SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2005
Commission file number 1-3919
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Keystone Consolidated Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 37-0364250
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1740
Three Lincoln Centre, Dallas, TX 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 458-0028
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Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
------------------------------
Common Stock, $.01 par value
Indicate by check mark:
If the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes No X
If the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes No X
Whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
If disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Whether the Registrant is a large accelerated filer, an accelerated filer
or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large
accelerated filer Accelerated filer Non-accelerated filer X .
Whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes No X
Whether the registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court. Yes X No .
The aggregate market value of the 5,077,832 shares of voting stock held by
nonaffiliates of the Registrant, as of June 30, 2005 (the last business day of
the Registrant's most-recently completed second fiscal quarter), was
approximately $508,000.
As of March 31, 2006 10,000,000 shares of common stock were outstanding.
Documents incorporated by reference
-----------------------------------
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
PART I
ITEM 1. BUSINESS.
Bankruptcy
On February 26, 2004, Keystone Consolidated Industries, Inc. ("Keystone" or
the "Company") and five of its direct and indirect subsidiaries filed for
voluntary protection under Chapter 11 of the Federal Bankruptcy Code. Keystone
and its filing subsidiaries filed their petitions in the U.S. Bankruptcy Court
for the Eastern District of Wisconsin in Milwaukee (the "Court"). Keystone's
amended plan of reorganization was accepted by the impacted constituencies and
confirmed by the Court on August 10, 2005 and Keystone emerged from Chapter 11
on August 31, 2005.
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.
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 to Keystone (fair
market value and book value both approximate $2.0 million), and will
then be used to form and operate a newly created wholly-owned
subsidiary of reorganized Keystone named Keystone Wire Products Inc.
("KWP");
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 Corporation ("Contran"), Keystone's largest
pre-petition shareholder) converted $5 million of its DIP credit
facility, certain of its pre-petition unsecured claims and all of its
administrative claims against Keystone into 51% of the new common
stock of reorganized Keystone; and
o The Board of Directors of reorganized Keystone now consists of seven
individuals, two each of which were designated by Contran and the
Official Committee of Unsecured Creditors (the "OCUC"), respectively.
The remaining three directors qualify as independent directors (two of
the independent directors were appointed by Contran with the OCUC's
consent and one was appointed by the OCUC with Contran's consent).
In addition, Keystone has obtained an $80 million secured credit facility from
Wachovia Capital Finance (Central). Proceeds from this credit facility were used
to extinguish Keystone's existing Debtor-In-Possession ("DIP") credit facilities
and to provide working capital for reorganized Keystone. See Note 2 to the
Consolidated Financial Statements.
General
Keystone believes it is a leading domestic manufacturer of steel fabricated
wire products, wire mesh, 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 based on tons shipped (101,000
tons in 2005). Keystone is vertically integrated, converting substantially all
of its fabricated wire products, wire mesh, nails and industrial wire from wire
rod produced in its steel mini-mill. The Company's vertical integration has
historically allowed it to benefit from the higher and more stable margins
associated with fabricated wire products and wire mesh as compared to wire rod,
as well as from lower production costs of wire rod as compared to wire
fabricators that purchase wire rod in the open market. Moreover, management
believes Keystone's downstream fabricated wire products, wire mesh, nails and
industrial wire businesses better insulate it from the effects of wire rod
imports as compared to non-integrated wire rod producers. In 2005, Keystone had
net sales of $367.5 million. Approximately 65% of the Company's net sales were
generated from sales of fabricated wire products, wire mesh, nails and
industrial wire with the balance generated primarily from sales of wire rod not
used in Keystone's own downstream operations.
The Company's fabricated wire products, which comprised 30% of its 2005 net
sales, include agricultural fencing, barbed wire, hardware cloth and woven wire
mesh. These products are sold to agricultural, construction, industrial,
consumer do-it-yourself and other end-user markets. Keystone serves these
markets through distributors, agricultural retailers, building supply centers
and consumer do-it-yourself chains such as Tractor Supply Co., Lowe's Companies,
Inc., and Ace Hardware Corporation. A significant proportion of these products
are sold to agricultural, consumer do-it-yourself and other end-user markets
which in management's opinion are typically less cyclical than many steel
consuming end-use markets such as the automotive, construction, appliance and
machinery manufacturing industries. Management believes the Company's ability to
service these customers with a wide range of fabricated wire products through
multiple production and distribution locations provides it a competitive
advantage in accessing these growing and less cyclical markets.
Keystone sells bulk and packaged nails primarily to construction
contractors and building product manufacturers and distributors. The Company
sells approximately 26% of its nails through PrimeSource, Inc., one of the
largest nail distributors in the United States, under PrimeSource's Grip-Rite(R)
label. During 2005, nails accounted for approximately 3% of Company net sales.
Approximately 84% of Keystone's net sales of fabricated wire products and
nails are generated by sales under the RED BRAND trademark, a widely recognized
brand name in the agricultural fencing and construction marketplaces for more
than 80 years.
The Company manufactures a wide variety of wire mesh rolls and sheets used
to form wire reinforcement in concrete construction projects such as pipe,
precast boxes and other applications, including use in roadways, buildings and
bridges through its wholly-owned subsidiary, Engineered Wire Products, Inc.
("EWP"). The Company's largest wire mesh customers include pipe manufacturers,
culvert manufacturers, rebar fabricators and steel reinforcing distributors.
Sales of wire mesh accounted for approximately 17% of the Company's consolidated
net sales during 2005.
The Company also sells industrial wire, an intermediate product used in the
manufacture of fabricated wire products, to third parties who are generally not
competitors. Keystone's industrial wire customers include manufacturers of
nails, coat hangers, barbecue grills, air conditioners, tools, containers,
refrigerators and other appliances. In 2005, industrial wire accounted for 14%
of Company net sales. In addition, Keystone also sells carbon steel rod into the
open market that it is not able to consume in its downstream fabricated wire
products, wire mesh, nails and industrial wire operations. During 2005, open
market sales of wire rod accounted for 32% of Company net sales.
Prior to July 2003, the Company owned a 51% interest in Garden Zone LLC
("Garden Zone"), a distributor of wire, plastic and wood lawn and garden
products to retailers. In July 2003, Garden Zone purchased Keystone's 51%
ownership in Garden Zone. During 2003, sales by Garden Zone accounted for 4% of
Company net sales. In addition, Keystone is engaged in ferrous scrap recycling
through its unconsolidated 50% interest in Alter Recycling Company, L.L.C.
("ARC"). See Notes 3 and 4 to the Consolidated Financial Statements.
See "Business -- Products, Markets and Distributions" and Notes 3 and 14 to
the Consolidated Financial Statements.
The Company's annual billet production capacity is 820,000 tons. However,
since Keystone's rod production is constrained by the 800,000 ton capacity of
its rod mill, the Company anticipates any excess billet production will be sold
externally.
The Company is the successor to Keystone Steel & Wire Company, which was
founded in 1889. Contran owns 51% of the Company's common stock at December 31,
2005. Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Mr. Harold
C. Simmons, of which Mr. Simmons is sole trustee, or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons. Consequently, Mr. Simmons may
be deemed to control the Company. See Note 2 to the Consolidated Financial
Statements.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Annual Report on Form 10-K relating to matters that are not historical facts
including, but not limited to, statements found in this Item 1 - "Business",
Item 1A - "Risk Factors", Item 3 - "Legal Proceedings", Item 7 - "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations", and
Item 7A - "Quantitative and Qualitative Disclosures About Market Risk", are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes", "intends", "may", "should",
"could", "anticipates", "expected", or comparable terminology, or by discussions
of strategies or trends. Although Keystone believes the expectations reflected
in such forward-looking statements are reasonable, it cannot give any assurances
that these expectations will prove to be correct. Such statements by their
nature involve substantial risks and uncertainties that could significantly
mpact expected results, and actual future results could differ materially from
those described in such forward-looking statements. While it is not possible to
identify all factors, Keystone continues to face many risks and uncertainties.
Among the factors that could cause actual future results to differ materially
are the risks and uncertainties discussed in this Annual Report and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission (the "SEC"), including, but not limited to:
o Future supply and demand for the Company's products (including
cyclicality thereof),
o Customer inventory levels,
o Changes in raw material and other operating costs (such as ferrous
scrap and energy),
o The possibility of labor disruptions,
o General global economic and political conditions,
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government regulations and possible changes therein,
o Significant increases in the cost of providing medical coverage to
employees,
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, fires,
explosions, unscheduled or unplanned downtime and transportation
interruptions),
o The ability of the Company to renew or refinance credit facilities,
o Any possible future litigation, and
o Other risks and uncertainties as discussed in this Annual Report,
including, without limitation, the sections referenced above.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected.
Keystone disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
Manufacturing
The Company's manufacturing operations consist of an electric arc furnace
mini-mill, a rod mill and three wire and wire product fabrication facilities.
The manufacturing process commences at the Company's Keystone Steel & Wire
("KSW") facility in Peoria, Illinois with ferrous scrap being loaded into an
electric arc furnace where it is converted into molten steel and then
transferred to a ladle refining furnace where chemistries and temperatures are
monitored and adjusted to specifications prior to casting. The Company believes
it is one of the largest recyclers of ferrous scrap in the State of Illinois.
The molten steel is transferred from the ladle refining furnace into a
six-strand continuous casting machine which produces five-inch square strands
referred to as billets that are cut to predetermined lengths. These billets,
along with any billets purchased, if any, from outside suppliers, are then
transferred to the adjoining rod mill.
Upon entering the rod mill, the billets are brought to rolling temperature
in a reheat furnace and are fed to the rolling mill, where they are finished to
a variety of diameters and specifications. After rolling, the wire rod is coiled
and cooled. After cooling, the coiled wire rod passes through inspection
stations for metallurgical, surface and diameter checks. Finished coils are
compacted and tied, and either transferred to the Company's other facilities for
processing into industrial wire, nails and fabricated wire products or shipped
to wire rod customers.
While the Company does not maintain a significant "shelf" inventory of
finished wire rod, it generally has on hand approximately a one-month supply of
industrial wire, nails and fabricated wire products inventory which enables
Keystone to fill customer orders and respond to shifts in product demand.
Products, Markets and Distribution
The following table sets forth certain information with respect to the
Company's steel and wire product mix in each of the last three years.
Year Ended December 31,
-----------------------------------------------------------------------------
2003 2004 2005
---------------------- ---------------------- ----------------------
Percent Percent Percent Percent Percent Percent
of Tons Of of Tons of of Tons of
Product Shipped Sales Shipped Sales Shipped Sales
------- ------- ----- ------- ----- ------- -----
Fabricated wire
products 22.0% 36.0% 22.6% 31.4% 19.2% 30.1%
Wire mesh 10.7 12.0 13.8 16.3 13.6 17.2
Nails 8.6 10.0 5.4 5.8 3.2 3.4
Industrial wire 14.9 14.0 16.0 16.1 13.7 14.4
Wire rod 41.0 26.8 38.9 29.6 44.9 32.4
Billets 2.8 1.2 3.3 .8 5.4 2.5
----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
Fabricated Wire Products. Keystone is one of the leading suppliers in the
United States of agricultural fencing, barbed wire, stockade panels and a
variety of woven wire mesh, fabric and netting for agricultural, construction
and industrial applications. The Company produces these products at KSW and KWP
(formerly known as Sherman Wire ("Sherman")) facilities, in Sherman, Texas. The
Company's fabricated wire products are distributed by Keystone through farm
supply distributors, agricultural retailers, building supply centers, building
and industrial materials distributors and consumer do-it-yourself chains such as
Tractor Supply Co., Lowe's Companies, Inc., and Ace Hardware Corporation. Many
of the Company's fencing and related wire products are marketed under the
Company's RED BRAND label, a recognized trademark of Keystone for more than 80
years. As part of its marketing strategy, Keystone designs merchandise
packaging, and supportive product literature for marketing many of these
products to the retail consumer market. Keystone also manufactures products for
residential and commercial construction, including rebar ty wire and stucco
netting, at KSW and KWP. The primary customers for these products are
construction contractors and building materials manufacturers and distributors.
Keystone believes its fabricated wire products are less susceptible to the
cyclical nature of the steel business than nails, industrial wire or wire rod
because the commodity-priced raw materials used in such products, such as
ferrous scrap, represent a lower percentage of the total cost of such
value-added products when compared to wire rod or other less value-added
products.
Wire Mesh. The Company manufactures a wide variety of wire mesh rolls and
sheets used to form wire reinforcement in concrete construction projects such as
pipe, precast boxes and other applications, including use in roadways,
buildings, and bridges at EWP in Upper Sandusky, Ohio. EWP's wire mesh customers
include pipe manufacturers, culvert manufacturers, rebar fabricators, and steel
reinforcing distributors. EWP was not one of the Company's subsidiaries included
in Keystone's 2004 Chapter 11 filing. Like its fabricated wire products,
Keystone believes its wire mesh products are also less susceptible to the
cyclical nature of the steel business than nails, industrial wire or wire rod
because the commodity-priced raw materials used in such products, such as
ferrous scrap, represent a lower percentage of the total cost of such
value-added products when compared to wire rod or other less value-added
products.
Nails. Keystone manufacturers bulk and packaged nails at KSW and sells
these nails primarily to construction contractors, building manufacturers and
distributors and do-it-yourself retailers. During 2005, the Company sold
approximately 26% of its nails through PrimeSource, Inc., one of the largest
nail distributors in the United States, under PrimesSource's Grip-Rite(R) label.
Industrial Wire. Keystone is one of the largest manufacturers of industrial
wire in the United States. At KSW and KWP the Company produces custom-drawn
industrial wire in a variety of gauges, finishes and packages for further
consumption by Keystone's fabricated wire products operations or for sale to
industrial fabrication and original equipment manufacturer customers. The
Company's industrial wire is used by customers in the production of a broad
range of finished goods, including nails, coat hangers, barbecue grills, air
conditioners, tools, containers, refrigerators and other appliances. Management
believes that with a few exceptions, its industrial wire customers do not
generally compete with Keystone.
Wire Rod. Keystone produces primarily low carbon steel wire rod at KSW's
rod mill. Low carbon steel wire rod, with carbon content of up to 0.38%, is more
easily shaped and formed than higher carbon wire rod and is suitable for a
variety of applications where ease of forming is a consideration. High carbon
steel wire rod, with carbon content of up to 0.65%, is used for high tensile
wire applications as well as for furniture and bedding springs. Although KWP and
EWP on occasion buy wire rod from outside suppliers, during 2005, approximately
56% of the wire rod manufactured by the Company was used internally to produce
industrial wire, nails, wire mesh and fabricated wire products. The remainder of
Keystone's wire rod production was sold directly to producers of construction
products, fabricated wire products and industrial wire, including products
similar to those manufactured by the Company.
Billets. KSW's annual billet production capacity is 820,000 tons. However,
since KSW's rod production is constrained by the 800,000 ton capacity of its rod
mill, periodic excess billet production is sold externally to producers of
products manufactured from low carbon steel. Keystone sold 17,000 tons of excess
billets during each of 2003 and 2004 and 29,000 tons of excess billets during
2005.
Business Dispositions. Prior to July 2003, the Company owned a 51% interest
in Garden Zone LLC, a distributor of wire, plastic and wood lawn and garden
products. In July 2003, Garden Zone purchased Keystone's 51% ownership in Garden
Zone for approximately $1.1 million. Keystone recorded a gain of approximately
$800,000 as a result of the sale. Garden Zone's revenues and operating profit
during 2003 were approximately $11.2 million and $700,000, respectively.
Prior to August 2003, the Company manufactured and distributed collated
nails at its Keystone Fasteners division. In August 2003, the Company sold the
Keystone Fasteners division to a third party for approximately $2.2 million. The
Company recorded a gain of approximately $300,000 as a result of the sale.
Keystone Fasteners' revenues and operating loss during 2003 approximated $7.3
million and $900,000, respectivey.
Industry and Competition
The fabricated wire products, wire mesh, nails, industrial wire and wire
rod businesses in the United States are highly competitive and are comprised
primarily of several large mini-mill wire rod producers, many small independent
wire companies and a few large diversified wire producers. Keystone's principal
competitors in the fabricated wire products, nails and industrial wire markets
are Leggett and Platt, Deacero, Merchants Metals, Inc. and Davis Wire
Corporation. Competition in the fabricated wire products, nails and industrial
wire markets is based on a variety of factors, including channels of
distribution, price, delivery performance, product quality, service, and brand
name preference. Since wire rod is a commodity steel product, management
believes the domestic wire rod market is more competitive than the fabricated
wire products, nails and industrial wire markets, and price is the primary
competitive factor. Among Keystone's principal domestic wire rod competitors are
Gerdau Ameristeel and Rocky Mountain Steel. The Company also faces significant
foreign competition.
The Company's principal competitors in its wire mesh markets are Insteel
Wire Products, Inc, of Mount Airy, NC, and MMI Products, Inc., of Houston Texas.
The Company also faces competition from smaller regional manufacturers and
wholesalers of wire mesh products. The Company believes that EWP's superior
products, renowned customer service, and industry leading sales force
distinguish EWP from its competitors. In addition, the Company believes that its
relationship with EWP enhances EWP's ability to compete more effectively in the
market as EWP can rely on a more stable supply of wire rod. Competitors of EWP
have at times faced raw material shortages that have negatively impacted their
daily production capability and delivery reliability.
The Company also competes with many small independent wire companies who
purchase wire rod from domestic and foreign sources. Due to the breadth of
Keystone's fabricated wire products, wire mesh, nails and industrial wire
offerings, its ability to service diverse geographic and product markets, and
the low relative cost of its internal supply of wire rod, the Company believes
it is well positioned to compete effectively with non-diversified wire rod
producers and wire companies. Foreign steel and industrial wire producers also
compete with the Company and other domestic producers.
The domestic steel wire rod industry continues to experience consolidation.
During the last five years, the majority of Keystone's major domestic
competitors have either filed for protection under federal bankruptcy laws and
discontinued operations or reduced or completely shut-down their operations. The
Company believes these shut-downs or production curtailments represent a
significant decrease in estimated domestic annual wire rod capacity. However,
worldwide overcapacity in the steel industry continues to exist and imports of
wire rod and certain fabricated wire products in recent years have increased
significantly.
Keystone believes its facilities are well located to serve markets
throughout the continental United States, with principal markets located in the
Midwestern, Southwestern and Southeastern regions. Close proximity to its
customer base provides the Company with certain advantages over foreign and
certain domestic competition including reduced shipping costs, improved customer
service and shortened delivery times. Keystone believes higher transportation
costs and the lack of local distribution centers tend to limit foreign
producers' penetration of the Company's principal fabricated wire products and
industrial wire markets, but there can be no assurance this will continue to be
the case.
Raw Materials and Energy
The primary raw material used in Keystone's operations is ferrous scrap.
The Company's steel mill is located close to numerous sources of high density
automobile, industrial and railroad ferrous scrap, all of which are currently
available. The purchase of ferrous scrap is highly competitive and its price
volatility is influenced by periodic shortages, export activity, freight costs,
weather, and other conditions beyond the control of the Company. The cost of
ferrous scrap can fluctuate significantly and product selling prices cannot
always be adjusted, especially in the short-term, to recover the costs of
increases in ferrous scrap prices. The Company has not entered into any
long-term contracts for the purchase or supply of ferrous scrap and Keystone is,
therefore, subject to the price fluctuation of ferrous scrap. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Keystone's manufacturing processes consume large amounts of energy in the
form of electricity and natural gas. The Company purchases electrical energy for
its Peoria, Illinois facility from a utility under an interruptible service
contract which provides for more economical electricity rates but allows the
utility to refuse or interrupt power to Keystone's Peoria, Illinois
manufacturing facilities. This utility has in the past, and may in the future,
refuse or interrupt service to the Company resulting in decreased production and
increased costs associated with the related downtime. In addition, in the past
the utility has had the right to pass through certain of its costs to consumers
through fuel adjustment surcharges. However, the Company's current agreement
with the utility does not provide for such fuel adjustment charges.
Trademarks
The Company has registered the trademark RED BRAND for field fence and
related products. Adopted by Keystone in 1924, the RED BRAND trademark has been
widely advertised and enjoys high levels of market recognition. The Company also
maintains other trademarks for various products that have been promoted in their
respective markets.
Employment
As of December 31, 2005, Keystone employed approximately 1,200 people, of
whom approximately 800 are represented by the Independent Steel Workers'
Alliance ("ISWA") at KSW, approximately 70 are represented by the International
Association of Machinists and Aerospace Workers (Local 1570) ("IAMAW") at
Sherman (who are then leased to KWP) and approximately 60 are represented by
Local Union #40, An Affiliate to the International Brotherhood of Teamsters'
Chauffeurs Warehousemen and Helpers of America, AFL-CIO ("IBTCWHA") at EWP. The
current collective bargaining agreements with the ISWA, IAMAW and IBTCWHA expire
in May 2006, October 2008, and November 2006, respectively. The Company believes
its relationship with its employees are good. Keystone has begun discussions
with the ISWA concerning the renewal of its collective bargaining agreement that
expires in May 2006. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Customers
The Company sells its products to customers in the agricultural,
industrial, construction, commercial, original equipment manufacturer and retail
markets primarily in the Midwestern, Southwestern and Southeastern regions of
the United States. Customers vary considerably by product and management
believes Keystone's ability to offer a broad range of products represents a
competitive advantage in servicing the diverse needs of its customers.
