----- ------- ----------- --------- -----
Balance - December 31, 2004 $10,798 $41,225 $(47,224) $(12) $ 4,787
Net income - - 29,169 - 29,169
Cancellation of common stock (10,798) 10,786 - 12 -
Cancellation of Series A
Preferred Stock - 2,112 - - 2,112
Issuance of common stock 100 21,300 - - 21,400
------- ------- -------- ---- -------
Balance - September 30, 2005 $ 100 $75,423 $(18,055) $ - $57,468
======= ======= ======== ==== =======
See accompanying notes to consolidated financial statements.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Restatement, organization and basis of presentation:
Restatement.
In connection with finalizing the preparation of the Company's consolidated
financial statements for the year ended December 31, 2005, the Company
determined that cash overdrafts, which currently are financed by borrowings
under the Company's revolving credit facility, and cash receipts which would be
applied against the revolving credit facility, were improperly classified as
part of accounts payable. Under accounting principles generally accepted in the
United States of America ("GAAP"), such cash overdrafts should have been
classified as part of the current portion of long-term debt. In addition, the
relative changes in such cash overdrafts were improperly included in the
determination of cash flows from operating activities, while under GAAP changes
in such cash overdrafts should have been included in the determination of cash
flows from financing activities.
Accordingly, the Company has restated its consolidated balance sheet at
December 31, 2004, as contained in this Form 10-Q, to reflect this correction.
The $2.7 million adjustment to the 2004 balance sheet is a result of $3.8
million of cash receipts net of $1.1 million of cash overdrafts.
The following table shows (i) selected consolidated financial statements
data as of December 31, 2004, as previously reported, (ii) adjustments to such
consolidated financial statement data to reflect the effect of this restatement
and (iii) such consolidated financial statement data, as restated.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
SELECTED CONSOLIDATED BALANCE SHEET DATA
December 31, 2004
(In thousands)
December 31, 2004
---------------------------------------------------
Previously
Reported Adjustments As restated
----------- ----------- -----------
Selected balance sheet items:
Notes payable and current maturities
of long-term debt $ 54,336 $ (2,696) $ 51,640
======== ======== ========
Accounts payable $ 1,105 $ 2,696 $ 3,801
======== ======== ========
Total current liabilities $ 75,226 $ - $ 75,226
======== ======== ========
Organization and basis of presentation.
The consolidated balance sheet of Keystone Consolidated Industries, Inc.
("Keystone" or the "Company") at December 31, 2004 has been condensed from the
Company's audited consolidated financial statements at that date included in the
Company's 2005 Form 10-K. The consolidated balance sheet at September 30, 2005
and the consolidated statements of operations and cash flows for the interim
periods ended September 30, 2004 and 2005, and the consolidated statement of
common stockholders' deficit for the interim period ended September 30, 2005,
have each been prepared by the Company, without audit, in accordance with GAAP.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the consolidated financial
position, results of operations and cash flows, have been made. However, it
should be understood that accounting measurements at interim dates may be less
precise than at year end. The results of operations for the interim periods are
not necessarily indicative of the operating results for a full year or of future
operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and certain prior year
amounts have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2005 (the "Annual Report").
At September 30, 2005, Contran Corporation ("Contran") and other entities
related to Mr. Harold C. Simmons, beneficially owned approximately 51% of the
outstanding common stock of the Company. 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.
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 Notes 2 and 9.
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. At September 30, 2005, the Company was still
negotiating the settlement of certain alleged claims with certain alleged
pre-petition unsecured creditors.
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 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 that related primarily to
greater employee participation in healthcare costs;
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 (fair market value and
book value both approximate $2.0 million) 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 liquidation of Sherman Wire's remaining
real estate assets (book value approximately $1.6 million) 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 a five-year, $80 million secured credit
facility from Wachovia Capital Finance (Central). See Notes 5 and 9.
Prior to Keystone's emergence from Chapter 11 on August 31, 2005, Contran
and other entities related to Mr. Harold C. Simmons, beneficially owned
approximately 50% of the outstanding common stock of the Company. In connection
with Keystone's emergence from Chapter 11, one of Keystone's
Debtor-In-Possession ("DIP") 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. As such,
Contran, or one of its affiliates, may be deemed to control Keystone both prior,
and subsequent to, Keystone's emergence from Chapter 11. Because Keystone's
emergence from Chapter 11 did not result in a change of control of the Company,
Keystone did not qualify to use Fresh Start Accounting upon its emergence from
Chapter 11.
Note 3 - Business Segment Information:
The Company's operating segments are organized along its manufacturing
facilities and include three 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, (ii) Engineered Wire Products ("EWP")
which manufacturers 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 and (iii)
Sherman Wire ("Sherman") which manufacturers and sells wire and wire products
for agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer markets. In connection with the Company's
emergence from Chapter 11 on August 31, 2005, certain operating assets and
existing operations of Sherman were sold at fair market value to Keystone, which
then used these assets to form and operate a newly created wholly-owned
subsidiary of reorganized Keystone named Keystone Wire Products Inc. ("KWP"). As
such, operating results of this segment prior to Keystone's emergence from
Chapter 11 were operating results of Sherman. Operating results of this segment
after Keystone's emergence from Chapter 11, were operating results of KWP. In
accordance with Keystone's plan of reorganization, the remaining assets of
Sherman will eventually be liquidated.
Business Segment Principal entities Location
- ---------------- ------------------ --------
Keystone Steel & Wire Keystone Steel & Wire Peoria, Illinois
Engineered Wire Products Engineered Wire Products Upper Sandusky, Ohio
Sherman (Keystone Wire Sherman Wire (Keystone Wire
Products) Products) Sherman, Texas
GAAP
Adjustments,
Corporate
Items
Sherman/ Segment and
KSW EWP KWP Total Eliminations Total
--- --- -------- -------- ------------ -----
(In thousands)
Three months ended September 30, 2004:
Third party net sales $ 91,938 $18,538 $2,024 $112,500 $ 5 $112,505
Intercompany sales 13,146 - 2,718 15,864 (15,864) -
-------- ------- ------- -------- -------- --------
$105,084 $18,538 $ 4,742 $128,364 $(15,859) $112,505
======== ======= ======= ======== ======== ========
Operating income $ 10,989 $ 3,423 $ 136 $ 14,548 $ 2,398 $ 16,946
======== ======= ======= ======== ======== ========
Three months ended September 30, 2005:
Third party net sales $ 64,811 $17,986 $ 1,973 $ 84,770 $ - $ 84,770
Intercompany sales 11,644 - 5,737 17,381 (17,381) -
-------- ------- ------- -------- -------- --------
$ 76,455 $17,986 $ 7,710 $102,151 $(17,381) $ 84,770
======== ======= ======= ======== ======== ========
Operating income (loss) $ (489) $ 2,453 $ (264) $ 1,700 $ 5,762 $ 7,462
======== ======= ======= ======== ======== ========
Nine months ended September 30, 2004:
Third party net sales $231,369 $45,577 $4,514 $281,460 $ 49 $281,509
Intercompany sales 37,526 - 7,725 45,251 (45,251) -
-------- ------- ------- -------- -------- --------
$268,895 $45,577 $12,239 $326,711 $(45,202) $281,509
======== ======= ======= ======== ======== ========
Operating income (loss) $ 14,296 $ 8,024 $ (425) $ 21,895 $ 7,194 $ 29,089
======== ======= ======= ======== ======== ========
Nine months ended September 30, 2005:
Third party net sales $210,706 $47,792 $ 4,801 $263,299 $ - $263,299
Intercompany sales 36,830 - 12,075 48,905 (48,905) -
-------- ------- ------- -------- -------- --------
$247,536 $47,792 $16,876 $312,204 $(48,905) $263,299
======== ======= ======= ======== ======== ========
Operating income (loss) $(11,060) $ 7,084 $ (814) $ (4,790) $ 17,287 $ 12,497
======== ======= ======= ======== ======== ========
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.