A listing of end-user markets by products follows:
Product Principal Markets Served
- ------- ------------------------
Fencing products Agricultural, construction, do-it-yourself retailers
Wire mesh products Construction
Nails Construction, do-it-yourself retailers
Industrial wire Producers of fabricated wire products
Wire rod Producers of industrial wire and
fabricated wire products
Billets Producers of products manufactured from low carbon
Steel
Lawn and garden products Do-it-yourself retailers
Keystone's industrial wire customers include manufacturers and producers of
nails, coat hangers, barbecue grills, air conditioners, tools, containers,
refrigerators and other appliances. With few exceptions, these customers are
generally not in competition with the Company. Keystone's wire rod customers
include other downstream industrial wire, nail and fabricated wire products
companies including manufacturers of products similar to those manufactured by
the Company.
The Company's ten largest customers represented approximately 35%, 48% and
43% of Keystone's net sales in 2003, 2004 and 2005, respectively. No single
customer accounted for more than 9% of the Company's net sales during 2003.
During 2004, a single customer accounted for approximately 12% of Keystone's net
sales. No other single customer accounted for more than 10% of the Company's net
sales during 2004. During 2005, a single customer accounted for approximately
11% of Keystone's net sales. No other single customer accunted for more than 10%
of the Company's net sales during 2005. Keystone's fabricated wire products,
wire mesh, nails, industrial wire and rod business is not dependent upon a
single customer or a few customers, the loss of any one, or a few, of which
would have a material adverse effect on its business.
Backlog
The Company's backlog of unfilled cancelable fabricated wire products, wire
mesh, nails, industrial wire and rod purchase orders, for delivery generally
within three months, approximated $26.4 million and $53.6 million at December
31, 2004 and 2005, respectively. Keystone believes backlog is not a significant
factor in its business, and expects all of the backlog at December 31, 2005 will
be shipped during 2006.
Environmental Matters
Keystone's production facilities are affected by a variety of environmental
laws and regulations, including laws governing the discharge of water pollutants
and air contaminants, the generation, transportation, storage, treatment and
disposal of solid wastes and hazardous substances and the handling of toxic
substances, including certain substances used in, or generated by, the Company's
manufacturing operations. Many of these laws and regulations require permits to
operate the facilities to which they pertain. Denial, revocation, suspension or
expiration of such permits could impair the ability of the affected facility to
continue operations.
The Company records liabilities related to environmental issues at such
time as information becomes available and is sufficient to support a reasonable
estimate of a range of probable loss. If Keystone is unable to determine that a
single amount in an estimated range is more likely, the minimum amount of the
range is recorded. Costs of future expenditures for environmental remediation
obligations are not discounted to their present value. Recoveries of
environmental remediation costs from other parties are recorded as assets when
their receipt is deemed probable.
Keystone believes its current operating facilities are in material
compliance with all presently applicable federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment. Environmental legislation and
regulations have changed rapidly in recent years and the Company may be subject
to increasingly stringent environmental standards in the future.
Information in Note 15 to the Consolidated Financial Statements is
incorporated herein by reference.
Acquisition and Restructuring Activities
The Company routinely compares its liquidity requirements against its
estimated future cash flows. As a result of this process, the Company has in the
past and may in the future seek to raise additional capital, refinance or
restructure indebtedness, consider the sale of interests in subsidiaries,
business units or other assets, or take a combination of such steps or other
steps, to increase liquidity, reduce indebtedness and fund future activities.
Such activities have in the past and may in the future involve related
companies. From time to time, the Company and related entities also evaluate the
restructuring of ownership interests among its subsidiaries and related
companies and expects to continue this activity in the future and may in
connection with such activities, consider issuing additional equity securities
and increasing the indebtedness of the Company or its subsidiaries.
Availability of Company Reports Filed with the SEC
The Company will provide without charge copies of this Annual Report on
Form 10-K for the year ended December 31, 2005, any copies of the Company's
Quarterly Reports on Form 10-Q for 2005 and any Current Reports on Form 8-K for
2004 and 2005, and any amendments thereto, as soon as they are filed with the
SEC upon written request to the Company. Such requests should be directed to the
attention of the Corporate Secretary at the Company's address on the cover page
of this Form 10-K.
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549, and may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC, including the Company.
ITEM 1A. RISK FACTORS
Listed below are certain risk factors associated with Keystone and its
businesses. In addition to the potential effect of these risk factors discussed
below, any risk factor which could result in reduced earnings or operating
losses, or reduced liquidity, could in turn adversely affect the Company's
ability to service its liabilities or adversely affect the quoted market prices
for Keystone's publicly-traded securities.
Our leverage may impair our financial condition or limit our ability to
operate our businesses. We currently have a significant amount of debt. As of
December 31, 2005, our total consolidated debt was approximately $99.9 million.
Our level of debt could have important consequences to our stockholders and
creditors, including:
o making it more difficult for us to satisfy our obligations with
respect to our liabilities;
o increasing our vulnerability to adverse general economic and industry
conditions;
o requiring that a portion of our cash flow from operations be used for
the payment of interest on our debt, therefore reducing our ability to
use our cash flow to fund working capital, capital expenditures,
acquisitions and general corporate requirements;
o limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions and general
corporate requirements;
o limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate and
o placing us at a competitive disadvantage relative to other
less-leveraged competitors.
We recently emerged from Chapter 11 bankruptcy protection. As part of our
emergence from the Chapter 11 bankruptcy proceedings, we negotiated a favorable
amendment to the collective bargaining agreement with our largest labor union
and received permanent reductions in our obligation to provide certain retiree
medical benefit payments to retirees. However, we continue to incur significant
ongoing costs for plant and equipment and pay substantial benefits for both
current and retired employees. As such, we remain vulnerable to business
downturns and increases in costs.
Demand for, and prices of, certain of our products are cyclical and we may
experience prolonged depressed market conditions for our products, which may
result in reduced earnings or operating losses. A significant portion of our
revenues are attributable to sales of products into the agricultural and
construction industries. These two industries themselves are cyclical and
changes in those industries' economic conditions can significantly impact our
earnings and operating cash flows. This may result in reduced earnings or
operating losses. Events that could adversely affect the agricultural and
construction industries include, among other things, short and long-term weather
patterns, interest rates and embargos placed by foreign countries on U.S.
agricultural products. Such events could significantly decrease our operating
results, and our business and financial condition could significantly decline.
We sell the majority of our products in mature and highly competitive
industries and face price pressures in the markets in which we operate, which
may result in reduced earnings or operating losses. The markets in which we
operate our businesses are highly competitive. Competition is based on a number
of factors, such as price, product quality and service. Some of our competitors
may be able to drive down prices for our products because the competitors' costs
are lower than our costs. In addition, some of our competitors' financial,
technological and other resources may be greater than our resources, and such
competitors may be better able to withstand changes in market conditions. Our
competitors may be able to respond more quickly than we can to new or emerging
technologies and changes in customer requirements. Further, consolidation of our
competitors or customers in any of the industries in which we compete may result
in reduced demand for our products. In addition, in some of our businesses new
competitors could emerge by modifying their existing production facilities so
they could manufacture products that compete with our products. The occurrence
of any of these events could result in reduced earnings or operating losses.
Many of our EWP division's products are ultimately used in infrastructure
projects by local, State or Federal governments. Such projects are impacted by
the availability of governmental funding for such projects. A decline in the
availability of governmental funds for such projects could ultimately result in
a decline in demand or selling prices of EWP's products. Such a decline could
result in reduced earnings or operating losses.
Wire rod imported into the U.S. continues at high levels. Global producers
of wire rod are able to import their products into the U.S. with minimal tariffs
and duties. Many of these global wire rod producers are able to produce wire rod
at costs lower than us. As such, these wire rod imports are often able to be
priced at lower levels than similar products manufactured by us. In addition, we
believe certain foreign governments subsidize local wire rod producers. These
events can adversely impact our shipment levels and pricing decisions and, as
such, could result in reduced earnings or operating losses.
Higher costs or limited availability of ferrous scrap may decrease our
liquidity. The number of sources for, and availability of, ferrous scrap, our
primary raw material, is generally limited to the particular geographical region
in which a facility is located. Should our suppliers not be able to meet their
contractual obligations or should we be otherwise unable to obtain necessary
ferrous scrap quantities, we may incur higher costs for ferrous scrap or may be
required to reduce production levels, either of which may decrease our liquidity
as we may be unable to offset such higher costs with increased selling prices
for our products.
We are subject to many environmental and safety regulations with respect to
our operating facilities that may result in unanticipated costs or liabilities.
Most of our facilities are subject to extensive laws, regulations, rules and
ordinances relating to the protection of the environment, including those
governing the discharge of pollutants in the air and water and the generation,
management and disposal of hazardous substances and wastes or other materials.
We may incur substantial costs, including fines, damages and criminal penalties
or civil sanctions, or experience interruptions in our operations for actual or
alleged violations or compliance requirements arising under environmental laws.
Our operations could result in violations under environmental laws, including
spills or other releases of hazardous substances to the environment. Some of our
operating facilities are in densely populated urban areas or in industrial areas
adjacent to other operating facilities. In the event of an accidental release or
catastrophic incident, we could incur material costs as a result of addressing
such an event and in implementing measures to prevent such incidents. Given the
nature of our business, violations of environmental laws may result in
restrictions imposed on our operating activities or substantial fines,
penalties, damages or other costs, including as a result of private litigation.
In addition, certain of our production facilities have been used for a number of
years to manufacture products. We may incur additional costs related to
compliance with environmental laws applicable to our historic operations and
these facilities. In addition, we may incur significant expenditures to comply
with existing or future environmental laws. Costs relating to environmental
matters will be subject to evolving regulatory requirements and will depend on
the timing of promulgation and enforcement of specific standards that impose
requirements on our operations. Costs beyond those currently anticipated may be
required under existing and future environmental laws.
Loss of key personnel or our ability to attract and retain new qualified
personnel could hurt our businesses and inhibit our ability to operate and grow
successfully. Our success in the highly competitive markets in which we operate
will continue to depend to a significant extent on the leadership teams of our
businesses and other key management personnel. We generally do not have binding
employment agreements with any of these managers. This increases the risks that
we may not be able to retain our current management personnel and we may not be
able to recruit qualified individuals to join our management team, including
recruiting qualified individuals to replace any of our current personnel that
may leave in the future.
Our relationships with our union employees could deteriorate. At December
31, 2005, we employed approximately 1,200 persons in our various businesses of
which approximately 79% are subject to collective bargaining or similar
arrangements. A significant portion of these collective bargaining agreements
are set to expire within the next two years. We may not be able to negotiate
labor agreements with respect to these employees on satisfactory terms or at
all. If our employees were to engage in a strike, work stoppage or other
slowdown, we could experience a significant disruption of our operations or
higher ongoing labor costs.
As a result of the material weaknesses described below, we have concluded
that our disclosure controls and procedures were not effective as of December
31, 2005. As of December 31, 2005, we did not maintain effective controls over
the completeness and accuracy of net sales and related cost of goods sold.
Specifically, we did not have controls designed and in place to detect sales
made under the terms F.O.B. at our customer's location. Additionally, we 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.
In addition, as of December 31, 2005, we 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 our consolidated
balance sheet, and that changes in our cash overdrafts were properly included in
the determination of cash flows from financing activities. This control
deficiency resulted in the restatement of our 2002, 2003 and 2004 annual
consolidated financial statements and audit adjustments to both our 2004 interim
consolidated financial statements and our annual and interim 2005 consolidated
financial statements.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in approximately
1,200 square feet of leased space at 5430 LBJ Freeway, Suite 1740, Dallas, Texas
75240-2697.
Keystone's fabricated wire products, wire mesh, industrial wire and wire
rod production facilities utilize approximately 2.4 million square feet for
manufacturing and office space, approximately 84% of which is located at the
Company's Peoria, Illinois facility.
The following table sets forth the location, size and general product types
produced for each of the Company's operating facilities, as of December 31,
2005, all of which are owned by the Company.
Approximate
Size
Facility Name Location (Square Feet) Products Produced
------------- -------- ------------- -----------------
Keystone Steel & Wire Peoria, IL 2,012,000 Fabricated wire products, nails,
industrial wire, wire rod
Keystone Wire Products Sherman, TX 299,000 Fabricated wire products and
industrial wire
Engineered Wire Products Upper Sandusky, OH 79,000 Wire mesh
---------
2,390,000
=========
The Company believes all of its facilities are well maintained and
satisfactory for their intended purposes.
ITEM 3. LEGAL PROCEEDINGS.
On February 26, 2004, Keystone and five of its direct and indirect
subsidiaries filed for voluntary protection under Chapter 11 of the Federal
Bankruptcy Code. Keystone and its filing subsidiaries filed their petitions in
the U.S. Bankruptcy Court for the Eastern District of Wisconsin in Milwaukee.
The Chapter 11 cases were consolidated for procedural purposes only and were
jointly administered under the name FV Steel and Wire Company - Case No.
04-22421-SVK. Each of the filing companies continued to operate its business and
manage its property as a debtor-in-possession. As a result of the Chapter 11
filings, litigation relating to prepetition claims against the filing companies
was stayed during the Chapter 11 proceedings. Keystone emerged from Chapter 11
on August 31, 2005.
Keystone is also involved in various legal proceedings. Information
required by this Item is included in Notes 2 and 15 and 17 to the Consolidated
Financial Statements, which information is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Until its emergence from Chapter 11 on August 31, 2005, Keystone's common
stock was traded on the OTC Bulletin Board (Symbol: KESNQ.PK). The Company's
common stock has not publicly traded since August 31, 2005. The number of
holders of record of the Company's common stock as of March 31, 2006 was 2. The
following table sets forth the high and low closing sales prices of the
Company's common stock for the calendar years indicated, according to published
sources.
High Low
---- ---
Year ended December 31, 2005
First quarter $ .23 $ .09
Second quarter $ .17 $ .08
Third quarter (through August 31) $ .08 $ .01
Third quarter (September 1 to September 30) N/A N/A
Fourth quarter N/A N/A
Year ended December 31, 2004
First quarter $ .33 $ .05
Second quarter $ .18 $ .05
Third quarter $ .42 $ .09
Fourth quarter $ .31 $ .03
The Company has not paid cash dividends on its common stock since 1977.
Keystone is subject to certain covenants under its commercial revolving credit
facilities that restrict its ability to pay dividends, including a prohibition
against the payment of cash dividends on its common stock without lender
consent.
All of the Company's outstanding common stock at August 31, 2005 was
cancelled in connection with the Keystone's emergence from Chapter 11, and at
that time, Keystone issued 10 million shares of a new issue of common stock. See
Note 2 to the Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with Keystone's Consolidated Financial Statements and Item 7 --
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations."
Years ended December 31,
------------------------------------------------------------------
2001 2002 2003 2004 2005
-------- ------- ------- ------- --------
(In thousands, except per share and per ton amounts)
Statement of Operations Data:
Net sales $325,187 $334,835 $306,671 $364,335 $367,545
Cost of goods sold 313,931 315,579 310,881 322,232 337,541
-------- -------- -------- -------- --------
Gross profit (loss) $ 11,256 $ 19,256 $ (4,210) $ 42,103 $ 30,004
======== ======== ======== ======== ========
Selling expenses $ 6,400 $ 7,754 $ 6,934 $ 5,634 $ 6,251
General and administrative
expenses 14,723 16,385 10,689 10,766 11,804
Operating income (loss) (4,388) (3,279) (28,731) 32,455 23,659
Gain on early extinguishment of
debt - 54,739 - - 32,510
Gain on legal settlement - - - 5,284 -
Interest expense 14,575 5,569 3,941 3,705 3,992
Reorganization costs - - - 11,158 10,308
Income (loss) before income taxes $(20,395) $ 40,045 $(37,218) $ 17,439 $ 39,662
Minority interest in after-tax
earnings 1 1 299 - -
Provision for income taxes (benefit) 5,998 21,622 - 1,379 430
-------- -------- -------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle (4) (26,394) 18,422 (37,517) 16,060 39,232
Cumulative effect of change in
accounting principle - 19,998 - - -
-------- -------- -------- -------- --------
Net income (loss) $(26,394) $ 38,420 $(37,517) $ 16,060 $ 39,232
======== ======== ======== ======== ========
Net income (loss) available for
common shares (1) $(26,394) $ 33,737 $(43,457) $ 14,837 $ 39,232
======== ======== ======== ======== ========
Basic net income (loss) available
for common shares per share $ (2.62) $ 3.35 $ (4.32) $ 1.47 $ 4.12
======== ======== ======== ======== ========
Diluted net income (loss) available
for common shares per share $ (2.62) $ 1.76 $ (4.32) $ .57 $ 1.88
======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding (3):
Basic 10,062 10,067 10,068 10,068 10,046
======== ======== ======== ======== ========
Diluted 10,062 21,823 10,068 28,043 22,029
======== ======== ======== ======== ========
Other Financial Data:
Capital expenditures $ 3,889 $ 7,973 $ 2,683 $ 5,080 $ 9,772
Depreciation and amortization 16,992 17,396 16,461 15,812 15,745
Other Steel and Wire Products
operating data:
Shipments (000 tons):
Fabricated wire products 143 146 135 116 101
Wire mesh 64 63 66 71 71
Nails 74 74 53 28 17
Industrial wire 94 96 91 82 72
Wire rod 291 287 252 200 236
Billets - 5 17 17 29
-------- -------- -------- -------- --------
Total 666 671 614 514 526
======== ======== ======== ======== ========
Average selling prices (per ton):
Fabricated wire products $ 789 $ 791 $ 783 $ 984 $ 1,090
Wire mesh 534 526 539 829 881
Nails 589 592 558 759 742
Industrial wire 454 448 452 709 731
Wire rod 283 304 314 539 503
Billets - 156 192 176 321
Steel and wire products in total 474 482 479 707 696
Average ferrous scrap purchase cost
per ton $ 85 $ 94 $ 115 $ 205 $ 220
As of December 31,
---------------------------------------------------------------------
2001 2002 2003 2004 2005
------ ------- ------ ------ -------
(Restated) (Restated) (Restated) (Restated)
(In thousands)
Balance Sheet Data:
Working capital (deficit) (2) $(30,982) $(41,790) $(90,210) $ 11,910 $ 36,373
Property, plant and equipment, net 129,600 119,984 105,316 94,033 86,773
Total assets 366,900 215,495 282,194 323,282 358,364
Total debt (5) 147,835 98,684 88,897 65,985 99,895
Redeemable preferred stock (3) - 2,112 2,112 2,112 -
Stockholders' equity (deficit) (336) (136,900) (10,050) 4,787 67,531
(1) Includes the effect of dividends on preferred stock of $4,683,000,
$5,940,000 and $1,223,000 in 2002, 2003 and 2004, respectively. The Company
discontinued accruing dividends on its preferred stock upon filing for
Chapter 11 on February 26, 2004. See Note 2 to the Consolidated Financial
Statements.
(2) Working capital (deficit) represents current assets minus current
liabilities.
(3) All of the Company's outstanding common and preferred stock at August 31,
2005 was cancelled in connection with Keystone's emergence from Chapter 11,
and at that time, Keystone issued 10 million shares of a new issue of
common stock.
(4) Upon adoption of Statement of Financial Accounting Standards No. 142,
effective January 1, 2002, negative goodwill with a net book value of $20.0
million was eliminated as a cumulative effect of change in accounting
principle.
(5) During 2005, the Company restated total debt at December 31, 2001, 2002,
2003 and 2004 to properly classify certain cash overdrafts as increases in
Keystone's revolving credit facility. As a result, total debt at both
December 31, 2001 and 2002, increased by $1.4 million and total debt at
December 31, 2003 increased by $1.2 million, from amounts previously
reported. See Note 1 to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Bankruptcy
On February 26, 2004, Keystone and five of its direct and indirect
subsidiaries filed for voluntary protection under Chapter 11 of the Federal
Bankruptcy Code. Keystone and its subsidiaries filed their petitions in the U.S.
Bankruptcy Court for the Eastern District of Wisconsin in Milwaukee. The Company
is managing its business as a debtor-in possession subject to approval by the
Court. Keystone attributed the need to reorganize to weaknesses in product
selling prices over the last several years, unprecedented increases in ferrous
scrap costs, Keystone's primary raw material, and significant liquidity needs to
service employee and retiree medical costs. These problems substantially limited
Keystone's liquidity and undermined its ability to obtain sufficient debt or
equity capital to operate as a going concern.
Under Chapter 11 proceedings, actions by creditors to collect Pre-petition
Claims are stayed, absent specific authorization from the Court to pay such
claims while the Company manages the business as a debtor-in-possession.
Keystone received approval from the Court to pay certain of its pre-petition
liabilities, including employee wages and certain employee benefits.
Keystone filed a plan of reorganization on October 4, 2004 and amended that
plan on May 26, 2005, June 21, 2005 and June 27, 2005. Keystone's amended plan
of reorganization was accepted by the impacted constituencies and confirmed by
the Court on August 10, 2005. The Company emerged from bankruptcy protection on
August 31, 2005. Significant provisions of Keystone's amended plan of
reorganization included, among other things:
o Assumption of the previously negotiated amendment to the collective
bargaining agreement with the 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, one of
Keystone's pre-petition wholly-owned subsidiaries, will be sold at fair
market value to Keystone (fair market value and book value both approximate
$2.0 million), 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, 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 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 2003 and 2004 consolidated balance sheets and statements of cash flows
to properly classify certain cash overdrafts.
The Company reported a net loss of $37.5 million during 2003 and net income
of $16.1 million and $39.2 million during 2004 and 2005, respectively. The
primarily reasons for the increase in earnings from 2003 to 2004 were (i)
significantly higher per-ton product selling prices partially offset by higher
costs for ferrous scrap, (ii) favorable changes to the Company's medical plans
for both active and retired employees during 2004, (iii) a higher defined
benefit pension credit in 2004, (iv) an $865,000 distribution of collected wire
rod tariffs and duties from the Federal government in 2004 and (v) a $5.3
million gain from a legal settlement with a former supplier relative to
consigned inventory on Keystone's premises at February 26, 2004, offset in part
by $11.2 million of expenses associated with the bankruptcy filing. The primary
reasons for the increase in earnings from 2004 to 2005 were (i) higher shipment
volumes, (ii) lower retiree medical costs in 2005, (iii) a higher defined
benefit pension credit during 2005 and (iv) a $32.5 million gain on cancellation
of debt as a result of the Company's emergence from Chapter 11 during 2005 all
partially offset by (i) lower per-ton product selling prices, (ii) higher costs
for ferrous scrap and natural gas and (iii) the absence of the $5.2 million gain
on legal settlement that was recorded by Keystone during 2004.
General
The Company believes it is a leading domestic manufacturer of steel
fabricated wire products, wire mesh, 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 based on tons shipped (101,000
tons in 2005). Keystone's operations benefit from vertical integration as the
Company's mini-mill supplies wire rod produced from ferrous scrap to its
downstream fabricated wire products, wire mesh, nails and industrial wire
operations. Sales of fabricated wire products, wire mesh, nails and industrial
wire by these downstream fabrication operations accounted for 65% of 2005 net
sales. Keystone's fabricated wire products and wire mesh typically yield higher
and less volatile gross margins compared to wire rod. Management believes
Keystone's fabricated wire products and wire mesh businesses help mitigate the
adverse effect of wire rod imports on market prices compared to producers that
rely primarily on wire rod sales. Moreover, historically over time, the
Company's wire rod production costs have generally been below the market price
for wire rod providing a significant cost advantage over wire producers who
purchase wire rod as a raw material.
The Company's annual billet production capacity is 820,000 tons. However,
Keystone's wire rod production is constrained by the 800,000 ton capacity of its
rod mill. The Company anticipates any excess billet production will be sold
externally.
The Company's steel making operations provided 585,000 tons and 590,000
tons of billets in 2005 and 2004, respectively. As a result of the slightly
lower billet production in 2005, wire rod production declined 2% from 544,000
tons (68% of estimated capacity) in 2004 to 534,000 tons (67% of estimated
capacity). Keystone's estimated current fabricated wire products, nail and
industrial wire production capacity is 542,000 tons. The Company's fabricated
wire products, wire mesh, nail and industrial wire production facilities
operated at about 55% of their annual capacity during each of 2003 and 2004 and
50% in 2005.
The Company's profitability is dependent in large part on its ability to
utilize effectively its production capacity, which is affected by the
availability of raw materials, plant efficiency and other production factors and
to control its manufacturing costs, which are comprised primarily of raw
materials, energy and labor costs. Keystone's primary raw material is ferrous
scrap, and during 2005 ferrous scrap costs represented approximately 42% of cost
of goods sold. The price of ferrous scrap is highly volatile and ferrous scrap
prices are affected by periodic shortages, export activity, freight costs,
weather and other conditions largely beyond the control of the Company. Ferrous
scrap prices can vary widely from period to period. The average per-ton price
paid for ferrous scrap by the Company was $115 in 2003, $205 in 2004 and $220 in
2005. Keystone's product selling prices cannot always be adjusted, especially in
the short-term, to recover any increases in ferrous scrap.
The domestic wire rod industry continues to experience consolidation.
During the last five years, the majority of Keystone's major domestic
competitors have either filed for protection under Federal bankruptcy laws and
discontinued operations or reduced or completely shut-down their operations. The
Company believes these shut-downs or production curtailments represent a
significant decrease in domestic annual capacity. However, worldwide over
capacity in the steel industry continues to exist and imports of wire rod,
certain fabricated wire products and nails in recent years have increased
significantly.
Keystone consumes a significant amount of energy in its manufacturing
operations and, accordingly, its profitability can also be adversely affected by
the volatility in the price of coal, oil and natural gas resulting in increased
energy, transportation, freight, ferrous scrap and supply costs. During 2005,
energy costs represented approximately 10% of cost of goods sold. The Company
purchases electrical energy for its Peoria, Illinois facility from a utility
under an interruptible service contract which provides for more economical
electricity rates but allows the utility to refuse or interrupt power to its
manufacturing facilities. The utility has in the past, and may in the future,
refuse or interrupt service to Keystone resulting in decreased production and
increased costs associated with the related downtime. In addition, in the past
the utility has had the right to pass through certain of its costs to consumers
through fuel adjustment surcharges. The Company's current agreement with the
utility does not provide for such fuel adjustment surcharges.
In July 2003, Keystone sold its 51% interest in Garden Zone back to Garden
Zone. The Company recorded a gain of approximately $800,000 as a result of the
sale. Garden Zone distributes wire, plastic and wood lawn and garden products to
retailers. Garden Zone's revenues and operating profit during 2003 were
approximately $11.2 million and $700,000, respectively.
In August 2003, the Company sold its Keystone Fasteners division to a third
party. Keystone recorded a gain of approximately $300,000 as a result of the
sale. Keystone Fasteners manufactured and distributed collated nails. Keystone
Fasteners' revenues and operating loss during 2003 approximated $7.3 million and
$900,000, respectively.
Keystone is also engaged in the operation of a ferrous scrap recycling
facility. The operations of Garden Zone, Keystone Fasteners and the ferrous
scrap recycling facility were insignificant when compared to the consolidated
operations of the Company. As such, the results of their operations are not
separately addressed in the discussion that follows.
Results of Operations
The following table sets forth Keystone's steel and wire production,
ferrous scrap costs, sales volume and pricing data, for the periods indicated.
Years Ended December 31,
---------------------------------------
2003 2004 2005
---- ---- ----
(Tons in thousands)
Production volume (tons):
Billets 577 590 585
Wire rod 559 544 534
Average per-ton ferrous scrap purchase cost $115 $205 $ 220
Sales volume (tons):
Fabricated wire products 135 116 101
Wire mesh 66 71 71
Nails 53 28 17
Industrial wire 91 82 72
Wire rod 252 200 236
Billets 17 17 29
---- ---- ------
614 514 526
==== ==== ======
Per-ton selling prices:
Fabricated wire products $783 $984 $1,090
Wire mesh 539 829 881
Nails 558 759 742
Industrial wire 452 709 731
Wire rod 314 539 503
Billets 192 176 321
All steel and wire products 479 707 696
The following table sets forth the components of the Company's net sales
for the periods indicated.
Years Ended December 31,
---------------------------------------
2003 2004 2005
---- ---- -----
(In millions)
Steel and wire products:
Fabricated wire products $106.0 $114.2 $110.1
Wire mesh 35.2 59.0 62.8
Nails 29.5 21.0 12.4
Industrial wire 41.3 58.4 52.5
Wire rod 78.9 107.6 118.6
Billets 3.4 3.0 9.3
Other 1.2 1.1 1.8
------ ------- -------
295.5 364.3 367.5
Lawn and garden products 11.2 - -
------ ------- -------
$306.7 $364.3 $367.5
====== ====== ======
The following table sets forth selected operating data of Keystone as a
percentage of net sales for the periods indicated.
Years Ended December 31,
--------------------------------------
2003 2004 2005
-------- ------- ------
Net sales 100.0 % 100.0 % 100.0%
Cost of goods sold 101.4 88.4 91.8
----- ----- -----
Gross margin (loss) (1.4)% 11.6 % 8.2%
===== ===== =====
Selling expense 2.3 % 1.5% 1.7%
General and administrative expense 3.5 3.0 3.2
Defined benefit pension expense (credit) 2.2 (1.9) (3.2)
Corporate expense 1.9 1.7 .9
Gain on legal settlement - (1.5) -
Reorganization costs - 3.1 2.8
Gain on cancellation of debt - - (8.8)
Income (loss) before income taxes (12.2)% 4.8 % 10.8%
Income tax provision - .4 .1
----- ----- -----
Net income (loss) (12.2)% 4.4% 10.7%
===== ===== =====
Year ended December 31, 2005 compared to year ended December 31, 2004
Discussion of operating results
During 2005, Keystone's shipment of steel and wire products increased
12,000 tons over 2004 shipment levels. This 2% increase in shipments resulted in
total 2005 shipments of 526,000 tons as compared to 514,000 tons during 2004.
Per-ton selling prices during 2005 declined $11 per-ton, or 2%, as compared to
2004 as per-ton selling prices fell from $707 per-ton in 2004 to $696 per-ton in
2005. This decline in per-ton product selling prices had an unfavorable impact
on net sales of approximately $5.7 million. In addition to the decline in
per-ton selling prices during 2005, the overall product mix during 2005 was a
less favorable mix than in 2004. Lower margin wire rod and billet shipments
accounted for 51% of the overall shipment volume in 2005 as compared to only 42%
in 2004. The 12,000 ton increase in shipment volume partially offset by the $11
per-ton decline in selling prices and less favorable product mix resulted in a
$3.2 million increase in net sales to $367.5 million during 2005.
Keystone realized increased per-ton selling prices during 2005 as compared
to 2004 in its fabricated wire products, wire mesh, industrial wire and billet
product lines while per-ton selling prices declined in its nails and wire rod
product lines. During 2005, per-ton selling prices of fabricated wire products
increased by 11%, wire mesh increased by 6%, industrial wire increased by 3% and
billets increased by 82% while per-ton selling prices of nails and wire rod
declined by 2% and 7%, respectively. Shipment volume of the Company's value
added products during 2005 declined or remained constant as compared to 2004
shipment levels. Shipments of fabricated wire products declined by 13% during
2005 as compared to 2004, while shipments of nails and industrial wire fell by
39% and 12% respectively. The 71,000 tons of wire mesh shipped during 2005
remained unchanged from 2004 shipment levels. Keystone was able to partially
offset the lower 2005 shipment volume of its value added products with an 18%
increase in wire rod shipments as well as a 71% increase in billet shipments.
The Company believes the lower shipment levels of its value added products
during 2005 were a result of lower market demand due to high inventory levels at
Keystone's customers.
Billet production during 2005 declined by 5,000 tons to 585,000 tons as
compared to 590,000 tons during 2004 while wire rod production declined by
10,000 tons to 534,000 tons as compared to 544,000 tons during 2004. The lower
billet and wire rod production during 2005 was primarily a result of lower
market demand for our value-added finished products.
Cost of goods sold increased by 4.8% during 2005 to $337.5 million as
compared to $322.2 million during 2004 as the cost of goods sold percentage
increased from 88.4% in 2004 to 91.8% during 2005. This increase in the cost of
goods sold percentage was due primarily to increased costs for ferrous scrap,
the Company's primary raw material, and natural gas costs at Keystone's Peoria,
Illinois facility, partially offset by lower retiree medical costs. During 2005,
the Company's per-ton ferrous scrap costs increased by 7.3% as compared to 2004
levels. Keystone purchased 651,000 tons of ferrous scrap at an average price of
$220 per-ton during 2005 as compared to 667,000 tons at an average price of $205
per-ton during 2004. This increase in per-ton ferrous scrap costs during 2005
adversely impacted cost of goods sold by approximately $9.8 million. The cost of
natural gas at the Company's Peoria facility during 2005 was approximately $4.4
million higher than in 2004. Keystone currently anticipates its costs for
ferrous scrap cost and natural gas for its Peoria facility during 2006 will
approximate the Company's 2005 experience.
During 2004, the Company entered into an agreement (the "1114 Agreement")
with certain retiree groups that substantially reduced the post retirement
benefits ("OPEB") 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 recorded 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 as compared to $20.9 million during 2004.
A significant portion of the Company's OPEB expense is recorded in cost of goods
sold.
As a result of the above items, Keystone recorded a gross profit of $30.0
million, or 8.2%, in 2005 as compared to $42.1 million, or 11.6% during 2004.
Selling expense during 2005 increased by $617,000 to $6.3 million from $5.6
million during 2004 primarily as a result of increased advertising and marketing
expenses during 2005.
General and administrative expenses during 2005 increased by approximately
$1.0 million to $11.8 million from $10.8 million during 2004. The primary
reasons for this increase were higher non-Chapter 11 legal costs partially
offset by lower retiree medical costs resulting from the 1114 Agreement.
During 2005, Keystone recorded a defined benefit pension credit of $11.7
million as compared to a credit in 2004 of $6.8 million. The higher pension
credit during 2005 was primarily a result of a $52 million increase in plan
assets during 2004, resulting in a higher expected return on plan assets
component of defined benefit pension plan expense. In addition, Keystone was not
required to make any cash contributions for defined benefit pension plan
fundings during either 2004 or 2005. As a result of a $277 million increase in
plan assets during 2005, the Company currently anticipates during 2006 it will
record a defined benefit pension credit in excess of the pension credit recorded
during 2005 and that no plan fundings will be required during 2006. However,
future variances from assumed actuarial rates, including the rate of return on
pension plan assets, may result in increases or decreases in pension expense or
credit and future funding requirements. See Note 10 to the Consolidated
Financial Statements and the following discussion of Assumptions on Defined
Benefit pension Plans - Defined benefit pension plan.
General corporate expense declined $2.8 million to $3.5 million during 2005
from $6.3 million during 2004. The primary reasons for this decline were lower
retiree medical costs resulting from the 1114 Agreement and lower general
insurance expense all partially offset by increased state franchise taxes.
Interest expense during 2005 was slightly higher than 2004 due primarily to
higher interest rates partially offset by lower debt levels. 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
26, 2004. Average borrowings by the Company approximated $91.2 million during
2005 as compared to $99.6 million during 2004. During 2005, the average interest
rate on outstanding indebtedness was 4.2% per annum as compared 2.2% per annum
during 2004. Keystone currently anticipates average interest rates and debt
levels in 2006 will be higher than their respective levels during 2005.
In connection with its Chapter 11 proceedings, during 2004, Keystone
entered into a settlement agreement with its former ferrous scrap supplier
relative to certain disputed ferrous scrap inventories located at Keystone's
Peoria, Illinois facility on February 26, 2004, the date of the Company's
Chapter 11 filing. As Keystone consumed these disputed inventories during 2004,
the Company deposited funds equal to the cost of these disputed inventories into
an escrow account and charged cost of goods sold. However, under the terms of
the settlement agreement, during December 2004, approximately $5.3 million of
the escrowed funds were refunded back to Keystone. Keystone recorded the receipt
of this refund as a gain on legal settlement on its 2004 statement of
operations. There was no such settlement during 2005.
During 2005, Keystone incurred $10.3 million in legal and professional fees
relative to its Chapter 11 proceedings and related reorganization activities as
compared to $11.2 million during 2004. The Company does not currently anticipate
significant levels of such legal and professional fees will be incurred during
2006.
In connection with Keystone's emergence from Chapter 11 on August 31, 2005,
pre-petition unsecured creditors, a debtor-in-possession secured lender and
certain post-petition creditors with allowed claims against the Company in the
amount of approximately $63.9 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 $32.5 million gain from cancellation of debt
during 2005.
The principal reasons for the difference between the U.S. federal statutory
income tax rate and the Company's effective income tax rates are explained in
Note 8 to the Consolidated Financial Statements. At December 31, 2005, the
Company had net operating loss carryforwards of approximately $8.0 million and
other tax attributes and net deductible temporary differences aggregating into a
gross deferred income tax asset of $10.7 million. Because the Company does not
currently believe the benefit of such net operating loss carryforward and other
net deductible temporary differences meets the "more-likely-than-not"
recognition criteria of GAAP, the Company had recorded a deferred tax asset
valuation allowance of $10.7 million at December 31, 2005, resulting in
recognition of no net deferred tax asset. 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 based on the criteria of
GAAP, 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 during
2006, and as a result of the deferred tax asset valuation allowance recognized
at December 31, 2005, the Company does not anticipate recognizing a tax
provision associated with its expected pre-tax income during 2006 will be
appropriate until such time as the Company determines (which might or might not
occur during 2006) that recognition of the benefit of its gross deferred income
tax assets is appropriate under GAAP.
As a result of the items discussed above, Keystone recorded net income
during 2005 of $39.2 million as compared to net income of $16.1 million in 2004.
At December 31, 2005, the Company's financial statements reflected total
accrued liabilities of $15.4 million ($8.5 million of which is reflected in
liabilities subject to compromise on the Company's December 31, 2005 balance
sheet) to cover estimated remediation costs arising from environmental issues.
Although Keystone has established an accrual for future required environmental
remediation costs that are probable and reasonably estimable, there is no
assurance regarding the ultimate cost of remedial measures that might eventually
be required by environmental authorities or that additional environmental
hazards, requiring further remedial expenditures, might not be asserted by such
authorities or private parties. Accordingly, the costs of remedial measures may
exceed the amounts accrued. See Note 15 to the Consolidated Financial
Statements.
Year ended December 31, 2004 compared to year ended December 31, 2003
Discussion of operating results
Despite a 100,000 ton decline in shipment volume of steel and wire products
during 2004, net sales increased by $57.7 million, or 18.8%, from 2003 due
primarily to a 47.6% increase in overall per-ton steel and wire product selling
prices. This increase was partially offset by an $18.5 million decline in net
sales from Garden Zone and Keystone Fasteners due to Keystone's sale of its
interest in Garden Zone and its Keystone Fasteners division during 2003. There
was no significant change in Keystone's steel and wire products mix between 2003
and 2004. The 47.6% increase in overall per-ton steel and wire product selling
prices ($228 per ton) favorably impacted net sales by approximately $117.2
million during 2004.
During 2004, Keystone realized increased per-ton selling prices over those
of 2003 in all product lines except billets. Fabricated wire products per-ton
selling prices increased by 25.7%, wire mesh increased 53.8%, nails increased
36.0%, industrial wire increased 56.9% and wire rod increased 71.7%. The per-ton
selling prices of billets during 2004 declined 8.3% as compared to 2003. During
2004, shipment volumes declined as compared to 2003 levels in all product lines
except wire mesh and billets. Fabricated wire products shipment volume declined
7.5%, nails declined 47.2%, industrial wire declined 9.9% and wire rod shipments
declined 20.6%. Wire mesh shipment volume increased 7.6% during 2004. Billet
shipment volume in 2004 remained unchanged from the 2003 level. The Company
believes the lower shipment volumes across the majority of its product lines
during 2004 was due to Keystone's limited production schedules during the period
preceding and immediately following Keystone's Chapter 11 filing combined with a
Company initiative to discontinue sales to its less profitable customers. During
the last portion of 2003 and throughout 2004, the Company implemented several
price increases primarily as a reaction to rapidly increasing ferrous scrap
costs, Keystone's primary raw material. As a result of these efforts, during
2004, the Company was able to realize significant increases in the per-ton
product selling prices of the majority of its product lines.
Billet production during 2004 increased by 23,000 tons to 590,000 tons from
577,000 tons in 2003. Wire rod production during 2004 declined by 15,000 tons to
544,000 tons from 559,000 tons in 2003. The lower wire rod production in 2004
was due primarily to Keystone's limited production schedules during the period
preceding and immediately following Keystone's Chapter 11 filing combined with
lower customer demand resulting from the Company's initiative to discontinue
sales to its less profitable customers.
Despite a 100,000 ton decline (16.3%) in shipment volume in 2004, as
compared to 2003, cost of goods sold increased by 3.7% in 2004 to $322.2 million
from $310.9 million in 2003. However, the cost of goods sold percentage declined
from 101.4% in 2003 to 88.4% of net sales in 2004. This decline in the cost of
goods sold percentage was due primarily to the significantly higher product
per-ton selling prices in 2004, partially offset by increased costs for ferrous
scrap, natural gas costs and electrical power at the Company's Peoria, Illinois
facility. In addition, during 2003, inventory quantities were reduced. This
reduction resulted in a liquidation of LIFO inventory quantities carried at
lower costs prevailing in prior years as compared with the cost of 2003
purchases, the effect of which decreased cost of goods sold during 2003 by
approximately $11.5 million. Keystone's per-ton ferrous scrap costs increased
77.7% during 2004 as compared to 2003. During 2004, the Company purchased
667,000 tons of ferrous scrap at an average price of $205 per-ton as compared to
2003 purchases of 634,000 tons at an average price of $115 per ton. This
increase in per-ton ferrous scrap costs adversely impacted gross profit during
2004 by approximately $59.7 million. The cost of natural gas and electrical
power at the Company's Peoria facility in 2004 was approximately $226,000 and
$425,000, respectively, higher than they were in 2003. In addition, in
connection with its restructuring activities during 2004, Keystone modified its
health and welfare benefit plans for active employees. These changes to the
health and welfare benefit plans resulted in a significantly higher
participation by the employees and a correspondingly lower required contribution
by the Company during 2004.
As a result of the above items, the gross margin loss of $4.2 million in
2003 improved to a positive margin of $42.1 million in 2004. As a result, the
gross margin percentage in 2003 of a 1.4% loss increased to a positive 11.6% in
2004.
Selling expense during 2004 declined 18.7% to $5.6 million from $6.9
million during 2003. The primary reason for this decline was the sale of
Keystone's interest in Garden Zone and its Keystone Fasteners division during
2003 partially offset by increased personnel costs at EWP. Through the date of
their respective 2003 sales, Garden Zone and Keystone Fasteners recorded a total
of $2.0 million of selling expenses.
General and administrative expense of $10.8 million in 2004 approximated
the general and administrative expense in 2003 of $10.7 million primarily as a
result of the 2003 sales of Keystone's interest in Garden Zone and its Keystone
Fasteners division as well as the changes to the employee health and welfare
benefit plans for active employees being offset by increased personnel costs at
EWP.
During 2004, Keystone recorded a defined benefit pension credit of $6.8
million as compared to recording pension expense in 2003 of $6.9 million. The
pension expense in 2003 was due primarily to a $46 million decline in plan
assets during 2002 and the resulting lower expected return on plan assets
component of defined benefit pension plan expense. However, as a result of an
$85 million increase in plan assets during 2003, the Company's defined benefit
pension credit was approximately $6.8 million in 2004. In addition, Keystone was
not required to make any cash contributions for defined benefit pension plan
fundings during 2004 or 2003. See Note 10 to the Consolidated Financial
Statements and the following discussion of Assumptions on Defined Benefit
pension Plans - Defined benefit pension plan.