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2004 2005 2004 2005
-------- -------- -------- -------
(In thousands)
Operating income (loss) $16,946 $ 7,462 $29,089 $12,497
General corporate items:
Interest income 85 138 117 220
Other income 56 167 73 271
Corporate expenses (1,134) (566) (2,639) (2,757)
Interest expense (874) (1,040) (2,899) (2,816)
------- ------- ------- -------
Income before income taxes and
reorganization items $15,079 $ 6,161 $23,741 $ 7,415
======= ======= ======= =======
Note 4 - Inventories:
December 31, September 30,
2004 2005
---------- ------------
(In thousands)
Steel and wire products:
Raw materials $15,142 $13,561
Work in process 21,305 19,171
Finished goods 28,941 32,642
Supplies 14,844 17,377
------- -------
80,232 82,751
Less LIFO reserve 27,215 22,297
------- -------
$53,017 $60,454
======= =======
Note 5 - Notes payable and long-term debt:
December 31, September 30,
2004 2005
------------- -------------
(Restated)
(In thousands)
Wachovia revolving credit facility $ - $25,311
DIP facilities:
Congress 15,108 -
EWP 5,000 -
EWP revolving credit facility 1,989 -
8% Notes 28,116 26,928
UC Note - 4,800
Term loans:
County 10,000 10,000
EWP 5,513 -
Wachovia - 22,508
Other 259 238
------- -------
65,985 89,785
Less current maturities 51,640 30,691
------- -------
$14,345 $59,094
======= =======
In connection with Keystone's emergence from Chapter 11 on August 31, 2005,
the Company's obligations due to pre-petition secured lenders other than its
Debtor-In-Possession ("DIP") lenders were reinstated in full against reorganized
Keystone. In addition, one of Keystone's DIP 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. See
Note 9.
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 classified as a current
liability at December 31, 2004. Upon emergence from Chapter 11, the Company paid
all the then delinquent payments on the 8% Notes. In addition, the Company paid
the scheduled September 2005, payment on the 8% Notes. As such, at September 30,
2005, only the scheduled principal payments during the next 12 months were shown
as current on Keystone's balance sheet.
Keystone has obtained a five-year, $80 million secured credit facility from
Wachovia Capital Finance (Central) in connection with the Company's emergence
from Chapter 11 (the "Wachovia Facility"). Proceeds from the Wachovia 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 Wachovia 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 the Wachovia 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 Wacovia Facility also provides for a LIBOR
interest rate option. Under the terms of the Wachovia 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. Otherwise, the principal
portion of the term notes are amortized over either 60 or 84 months depending on
the underlying collateral. All unpaid term note principal and interest is due
upon maturity of the Wachovia Facility. The Wachovia 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 September 30,
2005, unused credit available for borrowing under the Wachovia facility was
$29.2 million. The Wachovia Facility 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 this facility. Accordingly, any outstanding balances under the
revolving credit portion of the Wachovia Facility are always classified as a
current liability, regardless of the maturity date of the facility. The Wachovia
Facility matures in August 2010.
In connection with Keystone's emergence from Chapter 11, the Company
provided a $4.8 million note to its pre-petition unsecured creditors (the "UC
Note"). The UC Note will accrue interest until October 2006 at 12% per annum,
compounded on the first business day of each calendar quarter. Such interest
will be deferred and converted to principal and beginning in October 2006, the
UC Note will bear interest at 8% per annum and interest payments will be due on
the first day of each calendar quarter beginning in January 2007. The first
principal payment on the UC Note is due on January 1, 2007 in the amount of
$1,542,235. Thereafter, quarterly principal payments of $391,603 each are due on
the first day of each calendar quarter until such time as the UC Note is paid in
full. The UC Note is collateralized by a lien on the Company's equity interests
in EWP and any proceeds thereof. The UC Note contains identical financial
covenants to the Wachovia Facility.
At September 30, 2005, the aggregate future maturities of notes payable and
long-term debt (including a total of approximately $665,000 of interest that
will be converted to principal during 2005 and 2006) are shown in the table
below:
Year ending December 31, Amount
--------------
(In thousands)
2005 $26,876
2006 5,462
2007 25,948
2008 14,254
2009 14,910
2010 3,000
-------
$90,450
=======
The Company determined there was 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 during the third quarter and first nine months of
2005 was approximately $ 217,000 and $841,000, respectively.
Note 6 - Series A Preferred Stock:
All of the Company's Series A Preferred Stock (with an aggregate carrying
value of $2.1 million) was cancelled in connection with Keystone's emergence
from Chapter 11 on August 31, 2005. The cancellation of the Series A Preferred
Stock was accounted for as a direct increase to the Company's common
stockholders' equity (additional paid-in capital). The Company discontinued
accruing dividends on its Series A Preferred Stock upon filing for Chapter 11 on
February 26, 2004. The accrued dividends at that date were compromised in the
Chapter 11 proceedings. See Notes 2 and 9.
Note 7 - Income taxes:
Summarized below are (i) the differences between the provision for income
taxes and the amounts that would be expected by applying the U.S. federal
statutory income tax rate of 35% and (ii) the components of the comprehensive
provision for income taxes.
Nine months ended
September 30,
--------------------------
2004 2005
---- ------
(In thousands)
Expected tax provision, at statutory rate $ 5,413 $10,304
U. S. state income taxes, net 751 1,788
Deferred tax asset valuation allowance (7,781) (15,714)
Capitalize reorganization costs 2,897 3,613
Other, net (57) 281
------- -------
Provision for income taxes $ 1,223 $ 272
======= =======
Comprehensive provision for income taxes:
Currently payable:
U.S. federal $ 811 $ 80
U.S. state 412 192
------- -------
Net currently payable 1,223 272
Deferred income taxes, net - -
------- -------
$ 1,223 $ 272
======= =======
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 September 30, 2005, 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, at December 31, 2004, the
Company had provided a deferred tax asset valuation allowance of approximately
$30.3 million. As a result of the deferred tax asset valuation allowance, the
Company does not anticipate recognizing tax expense associated with its expected
pre-tax income during 2005 will be appropriate. Accordingly, during the first
nine months of 2005, the Company decreased the deferred tax asset valuation
allowance by approximately $16.2 million. 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 8 - Other accrued liabilities:
December 31, September 30,
2004 2005
------------ -------------
(In thousands)
Current:
Employee benefits $12,019 $11,159
Environmental - 6,921
Reorganization costs 2,883 5,567
Pre-petition unsecured creditor settlement - 5,200
Self insurance 1,064 3,927
Legal and professional 358 713
Income taxes 1,405 780
Other 1,235 3,484
------- -------
$18,964 $37,751
======= =======
Noncurrent:
Environmental $ - $ 2,869
Workers compensation payments 988 1,661
Other - 73
------- -------
$ 988 $ 4,603
======= =======
Note 9 - Liabilities subject to compromise
December 31, September 30,
2004 2005
------------ -------------
(In thousands)
Accrued OPEB cost $123,425 $ -
Environmental 19,432 8,507
6% Notes 16,031 -
Accrued preferred stock dividends 11,846 -
Accounts payable 10,776 877
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 726 374
Disposition of former facilities 665 684
Other 2,117 207
-------- -------
$212,346 $10,649
======== =======
In connection with Keystone's emergence from Chapter 11 on August 31, 2005,
pre-petition unsecured creditors (other than Contran) with allowed claims
against Keystone received, in the aggregate, on a pro rata basis, $5.2 million
in cash, a $4.8 million secured promissory note and 49% of the new common stock
of reorganized Keystone (valued at $10.5 million). Also in connection with
Keystone's emergence from Chapter 11, Contran received an aggregate of 51% of
the new common stock of reorganized Keystone (valued at $10.9 million) in
exchange for its $5.0 million of DIP financing and Contran's claims against
Keystone. The new common stock of reorganized Keystone represents an aggregate
of 10.0 million shares. Such shares were valued at $2.14 per share, by the
Company with the assistance of its independent financial advisors.
As of September 30, 2005, the pre-petition unsecured creditors had yet to
provide a trust account to receive their $5.2 million cash payment. As such,
Keystone has recorded a $5.2 million liability to the pre-petition unsecured
creditors which is included in other current accrued liabilities on the
Company's September 30, 2005 balance sheet. See Note 8. In addition, the Company
has escrowed these funds in a separate demand account and, as such, Keystone's
balance sheet at September 30, 2005 includes a restricted investment of $5.2
million in current assets that will be used to fund the payment to the
pre-petition unsecured creditors.
Accrued OPEB liabilities, certain accrued environmental liabilities related
to properties owned by Keystone and other liabilities were reinstated in full
against reorganized Keystone in connection with the Company's emergence from
Chapter 11. The Company continues to negotiate claims related to certain
pre-petition environmental and other liabilities at September 30, 2005. See
Notes 10 and 11. In addition, pre-petition unsecured creditors of Keystone with
balances due to them of less than $1,900, will be paid in full.