General corporate expenses during 2004 were approximately $280,000 higher
than general corporate expenses during 2003 due primarily to higher OPEB expense
in 2004 being offset by lower personnel and non-restructuring related legal and
professional costs.
Interest expense during 2004 was slightly lower than 2003 due primarily to
lower overall average borrowings and interest rates. The overall average
interest rates were impacted by the fact the Company discontinued accruing
interest on pre-petition unsecured debt upon filing for Chapter 11 on February
2, 2004. Average borrowings by the Company approximated $99.6 million during
2004 as compared to $101.5 million during 2003. During 2004, the average
interest rate on outstanding indebtedness was 2.2% per annum as compared 2.7%
per annum during 2003. Keystone currently anticipates average interest rates and
debt levels in 2005 will be higher than their respective levels during 2004.
In connection with its Chapter 11 proceedings, during 2004, Keystone
entered into a settlement agreement with its former ferrous scrap supplier
resulting in a $5.3 million refund which the Company recorded as a gain on legal
settlement on its 2004 statement of operations. There was no such settlement in
2005.
During 2004, Keystone incurred $11.2 million in legal and professional fees
relative to its Chapter 11 proceedings and related reorganization activities.
As a result of the items discussed above, Keystone recorded net income
during 2004 of $16.1 million as compared to recording a net loss of $37.5
million in 2003.
SEGMENT RESULTS OF OPERATIONS:
Keystone's operating segments are defined as components of consolidated
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. David L. Cheek, President and Chief Executive Officer of
Keystone. Each operating segment is separately managed, and each operating
segment represents a strategic business unit offering different products. See
Note 3 to the Consolidated Financial Statements.
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)
Keystone Wire Products ("KWP") 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 Wire were sold at fair market value to
Keystone, which then used these assets to form and operate KWP, a newly created
wholly-owned subsidiary of reorganized Keystone. As such, operating results of
this segment prior to Keystone's emergence from Chapter 11 were operating
results of Sherman Wire. 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 Wire will
eventually be liquidated. EWP was not included in the Company's February 2004
bankruptcy proceedings. See Note 2.
In addition, prior to July 2003, Keystone also operated three businesses,
including Sherman Wire, that did not constitute reportable business segments.
These businesses sold wire, nails and wire products for agricultural,
industrial, construction, commercial, original manufacturers and retail consumer
markets. The results of operations of these businesses are aggregated and
included under the "Sherman/KWP" heading in the following tables. During July
2003, Keystone transferred its operations at one of these three businesses to
other Keystone facilities, and during August 2003 Keystone sold another of the
businesses. As a result, from August 2003, through August 31, 2005, the
"Sherman/KWP" heading in the following tables only includes Sherman Wire.
Prior to July 2003, the Company owned a 51% interest in Garden Zone, a
distributor of wire, plastic and wood lawn and garden products to retailers. In
July 2003, Keystone sold its 51% ownership in Garden Zone.
The net proceeds from the sale of Garden Zone and Keystone Fasteners
aggregated $3.3 million. The gain on the sale of these businesses, as well as
the results of operations of each of Garden Zone and Keystone Fasteners are not
significant, individually and in the aggregate. Accordingly, the Company has
elected not to present their results of operations as discontinued operations
for all periods presented due to their immateriality.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that (i) defined benefit
pension expense for each segment is recognized and measured on the basis of
estimated current service cost of each segment, with the remainder of the
Company's net defined benefit pension expense or credit not allocated to each
segment but still is reported as part of operating profit or loss, (ii) segment
OPEB expense is recognized and measured based on the basis of the estimated
expense of each segment, with the remainder of the Company's actual OPEB expense
not allocated to each segment but still is reported as part of operating profit
or loss, (iii) elimination of intercompany profit or loss on ending inventory
balances is not allocated to each segment but still is reported as part of
operating profit or loss, (iv) LIFO inventory reserve adjustments are not
allocated to each segment but still are reported as a part of operating profit
or loss, and (v) amortization of goodwill included in general corporate expenses
and is not allocated to any segment and is not included in total reported
operating profit or loss. General corporate expense also includes OPEB and
environmental expense relative to facilities no longer owned by the Company.
Intercompany sales between reportable segments are generally recorded at prices
that approximate market prices to third-party customers.
Principal
Business Segment entities Location Products
---------------- -------------- --------- -----------------
Keystone Steel & Wire Keystone Steel & Wire Peoria, IL Billets, wire rod, industrial
wire, nails and fabricated wire
products
Engineered Wire Products Engineered Wire Upper Sandusky, Fabricated wire products
Products OH
Garden Zone Garden Zone (1) Charleston, SC Wire, wood and plastic lawn and
garden products
Sherman Wire/KWP Sherman Wire/ Sherman, TX Industrial wire and fabricated
Keystone Wire wire products
Products
Sherman Wire of Caldwell, TX Industrial wire and fabricated
Caldwell(2) wire products
Keystone Fasteners(3) Springdale, AR Nails
(1) 51.0% subsidiary - interest sold in July 2003.
(2) Transferred operations in July 2003 to Sherman and KSW.
(3) Business sold in August 2003.
2003 2004 2005
---- ---- ----
(In thousands)
Revenues:
Keystone Steel and Wire $274,284 $346,703 $342,139
Engineered Wire Products 35,260 58,982 62,777
Garden Zone 12,082 - -
Sherman Wire/KWP 28,127 16,193 21,655
Elimination of intersegment
revenues (43,082) (57,543) (59,026)
--------- -------- --------
$306,671 $364,335 $367,545
======== ======== ========
Operating profit (loss):
Keystone Steel and Wire $(21,388) $ 10,126 $ (6,091)
Engineered Wire Products 2,721 10,598 9,481
Garden Zone 700 - -
Sherman Wire/KWP (4,579) (422) (1,674)
GAAP adjustments and eliminations (6,185) 12,153 21,943
--------- -------- --------
$(28,731) $ 32,455 $ 23,659
======== ======== ========
Keystone Steel & Wire
KSW's net sales during 2005 declined by $4.6 million or 1.3% to $342.1
million from $346.7 million during 2004 due primarily to lower per-ton product
selling prices partially offset by increased shipment volume. During 2005, KSW
shipped 8,282 more tons of product than during 2004 although at the lower
per-ton selling prices. KSW's average per-ton selling prices during 2005 were
approximately $18 per-ton lower than in 2004. KSW believes the lower per-ton
selling prices during 2005 were a result of reduced demand for its value-added
finished products due to high inventory levels at KSW's customers. During 2005
and 2004, approximately 13% and 14%, respectively, of KSW's net sales were made
to other Keystone entities. Significantly all of the sales to other Keystone
entities were sales of wire rod.
During 2005, KSW reported an operating loss of $6.1 million, as compared to
recording operating income during 2004 of $10.1 million. The primary reasons for
this decline in operating profit were the lower per-ton product selling prices
and higher costs for ferrous scrap and natural gas during 2005 partially offset
by lower retiree medical costs as a result of the 1114 Agreement.
KSW's net sales in 2004 increased by $72.4 million or 26.4% to $346.7
million from $274.3 million in 2003, due primarily to higher overall per-ton
product selling prices partially offset by lower shipment volumes. KSW sold
approximately 79,000 less tons of products in 2004 as compared to 2003, at
selling prices $197 per-ton higher than per-ton product selling prices in 2003.
KSW believes the lower shipment volume during 2004 was due to its limited
production schedules during the period preceding and immediately following
Keystone's Chapter 11 filing combined with an initiative to discontinue sales to
KSW's less profitable customers. During the last portion of 2003 and throughout
2004, KSW implemented several price increases primarily as a reaction to rapidly
increasing ferrous scrap costs, KSW's primary raw material. As a result of these
efforts, during 2004, KSW was able to realize significant increases in its
per-ton product selling prices. During 2004 and 2003, approximately 14% and 11%,
respectively of KSW's net sales were made to other Keystone entities.
During 2004, KSW recorded operating income of $10.1 million as compared to
recording a $21.4 million operating loss in 2003. The primary reason for the
increased operating profit in 2004 was the significantly higher per-ton product
selling prices in 2004, partially offset by increased costs for ferrous scrap,
natural gas costs and electrical power. In addition, changes to KSW's health and
welfare benefit plans resulted in a significantly higher participation by the
employees and a correspondingly lower required contribution by KSW during 2004.
Engineered Wire Products
During 2005, EWP recorded net sales of $62.8 million which was a $3.8
million increase over the $59.0 million of net sales recorded during 2004. The
primary reason for this increase was a 2005 increase in per-ton product selling
prices as shipment volume remained constant between 2004 and 2005. During 2005,
EWP's per-ton product selling prices averaged $881 per-ton as compared to $829
per-ton during 2004. EWP shipped approximately 71,000 tons of its products
during each of 2004 and 2005.
Despite a $3.8 million increase in sales during 2005, EWP's operating
income declined to $9.5 million during 2005 as compared to $10.6 million during
2004. The primary reason for this decline was that the higher per-ton product
selling prices during 2005 were more than offset by higher costs, primarily wire
rod, EWP's primary raw material. EWP sources the majority of its wire rod
requirements from KSW.
EWP's net sales of $59.0 million during 2004 were approximately $23.7
million or 67.3% higher than during 2003 due primarily to both increased
shipment volume and higher overall per-ton product selling prices. During 2004,
EWP sold 5,700 more tons of products than during 2003 at per-ton product selling
prices approximately $291 per-ton higher than per-ton selling prices in 2003.
During 2004, EWP implemented several price increases primarily as a reaction to
rapidly increasing wire rod costs. As a result of these efforts, during 2004,
EWP was able to realize significant increases in its per-ton product selling
prices.
As a result of significantly higher per-ton product selling prices during
2004, partially offset by increased wire rod and personnel costs as compared to
2003, EWP recorded a $7.9 million increase in operating income to $10.6 million.
Sherman Wire/KWP
This segment's sales during 2005 amounted to $21.7 million, a $5.5 million
increase over sales during 2004 by this segment of $16.2 million. The primary
reason for this increase was an increase in shipment volume partially offset by
a decline in per-ton product selling prices. During 2005, this segment shipped
7,428 more tons of product than during 2004. This segment's average per-ton
selling price in 2005 was approximately $29 per-ton lower than in 2004. Like the
Company's KSW segment, management believes the lower per-ton selling prices
during 2005 were a result of reduced demand of its value-added finished products
due to high inventory levels at the Company's customers. During 2005 and 2004,
approximately 69% and 62%, respectively, of this segment's net sales were made
to KSW. The majority of these sales were fabricated wire products.
Despite increased sales by this segment during 2005, the recorded operating
loss increased by $1.3 million to $1.7 million from $422,000 during 2004. The
primary reason for this increase in operating loss during 2005 was the lower
per-ton product selling prices as well as higher costs for utilities and repairs
and maintenance partially offset by lower retiree medical costs as a result of
the 1114 Agreement.
Sherman Wire was the only business in this segment during 2004. Tons
shipped by Sherman Wire during 2003 declined by 26,000 tons from shipment levels
by the three businesses in this segment during 2004. On a stand alone basis,
Sherman Wire's shipment volume declined by 7,000 tons from 2003 to 2004. Sherman
Wire believes its lower shipment volume during 2004 was due to its limited
production schedules during the period preceding and immediately following
Keystone's Chapter 11 filing combined with an initiative to discontinue sales to
Sherman Wire's less profitable customers. Sherman Wire recorded net sales of
$16.2 million in 2004, as compared to net sales of $28.1 million recorded by the
three businesses in this segment during 2003. This $11.9 million decline was due
primarily to the sale and transfer of two of the businesses in this segment
during 2003 partially offset by a significant increase in Sherman Wire's per-ton
product selling prices during 2004. On a stand alone basis, Sherman Wire's net
sales during 2004 approximated its net sales in 2003 as increased per-ton
product selling prices offset the decline in shipment volume. Sherman Wire's
overall per-ton product selling price increased by approximately $224 per-ton
during 2004 as compared to the per-ton product selling prices achieved by the
businesses in this segment during 2003. On a stand alone basis, Sherman Wire's
per-ton product selling prices increased $216 per-ton from 2003 to 2004. During
2004, Sherman Wire implemented several price increases primarily as a reaction
to rapidly increasing wire rod costs, Sherman Wire's primary raw material. As a
result of these efforts, during 2004, Sherman Wire was able to realize
significant increases in its per-ton product selling prices. Sherman Wire
sources the majority of its wire rod requirements from KSW. During 2004 and
2003, approximately 62% and 36%, respectively, of this segment's net sales were
made to other Keystone entities. These sales to other Keystone entities were
sales of industrial wire and fabricated wire products. On a stand alone basis,
during 2004 and 2003, approximately 62% and 55%, respectively, of Sherman Wire's
net sales were made to other Keystone entities, primarily KSW. The majority of
these sales were fabricated wire products.
During 2004, Sherman Wire recorded a $422,000 operating loss as compared to
a $4.6 million operating loss recorded by the businesses in this segment in
2003. On a stand alone basis, during 2004, Sherman Wire recorded a $422,000
operating loss as compared to an operating loss of $2.5 million in 2003. The
primary reason for this improved operating performance in 2004 was the higher
overall per-ton product selling prices partially offset by the increased costs
for wire rod. In addition, changes to Sherman Wire's health and welfare benefit
plans resulted in a significantly higher participation by the employees and a
correspondingly lower required contribution by Sherman Wire during 2004.
GAAP adjustments and eliminations in the above table consisted primarily of
adjustments to reflect the difference between the defined benefit pension
expense or credit and OPEB expense allocated to the segments and the actual
expense or credit included in the determination of operating profit or loss.
GAAP adjustments and eliminations included a defined benefit pension credit of
$10.3 million and $15.3 million during 2004 and 2005, respectively and defined
benefit pension expense of $3.8 million during 2003. During 2003, GAAP
adjustments and eliminations included OPEB expense of $3.3 million. During 2004,
GAAP adjustments and eliminations included OPEB income of $6.1 million.
Related Party Transactions
As further discussed in Note 13 to the Consolidated Financial Statements,
the Company is party to certain transactions with related parties.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Outlook for 2006
As a result of the Company's strengthened financial position due to its
emergence from Chapter 11, management currently believes Keystone will be able
to recapture in 2006 a portion of the market that it lost during the last two
years. This market was lost due to customer concerns about the Company's
financial stability. As a result, management expects shipment volumes to
increase over 2005 levels during 2006. However, due to anticipated market
pressures, management currently believes overall per-ton selling prices will
decline in 2006 as compared to 2005. Despite these lower selling prices, the
Company expects ferrous scrap and energy costs to remain relatively flat in 2006
as compared to 2005. However, these lower selling prices will be tempered by
substantially lower retiree medical and restructure costs. As a result, Keystone
expects it will report net income for financial reporting purposes, and expects
to report positive cash flows from operating activities in 2006. 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 2006 until such time as the Company
determines (which might or might not occur during 2006) that recognition of the
benefit of its gross deferred income tax assets is appropriate under GAAP.
As discussed above, certain pre-petition liabilities of Sherman Wire remain
subject to compromise at December 31, 2005 as their claims have not yet been
finally adjudicated. See Note 12 to the Consolidated Financial Statements. When
such liabilities are finally adjudicated, it is possible the Company would
record an additional gain on cancellation of debt to the extent the amount of
the allowed claim was less than the amount of the associated liability
recognized in the Company's consolidated financial statements.
Critical Accounting Policies and Estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, the recoverability of other
long-lived assets (including goodwill and other intangible assets), pension and
other post-retirement benefit obligations and the underlying actuarial
assumptions related thereto, the realization of deferred income tax assets and
accruals for environmental remediation, litigation, income tax and other
contingencies. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the reported amounts of assets, liabilities, revenues and expenses. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
Keystone believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and
other factors. The Company takes into consideration the current financial
condition of the customers, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. During 2003, 2004 and 2005, the net amount
written off against the allowance for doubtful accounts as a percentage of
the balance of the allowance for doubtful accounts as of the beginning of
the year ranged from approximately 3% to 57%.
o Keystone provides reserves for estimated obsolescence or unmarketable
inventories equal to the difference between the cost of inventories and the
estimated net realizable value using assumptions about future demand for
its products and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory reserves
may be required. Keystone provides reserves for tools and supplies
inventory based generally on both historical and expected future usage
requirements.
o The Company uses the last-in, first-out ("LIFO") method to determine the
cost of certain of its inventories. The LIFO method assumes the last
inventory purchases during a period were sold first, leaving remaining
inventory on the balance sheet at earlier prices. As such, the LIFO method
generally reflects the effects of inflation or deflation on cost of goods
sold sooner than other inventory cost methods do. The LIFO method was used
to cost approximately 84% and 81% of inventories held at December 31, 2004
and 2005, respectively. The first-in, first-out or average cost methods
were used to determine the cost of all other inventories.
o The Company recognizes an impairment charge associated with its long-lived
assets, primarily property and equipment, goodwill and other intangible
assets whenever it determines that recovery of such long-lived asset is not
probable. Such determination is made in accordance with the applicable GAAP
requirements associated with the long-lived asset, and is based upon, among
other things, estimates of the amount of future net cash flows to be
generated by the long-lived asset and estimates of the current fair value
of the asset. Adverse changes in such estimates of future net cash flows or
estimates of fair value could result in an inability to recover the
carrying value of the long-lived asset, thereby possibly requiring an
impairment charge to be recognized in the future.
Under applicable GAAP (SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are present.
During 2005, no such impairment indicators were present.
Under applicable GAAP (SFAS No. 142, Goodwill and Other Intangible Assets,)
goodwill is required to be reviewed for impairment at least on an annual
basis. Goodwill will also be reviewed for impairment at other times during
each year when impairment indicators, as defined, are present. As discussed
in Notes 1 and 19 to the Consolidated Financial Statements, the Company has
assigned its goodwill to the EWP reporting unit (as that term is defined in
SFAS No. 142). No goodwill impairment was deemed to exist as a result of
the Company's annual impairment review completed during the third quarter
of 2005. The estimated fair value of the EWP reporting unit was determined
based on discounted cash flow projections. Significant judgment is required
in estimating the discounted cash flows for the EWP reporting unit. Such
estimated cash flows are inherently uncertain, and there can be no
assurance that EWP will achieve the future cash flows reflected in its
projections.
o Keystone records a valuation allowance to reduce its deferred income tax
assets to the amount that is believed to be realized under the
"more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it is
possible that in the future the Company may change its estimate of the
amount of the deferred income tax assets that would "more-likely-than-not"
be realized in the future, resulting in an adjustment to the deferred
income tax asset valuation allowance that would either increase or
decrease, as applicable, reported net income or loss in the period such
change in estimate was made. At December 31, 2005, the Company believes its
gross deferred tax assets do not currently meet the "more-likely-than-not"
realizability test and accordingly has provided a valuation allowance for
the total gross deferred tax assets.
o The Company records accruals for environmental, legal, income tax and other
contingencies when estimated future expenditures associated with such
contingencies become probable, and the amounts can be reasonably estimated.
However, new information may become available, or circumstances (such as
applicable laws and regulations) may change, thereby resulting in an
increase or decrease in the amount required to be accrued for such matters
(and therefore a decrease or increase in reported net income in the period
of such change).
o Keystone sponsors a defined benefit pension plan covering substantially all
employees who meet certain eligibility requirements. The Company was not
required to make cash contributions to the pension plan during 2005 and is
not expected to be required to make cash contributions to its pension plan
during 2006. The determination of additional minimum liability, intangible
asset, charge to stockholders' equity and pension expense is dependent on
the selection of certain actuarial assumptions that attempt to anticipate
future events. These pension actuarial assumptions, which are described in
Note 10 to the Consolidated Financial Statements, include discount rate,
expected return on plan assets, rate of future compensation increases, and
mortality rates. Actual results that differ from the Company's pension
actuarial assumptions are generally accumulated and amortized over future
periods and therefore, generally affect the pension asset or liability and
pension expense or credit in future periods. While the Company believes its
pension actuarial assumptions are appropriate, future material differences
between the Company's pension actuarial assumptions and actual results or
significant changes in the Company's pension actuarial assumptions, could
result in a material increase or decrease in the amount of the reported
pension asset or liability and expense or credit, and therefore have a
material impact on the Company's reported future results of operations. In
addition, the plan could become underfunded under applicable federal
regulations, which would require the Company to make cash contributions to
the plan. See also the following discussion of Assumptions on Defined
Benefit Pension Plans and OPEB Plans - Defined Benefit Pension Plan.
o The determination of the Company's obligation and expense for OPEB benefits
is dependent on the selection of certain actuarial assumptions which
attempt to anticipate future events. These OPEB actuarial assumptions,
which are also described in Note 10 to the Consolidated Financial
Statements, include discount rate and mortality rates. Actual results that
differ from the Company's OPEB actuarial assumptions are, in accordance
with GAAP, generally accumulated and amortized over future periods and
therefore, generally affect OPEB obligations and expense in future periods.
While the Company believes its OPEB actuarial assumptions are appropriate,
future differences between the Company's OPEB actuarial assumptions and
actual results or significant changes in the Company's OPEB actuarial
assumptions could materially affect the reported amount of the Company's
future OPEB obligation and expense, and therefore have a material impact on
the Company's reported future results of operations. In addition, the
amount the Company ultimately pays for future cash OPEB benefits could be
materially different from the amounts inherent in the actuarial
assumptions. See also the following discussion of Assumptions on Defined
Benefit Pension Plans and OPEB Plans - OPEB plans.
Accounting Principles Newly Adopted in 2005
See Note 19 to the Consolidated Financial Statements.
Accounting Principles Not Yet Adopted
See Note 20 to the Consolidated Financial Statements.
Assumptions on Defined Benefit Pension Plans and OPEB Plans
Defined benefit pension plan. The Company accounts for its defined benefit
pension plan using SFAS No. 87, Employer's Accounting for Pensions. Under SFAS
No. 87, defined benefit pension plan expense or credit and prepaid or accrued
pension costs are each recognized based on certain actuarial assumptions,
principally the assumed discount rate, the assumed long-term rate of return on
plan assets and the assumed increase in future compensation levels. The Company
recognized a consolidated defined benefit pension plan credit of $6.8 million in
2004 and $11.7 million in 2005 and a consolidated defined benefit pension
expense of $6.9 million in 2003. The amount of funding requirements for the
defined benefit pension plan is based upon applicable regulations, and will
generally differ from pension expense or credit recognized under SFAS No. 87 for
financial reporting purposes. No contributions were required to be made to the
Company's defined benefit pension plan during the past three years.
The discount rates the Company utilizes for determining defined benefit
pension expense or credit and the related pension obligations are based on
current interest rates earned on long-term bonds that receive one of the two
highest ratings given by recognized rating agencies. In addition, the Company
receives advice about appropriate discount rates from the Company's third-party
actuaries, who may in some cases utilize their own market indices. The discount
rates are adjusted as of each valuation date (December 31st) to reflect
then-current interest rates on such long-term bonds. Such discount rates are
used to determine the actuarial present value of the pension obligations as of
December 31st of that year, and such discount rates are also used to determine
the interest component of defined benefit pension expense or credit for the
following year.
The Company used the following discount rates for its defined benefit
pension plan during the last three years:
Discount rates used for:
------------------------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2003 and expense December 31, 2004 and expense December 31, 2005 and
in 2004 in 2005 expense in 2006
------------------------------- -------------------------------- -----------------------------
6.0% 5.65% 5.5%
The assumed long-term rate of return on plan assets represents the
estimated average rate of earnings expected to be earned on the funds invested
or to be invested in the plans' assets provided to fund the benefit payments
inherent in the projected benefit obligations. Unlike the discount rate, which
is adjusted each year based on changes in current long-term interest rates, the
assumed long-term rate of return on plan assets will not necessarily change
based upon the actual, short-term performance of the plan assets in any given
year. Defined benefit pension expense or credit each year is based upon the
assumed long-term rate of return on plan assets for the plan and the actual fair
value of the plan assets as of the beginning of the year. Differences between
the expected return on plan assets for a given year and the actual return are
deferred and amortized over future periods based upon the expected average
remaining service life of the active plan participants.
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets of its plan and the expected long-term rates of
return for such asset components. In addition, the Company receives advice about
appropriate long-term rates of return from the Company's third-party actuaries.
Substantially all of Keystone's plan assets are invested in the Combined Master
Retirement Trust ("CMRT"), a collective investment trust sponsored by Contran,
to permit the collective investment by certain master trusts that fund certain
employee benefits plans sponsored by Contran and certain of its affiliates.
Harold C. Simmons is the sole trustee of the CMRT. Mr. Simmons and two members
of Keystone's board of directors and Master Trust Investment Committee comprise
the Trust Investment Committee for the CMRT. The CMRT's long-term investment
objective is to provide a rate of return exceeding a composite of broad market
equity and fixed income indices (including the S&P 500 and certain Russell
indicies) utilizing both third-party investment managers as well as investments
directed by Mr. Simmons. During the 18-year history of the CMRT through December
31, 2005, the average annual rate of return has been 14.0%. For 2003, 2004 and
2005, the assumed long-term rate of return utilized for plan assets invested in
the CMRT was 10%. In determining the appropriateness of such long-term rate of
return assumption, the Company considered, among other things, the historical
rate of return for the CMRT, the current and projected asset mix of the CMRT and
the investment objectives of the CMRT's managers. In addition, the Company
receives advice about appropriate long-term rates of return from the Company's
third-party actuaries. At December 31, 2005, the asset mix of the CMRT was 86%
in U.S. equity securities, 3% in U.S. fixed income securities, 7% in
international equity securities, 3% in cash and 1% in other investments
(primarily real estate).
The Company regularly reviews its actual asset allocation for its defined
benefit pension plan, and will periodically rebalance the investments in the
plan to more accurately reflect the targeted allocation when considered
appropriate.
As noted above, the Company's assumed long-term rate of return on plan
assets was 10% for each of 2003, 2004 and 2005. The Company currently expects to
utilize the same long-term rate of return on plan assets assumption in 2006 as
it used in 2005 for purposes of determining the 2006 defined benefit pension
plan expense or credit.
To the extent the defined benefit pension plan's particular pension benefit
formula calculates the pension benefit in whole or in part based upon future
compensation levels, the projected benefit obligations and the pension expense
will be based in part upon expected increases in future compensation levels. For
pension benefits that are so calculated, the Company generally bases the assumed
expected increase in future compensation levels upon average long-term inflation
rates.
As discussed above, assumed discount rates and rate of return on plan
assets are re-evaluated annually. A reduction in the assumed discount rate
generally results in an actuarial loss, as the actuarially-determined present
value of estimated future benefit payments will increase. Conversely, an
increase in the assumed discount rate generally results in an actuarial gain. In
addition, an actual return on plan assets for a given year that is greater than
the assumed return on plan assets results in an actuarial gain, while an actual
return on plan assets that is less than the assumed return results in an
actuarial loss. Other actual outcomes that differ from previous assumptions,
such as individuals living longer or shorter than assumed in mortality tables
that are also used to determine the actuarially-determined present value of
estimated future benefit payments, changes in such mortality table themselves or
plan amendments, will also result in actuarial losses or gains. Under GAAP, all
of such actuarial gains and losses are not recognized in earnings currently, but
instead are deferred and amortized into income in the future as part of net
periodic defined benefit pension cost. However, any actuarial gains generated in
future periods would reduce the negative amortization effect of any cumulative
unrecognized actuarial losses, while any actuarial losses generated in future
periods would reduce the favorable amortization effect of any cumulative
unrecognized actuarial gains.
During 2005, the Company's defined benefit pension plans generated a net
actuarial gain of approximately $254 million. This actuarial gain resulted
primarily from the effect of the actual return on plan assets ($304 million)
exceeded the expected return on plan assets ($41 million), offset in part by an
actuarial loss resulting primarily from the reduction in the assumed discount
rate. As discussed above, actuarial gains and losses are deferred and amortized
into income in future periods. As a result, the amount of prepaid pension cost
recognized by the Company at December 31, 2005 ($145 million) is less than the
excess of the fair value of plan assets over the actuarially determined present
value of estimated benefit payments ($309 million).
Based on the actuarial assumptions described above, Keystone expects its
2006 defined benefit pension credit will exceed 2005's defined benefit pension
credit of $11.7 million. Keystone was not required to make contributions to the
defined benefit pension plan during 2003, 2004 or 2005 and does not expect to be
required to make any contributions during 2006.
As noted above, defined benefit pension expense or credit and the amounts
recognized as prepaid or accrued pension costs are based upon the actuarial
assumptions discussed above. The Company believes all of the actuarial
assumptions used are reasonable and appropriate. If Keystone had lowered the
assumed discount rate by 25 basis points as of December 31, 2005, the Company's
projected and accumulated benefit obligations would have increased by
approximately $10.0 million and $9.6 million, respectively at that date, and the
defined benefit pension credit would be expected to decrease by approximately
$487,000 during 2006. Similarly, if Keystone lowered the assumed long-term rate
of return on plan assets by 25 basis points for its defined benefit pension
plan, the defined benefit pension credit would be expected to decrease by
approximately $1.0 million during 2006.
OPEB plans. The Company currently provides certain post retirement benefits
for eligible retired employees. See Note 10 to the Consolidated Financial
Statements. The Company accounts for such OPEB costs under SFAS No. 106,
Employers Accounting for Postretirement Benefits other than Pensions. Under SFAS
No. 106, OPEB expense and accrued OPEB costs are based on certain actuarial
assumptions, including the assumed discount rate. The Company recognized
consolidated OPEB expense of $17.5 million in 2003, $20.9 million in 2004 and
$8.9 million in 2005. Similar to defined benefit pension benefits, the amount of
funding will differ from the expense recognized for financial reporting
purposes, and contributions to the plans to cover benefit payments aggregated
$10.3 million in 2003, $5.3 million in 2004 and $8.3 million in 2005. The amount
of OPEB contributions made by the Company in 2004 and 2005, which was lower than
the Company's contributions in 2003 of $10.3 million, reflects in part certain
interim relief related to the Company's retiree medical plans that were approved
by the Bankruptcy Court in connection with the Company's Chapter 11 filing as
well as the subsequent 1114 Agreement.
The assumed discount rates the Company utilizes for determining OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company utilizes for its defined benefit pension plan.
Because future OPEB payments are not based on health care costs, changes in the
healthcare cost trend rate do not impact future OPEB expense or obligations.
As discussed above, assumed discount rates are re-evaluated annually. A
reduction in the assumed discount rate generally results in an actuarial loss,
as the actuarially-determined present value of estimated future benefit payments
will increase. Conversely, an increase in the assumed discount rate generally
results in an actuarial gain. Other actual outcomes that differ from previous
assumptions, such as individuals living longer or shorter than assumed in
mortality tables which are also used to determine the actuarially-determined
present value of estimated future benefit payments, changes in such mortality
table themselves or plan amendments, will also result in actuarial losses or
gains. Under GAAP, all of such actuarial gains and losses are not recognized in
earnings currently, but instead are deferred and amortized into income in the
future as part of net periodic OPEB cost. However, any actuarial gains generated
in future periods would reduce the negative amortization effect of any
cumulative unrecognized actuarial losses, while any actuarial losses generated
in future periods would reduce the favorable amortization effect of any
cumulative unrecognized actuarial gains.
As discussed above, 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 bankruptcy
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. Concurrent confirmation
of the 1114 Agreement in August 2005, 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. As a result, the Company's OPEB plans generated an
aggregate $192 million actuarial gain during 2005, and the amount of the
Company's aggregate accrued OPEB costs at December 31, 2005 ($137 million)
exceeds the actuarially-determined present value of the estimated future benefit
payments at such date ($39 million).
Based on the actuarial assumptions described above and changes to the
Company's post retirement benefit plans during 2004 and in connection with
Keystone's Chapter 11 filings, the Company expects it will record a consolidated
$6.6 million OPEB credit in 2006. In comparison, the Company expects to make
$4.3 million of contributions to such plans during 2006.
As noted above, OPEB expense and the amount recognized as accrued OPEB
costs are based upon the actuarial assumptions discussed above. The Company
believes all of the actuarial assumptions used are reasonable and appropriate.
If the Company had lowered the assumed discount rate by 25 basis points for all
of its OPEB plans as of December 31, 2005, the Company's aggregate accumulated
OPEB obligations would have increased by approximately $906,000 at that date,
and the Company's OPEB expense would be expected to increase by $319,000 during
2006.
Liquidity and Capital Resources
At December 31, 2005, Keystone had working capital of $36.4 million,
including $5.5 million of notes payable and current maturities of long-term debt
as well as outstanding borrowings under the Company's revolving credit facility
of $32.1 million. The amount of available borrowings under Keystone's revolving
credit facility is based on formula-determined amounts of trade receivables and
inventories, less the amount of outstanding letters of credit. At December 31,
2005, $4.6 million of letters of credit were outstanding and unused credit
available for borrowing under Keystone's revolving credit facility was $21.6
million. The 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 this facility are always classified
as a current liability regardless of the maturity date of the facility.
Despite a $23.2 million increase in earnings between 2004 and 2005, the
Company's operations used $30.7 million in cash during 2005 as compared to the
$11.9 million of cash provided by operations in 2004. The significant reasons
for this difference were the $32.5 million non-cash gain on cancellation of debt
during 2005, a $15.1 million decline in the Company's non-cash pension expense
during 2005, a $5.0 million increase in the Company's non-cash pension credit
during 2005 and a $1.9 million increase in reorganization costs paid during 2005
all partially offset by a $5.3 million non-cash gain on a legal settlement
during 2004.
During 2005, Keystone made capital expenditures of approximately $9.8
million, primarily related to upgrades of production equipment at its facility
in Peoria, Illinois, as compared to $5.1 million in 2004. Capital expenditures
for 2006 are expected to be approximately $23.0 million and are related
primarily to a plant expansion at EWP and upgrades to production equipment at
KSW. Such capital expenditures are expected to be funded using cash flows from
operations together with borrowing availability under Keystone's credit
facility.
At December 31, 2005, the Company's financial statements reflected accrued
liabilities of $15.4 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 that 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 $16 million.
Keystone is not expected to be required to make contributions to its
pension plan during 2006. Future variances from assumed actuarial rates,
including the rate of return on pension plan assets, may result in increases or
decreases to pension expense or credit and funding requirements in future
periods. See Note 10 to the Consolidated Financial Statements.
The Company periodically reviews the recoverability of its deferred tax
assets to determine whether such assets meet the "more-likely-than-not"
recognition criteria. At December 31, 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, the Company has provided a
deferred tax asset valuation allowance of approximately $10.7 million at
December 31, 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 2006.
Keystone incurs significant ongoing costs for plant and equipment and pays
substantial benefits for both current and retired employees. As such, Keystone
is vulnerable to business downturns and increases in costs, and accordingly,
routinely compares its liquidity requirements and capital needs against its
estimated future operating cash flows. During Keystone's Chapter 11 proceedings,
the Company negotiated a favorable amendment to the collective bargaining
agreement with its largest labor union and received permanent relief with
respect to certain OPEB payments to retirees. Keystone is also taking additional
action towards improving its liquidity. These actions include, but are not
limited to, reducing inventory levels through more efficient production
schedules and modifying coverages and participant contribution levels of medical
plans for both employees and retirees. Keystone has also considered, and may in
the future consider, the sale of certain divisions or subsidiaries that are not
necessary to achieve the Company's long-term business objectives. Keystone
currently believes these efforts combined with its existing credit facilities
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, 6, 16 and 17 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments of the
Company and its consolidated subsidiaries that are unconditional both in terms
of timing and amount by the type and date of payment:
Payment due date
---------------------------------------
2011 and
Contractual commitment 2006 2007/2008 2009/2010 after Total
------ --------- --------- ---------- -----
(In thousands)
Indebtedness:
Principal $ 5,466 $40,203 $54,696 $ - $100,365
Interest 4,277 8,047 5,327 - 17,651
Operating leases 495 274 128 - 897
Product supply agreements 1,613 2,400 2,400 1,500 7,913
------- ------- ------- ------- --------
$11,851 $50,924 $62,551 $1,500 $126,826
======= ======= ======= ====== ========
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. In addition,
balances due under the Company's revolving credit facilities are shown as
current maturities in the Company's Consolidated Financial Statements at
December 31, 2005. However, the above table reflects maturities of these
facilities only upon the contracted expiration of the respective 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 are 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 census data. Such defined benefit pension plans
and OPEB plans are discussed above in greater detail.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Keystone's exposure to changes in interest rates relates primarily to
long-term debt obligations. At December 31, 2005, approximately 66% of the
Company's long-term debt was comprised of fixed rate instruments, which minimize
earnings volatility related to interest expense. Keystone does not currently
participate in interest rate-related derivative financial instruments.
The table below presents principal amounts (including a total of
approximately $470,000 of interest that will be converted to principal during
2006) and related weighted-average interest rates by maturity date for
Keystone's long-term debt obligations.
Contracted Maturity Date Estimated
--------------------------------------------------------------------- Fair Value
2006 2007 2008 2009 2010 Thereafter Total December 31, 2005
---- ---- ---- ---- ---- ---------- ----- -----------------
($ In thousands)
Fixed-rate debt -
Principal amount $ 867 $21,364 $9,657 $10,312 $ - $ - $42,200 $31,439
Weighted-average
interest rate .1% 1.5% 1.9% 1.4% -% - % 1.6%
Variable-rate debt-
Principal amount $4,599 $ 4,592 $4,590 $ 4,590 $39,794 $ - $58,165 $58,165
Weighted-average
interest rate 7.3% 7.3% 7.3% 7.3% 7.3% - % 7.3%
At December 31, 2004, long-term debt included $27.6 of million
variable-rate debt which approximated fair value, with a weighted-average
interest rate of 5.7%. Due to the significant uncertainties surrounding the
Company's Chapter 11 proceedings, management was unable to estimate the
aggregate fair value of Keystone's fixed rate notes, with a weighted-average
interest rate of 2.0%, at December 31, 2004.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is contained in a separate section
of this report. See Index of Financial Statements and Financial Statement
Schedule on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company maintains
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 (the
"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 December 31, 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 December 31, 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 December 31, 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 December 31, 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
ccounts 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 December 31, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
Keystone's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this report (the "Keystone Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
Keystone Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
Keystone Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
Keystone Proxy Statement. See also Note 13 to the Consolidated Financial
Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Independent Auditors. The firm of PricewaterhouseCoopers LLP ("PwC") served
as Keystone's independent registered public accounting firm for the year ended
December 31, 2005. Keystone expects PwC will be considered for appointment to
audit Keystone's annual consolidated financial statements for the year ending
December 31, 2006.
Pre-approval Policies and Procedures. Keystone's audit committee has
implemented pre-approval policies and procedures that require the audit
committee to pre-approve any services Keystone's independent registered public
accounting firm provides to Keystone or its subsidiaries.
Fees Paid to PwC. The following table shows the aggregate fees PwC has
billed or is expected to bill to Keystone and its subsidiaries for services
rendered for 2004 and 2005.
Type of Fees 2004 2005
------------ ---- ----
Audit Fees (1) $443,000 $498,000
Audit-Related Fees (2) 132,500 -
Tax Fees - -
All Other Fees - -
-------- --------
Total $575,500 $498,000
======== ========
_______________________
(1) Fees for the following services:
(a) audits of Keystone's consolidated year-end financial statements for
each year ($423,000 and $393,000 in 2004 and 2005, respectively);
(b) reviews of the unaudited quarterly financial statements appearing in
Keystone's Form 10-Q for each of the first three quarters of 2005;
(c) normally provided statutory or regulatory filings or engagements for
each year; and
(d) the estimated out-of-pocket costs PwC incurred in providing all of
such services for which Keystone reimburses PwC.
(e) accounting consultations concerning comment letters received from the
United States Securities and Exchange Commission ($20,000 in 2004)
(2) 2004 - Fees for employee benefit plan audits.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1), (2) The Index of Consolidated Financial Statements and Financial
Statement Schedule is included on page F-1 of this report.
(a)(3) Exhibits
Included as exhibits are the items listed in the Exhibit Index. The
Company will furnish a copy of any of the exhibits listed below upon
payment of $4.00 per exhibit to cover the costs to the Company in
furnishing the exhibits.
Exhibit No. Exhibit
3.1 Restated Certificate of Incorporation dated September 15, 1995, as
filed with the Secretary of State of Delaware. (Incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2003).
3.2 Certificate of Amendment of the Restated Certificate of Incorporation
dated October 9, 2003, as filed with the Secretary of State of
Delaware. (Incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003).
3.3 Amended and Restated Certificate of Incorporation of the Registrant
dated August 31, 2005, as filed with the Secretary of State of
Delaware. (Incorporated by reference to Exhibit 3.3 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003).
3.4 Amended and Restated Certificate of Designations, Rights and
Preferences of the Series A 10% Cumulative Convertible Pay-In-Kind
Preferred Stock of Registrant dated March 12, 2003. (Incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002).
3.5 Bylaws of the Company, as amended and restated December 30, 1994
(Incorporated by reference to Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994).
3.6 Amended and Restated Bylaws of the Registrant dated August 31, 2005.
(Incorporated by reference to Exhibit 3.6 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.1 Indenture dated as of August 7, 1997 relating to the Registrant's 9
5/8% Senior Secured Notes due 2007. (Incorporated by reference to
Exhibit 4.1 to the Registrant's Form 8-K filed September 4, 1997).
4.2 First Supplemental Indenture Dated as of March 15, 2002 to Indenture
Dated as of August 7, 1997 Between Registrant as Issuer and the Bank
of New York, as Trustee. (Incorporated by reference to Exhibit 4.2 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
Exhibit No. Exhibit
4.3 Dated as of August 7, 1997 Between Registrant as Issuer and the Bank
of New York, as Trustee. (Incorporated by reference to Exhibit 4.3 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.4 Amended and Restated Revolving Loan And Security Agreement dated as of
December 29, 1995 between the Company and Congress Financial
Corporation (Central). (Incorporated by reference to Exhibit 4.1 to
Registrant's Form 10-K for the year ended December 31, 1995).
4.5 First Amendment to Amended and Restated Revolving Loan And Security
Agreement dated as of September 27, 1996 between Registrant and
Congress Financial Corporation (Central). (Incorporated by reference
to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996).
4.6 Second Amendment to Amended and Restated Revolving Loan And Security
Agreement dated as of August 4, 1997 between Registrant and Congress
Financial Corporation (Central). (Incorporated by reference to Exhibit
4.6 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.7 Third Amendment to Amended and Restated Revolving Loan And Security
Agreement dated as of May 14, 1999 between Registrant and Congress
Financial Corporation (Central). (Incorporated by reference to Exhibit
4.7 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.8 Fourth Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of December 31, 1999 between Registrant and
Congress Financial Corporation (Central) (Incorporated by reference to
Exhibit 4.4 to the Registrant's Form 10-K for the year ended December
31, 1999).
4.9 Fifth Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of February 3, 2000 between Registrant and Congress
Financial Corporation (Central). (Incorporated by reference to Exhibit
4.6 to the Registrant's Form 10-K for the year ended December 31,
1999).