The remaining liabilities subject to compromise at September 30, 2005,
relate to Sherman Wire Company.
As a result of the foregoing, the Company recorded a $32.3 million gain
from cancellation of debt during the third quarter of 2005. The following table
summarizes the significant components of compromised liabilities and the related
recorded gain from cancellation of debt.
Unsecured
claims
other than Contran
Contran claims Total
------- -------- -------
(In thousands)
Liabilities compromised:
6% Notes $16,031 $ - $16,031
Accrued Series A Preferred Stock
dividends 1,098 10,748 11,846
Accounts payable - pre-petition 7,758 3,279 11,037
Accounts payable - post-petition - 1,179 1,179
Deferred vendor payments 10,518 - 10,518
9 5/8% Notes 6,150 - 6,150
DIP loan - 5,000 5,000
Accrued interest 1,236 - 1,236
Other, net 752 - 752
------- ------- -------
Total liabilities compromised 43,543 20,206 63,749
------- ------- -------
Consideration provided:
Cash 5,200 - 5,200
Secured Note 4,800 - 4,800
Common stock 10,486 10,914 21,400
------- ------- -------
Total consideration provided 20,486 10,914 31,400
------- ------- -------
Gain on cancellation of debt $23,057 $ 9,292 $32,349
======= ======= =======
Note 10 - Employee benefit plans:
Defined benefit plans. The components of net periodic defined benefit
pension credit are presented in the table below.
Three months ended Nine months ended
September 30, September 30,
------------------------ --------------------------
2004 2005 2004 2005
------ ------- --------- -------
(In thousands)
Service cost $ 875 $ 938 $ 2,625 $ 2,813
Interest cost 5,439 5,432 16,317 16,300
Expected return on plan assets (9,373) (10,732) (28,120) (32,216)
Amortization of unrecognized:
Prior service cost 221 221 662 662
Actuarial losses 1,338 915 4,016 2,766
------- -------- -------- --------
$(1,500) $ (3,226) $ (4,500) $ (9,675)
======= ======== ======== ========
Postretirement benfits other than pensions ("OPEB"). The components of net
periodic OPEB cost are presented in the table below.
Three months ended Nine months ended
September 30, September 30,
------------------------ --------------------------
2004 2005 2004 2005
------ ------- -------- --------
(In thousands)
Service cost $ 725 $ 514 $ 2,175 $ 1,995
Interest cost 3,496 2,196 10,487 8,248
Amortization of unrecognized:
Prior service cost (86) (86) (258) (257)
Prior service cost due to
plan amendment (625) (1,915) (1,875) (3,335)
Actuarial losses 1,015 1,512 3,046 4,305
Settlement loss 1,250 - 3,750 -
------ -------- ------- -------
$5,775 $ 2,221 $17,325 $10,956
====== ======== ======= =======
During 2004, the Company entered into an agreement (the "1114 Agreement")
with certain retiree groups that substantially reduced the OPEB benefits that
will be paid to these retiree groups in the future. Prior to confirmation of
Keystone's definitive plan of reorganization, the Court could have rescinded the
1114 Agreement and therefore the 1114 Agreement was not definitive until it was
confirmed by the Court in connection with Keystone's emergence from Chapter 11
on August 31, 2005. As such, and in accordance with GAAP, the Company continued
to record OPEB expense through August 31, 2005 at the estimated level ($11.6
million for the first eight months of 2005) as if Keystone had not entered into
the 1114 Agreement. However, at the time of the Company's emergence from Chapter
11 on August 31, 2005, and concurrent confirmation of the 1114 Agreement, GAAP
then requires the effect of the substantially reduced OPEB benefits agreed to as
part of the 1114 Agreement be accounted for as a plan amendment, the benefit of
which is amortized into income over future periods. Accordingly, Keystone will
ultimately record an OPEB credit of approximately $2.7 million for the last four
months of 2005, resulting in an $8.9 million expense for the year 2005.
Employer Contributions. Keystone previously disclosed in its financial
statements for the year ended December 31, 2004, that it expected not to be
required to contribute to its defined benefit pension plan in 2005. As of
September 30, 2005, Keystone had not made any contributions to its defined
benefit pension plan during 2005. The Company also previously disclosed in its
financial statements for the year ended December 31, 2004, that it expected to
contribute approximately $8.3 million to its post retirement benefit plans in
2005. As of September 30, 2005, Keystone had contributed $4.1 million to these
plans during 2005. The 1114 Agreement provides that the Company will make a $3.0
million aggregate lump sum payment to the covered retirees prior to October 31,
2005.
Note 11 - Environmental matters:
As a result of the Chapter 11 filings on February 26, 2004, litigation
relating to pre-petition claims against the filing companies, including Keystone
and Sherman Wire, was stayed. Upon emergence from Chapter 11 in August 2005, the
pre-petition litigation claims against Sherman Wire continue to be stayed while
these claims are adjudicated. Environmental liabilities related to non-owned
Keystone sites ($868,000) were discharged in connection with the Chapter 11
proceedings. Recorded environmental liabilities related to non-owned Sherman
Wire sites ($7.6 million) and an owned Sherman Wire site ($.9 million) continue
to be negotiated and adjudicated subsequent to Keystone's emergence from Chapter
11 on August 31, 2005.
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
19 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 ($18.3 million
at September 30, 2005, $8.5 million of which is reflected in liabilities subject
to compromise on the Company's September 30, 2005 balance sheet) for these
matters at ten 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
nine 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 (14 sites) is approximately
$18.3 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 nine months ended September 30, 2005 is
as follows:
Nine months ended
September 30,
-----------------
(In thousands)
Balance at December 31, 2004 $19,432
Expense -
Payments (699)
Reclassification 432
Discharged in connection with Chapter 11 proceedings (868)
-------
Balance at September 30, 2005 $18,297
=======
Approximately $8.5 million of the Company's $18.3 million recorded
environmental accrual at September 30, 2005 is included in liabilities subject
to compromise on the Company's balance sheet. All of the recorded environmental
liability included in liabilities subject to compromise on the Company's
September 30, 2005 balance sheet 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.
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 and must continue these
quarterly deposits until the remediation is complete. The Company is able to
fund the remediation costs out of this trust fund. At December 31, 2004 and
September 30, 2005, the trust fund had a balance of $5.7 million and $6.0
million, respectively, which amounts are included in other noncurrent assets.
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. In February 2004, the Company reached a settlement
agreement with the IEPA which provided for Keystone to make a $75,000 penalty
payment to the IEPA, and to implement certain corrective actions to prevent a
recurrence of the NPDES violations. The Company did not pay the $75,000 penalty
because the enforcement action was stayed by Keystone's Chapter 11 filing. The
Company reached a settlement agreement with the IEPA in 2005 to satisfy the
penalty obligation through a RCRA trust fund controlled by the IEPA.
In December 2005, the Company received a Notice of Violation from the U.S.
EPA regarding air permit issues at its Peoria, Illinois facility. The U.S. EPA
alleges Keystone failed to perform stack testing and conduct a review of best
available emission control technology in connection with the implementation of
plant construction modifications made pursuant to a 2001 air permit issued under
the Clean Air Act and the Illinois Environmental Protection Act. During January
2006, the Company and the U.S. EPA reached a preliminary agreement on a plan for
addressing the U.S. EPA's concerns without referring the matter for any
enforcement action or resulting fines.
"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 nine 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, 2003 and the first nine months of 2005, the Company
received approximately $43,000, $32,000 and $80,000, 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. Pursuant to
a settlement agreement, the United States was given a $228,000 allowed claim in
Keystone's Chapter 11 proceedings. Any further liability of Keystone related to
this site was discharged in the Chapter 11 proceedings.
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. Purusant to a settlement
agreement, the PRP group was given a $125,000 allowed claim in the Chapter 11
proceedings and Keystone received a site release. Any further liability of
Keystone related to this site was discharged in the Chapter 11 proceedings.
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 have been responsible for an unspecified share of
U.S. EPA's future costs in the event that changes to the existing ROD are
required. There were no claims related to this site filed in Keystone's Chapter
11 proceedings.
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. A majority of the
PRPs and Sherman entered into a Participation Agreement dated May 26, 1989
pursuant to which the parties agreed to share in the clean up costs of the site.
The site was remediated by the participating PRPs within the scope of the EPA's
Statement of Work set forth in the administrative order as of Sherman's
bankruptcy petition date. The participation agreement provides that Sherman
could withdraw from the agreement and have no further liability under the
agreement for clean-up costs if it gave written notice to the other PRPs who
were a party to the agreement that it was withdrawing from the agreement.
Sherman was current on its obligations under the agreement as of its petition
date and gave formal notice of its withdrawal on February 18, 2005. On February
28, 2005, the EPA indicated to the other PRPs that it was possibly going to
require additional remediation at the site. The other PRPs did timely file a
claim against Sherman in its bankruptcy for any future liability it might have
under the participation agreement, but on September 27, 2005 the Court denied
the claim pursuant to Section 502(e)(1)(B) of the Bankruptcy Code as a
contingent contribution claim, which are not allowable claims. The EPA did not
file a claim against Sherman in connection with this site at all. The other PRPs
have appealed the Court's September 27, 2005 Order denying their claim to the
U.S. District Court of Wisconsin. Sherman and the other PRPs have filed the
necessary appellate motion and reply brief and the case has not been set for
oral argument as of March 28, 2006. On March 3, 2006, the U.S. EPA ordered
further remedial action, the exact extent of which is not currently known.
Further obligations by Sherman related to this site were discharged in
connection with the Chapter 11 proceedings.
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 Wire 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. Pursuant to a settlement agreement, the other
Midco PRPs were given a $1.1 million allowed claim in the Chapter 11 proceedings
and DeSoto was given a site release. Further obligations by Sherman related to
this site will be discharged in connection with the Chapter 11 proceedings.
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.
Pursuant to a settlement agreement, the Pollution Control Finance Authority of
Cambden County was given a $750,000 allowed claim in the Chapter 11 proceedings
and DeSoto was given a site release. The other PRP's claims were dismissed in
the Chapter 11 proceedings. Any further liability of Sherman related to this
site will be discharged in connection with the Chapter 11 proceedings.
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. The TNRCC was granted a
$15,000 claim in the Chapter 11 proceedings. Further obligations by Sherman
related to this site will be discharged in connection with the Chapter 11
proceedings.
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 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. There were no claims filed
in connection with this site in the Chapter 11 proceedings. The Company's
emergence from Chapter 11 proceedings in August 2005 precludes subsequent claims
against Sherman related to this site.
In addition to the sites discussed above, Sherman Wire was allegedly
involved at various other sites and in related toxic tort lawsuits which, as a
result of the Chapter 11 proceedings, it does not currently expect to incur
significant liability. Prepetition claims against Sherman continue to be
negotiated and adjudicated subsequent to the Company's emergence from Chapter 11
on August 31, 2005.
Sherman Wire 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. At December 31, 2004 and September 30, 2005, the balance in this
trust fund was approximately $248,000 and $252,000, respectively.
Note 12 - Other commitments and contingencies:
Current litigation
Prepetition claims against Sherman continue to be negotiated and
adjudicated subsequent to the Company'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
Wire 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.
On March 1, 2006, Sears filed a notice with the Bankruptcy Court indicating
it is consenting to the Allstate Settlement described below and will withdraw
its claims with prejudice respect to this matter on the date the Bankruptcy
Court's order approving the Allstate Settlement becomes final and
non-appeasable. The Chapter 11 proceedings bar any future claims against Sherman
with respect to this matter.
On March 27, 2006, the Bankruptcy Court approved a settlement agreement
with one of DeSoto's former insurers, Allstate Insurance Company ("AIC") and
Northbrook Property and Casualty Insurance Company ("NP&CIC"), whereby Sherman
entered into a policy buy-back arrangement with the insurers and the insurers
agree to withdraw their claims for retrospective premiums under the policies in
Sherman's bankruptcy with prejudice after of the Bankruptcy Court's order
approving the agreement becomes final and non-appealable. As a result of this
agreement, Sherman will receive approximately $4.0 million from the insurers in
exchange for a release of the insurers from the policies. The $4.0 million may
be used by Sherman to satisfy its pre-petition allowed unsecured claims,
including environmental related claims against Sherman in its bankruptcy
proceedings. Any portion of the $4.0 million not used to satisfy Sherman's
allowed unsecured claims will revert back to the bankruptcy estate of Sherman
and be distributed in accordance with Keystone's plan of reorganization. The
settlement agreement does not apply to any Worker's Compensation policies that
AIC or NP&CIC underwrote for Sherman. The settlement agreement also does not
apply to Sears, but Sears will be barred from bringing a claim against Sherman's
bankruptcy estate after the Bankruptcy Court's order approving the settlement
becomes final and non-appealable.
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.
Note 13 - Earnings per share:
Net income 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 is presented below. Keystone stock options were omitted
from the calculation because they were antidilutive in all periods presented.
Three months ended Nine months ended
September 30, September 30,
---------------------- -----------------------
2004 2005 2004 2005
------ ------- -------- -------
(In thousands)
Numerator:
Net income $10,887 $34,104 $14,242 $ 29,169
Cancellation of Series A Preferred
Stock - 2,112 - 2,112
Less Series A Preferred Stock
dividends - - (1,223) -
------- ------- -------- ---------
Basic net income 10,887 36,216 13,019 31,281
Series A Preferred Stock dividends - - 1,223 -
------- ------- -------- ---------
Diluted net income $10,887 $36,216 $14,242 $ 31,281
======= ======= ======= ========
Denominator:
Average common shares outstanding 10,068 10,046 10,068 10,061
Dilutive effect of Series A
Preferred Stock 17,975 11,983 17,975 15,978
------- ------- -------- ---------
Diluted shares 28,043 22,029 28,043 26,039
======= ======= ======= ========
Note 14 - Stock Options:
At December 31, 2004, the Company had 369,000 options outstanding under two
different option plans. In connection with Keystone's emergence from Chapter 11
on August 31, 2005, all of Keystone's common stock outstanding at the February
2004 petition date (10.1 million shares) was cancelled. As such, the related
stock options were also cancelled. As a result, at September 30, 2005, the
Company did not have any outstanding stock options.
Note 15 - 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. Because all of
the Company's outstanding options upon emergence from Chapter 11 on August 31,
2005 were cancelled and the Company is not expected to grant any options prior
to January 1, 2006, 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.
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 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
As discussed in Note 1 to the Consolidated Financial Statements, Keystone
restated its 2003 and 2004 consolidated balance sheets and statements of cash
flows to properly classify certain cash overdrafts.
The Company reported net income of $34.1 million in the third quarter of
2005 as compared to net income of $10.9 million in the third quarter of 2004.
During the first nine months of 2005, the Company reported net income of $29.2
million as compared to net income of $14.2 million during the first nine months
of 2004. The primary reasons for the increase in net income from both of the
2004 periods to the respective periods in 2005 were (i) a $32.3 million gain on
cancellation of debt in connection with the Company's emergence from Chapter 11
on August 31, 2005 in both of the 2005 periods, (ii) a higher defined benefit
pension credit in both of the 2005 periods, and (iii) significantly lower OPEB
expense during both of the 2005 periods, all partially offset by lower shipment
volumes during both of the 2005 periods.
OVERALL RESULTS OF OPERATIONS:
Keystone believes it is a leading 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 in
the United States. Historically, the Company has experienced greater sales and
profits during the first half of the year due to the seasonality of sales in
principal wire products markets, including the agricultural and construction
markets. Keystone is also engaged in the operation of a ferrous scrap recycling
facility. The operations of this ferrous scrap recycling facility were
insignificant when compared to the consolidated operations of the Company. As
such, the results of its operations are not separately addressed in the
discussion that follows.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
including, but not limited to, statements found in this "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations," are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes", "intends", "may", "should",
"could", "anticipates," "expected" or comparable terminology, or by discussions
of strategies or trends. Although Keystone believes the expectations reflected
in such forward-looking statements are reasonable, it cannot give any assurances
that these expectations will prove to be correct. Such statements by their
nature involve substantial risks and uncertainties that could significantly
impact expected results, and actual future results could differ materially from
those described in such forward-looking statements. While it is not possible to
identify all factors, Keystone continues to face many risks and uncertainties.
Among the factors that could cause actual future results to differ materially
are the risks and uncertainties discussed in this Quarterly Report and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission including, but not limited to;
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 The possibility of labor disruptions,
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 Quarterly Report
and the Annual Report, including, without limitation, the section
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.