4.10 Sixth Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of January 17, 2001 between Registrant and Congress
Financial Corporation (Central). (Incorporated by reference to Exhibit
4.10 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.11 Seventh Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of November 1, 2001 between Registrant and Congress
Financial Corporation (Central). (Incorporated by reference to Exhibit
4.11 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.12 Eighth Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of December 31, 2001 between Registrant and
Congress Financial Corporation (Central). (Incorporated by reference
to Exhibit 4.12 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001).
Exhibit No. Exhibit
4.13 Ninth Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of January 31, 2002 between Registrant and Congress
Financial Corporation (Central). (Incorporated by reference to Exhibit
4.13 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.14 Tenth Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of February 28, 2002 between Registrant and
Congress Financial Corporation (Central). (Incorporated by reference
to Exhibit 4.14 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001).
4.15 Eleventh Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of March 15, 2002 between Registrant and Congress
Financial Corporation (Central). (Incorporated by reference to Exhibit
4.15 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.16 Twelfth Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of March 15, 2002 between Registrant and Congress
Financial Corporation (Central). (Incorporated by reference to Exhibit
4.16 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.17 Thirteenth Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of November 17,2003 between Registrant and
Congress Financial Corporation (Central). (Incorporated by reference
to Exhibit 4.17 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2003).
4.18 Loan Agreement dated as of March 13, 2002 between Registrant and the
County of Peoria, Illinois. (Incorporated by reference to Exhibit 4.17
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.19 Subordinate Security Agreement dated as of March 13, 2002 made by
Registrant in favor of the County of Peoria, Illinois. (Incorporated
by reference to Exhibit 4.18 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2001).
4.20 Amended and Restated EWP Bridge Loan Agreement dated as of November
21, 2001, by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.19 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001).
4.21 First Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of March 18, 2002, by and between Registrant and EWP
Financial LLC. (Incorporated by reference to Exhibit 4.20 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
4.22 Second Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of December 31, 2002, by and between Registrant and EWP
Financial LLC. (Incorporated by reference to Exhibit 4.21 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2002).
Exhibit No. Exhibit
4.23 Third Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of June 30, 2003, by and between Registrant and EWP Financial
LLC. (Incorporated by reference to Exhibit 4.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
4.24 Fourth Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of July 31, 2003, by and between Registrant and EWP Financial
LLC. (Incorporated by reference to Exhibit 4.2 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
4.25 Fifth Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of August 31, 2003, by and between Registrant and EWP
Financial LLC. (Incorporated by reference to Exhibit 4.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
4.26 Sixth Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of September 30, 2003, by and between Registrant and EWP
Financial LLC. (Incorporated by reference to Exhibit 4.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
4.27 Seventh Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of October 31, 2003, by and between Registrant and EWP
Financial LLC. (Incorporated by reference to Exhibit 4.3 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
4.28 Eighth Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of November 25, 2003 by and between Registrant and EWP
Financial LLC. (Incorporated by reference to Exhibit 4.28 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003).
4.29 Ninth Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of December 15, 2003, by and between Registrant and EWP
Financial LLC. (Incorporated by reference to Exhibit 4.29 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003).
4.30 Tenth Amendment to Amended and Restated EWP Bridge Loan Agreement
dated as of January 15, 2004, by and between Registrant and EWP
Financial LLC. (Incorporated by reference to Exhibit 4.30 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003).
4.31 Assumption Agreement and Amendment to Financing Agreements dated
February 27, 2004 by and between Registrant and Congress Financial
Corporation (Central). (Incorporated by reference to Exhibit 4.31 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003).
4.32 First Amendment to Post-Petition Credit Agreement dated December 10,
2004 by and between Registrant and Congress Financial Corporation
(Central). (Incorporated by reference to Exhibit 4.32 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003).
Exhibit No. Exhibit
4.33 Second Amendment to Post-Petition Credit Agreement dated March 31,
2005 by and between Registrant and Congress Financial Corporation
(Central). (Incorporated by reference to Exhibit 4.33 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003).
4.34 Debtor-in-Possession Credit Agreement dated February 27, 2004 by and
between Registrant and EWP Financial LLC. (Incorporated by reference
to Exhibit 4.34 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2003).
4.35 First Amendment to Debtor-In-Possession Credit Agreement dated August
25, 2004 by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.35 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.36 Second Amendment to Debtor-In-Possession Credit Agreement dated
December 31, 2004 by and between Registrant and EWP Financial LLC.
(Incorporated by reference to Exhibit 4.36 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.37 Letter agreement dated July 31, 2005, amending Debtor-In-Possession
Credit Agreement by and between Registrant and EWP Financial LLC.
4.38 Stock Pledge Agreement dated as of November 21, 2001, by and between
Registrant and EWP Financial LLC. (Incorporated by reference to
Exhibit 4.21 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001).
4.39 Form of Registrant's 6% Subordinated Unsecured Note dated as of March
15, 2002. (Incorporated by reference to Exhibit 4.22 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
4.40 Form of Registrant's 8% Subordinated Secured Note dated as of March
15, 2002. (Incorporated by reference to Exhibit 4.23 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2001).
4.41 Indenture Dated as of March 15, 2002, related to Registrant's 8%
Subordinated Secured Notes Between Registrant as Issuer, and U.S. Bank
National Association, as Trustee. (Incorporated by reference to
Exhibit 4.24 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001).
4.42 Supplemental Indenture No. 1 dated as of August 31, 2005, related to
Registrant's 8% Subordinated Secured Notes between Registrant as
issuer, and U.S. Bank National Association as Trustee.
4.43 Revolving credit Facility Promissory Note dated as of January 5, 2004,
by and between Engineered Wire Products, Inc. and Bank One, N.A.
(Incorporated by reference to Exhibit 4.41 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.44 Business Loan Agreement (Asset Based) dated as of January 5, 2004, by
and between Engineered Wire Products, Inc. and Bank One, N.A.
(Incorporated by reference to Exhibit 4.42 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
Exhibit No. Exhibit
4.45 Term Promissory Note dated as of January 5, 2004, by and between
Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.43 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2003).
4.46 Commercial Security Agreement dated as of January 5, 2004, by and
between Engineered Wire Products, Inc. and Bank One, N.A.
(Incorporated by reference to Exhibit 4.44 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.47 Amendment to Loan Agreement dated May 17, 2004 by and between
Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.45 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2003).
4.48 Business Loan Extension Agreement dated June 18, 2004 by and between
Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.46 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2003).
4.49 Business Loan Extension Agreement dated September 30, 2004 by and
between Engineered Wire Products, Inc. and Bank One, N.A.
(Incorporated by reference to Exhibit 4.47 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.50 Business Loan Extension Agreement dated December 22, 2004 by and
between Engineered Wire Products, Inc. and Bank One, N.A.
(Incorporated by reference to Exhibit 4.48 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.51 Business Loan Extension Agreement dated March 30, 2005 by and between
Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.49 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2003).
4.52 Business Loan Extension Agreement dated June 27, 2005, by and between
Engineered Wire Products, Inc. and Bank One, N.A. (Incorporated by
reference to Exhibit 4.50 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2003).
4.53 Loan and Security Agreement dated August 31, 2005 by and between the
Registrant and Wachovia Capital Finance Corporation (Central).
(Incorporated by reference to Exhibit 4.51 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003).
4.54 Promissory Note dated August 31, 2005, from Registrant to Jack B.
Fishman Esq. as trustee for holders of Class A6 claims.
4.55 Securities Pledge Agreement dated August 31, 2005, by and between
Registrant and Jack B. Fishman Esq. as trustee for holders of Class A6
claims.
10.1 Agreement Regarding Shared Insurance between Registrant, CompX
International, Inc., Contran Corporation, Kronos Worldwide, Inc., NL
Industries, Inc., Titanium Metals Corp. and Valhi, Inc. dated as of
October 30, 2003. (Incorporated by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003).
10.2 The Combined Master Retirement Trust between Valhi, Inc. and Harold C.
Simmons as restated effective July 1, 1995 (Incorporated by reference
to Exhibit 10.2 to the Registrant's Registration Statement on Form S-4
(Registration No. 333-35955)).
Exhibit No. Exhibit
10.3* Keystone Consolidated Industries, Inc. 1992 Incentive Compensation
Plan. (Incorporated by reference to Exhibit 99.1 to Registrant's
Registration Statement on Form S-8 (Registration No. 33-63086)).
10.4* Keystone Consolidated Industries, Inc. 1992 Non-Employee Director
Stock Option Plan. (Incorporated by reference to Exhibit 99.2 to
Registrant's Registration Statement on Form S-8 (Registration No.
33-63086)).
10.5* Keystone Consolidated Industries, Inc. 1997 Long-Term Incentive Plan.
(Incorporated by reference to Appendix A to Registrant's Schedule 14A
filed April 25, 1997).
10.6* Amendment to the Keystone Consolidated Industries, Inc. 1997 Long-Term
Incentive Plan. (Incorporated by reference to Registrant's Schedule
14A filed April 24, 1998.)
10.7* Form of Deferred Compensation Agreement between the Registrant and
certain executive officers. (Incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q (File No. 1-3919)
for the quarter ended March 31, 1999).
10.8 Account Reconciliation Agreement dated as of March 12, 2002 between
Registrant and Central Illinois Light Company. (Incorporated by
reference to Exhibit 10.8 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2001).
10.9 Account Reconciliation Agreement dated as of March 11, 2002 between
Registrant and PSC Metals, Inc. (Incorporated by reference to Exhibit
10.9 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.10 Intercorporate Services Agreement dated as of September 1, 2005 by and
between Registrant and Contran Corporation.
21 Subsidiaries of the Company.
31.1 Certification
31.2 Certification
32.1 Certification
*Management contract, compensatory plan or agreement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned and dated March 31, 2006, thereunto duly
authorized.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
(Registrant)
/s/ GLENN R. SIMMONS
Glenn R. Simmons
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below and dated as of March 31, 2006 by the following
persons on behalf of the registrant and in the capacities indicated:
/s/ GLENN R. SIMMONS /s/ STEVEN L. WATSON
- ------------------------ --------------------------
Glenn R. Simmons Steven L. Watson
Chairman of the Board Director
/s/ PAUL M. BASS, JR. /s/ DONALD P. ZIMA
- ------------------------ --------------------------
Paul M. Bass, Jr. Donald P. Zima
Director Director
/s/ RICHARD R. BURKHART /s/ DAVID L. CHEEK
- ------------------------ --------------------------
Richard R. Burkhart David L. Cheek
Director President and
Chief Executive Officer
/s/ JOHN R. PARKER /s/ BERT E. DOWNING, JR.
- ------------------------ --------------------------
John R. Parker Bert E. Downing, Jr.
Director Vice President, Chief
Financial Officer, Corporate
Controller and Treasurer
/s/ TROY T. TAYLOR (Principal Accounting and
- ------------------------ Financial Officer)
Troy T. Taylor
Director
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Items 8, 14(a) and 14(d)
Index of Consolidated Financial Statements and Financial Statement Schedule
Page
Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets -
December 31, 2004 and 2005 F-3
Consolidated Statements of Operations -
Years ended December 31, 2003, 2004 and 2005 F-5
Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2003, 2004 and 2005 F-7
Consolidated Statements of Stockholders' Equity (Deficit) -
Years ended December 31, 2003, 2004 and 2005 F-8
Consolidated Statements of Cash Flows -
Years ended December 31, 2003, 2004 and 2005 F-9
Notes to Consolidated Financial Statements F-11
Financial Statement Schedule
Report of Independent Registered Public Accounting Firm S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Keystone Consolidated Industries,
Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity (deficit) and cash flows present fairly, in all material
respects, the financial position of Keystone Consolidated Industries, Inc. and
its subsidiaries at December 31, 2004 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
restated its 2004 and 2003 consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
March 31, 2006
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2005
(In thousands, except share data)
ASSETS 2004 2005
--------- --------
(Restated)
Current assets:
Accounts receivable, net of allowances
of $448 and $451 $ 26,729 $ 46,199
Inventories 53,017 69,691
Prepaid expenses and other 2,017 2,760
Restricted investments 5,373 1,040
-------- --------
Total current assets 87,136 119,690
-------- --------
Property, plant and equipment:
Land, buildings and improvements 56,252 55,382
Machinery and equipment 311,226 310,446
Construction in progress 1,558 3,949
-------- --------
369,036 369,777
Less accumulated depreciation 275,003 283,004
-------- --------
Net property, plant and equipment 94,033 86,773
-------- --------
Other assets:
Restricted investments 5,965 4,758
Prepaid pension cost 133,443 145,152
Deferred financing costs 1,226 902
Goodwill 752 752
Other 727 337
-------- --------
Total other assets 142,113 151,901
-------- --------
$323,282 $358,364
======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2004 and 2005
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2005
------ ------
(Restated)
Current liabilities:
Notes payable and current maturities of
long-term debt $ 51,640 $ 41,640
Accounts payable 3,801 9,797
Accounts payable to affiliates 821 -
Accrued OPEB cost - 4,256
Other accrued liabilities 18,964 27,624
-------- ---------
Total current liabilities 75,226 83,317
-------- ---------
Noncurrent liabilities:
Long-term debt 14,345 58,255
Accrued OPEB cost 13,478 133,208
Other 988 5,577
-------- ---------
Total noncurrent liabilities 28,811 197,040
-------- ---------
Liabilities subject to compromise 212,346 10,476
-------- ---------
Series A preferred stock, $1,000 stated
value; 250,000 shares authorized and 71,899
shares issued in 2004 2,112 -
-------- ---------
Stockholders' equity:
Common stock, $1.00 stated value, 27,000,000
shares authorized and 10,069,584 shares issued
in 2004; $.01 par value, 11,000,000 shares
authorized and 10,000,000 shares issued and
outstanding in 2005 10,798 100
Additional paid-in capital 41,225 75,423
Accumulated deficit (47,224) (7,992)
Treasury stock - 1,134 shares, at cost in 2004 (12) -
-------- ---------
Total stockholders' equity 4,787 67,531
-------- ---------
$ 323,282 $ 358,364
========= =========
Commitments and contingencies (Notes 15, 16 and 17).
See accompanying notes to consolidated finanical statements.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2004 and 2005
(In thousands, except per share data)
2003 2004 2005
---- ---- ----
Net sales $306,671 $364,335 $367,545
Cost of goods sold 310,881 322,232 337,541
-------- -------- --------
Gross margin (loss) (4,210) 42,103 30,004
-------- -------- --------
Selling expense 6,934 5,634 6,251
General and administrative expense 10,689 10,766 11,804
Defined benefit pension expense (credit) 6,898 (6,752) (11,710)
-------- -------- --------
24,521 9,648 6,345
-------- -------- --------
Operating income (loss) (28,731) 32,455 23,659
-------- -------- --------
General corporate income (expense):
Corporate expense (5,973) (6,253) (3,466)
Interest expense (3,941) (3,705) (3,992)
Interest income 41 132 266
Gain on legal settlement - 5,284 -
Gain on sale of business units 1,073 - -
Other income, net 313 684 993
-------- -------- --------
(8,487) (3,858) (6,199)
-------- -------- --------
Income (loss) before income taxes
and reorganization items (37,218) 28,597 17,460
-------- -------- --------
Reorganization items:
Reorganization costs - (11,158) (10,308)
Gain on cancellation of debt - - 32,510
-------- -------- --------
- (11,158) 22,202
-------- -------- --------
Income (loss) before income taxes (37,218) 17,439 39,662
Provision for income taxes - 1,379 430
Minority interest in after-tax earnings 299 - -
-------- -------- --------
Net income (loss) (37,517) 16,060 39,232
Dividends on preferred stock 5,940 1,223 -
-------- -------- --------
Net income (loss) available for
common shares $(43,457) $ 14,837 $ 39,232
======== ======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years ended December 31, 2003, 2004 and 2005
(In thousands, except per share data)
2003 2004 2005
---- ---- ----
Basic earnings (loss) per share
available for common shares $ (4.32) $ 1.47 $ 4.12
======= ======= =======
Basic shares outstanding 10,068 10,068 10,046
======= ======= =======
Diluted earnings (loss) per share
available for common shares $ (4.32) $ .57 $ 1.88
======= ======= =======
Diluted shares outstanding 10,068 28,043 22,029
======= ======= =======
See accompanying notes to consolidated finanical statements.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Net income (loss) $(37,517) $ 16,060 $ 39,232
Other comprehensive income (loss), net
of tax -
Pension liabilities adjustment 170,307 - -
-------- -------- --------
Comprehensive income (loss) $132,790 $ 16,060 $ 39,232
======== ======== ========
See accompanying notes to consolidated financial statements.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
Accumulated
other
comprehensive
Common stock Additional loss -
------------------- paid-in Pension Accumulated Treasury
Shares Amount capital Liabilities (deficit) stock Total
------ ------ --------- ----------- ----------- -------- -------
Balance - December 31, 2002 10,068 $10,798 $48,388 $(170,307) $(25,767) $(12) $(136,900)
Net loss - - - - (37,517) - (37,517)
Preferred stock dividends - - (5,940) - - - (5,940)
Other comprehensive income - - - 170,307 - - 170,307
------- -------- --------- --------- -------- ---- --------
Balance - December 31, 2003 10,068 10,798 42,448 - (63,284) (12) (10,050)
Net income - - - - 16,060 - 16,060
Preferred stock dividends - - (1,223) - - - (1,223)
------- -------- --------- --------- -------- ---- --------
Balance - December 31, 2004 10,068 10,798 41,225 - (47,224) (12) 4,787
Net income - - - - 39,232 - 39,232
Cancellation of common stock (10,068) (10,798) 10,786 - - 12 -
Cancellation of Series A
Preferred Stock - - 2,112 - - - 2,112
Issuance of common stock 10,000 100 21,300 - - - 21,400
------- -------- --------- --------- -------- ---- --------
Balance - December 31, 2005 10,000 $ 100 $75,423 $ - $ (7,992) $ - $ 67,531
======= ======= ======= ======== ======== ===== ========
See accompanying notes to consolidated financial statements.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
-------- --------- --------
(Restated) (Restated)
Cash flows from operating activities:
Net income (loss) $(37,517) $ 16,060 $ 39,232
Depreciation and amortization 16,461 15,812 15,745
Amortization of deferred financing costs 742 1,108 694
Non-cash OPEB expense 7,158 15,655 560
Non-cash defined benefit pension
expense (credit) 6,898 (6,752) (11,710)
Gain on cancellation of debt - - (32,510)
Gain on legal settlement - (5,284) -
Reorganization costs accrued - 11,158 10,307
Reorganization costs paid - (8,275) (10,133)
Other, net (1,440) 576 29
Change in assets and liabilities:
Accounts receivable 5,887 (11,049) (19,473)
Inventories 20,097 (29,012) (16,674)
Accounts payable (6,191) 8,155 4,252
Other, net (5,875) 3,702 (11,004)
-------- --------- ---------
Net cash provided (used) by operating
activities 6,220 11,854 (30,685)
-------- --------- ---------
Cash flows from investing activities:
Capital expenditures (2,683) (5,080) (9,772)
Proceeds from sale of business units 3,344 - -
Collection of notes receivable 75 75 75
Restricted investments (141) (5,467) 5,540
Other, net (619) 76 1,261
-------- --------- ---------
Net cash used by investing
activities (24) (10,396) (2,896)
-------- --------- ---------
Cash flows from financing activities:
Revolving credit facilities, net (7,308) (14,222) 28,314
Other notes payable and long-term debt:
Additions 3,588 16,028 23,372
Principal payments (2,446) (2,537) (17,575)
Deferred financing costs paid (30) (727) (530)
-------- --------- ---------
Net cash provided (used) by financing
activities (6,196) (1,458) 33,581
-------- --------- ---------
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
------ ------ ------
(Restated) (Restated)
Cash and cash equivalents:
Net change from operations, investing
and financing activities - - -
Balance at beginning of year - - -
-------- ------- --------
Balance at end of year $ - $ - $ -
======== ======= ========
Supplemental disclosures:
Cash paid (received) for:
Interest, net of amounts capitalized $ 2,789 $ 2,306 $ 3,195
Income taxes, net 18 (27) 985
Common stock issued in exchange for
extinguishment of certain pre-petition
unsecured and DIP claims - - 21,400
Note issued in exchange for extinguishment
of certain pre-petition unsecured claims - - 4,800
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Restatement and summary of significant accounting policies
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 financial statements
at December 31, 2004 and its consolidated statements of cash flows for the years
ended December 31, 2003 and 2004, as contained in this Form 10-K, 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 tables show (i) selected consolidated balance sheet data as
of December 31, 2004, and selected consolidated statements of cash flow data for
the years ended December 31, 2003 and 2004, in each case 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
======== ======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
SELECTED CONSOLIDATED STATEMENT OF CASH FLOW DATA
(In thousands)
Year ended December 31, 2004
----------------------------------------------------
Previously
Reported Adjustments As restated
------------ ----------- -----------
Items comprising cash flow provided
by operating activities:
Change in accounts payable $ 4,237 $ 3,918 $ 8,155
======== ======== ========
Total cash flow provided by
operating activities $ 7,936 $ 3,918 $ 11,854
======== ======== ========
Items comprising cash flow
provided (used) by financing
activities:
Revolving credit facilities, net $(10,304) $ (3,918) $ (14,222)
======== ======== ========
Total cash flow provided (used)
by financing activities $ 2,460 $ (3,918) $ (1,458)
======== ======== ========
Cash and cash equivalents -
Net change from operations,
investing and financing
activities $ - $ - $ -
======== ======== ========
Year ended December 31, 2003
----------------------------------------------------
Previously
Reported Adjustments As restated
------------ ----------- -----------
Items comprising cash flow provided
(used) by operating activities:
Change in accounts payable $ (6,412) $ 221 $ (6,191)
======== ======== ========
Total cash flow provided by
operating activities $ 5,999 $ 221 $ 6,220
======== ======== ========
Items comprising cash flow
provided (used) by financing
activities:
Revolving credit facilities, net $ (7,087) $ (221) $ (7,308)
======== ======== ========
Total cash flow provided (used)
by financing activities $ (5,975) $ (221) $ (6,196)
======== ======== ========
Cash and cash equivalents -
Net change from operations,
investing and financing
activities $ - $ - $ -
======== ======== ========
Summary of significant accounting policies.
At December 31, 2005, Keystone Consolidated Industries, Inc. ("Keystone" or
"the Company") is 51% owned by Contran Corporation ("Contran"). Substantially
all of Contran's outstanding voting stock is held by trusts established for the
benefit of certain children and grandchildren of Mr. Harold C. Simmons, of which
Mr. Simmons is sole trustee. Consequently, Mr. Simmons may be deemed to control
the Company.
On February 26, 2004, Keystone and five of its direct and indirect
subsidiaries filed for voluntary protection under Chapter 11 of the Federal
Bankruptcy Code. Keystone and its subsidiaries filed their petitions in the U.S.
Bankruptcy Court for the Eastern District of Wisconsin in Milwaukee (the
"Court"). Keystone's amended plan of reorganization was accepted by the impacted
constitutencies and confirmed by the Court on August 10, 2005. The Company
emerged from bankruptcy protection on August 31, 2005. See Note 2.
Under Chapter 11 proceedings, actions by creditors to collect claims in
existence at the filing date ("Pre-petition Claims") are stayed, absent specific
authorization by the Court to pay such claims, while the Company continues to
manage the business as a debtor-in-possession. Keystone received approval from
the Court to pay certain of its Pre-petition Claims including employee wages and
certain employee benefits. All of the Company's liabilities at February 26, 2004
(other than liabilities of one of the Company's subsidiaries that was not a
party to the bankruptcy filing), are considered Pre-petition Claims.
Management's Estimates. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of Keystone and its majority-owned subsidiaries. All material
intercompany accounts and balances have been eliminated. Certain prior year
amounts have been reclassified to conform with the 2005 presentation.
Fiscal year. The Company's fiscal year is 52 or 53 weeks and ends on the
last Sunday in December. Each of fiscal 2003, 2004 and 2005 were 52-week years.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market. The last-in, first-out ("LIFO") method is used to determine the cost
of approximately 84% and 81% of the inventories held at December 31, 2004 and
2005, respectively. The first-in, first-out or average cost methods are used to
determine the cost of all other inventories. Cost of sales include costs for
materials, packing and finishing, utilities, salaries and benefits, maintenance,
shipping and handling costs and depreciation.
Property, plant and equipment and depreciation expense. Property, plant and
equipment are stated at cost. Depreciation for financial reporting purposes is
computed using principally the straight-line method over the estimated useful
lives of 10 to 30 years for buildings and improvements and three to 12 years for
machinery and equipment. Accelerated depreciation methods are used for income
tax purposes, as permitted. Depreciation expense for financial reporting
purposes amounted to $16,459,000, $15,812,000 and $15,745,000 during the years
ended December 31, 2003, 2004 and 2005, respectively. Upon sale or retirement of
an asset, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is recognized in income currently.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. Keystone performs certain
planned major maintenance activities during the year (generally during the
fourth quarter). The costs estimated to be incurred in connection with these
maintenance activities are accrued in advance on a straight-line basis and are
included in cost of goods sold.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized in
each of 2003 and 2004 amounted to $3,000. Interest cost capitalized in 2005
amounted to $1,000.
When events or changes in circumstances indicate assets may be impaired, an
evaluation is performed to determine if an impairment exists. Such events or
changes in circumstances include, among other things, (i) significant current
and prior periods or current and projected periods with operating losses, (ii) a
significant decrease in the market value of an asset or (iii) a significant
change in the extent or manner in which an asset is used. All relevant factors
are considered. The test for impairment is performed by comparing the estimated
future undiscounted cash flows (exclusive of interest expense) associated with
the asset to the asset's net carrying value to determine if a write-down to
market value or discounted cash flow value is required. The Company assesses
impairment of other long-lived assets (such as property and equipment) in
accordance with SFAS No. 144, Accounting for the Impairment of Disposal of
Long-Lived Assets. Keystone did not record a charge under SFAS No. 144, during
2003, 2004 and 2005.
Investment in joint ventures. Investments in 20% but less than
majority-owned companies are accounted for by the equity method. Differences
between the cost of the investments and Keystone's pro rata share of
separately-reported net assets, if any, are not significant.
Deferred financing costs. Deferred financing costs relate primarily to the
issuance of substantially all of Keystone's long-term debt as well as its
primary revolving credit facility and are amortized by the interest method over
the respective terms of these debt facilities. Deferred financing costs are
stated net of accumulated amortization of $6,808,000 and $7,502,000 at December
31, 2004 and 2005, respectively.
Goodwill. Goodwill represents the excess of cost over fair value of
individual net assets acquired in business combinations accounted for by the
purchase method. Under SFAS No. 142 goodwill is not subject to periodic
amortization.
The Company assesses impairment of goodwill in accordance with SFAS No.
142. The Company's recorded goodwill relates to a business segment that was not
included in the Chapter 11 petitions filed in February 2004. See Note 2.
Retirement plans and post-retirement benefits other than pensions.
Accounting and funding policies for retirement plans and post retirement
benefits other than pensions ("OPEB") are described in Note 10.
Environmental liabilities. Keystone records liabilities related to
environmental remediation when estimated future expenditures are probable and
reasonably estimable. If the Company is unable to determine that a single amount
in an estimated range is more likely, the minimum amount of the range is
recorded. Such accruals are adjusted as further information becomes available or
circumstances change. Estimated future expenditures are not discounted to their
present value. Recoveries of environmental remediation costs from other parties
are recorded as assets when their receipt is deemed probable. At December 31,
2004, Keystone had such assets recorded of approximately $323,000. The Company
did not have any such assets recorded at December 31, 2005. See Note 15.
Income taxes. Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between the income
tax and financial reporting carrying amounts of assets and liabilities. Keystone
periodically evaluates its deferred tax assets and adjusts any related valuation
allowance based on the estimate of the amount of such deferred tax assets which
the Company believes does not meet the "more-likely-than-not" recognition
criteria.
Net sales. Sales are recorded when products are shipped because title and
other risks and rewards of ownership have passed to the customer. Shipping terms
of products shipped are generally FOB shipping point, although in some instances
shipping terms are FOB destination point (for which sales are not recognized
until the product is received by the customer). Amounts charged to customers for
shipping and handling are included in net sales. Sales are stated net of price,
early payment and distributor discounts and volume rebates.
Selling, general and administrative expenses. Selling, general and
administrative expenses include costs related to marketing, sales, distribution,
and administrative functions such as accounting, treasury and finance, and
includes costs for salaries and benefits, travel and entertainment, promotional
materials and professional fees. Advertising costs, expensed as incurred, were
$1.0 million in each of 2003 and 2005 and $.6 million in 2004.
Corporate expenses. Corporate expenses include expenses related to the
maintenance of the Company's corporate office, amortization of goodwill, and
OPEB and environmental expenses related to facilities no longer owned by
Keystone. Corporate expenses are not included in total operating profit or loss.
Income (loss) per share. Basic and diluted income (loss) per share is based
upon the weighted average number of common shares actually outstanding during
each year. Diluted earnings per share includes the diluted impact, if any, of
the Company's convertible preferred stock. The impact of outstanding stock
options was antidilutive for all periods presented. The weighted average number
of outstanding stock options which were excluded from the calculation of diluted
earnings per share because their impact would have been antidilutive
approximated 462,000, 374,000 and 244,000 in 2003, 2004 and 2005, respectively.
Employee stock options. Keystone accounted for stock-based employee
compensation in accordance with Accounting Principles Board Opinion ("APBO") No.
25, Accounting for Stock Issued to Employees, and its various interpretations.
See Notes 9 and 19. Under APBO No. 25, no compensation cost is generally
recognized for fixed stock options in which the exercise price is equal to or
greater than the market price on the grant date. Compensation cost related to
stock options recognized by the Company in accordance with APBO No. 25 has not
been significant in each of the past three years. All of the Company's
outstanding common stock and stock options were cancelled in connection with
Keystone's emergence from Chapter 11 on August 31, 2005. See Note 2.
The following table presents what the Company's consolidated net income
(loss), and related per share amounts, would have been in 2003, 2004 and 2005 if
Keystone would have elected to account for its stock-based employee compensation
related to stock options in accordance with the fair value-based recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all
awards granted subsequent to January 1, 1995.
Years ended December 31,
----------------------------------------
2003 2004 2005
---------- -------- --------
(In thousands, except per
share amounts)
Net income (loss) available for common
Shares as reported $(37,517) $16,060 $39,232
Adjustments, net of applicable income
tax effects:
Stock-based employee compensation
expense under APBO No. 25 - - -
Stock-based employee compensation
expense under SFAS No. 123 (25) - -
-------- ------- -------
Pro forma net income (loss) available for
common shares $(37,542) $16,060 $39,232
======== ======= =======
Basic net income (loss) available for common
shares per share:
As reported $ (4.32) $ 1.47 $ 4.12
Pro forma $ (4.32) $ 1.47 $ 4.12
Diluted net income (loss) available for
common shares per share:
As reported $ (4.32) $ .57 $ 1.88
Pro forma $ (4.32) $ .57 $ 1.88
Derivative activities. The Company has adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. Under SFAS No. 133,
all derivatives are recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative, and such changes are recognized either
in net income or other comprehensive income.
Chapter 11. Legal and professional fees incurred in connection with the
Company's Chapter 11 filing have been expensed as incurred. These fees relate
primarily to fees paid to lawyers and financial advisors representing Keystone
as well as the other impacted constituencies. During 2004 and 2005, such
reorganization costs amounted to approximately $11.2 million and $10.3 million,
respectively.
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 subsequent to February 26, 2004 and through the
date of the Company's emergence from Chapter 11 (August 31, 2005), was
approximately $1.0 million in 2004 and $841,000 in 2005, and as such,
contractual interest expense during 2004 and 2005 exceeded recorded interest
expense by those respective amounts. In addition, the Company also discontinued
accruing dividends on its preferred stock at the filing date.
Note 2 - Bankruptcy
On February 26, 2004, Keystone and five of its direct and indirect
subsidiaries filed for voluntary protection under Chapter 11 of the Federal
Bankruptcy Code. Keystone and its subsidiaries filed their petitions in the U.S.
Bankruptcy Court for the Eastern District of Wisconsin in Milwaukee. 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.
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.
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 loss;
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, and 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 Note 6.
See Note 12 for the details of the effect on the Company's consolidated
financial statements resulting from confirmation of the Company's plan of
reorganization. In addition, as noted above, certain pre-petition liabilities of
Sherman Wire remain subject to compromise at December 31, 2005 as their claims
have not yet been finally adjudicated.
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:
Keystone's operating segments are defined as components of consolidated
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. David L. Cheek, President and Chief Executive Officer of
Keystone. Each operating segment is separately managed, and each operating
segment represents a strategic business unit offering different products.
The Company's operating segments are organized along its manufacturing
facilities and include 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)
Keystone Wire Products ("KWP") 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 Wire were sold at fair market value to
Keystone, which then used these assets to form and operate KWP, a newly created
wholly-owned subsidiary of reorganized Keystone. As such, operating results of
this segment prior to Keystone's emergence from Chapter 11 were operating
results of Sherman Wire. 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 Wire will
eventually be liquidated. EWP was not included in the Company's February 2004
bankruptcy proceedings. See Note 2.
In addition, prior to July 2003, Keystone also operated three businesses,
including Sherman Wire, that did not constitute reportable business segments.
These businesses sold wire, nails and wire products for agricultural,
industrial, construction, commercial, original manufacturers and retail consumer
markets. The results of operations of these businesses are aggregated and
included under the "Sherman/KWP" heading in the following tables. During July
2003, Keystone transferred its operations at one of these three businesses to
other Keystone facilities, and during August 2003 Keystone sold another of the
businesses. As a result, from August 2003, through August 31, 2005, the
"Sherman/KWP" heading in the following tables only includes Sherman Wire.
Prior to July 2003, the Company owned a 51% interest in Garden Zone LLC
("Garden Zone"), a distributor of wire, plastic and wood lawn and garden
products to retailers. In July 2003, Garden Zone purchased Keystone's 51%
ownership in Garden Zone.
Keystone is also engaged in a scrap recycling joint venture through its 50%
interest in Alter Recycling Company, L.L.C. ("ARC"), an unconsolidated equity
affiliate.
KSW's, EWP's and Sherman/KWP's products are distributed primarily in the
Midwestern, Southwestern and Southeastern United States. Garden Zone's products
were distributed primarily in the Southeastern United States.
Business Segment Principal entities Location
- ---------------- ------------------ --------
Keystone Steel & Wire Keystone Steel & Wire Peoria, Illinois
Engineered Wire Products Engineered Wire Products Upper Sandusky, Ohio
Garden Zone Garden Zone (1) Charleston, South
Carolina
Sherman Wire/Keystone Sherman Wire/Keystone Wire Sherman, Texas
Wire Products Products
Sherman Wire
of Caldwell, Inc. (2) Caldwell, Texas
Keystone Fasteners (3) Springdale, Arkansas
(1) 51.0% subsidiary - interest sold in July 2003.
(2) Transferred operations in July 2003 to Sherman Wire and Keystone Steel &
Wire.
(3) Business sold in August 2003.
The net proceeds from the sale of Garden Zone and Keystone Fasteners
aggregated $3.3 million. The gain on the sale of these businesses, as well as
the results of operations of each of Garden Zone and Keystone Fasteners are not
significant, individually and in the aggregate. Accordingly, the Company has
elected not to present their results of operations as discontinued operations
for all periods presented due to their immateriality.
Keystone evaluates segment performance based on segment operating income,
which is defined as income before income taxes and interest expense, exclusive
of certain items (such as gains or losses on disposition of business units or
sale of fixed assets) and certain general corporate income and expense items
(including interest income) which are not attributable to the operations of the
reportable operating segments.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that (i) defined benefit
pension expense for each segment is recognized and measured on the basis of
estimated current service cost of each segment, with the remainder of the
Company's net defined benefit pension expense or credit not allocated to each
segment but still is reported as part of operating profit or loss, (ii) segment
OPEB expense is recognized and measured based on the basis of the estimated
expense of each segment with the remainder of the Company's actual OPEB expense
not allocated to each segment but still is reported as part of operating profit
or loss, (iii) elimination of intercompany profit or loss on ending inventory
balances is not allocated to each segment but still is reported as part of
operating profit or loss, (iv) LIFO inventory reserve adjustments are not
allocated to each segment but still are reported as part of operating profit or
loss, and (v) amortization of goodwill is included in corporate expenses and is
not allocated to any segment and is not included in total reporting operating
profit or loss. Corporate expenses also includes OPEB and environmental expenses
relative to facilities no longer owned by the Company. Intercompany sales
between reportable segments are generally recorded at prices that approximate
market prices to third-party customers.
Segment assets are comprised of all assets attributable to each reportable
operating segment. Corporate assets consist principally of pension related
assets, restricted investments, deferred tax assets and corporate property,
plant and equipment.
GAAP
Adjustments,
Corporate
Items
Sherman/ Garden Segment and
KSW EWP KWP Zone Total Eliminations Total
--- --- -------- ------ ------- ------------ -----
(In thousands)
Year ended December 31, 2005:
Third party net sales $298,091 $62,777 $ 6,677 $ - $367,545 $ - $367,545
Intercompany sales 44,048 - 14,978 - 59,026 (59,026) -
-------- ------- -------- ---- -------- -------- --------
$342,139 $62,777 $ 21,655 $ - $426,571 $(59,026) $367,545
======== ======= ======== ==== ======== ======== ========
Depreciation and
amortization $ 13,486 $ 1,034 $ 1,133 $ - $ 15,653 $ 92 $ 15,745
Operating profit (loss) (6,091) 9,481 (1,674) - 1,716 21,943 23,659
Identifiable segment assets 178,697 22,750 5,260 - 206,707 151,657 358,364
Capital expenditures 9,450 201 121 - 9,772 - 9,772
Year ended December 31, 2004:
Third party net sales $299,117 $58,982 $ 6,187 $ - $364,286 $ 49 $364,335
Intercompany sales 47,586 - 10,006 - 57,592 (57,592) -
-------- ------- -------- ---- -------- -------- --------
$346,703 $58,982 $ 16,193 $ - $421,878 $(57,543) $364,335
======== ======= ======== ==== ======== ======== ========
Depreciation and $ -
amortization $ 13,418 $ 1,037 $ 1,171 $ 15,626 $ 186 $ 15,812
Operating profit (loss) 10,126 10,598 (422) - 20,302 12,153 32,455
Identifiable segment assets 146,869 26,708 7,891 - 181,468 141,814 323,282
Capital expenditures 4,727 274 77 - 5,078 2 5,080
Year ended December 31, 2003:
Third party net sales $244,069 $35,260 $ 16,139 $11,203 $306,671 $ - $306,671
Intercompany sales 30,215 - 11,988 879 43,082 (43,082) -
-------- ------- -------- ------- -------- -------- --------
$274,284 $35,260 $ 28,127 $12,082 $349,753 $(43,082) $306,671
======== ======= ======== ======= ======== ======== ========
Depreciation and
amortization $ 13,905 $ 1,014 $ 1,491 $ - $ 16,410 $ 51 $ 16,461
Operating profit (loss) (21,388) 2,721 (4,579) 700 (22,546) (6,185) (28,731)
Identifiable segment assets 121,826 20,635 7,765 - 150,226 131,968 282,194
Capital expenditures 2,197 380 74 32 2,683 - 2,683
In the above tables, GAAP adjustments relate to operating profit (loss),
Corporate items relate to depreciation and amortization, segment assets and
capital expenditures and eliminations relate to net sales. GAAP adjustments are
principally (i) the difference between the defined benefit pension expense or
credit and OPEB expense allocated to the segments and the actual expense or
credit included in the determination of operating profit or loss, (ii) the
elimination of intercompany profit or loss on ending inventory balances and
(iii) LIFO inventory reserve adjustments.
Years ended December 31,
-----------------------------------------
2003 2004 2005
----- ---- --------
(In thousands)
Operating income (loss) $(28,731) $ 32,455 $ 23,659
General corporate items:
Interest income 41 132 266
Other income 1,386 684 993
Corporate expense (5,973) (6,253) (3,466)
Gain on legal settlement - 5,284 -
Interest expense (3,941) (3,705) (3,992)
-------- -------- --------
Income (loss) before income taxes and
reorganization items $(37,218) $ 28,597 $ 17,460
======== ======== ========
Substantially all of the Company's assets are located in the United States.
Information concerning geographic concentration of net sales based on location
of customer is as follows:
Year ended December 31,
---------------------------------------------
2003 2004 2005
------ -------- ----------
(In thousands)
United States $303,668 $359,575 $360,282
Canada 2,876 4,437 6,329
Great Britain 125 180 657
Australia - 63 277
Ireland - 80 -
Japan 2 - -
-------- -------- --------
$306,671 $364,335 $367,545
======== ======== ========
Note 4 - Joint ventures
In January 1999, Keystone and two unrelated parties formed Garden Zone to
supply wire, wood and plastic products to the consumer lawn and garden market.
Prior to July 2003, Keystone owned 51% of Garden Zone and, as such, Keystone's
consolidated financial statements included the accounts of Garden Zone. Neither
Keystone nor the other owners contributed capital or assets to the Garden Zone
joint venture, but Keystone did guarantee 51% of Garden Zone's $4 million
revolving credit agreement. See Note 6. Garden Zone commenced operations in
February 1999 and its net income since that date, of which 51% accrued to
Keystone for financial reporting purposes, has been insignificant. In July 2003,
Garden Zone purchased Keystone's 51% ownership in Garden Zone.
In July 1999, Keystone formed ARC, a joint venture with Alter Peoria, Inc.,
to operate a ferrous scrap recycling operation at Keystone's facility in Peoria,
Illinois. ARC sells ferrous scrap to Keystone and others. Upon formation,
Keystone contributed the property and equipment of its Peoria ferrous scrap
facility (net book value of approximately $335,000) to the joint venture in
return for its 50% ownership interest. Keystone is not required to, nor does it
currently anticipate it will, make any other contributions to fund or operate
this joint venture. Keystone has not guaranteed any debt or other liability of
the joint venture. Keystone recognized no gain or loss upon formation of ARC and
the investment in ARC is accounted for by the equity method. In addition,
Keystone sold its ferrous scrap facility's existing inventory to ARC upon
commencement of ARC's operations. Prior to 2003, Keystone had reduced its
investment in ARC to zero due to operating losses incurred by ARC, and in
accordance with GAAP, the Company did not recognize additional equity in losses
of ARC as the Company had no obligation to fund such losses or otherwise provide
funds to ARC. During 2005, ARC returned to cumulative profitability. As such
during 2005, the Company recorded $37,000 of equity in net income of ARC. Such
amount is included in other income in the Company's 2005 statement of
operations. At December 31, 2005, the Company's investment in ARC ($37,000) is
incuded in other noncurrent assets. During 2003, 2004 and 2005, Keystone
purchased approximately $5.5 million, $4.3 million and $834,000, respectively of
ferrous scrap from ARC.