The following table sets forth Keystone's steel and wire production,
ferrous scrap costs, sales volume and pricing data for the periods indicated.
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
2004 2005 2004 2005
---- ---- ---- ----
(Tons in thousands)
Production volume (tons):
Billets 169 166 455 403
Wire rod 161 148 428 380
Average per-ton ferrous
scrap purchase cost $210 $201 $193 $225
Sales volume(tons):
Fabricated wire products 46 40 154 133
Nails 4 4 25 12
Industrial wire 22 19 66 50
Wire rod 79 61 142 149
Billets 3 5 17 11
------ ----- ---- ------
154 129 404 355
====== ===== ==== ======
Per-ton selling prices:
Fabricated wire products $1,005 $958 $901 $1,014
Nails $863 $718 $749 $ 768
Industrial wire $776 $704 $691 $ 741
Wire rod $571 $470 $526 $ 520
Billets $226 $277 $176 $ 295
All steel and wire products $731 $656 $695 $ 738
The following table sets forth the components of the Company's net sales
for the periods indicated.
Three months ended Nine months ended
September 30, September 30,
-------------------- ----------------------
2004 2005 2004 2005
---- ---- ----- ------
(In millions)
Fabricated wire products $ 46.0 $38.4 $138.4 $135.1
Nails 3.6 2.7 18.7 9.3
Industrial wire 17.1 13.6 46.0 37.2
Wire rod 44.7 28.4 74.4 77.4
Billets .7 1.5 3.0 3.2
Other .4 .2 1.0 1.1
------ ----- ------ ------
$112.5 $84.8 $281.5 $263.3
====== ===== ====== ======
The following table sets forth selected operating data of the Company as a
percentage of net sales for the periods indicated.
Three months ended Nine months ended
September 30, September 30,
-------------------- -----------------------
2004 2005 2004 2005
---- ---- ------ --------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 82.3 89.5 86.8 94.0
----- ----- ----- -----
Gross margin 17.7 % 10.5 % 13.2 % 6.0 %
===== ===== ===== =====
Selling expense 1.5 % 1.9 % 1.5 % 1.8 %
General and administrative expense 2.6 % 3.6 % 3.0 % 3.2 %
Defined benefit pension credit 1.3 % 3.8 % 1.6 % 3.7 %
Corporate expense 1.0 % 0.7 % .9 % 1.0 %
Reorganization costs 2.9 % 5.1 % 2.9 % 3.9 %
Gain on cancellation of debt - % 38.2 % - % 12.3 %
Income before income taxes 10.5 % 40.3 % 5.5 % 11.2 %
Income tax provision .8 .1 .4 .1
----- ----- ----- -----
Net income 9.7 % 40.2 % 5.1 % 11.1 %
===== ===== ===== =====
Discussion of operating results
Net sales during the third quarter of 2005 declined $27.7 million, or 24.6%
from the third quarter of 2004 due primarily to a 25,000 ton decline in shipment
volume and a 10.3% decline in per-ton product selling prices. There was not a
significant change in the Company's product mix between the third quarters of
2004 and 2005. The 10.3% decline ($75 per ton) in overall per-ton product
selling prices during the third quarter of 2005 adversely impacted net sales in
that period by approximately $9.7 million. Net sales during the first nine
months of 2005 declined $18.2 million, or 6.5% from the first nine months of
2004 as a 49,000 ton decline in shipment volume more than offset higher per-ton
product selling prices. As a result of lower shipment volumes in all product
lines except wire rod during the first nine months of 2005 as compared to the
same period in 2004, Keystone's product mix in the 2005 period consisted of a
lower percentage of fabricated wire products, nails and industrial wire than
during the respective 2004 period. Keystone was able to supplement these lower
shipment volumes of fabricated wire products, nails and industrial wire during
the 2005 period with increased shipments of wire rod. However, the Company
typically realizes a lower gross margin on sales of wire rod than it does on its
other products. The 6.2% increase ($43 per ton) in overall per-ton product
selling prices during the first nine months of 2005 favorably impacted net sales
in that period by approximately $15.3 million.
During the third quarter of 2005, Keystone experienced a decline in per-ton
selling prices in all product lines except billets over those of the same period
during 2004. During the third quarter of 2005, fabricated wire products per-ton
selling prices declined by 4.7%, nails declined 16.8%, industrial wire declined
9.3%, wire rod declined 17.7% and the per-ton selling prices of billets during
the third quarter of 2005 increased 22.6% as compared to the third quarter of
2004. During the third quarter of 2005, fabricated wire products shipment volume
declined 13.0%, industrial wire declined 13.6% and wire rod declined 22.8% while
billet shipments increased by 66.7% in the third quarter of 2005 from the 2004
third quarter levels. Shipments of nails during the 2005 third quarter were
unchanged from the 2004 third quarter levels. During the first nine months of
2005, fabricated wire products per-ton selling prices increased by 12.5%, nails
increased 2.5%, industrial wire increased 7.2% and billets increased 67.6% while
the per-ton selling price of wire rod during the first nine months of 2005
declined 1.1% as compared to the first nine months of 2004. During the first
nine months of 2005, fabricated wire products shipment volume declined 13.6%,
nails declined 52.0%, industrial wire declined 24.2% and billet shipments
declined 35.3% while wire rod shipment volume in the first nine months of 2005
increased 4.9% from the first nine months of 2004 levels. The Company believes
the lower shipment volume in the 2005 periods of both its fabricated wire
products and industrial wire were due to high inventory levels at Keystone's
customers. In addition, Keystone believes the late winter and inclement weather
during the spring also adversely impacted fabricated wire product shipments. The
Company also believes the lower shipment volume of nails during the first nine
months of 2005 period was due primarily to a Company initiative that began
during the last quarter of 2003 to discontinue sales to its less profitable
customers. 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, with the exception of wire
rod, during the first nine months of 2005, the Company was able to realize
increases in the per-ton product selling prices of all of its product lines as
compared to per-ton selling prices during the respective period during 2004.
During the third quarter of 2005, the cost of ferrous scrap was actually lower
than the 2004 third quarter, and as such, the Company's overall per-ton product
selling prices declined during the 2005 third quarter as compared to the 2004
third quarter.
Billet production during the 2005 third quarter declined by 3,000 tons to
166,000 tons from 169,000 tons during the third quarter of 2004. Wire rod
production during the third quarter of 2005 declined by 13,000 tons to 148,000
tons from 161,000 tons during the third quarter of 2004. Billet production
during the first nine months of 2005 declined by 52,000 tons to 403,000 tons
from 455,000 tons during the first nine months of 2004. Wire rod production
during the first nine months of 2005 declined by 48,000 tons to 380,000 tons
from 428,000 tons during the first nine months of 2004. With the exception of
the increase in billet production during the 2005 third quarter, the lower
billet and wire rod production during the 2005 periods was due primarily to
Keystone limiting production schedules during the 2005 periods as a result of
the lower market demand.
Cost of goods sold during the 2005 third quarter declined by 18.0% to $75.9
million from $92.5 million during the 2004 third quarter. However, the cost of
goods sold percentage increased from 82.3% in the 2004 third quarter to 89.5% of
net sales in the third quarter of 2005. This increase in the cost of goods sold
percentage was due primarily to the lower per-ton product selling prices during
the 2005 third quarter partially offset by lower costs for ferrous scrap,
natural gas and electrical power at the Company's Peoria, Illinois facility and
lower retiree medical costs during the 2005 quarter. Keystone's per-ton ferrous
scrap costs declined 4.5% during the 2005 third quarter as compared to the 2004
third quarter. During the 2005 third quarter, the Company purchased 183,000 tons
of ferrous scrap at an average price of $201 per-ton as compared to 2004 third
quarter purchases of 192,000 tons at an average price of $210 per ton. This
decline in per-ton ferrous scrap costs favorably impacted gross profit during
the 2005 third quarter by approximately $1.7 million. The cost of natural gas
and electrical power at the Company's Peoria facility in the 2005 third quarter
was approximately $400,000 lower than the 2004 quarter.
During 2004, the Company entered into an agreement (the "1114 Agreement")
with certain retiree groups that substantially reduced the post retirement
("OPEB") benefits that will be paid to these retiree groups in the future. Prior
to confirmation of Keystone's definitive plan of reorganization, the Court could
have rescinded the 1114 Agreement and therefore the 1114 Agreement was not
definitive until it was confirmed by the Court in connection with Keystone's
emergence from Chapter 11 on August 31, 2005. As such, and in accordance with
GAAP, the Company continued to record OPEB expense through August 31, 2005 at
the estimated level ($11.6 million for the first eight months of 2005) as if
Keystone had not entered into the 1114 Agreement. However, at the time of the
Company's emergence from Chapter 11 on August 31, 2005, and concurrent
confirmation of the 1114 Agreement, GAAP then required the effect of the
substantially reduced OPEB benefits agreed to as part of the 1114 Agreement be
accounted for as a plan amendment, the benefit of which is amortized into income
over future periods. Accordingly, Keystone will record an OPEB credit of
approximately $2.7 million for the last four months of 2005, resulting in an
$8.9 million expense for the year 2005.
Despite a 6.5% decline in sales during the first nine months of 2005 as
compared to the same period in 2004, cost of goods sold increased by 1.3% to
$247.4 million from $244.3 million during the first nine months of 2004. As a
result, the cost of goods sold percentage increased from 86.8% in the first nine
months of 2004 to 94.0% of net sales in the first nine months of 2005. This
increase in the cost of goods sold percentage was due primarily to higher costs
for ferrous scrap, natural gas and electrical power at the Company's Peoria,
Illinois in the 2005 period as well as the less favorable product mix, all
partially offset by the increased product per-ton selling prices in the 2005
periods and the lower retiree medical costs. Keystone's per-ton ferrous scrap
costs increased 16.6% during the first nine months of 2005 as compared to the
same period in 2004. During the first nine months of 2005, the Company purchased
447,000 tons of ferrous scrap at an average price of $225 per-ton as compared to
purchases during the first nine months of 2004 of 511,000 tons at an average
price of $193 per ton. This increase in per-ton ferrous scrap costs adversely
impacted gross profit during the 2005 period by approximately $14.3 million. The
cost of natural gas and electrical power at the Company's Peoria facility in the
first nine months of 2005 was $1.3 million higher than during the 2004 period.
As a result of the above items, the gross margin of $20.0 million in the
2004 third quarter declined to $8.9 million in the 2005 third quarter and the
gross margin of $37.2 million during the first nine months of 2004 declined to
$15.9 million during the first nine months of 2005. As a result, the gross
margin percentage in the third quarter of 2004 of 17.7% declined to 10.5% in the
2005 third quarter and the gross margin percentage in the first nine months of
2004 of 13.2% declined to 6.0% in the first nine months of 2005.
Selling expense during the 2005 third quarter of $1.6 million was relativey
unchanged from the third quarter of 2004. However, selling expense during the
first nine months of 2004 of $4.3 million increased to $4.6 million during the
first nine months of 2005 due primarily to increased advertising expenses.
General and administrative expense of $3.1 million in the 2005 third
quarter was approximately $169,000 more than general and administrative expenses
during the third quarter of 2004 and general and administrative expense during
the first nine months of 2005 of $8.1 million was approximately $155,000 more
than the $8.3 million of general and administrative expense in the first nine
months of 2004 due primarily to increased non-Chapter 11 related legal costs
partially offset by lower retiree medical costs.
During the third quarter and first nine months of 2005, Keystone recorded a
defined benefit pension credit of $3.2 million and $9.7 million, respectively,
as compared to recording a defined benefit pension credit in the same periods
during 2004 of $1.5 million and $4.5 million, respectively. The increased
pension credit during the 2005 periods was a result of a $52 million increase in
plan assets from the end of 2003 to the end of 2004. In addition, Keystone was
not required to make any cash contributions for defined benefit pension plan
fundings during either 2005 or 2004. The Company currently anticipates during
2005 it will record a defined benefit pension credit of $11.7 million 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.
During the third quarter of 2005, the Company recorded $566,000 of general
corporate expense as compared to recording $1.1 million of general corporate
expenses during 2004 third quarter. The primary reason for this difference is
lower retiree medical costs. In addition, general insurance expense was
approximately $500,000 less in the 2005 third quarter than in the same quarter
in 2004. During the first nine months of 2005, Keystone recorded $2.8 million of
general corporate expense which was a $118,000 increase from the $2.6 million of
general corporate expenses recorded in the first nine months of 2004. The
primary reasons for this increase was increased state franchise taxes partially
offset by lower retiree medical costs and general insurance expense.
Interest expense during the third quarter of 2005 was slightly higher than
in the third quarter of 2004 due primarily to higher interest rates and debt
levels in the 2005 quarter. Interest expense during the first nine months of
2005 was slightly lower than in the first nine months of 2004 due primarily to
lower interest rates in 2005 partially offset by lower debt levels in 2005. 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
$88.6 million during the third quarter of 2005 as compared to $76.6 million
during the third quarter of 2004. Average borrowings by the Company approximated
$87.1 million during the first nine months of 2005 as compared to $100.5 million
during the first nine months of 2004. During the third quarter of 2005, the
average interest rate on outstanding indebtedness was 4.2% per annum as compared
2.6% per annum during the 2004 third quarter. During the nine six months of
2005, the average interest rate on outstanding indebtedness was 4.0% per annum
as compared 3.2% per annum during the first nine months of 2004. Keystone
currently anticipates average interest rates and debt levels for the year 2005
will be higher than their respective levels during 2004.
In connection with Keystone's emergence from Chapter 11 on August 31, 2005,
pre-petition unsecured creditors and certain post-petition creditors with
allowed claims against the Company in the amount of approximately $63.7 million
received, on a pro rata basis, in the aggregate, $5.2 million in cash, a $4.8
million secured promissory note and 100% of the new common stock of reorganized
Keystone (valued at $21.4 million). As a result, the Company recorded a $32.3
million gain from cancellation of debt during the third quarter of 2005.
During the third quarters of 2005 and 2004, Keystone incurred $4.3 million
and $3.3 million, respectively of legal and professional fees relative to its
Chapter 11 proceedings and related reorganization activities. During the first
nine month periods of 2005 and 2004, Keystone incurred $10.3 million and $8.3
million, respectively of legal and professional fees relative to these same
activities.
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 7 to the Consolidated Financial Statements. At September 30, 2005, the
Company had recorded a deferred tax asset valuation allowance of $7.3 million
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 pre-tax income for financial reporting purposes during 2005,
it 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.
As a result of the items discussed above, Keystone recorded net income
during the third quarter of 2005 of $34.1 million as compared to net income of
$10.9 million in the third quarter of 2004 and net income of $29.2 million
during the first nine months of 2005 as compared to net income of $14.2 million
during the first nine months of 2004.
SEGMENT RESULTS OF OPERATIONS:
The Company's operating segments are organized along its manufacturing
facilities and include three 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, (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 and, (iii)
Sherman Wire ("Sherman") which manufacturers and sells wire and wire products
for agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer markets. In connection with the Company's
emergence from Chapter 11 on August 31, 2005, certain operating assets and
existing operations of Sherman were sold at fair market value to Keystone, which
then used these assets to form and operate a newly created wholly-owned
subsidiary of reorganized Keystone named Keystone Wire Products Inc. ("KWP"). As
such, operating results of this segment prior to Keystone's emergence from
Chapter 11 were operating results of Sherman. Operating results of this segment
after Keystone's emergence from Chapter 11, were operating results of KWP. In
accordance with Keystone's plan of reorganization, the remaining assets of
Sherman will eventually be liquidated.
Three months ended Nine months ended
September 30, September 30,
------------------------- ------------------------
2004 2005 2004 2005
------ ------- ------- -------
(In thousands)
Revenues:
Keystone Steel and Wire $105,084 $ 76,455 $268,895 $247,536
Engineered Wire Products 18,538 17,986 45,577 47,792
Sherman/KWP 4,742 7,710 12,239 16,876
Elimination of intersegment
revenues (15,859) (17,381) (45,202) (48,905)
-------- -------- -------- --------
$112,505 $ 84,770 $281,509 $263,299
======== ======== ======== ========
Operating profit (loss):
Keystone Steel and Wire $ 10,989 $ (489) $ 14,296 $(11,060)
Engineered Wire Products 3,423 2,453 8,024 7,084
Sherman/KWP 136 (264) (425) (814)
GAAP adjustments and
eliminations 2,398 5,762 7,194 17,287
-------- -------- -------- --------
$ 16,946 $ 7,462 $ 29,089 $ 12,497
======== ======== ======== ========
GAAP adjustments and eliminations in the above table consisted primarily of
adjustments to reflect the difference between the defined benefit pension 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 $4.1 million and $3.1
million during the three months ended September 30, 2005 and 2004, respectively,
and $12.4 million and $7.2 million during the nine months ended September 30,
2005 and 2004, respectively.
Keystone Steel & Wire
KSW's net sales in the 2005 third quarter declined by $28.6 million or
27.2% to $76.5 million from $105.1 million in the third quarter of 2004 due
primarily to lower shipment volumes and lower overall per-ton product selling
prices. KSW's net sales during the first nine months of 2005 declined by $21.4
million or 7.9% to $247.5 million from $268.9 million during the first nine
months of 2004 due primarily to lower shipment volumes partially offset by
higher overall per-ton product selling. KSW sold approximately 29,000 less tons
of products in the 2005 third quarter as compared to the third quarter of 2004,
at selling prices $84 per-ton lower than per-ton product selling prices in the
2004 third quarter. KSW sold approximately 22,000 less tons of products in the
first nine months of 2005 as compared to the first nine months of 2004, although
at selling prices $32 per-ton higher than per-ton product selling prices in the
same period during 2004. KSW believes the lower shipment volume in the 2005
periods of both its fabricated wire products and industrial wire were due to
high inventory levels at KSW's customers. In addition, KSW believes the late
winter and inclement weather during the spring also adversely impacted
fabricated wire product shipments. KSW also believes the lower shipment volume
of nails during the 2005 periods was due primarily to an initiative that began
during the last quarter of 2003 to discontinue sales to its less profitable
customers. KSW was able to supplement these lower shipment volumes of fabricated
wire products, nails and industrial wire during the 2005 periods with increased
shipments of wire rod. However, KSW typically realizes a lower gross margin on
sales of wire rod than it does on its other products. Throughout 2004, KSW
implemented several price increases primarily as a reaction to increasing
ferrous scrap costs, KSW's primary raw material. As a result of these efforts,
during the first nine months of 2005, KSW was able to realize increases in its
per-ton product selling prices over the same period in 2004. However, during the
third quarter of 2005, the cost of ferrous scrap was actually lower than the
2004 third quarter, and as such, the Company's overall per-ton product selling
prices declined during the 2005 third quarter as compared to the 2004 third
quarter. During both the 2005 and 2004 third quarters, approximately 15.2% of
KSW's net sales were made to other Keystone entities. During the first nine
months of both 2005 and 2004, approximately 14.9% of KSW's net sales were made
to other Keystone entities. Significantly all of the KSW sales to other Keystone
entities were sales of wire rod.
During the third quarter of 2005, KSW recorded an operating loss of
$489,000 as compared to operating income of $11.0 million in the 2004 third
quarter. During the first nine months of 2005, KSW recorded an operating loss of
$11.1 million as compared to $14.3 million of operating income during the first
nine months of 2004. The primary reasons for the lower operating profit in the
third quarter of 2005 were the lower shipment volumes and per-ton product
selling prices in the 2005 third quarter partially offset by lower costs for
ferrous scrap, natural gas and electrical power and lower retiree medical costs
in the 2005 third quarter. The primary reasons for the lower operating profit
during the first nine months of 2005 were lower shipment volumes, a less
favorable product mix and higher costs for ferrous scrap and natural gas
electrical power all partially offset by lower retiree medical costs and higher
per-ton product selling prices in the first nine months of 2005.
Engineered Wire Products
EWP's net sales of $18.0 million during the third quarter of 2005 were
approximately $500,000 or 3.0% lower than during the third quarter of 2004 due
primarily to slightly lower overall per-ton product selling prices partially
offset by slightly higher shipment volume. During the first nine months of 2005,
EWP's net sales of $47.8 million were approximately $2.2 million or 4.9% higher
than during the first nine months of 2004 due primarily to higher overall
per-ton product selling prices partially offset by lower shipment volume. During
the 2005 third quarter, EWP sold approximately 300 more tons of products than
during the third quarter of 2004 at per-ton product selling prices approximately
$40 per-ton lower than per-ton selling prices in the 2004 third quarter. During
the first nine months of 2005, EWP sold 3,000 less tons of products than during
the first nine months of 2004 at per-ton product selling prices approximately
$85 per-ton higher than per-ton selling prices in the same period in 2004.
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 the first nine months of 2005, EWP was able to realize
increases in its per-ton product selling prices over the same period in 2004.
However, during the third quarter of 2005, the cost of wire rod was actually
lower than the 2004 third quarter, and as such, EWP's overall per-ton product
selling prices declined during the 2005 third quarter as compared to the 2004
third quarter. EWP sources the majority of its wire rod requirements from KSW.
Primarily as a result of the lower selling prices during the third quarter
of 2005, partially offset by lower cost for wire rod, EWP reported operating
income of $2.5 million as compared to $3.4 million during the 2004 third
quarter. During the first nine months of 2005, EWP's higher per-ton product
selling prices were more that offset by higher costs, primarily wire rod, and,
as such, EWP's operating income declined from $8.0 million during the first nine
months of 2004 to $7.1 million during the first nine months of 2005.
Sherman Wire/Keystone Wire Products
This segment's net sales of $7.7 million in the 2005 third quarter were
approximately $3.0 million more than net sales during the third quarter of 2004
of $4.7 million as increased shipment volume more than offset a decline in
per-ton product selling prices. In addition, during the first nine months of
2005, this segment's net sales increased 37.9% to $16.9 million from $12.2
million during the first nine months of 2004 also due to increased shipment
volumes partially offset by lower per-ton product selling prices. Tons shipped
by this segment during the third quarter of 2005 increased by 5,400 tons, or
94.9% from shipment levels during the third quarter of 2004. Tons shipped by
this segment during the first nine months of 2005 increased by 6,300 tons from
shipment levels during the same period of 2004. Management believes this
segment's higher shipment volumes during the 2005 periods were due to increased
demand from existing customers during the 2005 period. This segment's overall
per-ton product selling price declined by approximately $138 per-ton during the
2005 third quarter as compared to the per-ton product selling prices during the
third quarter of 2004. This segment's overall per-ton product selling price
declined by approximately $33 per-ton during the first nine months of 2005 as
compared to the per-ton product selling prices during the first nine months of
2004. Management believes the decline in per-ton product selling prices from
this segment during both the 2005 periods was due to lower costs for wire rod,
this segment's primary raw material, and declining market prices. This segment
sources the majority of its wire rod requirements from KSW. During the third
quarter of 2005 and 2004, approximately 74% and 57%, respectively, and during
the first nine months of 2005 and 2004, approximately 72% and 63%, respectively,
of this segment's net sales were made to other Keystone entities, primarily KSW.
The majority of these sales were fabricated wire products.
During the third quarter of 2005, this segment recorded an operating loss
of $264,000 as compared to $136,000 of operating income recorded in the third
quarter of 2004. During the first nine months of 2005, Sherman Wire/KWP recorded
an $814,000 operating loss as compared to a $425,000 operating loss during the
first nine months of 2004. The primary reason for this decline in operating
performance in the first nine months of 2005 was a less favorable product mix
during the 2005 period as well as increased costs during the 2005 period for
utilities and repair and maintenance partially offset by lower retiree medical
costs.
Outlook for 2005
During 2005, rod imports have 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 the Company expects to report a significant gain upon cancellation
of debt and other liabilities as well as substantially lower OPEB expense
concurrent with its emergence from Chapter 11. As a result, Keystone expects it
will report net income for financial reporting purposes although it expects to
report negative cash flows from operating activities in 2005. 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.
LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 2005, Keystone had working capital of $29.8 million,
including $5.4 million of notes payable and current maturities of long-term debt
as well as outstanding borrowings under the Company's revolving credit facility
of $25.3 million. The amount of available borrowings under the revolving credit
facility is based on formula-determined amounts of trade receivables and
inventories, less the amount of outstanding letters of credit. At September 30,
2005, unused credit available for borrowing under Keystone's revolving credit
facility was $29.2 million. The Company's revolving credit facility 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
revolving credit facility are always classified as a current liability
regardless of the maturity date of the facility.
Despite a $14.9 million increase in earnings between the first nine months
of 2004 and the first nine months of 2005, cash flow from operating activities
in the first nine months of 2005 declined by $23.4 million as Keystone generated
$5.1 million of cash from operations during the first nine months of 2004 as
compared to using $18.3 million of cash in operations during the first six
months of 2005. This increase in cash used in operations was due primarily to
the $32.3 million non-cash gain on cancellation of debt in the 2005 period, the
difference between recording $13.6 million of non-cash OPEB expense during the
2004 period and $6.8 million of non-cash OPEB expense in the 2005 period, a
$10.6 million increase in accounts payable related to a former ferrous scrap
supplier during the 2004 period and a $5.2 million increase in the non-cash
pension credit from 2004 to 2005, all offset by changes in inventory levels
between 2004 and 2005. As a result of the 1114 Agreement, during 2005, the
Company recorded OPEB expense of $11.0 million as opposed to OPEB expense of
$17.3 million during the 2004 period. During 2004, as a result of a dispute with
a ferrous scrap supplier relative to consigned inventories on the Company's
premises at the bankruptcy filing date, Keystone was required to make payments
into a restricted cash account as it consumed the disputed ferrous scrap
inventories. As a result, at September 30, 2004, Keystone had accrued a payable
to the ferrous scrap supplier of approximately $10.6 million. This dispute was
resolved and the restricted cash account was released during the fourth quarter
of 2004. During the 2004 period, the Company increased inventories by
approximately $21.3 million as opposed to a $7.4 million increase in inventories
during the 2005 period. Because of the seasonal nature of the Company's
business, the 2005 change in inventory levels was typical. The reason the 2004
changes in these inventory levels was not consistent with 2005's change was due
to Keystone's limited liquidity during the last half of 2003 and the first
portion of 2004, not allowing the Company 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 and the first two months
of 2004 in order to meet customer shipment demand. As such, at the end of 2003,
the Company's inventory balances were at abnormally low levels. Keystone's
operations returned to normal levels during 2004.
During the first nine months of 2005, Keystone made capital expenditures of
approximately $6.1 million primarily related to upgrades of production equipment
at its facility in Peoria, Illinois, as compared to $1.9 million in the first
nine months of 2004. 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 September 30, 2005, the Company's financial statements reflected accrued
liabilities of $18.3 million ($8.5 million 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 $18.3 million. See Notes 11 and 12 to the
Consolidated Financial Statements for discussions of the Company's environmental
liabilities and current litigation.
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.
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 September 30, 2005, the Company expects that its
long-term profitability should ultimately be sufficient to enable it to realize
full benefit of its future tax deductions, in part due to the long-term nature
of its net operating loss carryforwards, which expire in 2023 and 2024.
Although, considering all factors believed to be relevant, including the
Company's recent operating results, its expected future near-term productivity
rates; cost of raw materials, electricity, labor and employee benefits,
environmental remediation, and retiree medical coverage; interest rates; product
mix; sales volumes and selling prices 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 $7.3 million at September 30, 2005, 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.
During the Company's Chapter 11 proceedings, Keystone was able to
significantly reduce its expected annual cash contributions to medical plans for
both current and retired employees. Despite these significant reductions,
Keystone still incurs significant ongoing costs for medical benefits for both
current and retired employees as well as for plant and equipment. As such,
Keystone is vulnerable to business downturns and increases in costs, and
accordingly, routinely compares its liquidity requirements and capital needs
against its estimated future operating cash flows. In addition, Keystone
currently anticipates incurring legal and professional fees of approximately
$11.0 million during 2005 related to its reorganization efforts. Keystone is
also taking additional action towards improving its liquidity. 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.
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 and 5 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
-----------------------------------------------------
2011 and
Contractual commitment 2005 2006 2007/2008 2009/2010 After Total
---------------------- ---- ---- --------- --------- ------- -----
(In thousands)
Indebtedness:
Principal $1,566 $5,461 $40,203 $43,220 $ - $ 90,450
Interest 509 1,876 3,555 1,897 - 7,837
Operating leases 283 480 275 127 - 1,165
Product supply
agreement 300 1,200 2,400 2,400 1,500 7,800
------ ------ ------- ------- ------ ---------
$2,658 $9,017 $46,433 $47,644 $1,500 $107,252
====== ====== ======= ======= ====== ========
The timing and amounts shown in the above table for the Company's
commitments related to indebtedness (both principal and interest), operating
leases and product supply agreements are based upon the contractual payment
amount and the contractual payment date for such commitments (including a total
of approximately $665,000 of interest that will be converted to principal during
2005 and 2006. In addition, the $24.3 million due under the Company's revolving
credit facility is shown as current maturities in the Company's Consolidated
Financial Statements at September 30, 2005. However, the above table reflects
maturities of these facilities only upon the contracted expiration of the credit
facility.
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 as the related environmental site is
remediated.
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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company maintains
disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by Rule 13a-15(e) of the Securities and Exchange Act of
1934 as amended ("the Act"), 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 Securities and Exchange Commission ("SEC"),
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 that
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, or persons performing similar functions, 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 September 30, 2005. Based upon their evaluation,
and solely as a result of the material weaknesses discussed below, these
executive officers have concluded the Company's disclosure controls and
procedures were not effective as of September 30, 2005.
Internal Control Over Financial Reporting. A material weakness is a control
deficiency, or a combination of control deficiencies, that results in more than
a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. Management of the
Company has concluded that the following control deficiencies constitute
material weaknesses in the Company's internal control over financial reporting:
(1) As of September 30, 2005, the Company did not maintain effective
controls over the completeness and accuracy of net sales and related
cost of goods sold. Specifically, the Company did not have controls
designed and in place to detect sales made under the terms F.O.B. at
the customer's location. Additionally, the Company did not maintain
effective controls over the review and monitoring of the accuracy and
completeness of net sales and costs of goods sold. This control
deficiency resulted in adjustments to net sales and cost of goods sold
in the third quarter of 2005.
(2) As of September 30, 2005, the Company did not maintain effective
controls over the presentation and classification of cash overdrafts.
Specifically, effective controls were not designed and in place to
ensure that cash overdrafts were properly classified as indebtedness
in the Company's consolidated balance sheet, and that changes in its
cash overdrafts were properly included in the determination of cash
flows from financing activities. This control deficiency resulted in
the restatement of the Company's 2003 and 2004 annual consolidated
financial statements and audit adjustments to both its 2004 interim
consolidated financial statements and its annual and interim 2005
consolidated financial statements affecting accounts payable and the
current portion of long-term debt.
Each of these two control deficiencies could result in a misstatement of
the aforementioned accounts that would result in a material misstatement to the
Company's annual or interim consolidated financial statements that would not be
prevented or detected.
Accordingly, management of the Company determined that each of these
control deficiencies constitutes a material weakness.
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 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.
Remediation of Material Weakness. In order to remediate the first material
weakness discussed above, in March 2006, the Company modified its information
system to appropriately identify products shipped to its customers under
delivery terms of F.O.B. at the customer location. In addition, the Company
intends to institute a quarterly close procedure, to be implemented for the
first time for the quarter ending March 31, 2006, to review all sales within a
specified number of weeks prior to the end of the quarter to ensure the delivery
terms are consistent with revenue recognition in the quarter of shipment.
In order to remediate the second material weakness discussed above, in
March 2006 the Company revised the recurring reclassification journal entry used
in the preparation of its consolidated balance sheet to properly classify the
amount of any cash overdrafts as part of the current portion of long-term debt.
In addition, the Company intends to institute quarterly close procedures, to be
implemented for the first time for the quarter ending March 31, 2006, to ensure
(i) that an adequate review of the Company's balance sheet and statement of cash
flow consolidation occurs each quarter and (ii) the continued appropriateness of
the reclassification journal entry to classify bank overdrafts as part of the
current portion of long-term debt.
Changes in Internal Control Over Financial Reporting. There have been no
changes in the Company's internal control over financial reporting during the
quarter ended September 30, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to disclosure provided under the caption "Current
litigation" in Note 12 to the Consolidated Financial Statements.
ITEM 6. Exhibits
(a) The Company has retained a signed original of any exhibit listed below
that contains signatures, and the Company will provide any such
exhibit to the Commission or its staff upon request. The following
exhibit is included herein:
31.1 Chief Executive Officer's Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive and Chief Financial Officers' Certification
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Keystone Consolidated Industries, Inc.
(Registrant)
Date: March 31, 2006 By /s/Bert E. Downing, Jr.
--------------------------------------
Bert E. Downing, Jr.
Vice President, Chief Financial
Officer, Corporate Controller
and Treasurer
(Principal Financial and Accounting
Officer)