Note 5 - Inventories
December 31,
-----------------------
2004 2005
------ --------
(In thousands)
Steel and wire products:
Raw materials $15,142 $10,914
Work in process 21,305 29,550
Finished products 28,941 28,018
Supplies 14,844 16,421
------- -------
80,232 84,903
Less LIFO reserve 27,215 15,212
------- -------
$53,017 $69,691
======= =======
During 2003, inventory quantities were reduced. This reduction resulted in
a liquidation of LIFO inventory quantities carried at lower costs prevailing in
prior years as compared with the cost of 2003 purchases, the effect of which
decreased cost of goods sold by approximately $11.5 million or $1.14 per share.
During each of 2004 and 2005 the Company added LIFO inventory quantities.
Note 6 - Notes payable and long-term debt
December 31,
------------------------
2004 2005
-------- --------
(Restated)
(In thousands)
Revolving credit facilities:
Wachovia $ - $36,174
EWP 1,989 -
DIP facilities:
Congress 15,108 -
EWPFLLC 5,000 -
8% Notes 28,116 26,532
UC Note - 4,997
Term loans:
Wachovia - 21,980
County 10,000 10,000
EWP 5,513 -
Other 259 212
-------- --------
65,985 99,895
Less current maturities 51,640 41,640
-------- --------
$14,345 $58,255
======= =======
Keystone has obtained an $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 Debtor-in-Possession ("DIP") credit
facilities, the EWP Term Loan (defined below) and the EWP Revolver (defined
below) 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.
At December 31, 2005, $4.6 million of letters of credit were outstanding and
unused credit available for borrowing under the Wachovia facility was $21.6
million. 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 (7.25% at December 31, 2005). 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 as well as a covenant prohibiting
the payment of cash dividends on the Company's common stock. The facility also
provides the lender with the ability to declare a default under the credit
facility in the event of, among other things, a material adverse change in the
Company's business. Keystone paid the lender approximately $400,000 of
diligence, commitment and closing fees in connection with this facility. At
December 31, 2005, unused credit available for borrowing under the Wachovia
facility was $21.6 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.
Keystone's 8% Notes were issued in connection with an exchange offer during
2002 whereby the Company retired approximately $93.9 million of its $100.0
million then outstanding 9 5/8% notes along with accrued interest at the date of
the exchange (the "Exchange Offer"). Keystone accounted for the transactions
related to the Exchange Offer in accordance with SFAS No. 15, Accounting by
Debtors and Creditors for troubled Debt Restructurings. In accordance with SFAS
No. 15, the 8% Notes were recorded at their aggregate undiscounted future cash
flows (both principal and interest) of $29.3 million and thereafter both
principal and interest payments are accounted for as a reduction of the carrying
amount of the debt, and no interest expense is recognized. The 8% Notes bear
simple interest at 8% per annum, one-half of which will be paid in cash on a
semi-annual basis and one-half will be deferred and be paid together with the
principal in three installments, one-third in each of March 2007, 2008 and 2009.
The 8% Notes are collateralized by a second-priority lien on substantially all
of the existing fixed and intangible assets of the Company and its subsidiaries
(excluding EWP), other than the real property and other fixed assets comprising
Keystone's steel mill in Peoria, Illinois, on which there is a third-priority
lien. Keystone may redeem the 8% Notes, at its option, in whole or in part at
any time with no prepayment penalty. The 8% Notes are subordinated to all
existing senior indebtedness of Keystone, including, without limitation, the
Wachovia Facility and, to the extent of the Company's steel mill in Peoria,
Illinois, the County Term Loan (as defined below). The 8% Notes rank senior to
any expressly subordinated indebtedness of Keystone. In October 2002, Contran
purchased $18.3 million of the total $19.8 million principal amount at maturity
of the 8% Notes. As such, approximately $26.0 million of the recorded $28.1
million liability for the 8% Notes at December 31, 2004 was payable to Contran.
Approximately $24.5 million of the recorded $26.5 million liability for the 8%
Notes at December 31, 2005 was payable to Contran. 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 December 31, 2005, only the
scheduled principal payments during the next 12 months were shown as current on
Keystone's balance sheet. In connection with Keystone's emergence from Chapter
11 on August 31, 2005, the Company's obligations under the 8% Notes were
reinstated in full against reorganized Keystone.
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.
In April 2002 Keystone received a new $10 million term loan from the County
of Peoria, Illinois (the "County Term Loan"). The County Term Loan does not bear
interest, requires no amortization of principal, is due in 2007 and is
collateralized by a second priority lien on the real property and other fixed
assets comprising KSW's steel mill in Peoria, Illinois. Proceeds from the County
Term Loan were used by Keystone to reduce the outstanding balance of Keystone's
revolving credit facility. In connection with Keystone's emergence from Chapter
11 on August 31, 2005, the Company's obligations under the County Term Note were
reinstated in full against reorganized Keystone.
Prior to Keystone's Chapter 11 filing, its then primary revolving credit
facility ("the Keystone Revolver"), as amended in November 2003, provided for
revolving borrowings of up to $45 million based upon formula-determined amounts
of trade receivables and inventories. Borrowings bore interest at the prime rate
plus 1.0%, and were collateralized by certain of the Company's trade receivables
and inventories. In addition, the Keystone Revolver was cross-collateralized
with junior liens on certain of the Company's property, plant and equipment. The
Keystone Revolver required the Company's daily net cash receipts to be used to
reduce the outstanding borrowings, which resulted in the Company maintaining
zero cash balances so long as there was an outstanding balance under the
Keystone Revolver. Accordingly, any outstanding balances under the Keystone
Revolver were always classified as a current liability, regardless of the
maturity date of the facility. The Keystone Revolver contained restrictive
covenants, including certain minimum working capital and net worth requirements,
maintenance of financial ratios requirements and other customary provisions
relative to payment of dividends on Keystone's common stock and on the Company's
Redeemable Series A Preferred Stock. The Keystone Revolver comprised a portion
of the Congress DIP Facility discussed below.
In April 2002, Keystone received a new $5 million term loan (the "Keystone
Term Loan") from the same lender providing the Keystone revolving credit
facility. The Keystone Term Loan bore interest at prime plus 1.0%. The Keystone
Term Loan was collateralized by a first-priority lien on all of the fixed assets
of the Company and its subsidiaries, other than EWP. Proceeds from the Keystone
Term Loan were used by Keystone to reduce the outstanding balance of Keystone's
revolving credit facility. In November 2003, Keystone increased the then $3.0
million outstanding balance on the Keystone Term Loan by $3.5 million. Principal
payments on the amended Keystone Term Loan was due in 48 monthly installments
through December 2007. Proceeds from the amended Keystone Term Loan were used by
Keystone to reduce the outstanding balance of the Keystone Revolver. The
Keystone Term Loan comprised a portion of the Congress DIP Facility discussed
below.
Borrowings under EWP's $7 million revolving credit facility (the "EWP
Revolver") as amended in March 2005, bore interest at LIBOR plus 2.45%. Prior to
January 2004, borrowings under the EWP Revolver bore interest at either the
prime rate or LIBOR plus 2.25%. EWP's accounts receivable and inventories
collateralized the EWP Revolver. The EWP Revolver Agreement contained covenants
with respect to working capital, additional borrowings, payment of dividends and
certain other matters. The EWP Revolver was retired with the proceeds of the
Wachovia Facility on August 31, 2005.
In January 2004, EWP received a new $6.75 million term loan ("the EWP Term
Loan") from the same lender providing the EWP Revolver. The EWP Term Loan bore
interest at LIBOR plus 2.5%, was due in monthly installments of $112,500 plus
accrued interest and a balloon payment upon the maturity date, as amended, on
March 31, 2005. In addition, the EWP Term Loan, was collateralized by a lien on
all of the fixed assets of EWP and cross-collateralized with the EWP Revolver.
Proceeds from the EWP Term Loan were used to repay intercompany indebtedness to
Keystone. Keystone used the proceeds to reduce the outstanding balance of the
Keystone Revolver. The EWP Term Note was retired with the proceeds of the
Wachovia Facility on August 31, 2005.
In addition, EWP Financial LLC ("EWPFLLC"), a wholly-owned subsidiary of
Contran, had agreed to loan the Company up to an aggregate of $6 million under
the terms of a revolving credit facility that matured on February 29, 2004. This
facility was collateralized by the common stock of EWP owned by Keystone. The
Company did not borrow any amounts under such facility. However, EWPFLLC issued
a $250,000 letter of credit for the benefit of the Company under this revolving
credit facility which is no longer outstanding at December 31, 2005.
On March 15, 2004, the Court approved two new debtor-in-possession
financing facilities (the "DIP Order). The first debtor-in-possession financing
facility consists of an Assumption Agreement whereby the pre-petition lender on
the Keystone Revolver and Keystone Term Note agreed to convert those credit
facilities to a debtor-in-possession facility (collectively, the "Congress DIP
Facility"). The terms of the respective facilities comprising the Congress DIP
Facility were relatively unchanged from the respective pre-petition facilities
with the exception of the elimination of the existing financial covenants and
the granting of a second lien on the stock of EWP owned by Keystone. In
connection with the approval of the Congress DIP Facility, the Keystone Term
Note was increased by $4.0 million. Approximately $2.0 million of these proceeds
were applied to the Keystone Revolver portion of the Congress DIP Facility and
the remainder was used to fund Keystone's working capital needs. However, the
Congress DIP Facility lender applied an availability reserve of approximately
$2.0 million to the borrowing base of the Keystone Revolver in connection with
the increase in Keystone Term Note resulting in no net increase in availability
under the Keystone Revolver at that time. The Keystone Term Note required
monthly principal payments of $100,000. The Congress DIP Facility matured the
earliest to occur of September 30, 2005, payment in full of the Congress DIP
Facility, confirmation of a plan of reorganization of Keystone, an event of
default or upon certain other events. The Congress DIP Facility required a
facility fee of $375,000, half of which was paid at inception and half of which
was paid in August 2004. In addition, EWPFLLC has a $2.0 million participation
in the Congress DIP Facility. Upon emergence from bankruptcy in August 2005, the
Wachovia Facility was used to extinguish the Congress DIP facility. See Note 2.
The second debtor-in-possession financing facility comprising the DIP Order
is a $5 million revolving credit facility with EWPFLLC, (the "EWPFLLC DIP
Facility"). Advances under the EWPFLLC DIP Facility bore interest at the prime
rate plus 3.0% per annum and were collateralized by the common stock of EWP
owned by Keystone. Proceeds from the EWPFLLC DIP Facility were used to fund
Keystone's working capital needs. The EWPFLLC DIP Facility required Keystone to
abide by specified cash budgets. In addition, the EWPFLLC DIP Facility required
EWPFLLC to fund up to an additional $2 million through a participation in the
Congress DIP Facility upon the Company's realization of certain milestones. The
Company met such milestones and in April 2004, this additional funding was made.
The EWPFLLC DIP Facility, as amended, matured on August 31, 2005, or upon
confirmation of a plan of reorganization of Keystone, closing of a sale of EWP,
an event of default under the EWP Term Note, an event of default under the
Congress DIP Facility or upon certain other events. The EWPFLLC DIP Facility
required a facility fee of $100,000, half of which was paid at inception and
half of which was paid in August 2004. In addition, during 2004 and 2005,
Keystone paid EWPFLLC approximately $305,000 and $362,000, respectively, of
interest under this facility. Upon Keystone's emergence from Chapter 11 on
August 31, 2005, EWPFLLC assigned its $5 million DIP credit facility to Contran
and Contran converted the DIP 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 Notes 2 and 12.
The unsecured 6% Notes and the unsecured 9 5/8% Notes described below were
classified as liabilities subject to compromise at December 31, 2004. In
addition, Keystone ceased to accrue interest on such indebtedness upon filing
for Chapter 11 on February 26, 2004. The 6% Notes and the 9 5/8% Notes were both
compromised as part of the Company's confirmed plan of reorganization. See Note
12.
The Company's 6% Notes bore simple interest at 6% per annum, of which
one-fourth was to be paid in cash on a semi-annual basis and three-fourths was
to accrue and be paid together with the principal in four installments,
one-fourth in each of March 2009, 2010 and 2011 and May 2011. Keystone could
have redeemed the 6% Notes, at its option, in whole or in part at any time with
no prepayment penalty. The 6% Notes were subordinated to all existing and future
senior or secured indebtedness of the Company, including, without limitation,
the revolving credit facilities of Keystone, EWP and Garden Zone, the Keystone
Term Loan, the County Term Loan, the 8% Notes and any other future indebtedness
of the Company which was not expressly subordinated to the 6% Notes. The 6%
Notes were also originally issued in connection with the Exchange Offer and in
accordance with SFAS No. 15, the 6% Notes were recorded at the $16.0 million
carrying amount of the associated 9 5/8% Notes (both principal and interest),
and interest expense on such debt was recognized on the effective interest
method at a rate of 3.8%. The 6% Notes were classified as liabilities subject to
compromise at December 31, 2004. See Note 12.
Keystone's remaining 9 5/8% Notes at the petition date were also classified
as liabilities subject to compromise at December 31, 2004. See Note 12.
The Wachovia Facility reprices with changes in interest rates. Due to the
significant uncertainties surrounding the Company's Chapter 11 filings,
management was unable to estimate the aggregate fair value of Keystone's fixed
rate notes ($60.5 million book value) at December 31, 2004. The book value of
all other indebtedness at December 31, 2004 was deemed to approximate market
value. At December 31, 2005, the aggregate fair value of Keystone's fixed rate
notes, based on management's estimate of fair value, approximated $31.4 million
($42.2 million book value). The book value of all other indebtedness at December
31, 2005 is deemed to approximate market value.
At December 31, 2005, the aggregate future maturities of notes payable and
long-term debt (including a total of approximately $470,000 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)
2006 $ 5,466
2007 25,956
2008 14,247
2009 14,902
2010 35,758
-------
$96,329
=======
Note 7 - Series A Preferred Stock:
In connection with the Exchange Offer, Keystone issued 59,399 shares of
Series A 10% Cumulative Convertible Pay-In-Kind Preferred Stock (the "Series A
Preferred Stock"). The Series A Preferred Stock had a stated value of $1,000 per
share and had a liquidation preference of $1,000 per share plus accrued and
unpaid dividends. The Series A Preferred Stock had an annual dividend commencing
in December 2002 of $100 per share, and such dividends could have been paid in
cash or, at the Company's option, in whole or in part in new Series A Preferred
Stock based on their stated value. The Company discontinued accruing dividends
on its Series A Preferred Stock upon filing for Chapter 11 on February 26, 2004.
The $11.8 million of dividends accrued at February 26, 2004 (all of which are
included in Liabilities Subject to Compromise at December 31, 2004, see Note 12)
were determined based on the assumption such dividends would be paid in cash
rather than in the form of additional shares of Series A Preferred Stock.
In connection with the Company's restructuring activities in December 2003,
the Company issued 12,500 additional Shares of Series A Preferred Stock to the
employees of KSW's primary labor union. Based on the Company's financial
position at the issuance date and subsequent Chapter 11 filing, management
believes the fair value of the 12,500 additional shares issued in December 2003
was deminimis and as such, did not assign a value to the newly issued shares.
All of the Company's Series A Preferred Stock was cancelled in connection
with Keystone's emergence from Chapter 11 on August 31, 2005. See Note 2 and 12.
Note 8 - Income taxes
Summarized below are (i) the differences between the provision (benefit)
for income taxes and the amounts that would be expected using the U. S. federal
statutory income tax rate of 35%, and (ii) the components of the comprehensive
provision (benefit) for income taxes.
Years ended December 31,
------------------------------------
2003 2004 2005
------- ------- -------
(In thousands)
Expected tax provision (benefit), at
statutory rate $(13,026) $ 6,104 $13,882
U.S. state income taxes (benefit), net (1,093) 559 2,265
Deferred tax asset valuation allowance 19,088 (8,808) (19,651)
Capitalize reorganization costs - 3,840 3,608
Release of contingency reserve (5,292) - -
Other, net 323 (316) 326
-------- -------- -------
Provision for income taxes $ - $ 1,379 $ 430
======== ======== =======
Provision (benefit) for income taxes:
Currently payable (refundable):
U.S. federal $ (27) $ 914 $ 75
U.S. state 27 465 355
-------- -------- -------
Net currently payable - 1,379 430
Deferred income taxes, net - - -
-------- -------- -------
$ - $ 1,379 $ 430
======== ======== =======
The components of the net deferred tax asset are summarized below.
December 31,
---------------------------------------
2004 2005
--------------------------------------------------------
Assets Liabilities Assets Liabilities
---------- ------------- ---------- ----------------
(In thousands)
Tax effect of temporary differences relating to:
Inventories $ 6,008 $ - $ 4,697 $ -
Property and equipment - (4,445) - (14,960)
Pensions - (52,043) - (56,610)
Accrued OPEB cost 53,401 - 53,611 -
Accrued liabilities 14,084 - 11,334 -
Other deductible differences 5,460 - 3,954 -
Other taxable differences - (2,833) - (3,026)
Net operating loss carryforwards 3,493 - 4,372 -
Alternative minimum tax credit carryforwards 7,201 - 7,303 -
Deferred tax asset valuation allowance (30,326) - (10,675) -
-------- -------- --------- --------
Gross deferred tax assets 59,321 (59,321) 74,596 (74,596)
Reclassification, principally netting by tax
jurisdiction (59,321) 59,321 (74,596) 74,596
-------- -------- --------- --------
Net deferred tax asset - - - -
Less current deferred tax asset, net of pro rata
allocation of deferred tax asset valuation
allowance - - - -
-------- -------- --------- --------
Noncurrent net deferred tax asset $ - $ - $ - $ -
======== ======== ========= ========
Years ended December 31,
--------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Increase (decrease) in valuation allowance:
Increase in certain deductible temporary
differences which the Company believes do
not meet the "more-likely-than-not"
recognition criteria:
Recognized in net income (loss) $ 21,995 $(8,808) $(19,651)
Offset to the change in gross deferred
income tax assets due principally to
redetermination of certain tax attributes (2,907) - -
Recognized in other comprehensive loss -
pension liabilities (66,420) - -
-------- ------- --------
$(47,332) $(8,808) $(19,651)
======== ======= ========
At December 31, 2005, Keystone had (i) approximately $7.2 million of
alternative minimum tax credit carryforwards that have no expiration date and
(ii) net operating loss carryforwards of approximately $10.0 million which
expire in 2023 through 2025, and which may be used to reduce future taxable
income of the entire Company. See Note 2.
The Company's emergence from Chapter 11 on August 31, 2005 did not result
in an ownership change within the meaning of Section 382 of the Internal Revenue
Code.
At December 31, 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, natural gas, labor and
employee benefits, environmental remediation, and retiree medical coverage;
interest rates; product mix; sales volumes and selling prices; financial
restructuring efforts and the fact that accrued OPEB expenses will become
deductible over an extended period of time and require the Company to generate
significant amounts of future taxable income, the Company believes its gross
deferred tax assets do not currently meet the "more-likely-than-not"
realizability test. As such, the Company has provided a deferred tax asset
valuation allowance to offset its gross deferred income tax asset. Keystone will
continue to review the recoverability of its deferred tax assets, and based on
such periodic reviews, Keystone could recognize a change in the valuation
allowance related to its deferred tax assets in the future.
Note 9 - Stock options, warrants and stock appreciation rights plan
In 1997, Keystone adopted its 1997 Long-Term Incentive Plan (the "1997
Plan"). Stock options granted under the 1997 Plan could be exercised over a
period of ten, or in certain instances, five years. The vesting period, exercise
price, length of period during which awards could be exercised, and restriction
periods of all awards were determined by the Incentive Compensation Committee of
the Board of Directors. During 1997, the Company granted all remaining options
available under Keystone's 1992 Option Plan.
All of the Company's outstanding common stock and stock options were
cancelled in connection with Keystone's emergence from Chapter 11 on August 31,
2005. See Note 2.
Changes in outstanding options, including options outstanding under the
former 1992 Option Plan, are summarized in the table below.
Price per Amount payable
Options share upon exercise
------- ----------- ---------------
Outstanding at December 31, 2002 487,300 $4.25 -$13.94 $ 3,987,668
Cancelled (61,300) 5.13 - 10.25 (522,824)
-------- ------------- -----------
Outstanding at December 31, 2003 426,000 4.25 - 13.94 3,464,844
Cancelled (57,000) 8.13 - 10.25 (488,625)
-------- ------------- -----------
Outstanding at December 31, 2004 369,000 4.25 - 13.94 2,976,219
Cancelled (369,000) 4.25- 13.94 (2,976,219)
-------- ------------- -----------
Outstanding at December 31, 2005 -0- $0.00- $0.00 $ -0-
======== ============ ===========
The pro forma information included in Note 1, required by SFAS No. 123, as
amended, is based on an estimation of the fair value of options issued
subsequent to January 1, 1995. There were no options granted subsequent to
December 31, 2000. The fair values of the options granted subsequent to January
1, 1995 and prior to January 1, 2001 were calculated using the Black-Scholes
stock option valuation model. The Black-Scholes model was not developed for use
in valuing employee stock options, but was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, it requires the use of subjective assumptions
including expectations of future dividends and stock price volatility. Such
assumptions are only used for making the required fair value estimate and should
not be considered as indicators of future dividend policy or stock price
appreciation. Because changes in the subjective assumptions can materially
affect the fair value estimate, and because employee stock options have
characteristics significantly different from those of traded options, the use of
the Black-Scholes option-pricing model may not provide a reliable estimate of
the fair value of employee stock options. The pro forma impact on net income
(loss) per share disclosed in Note 1 is not necessarily indicative of future
effects on net income (loss) or earnings (loss) per share.
Note 10 - Pensions and other post retirement benefits plans
Keystone sponsors several pension plans and other post retirement benefit
plans for its employees and certain retirees. Under plans currently in effect,
certain active employees would be entitled to receive OPEB upon retirement. The
Company uses a December 31st measurement date for its defined benefit pension
and OPEB plans. The following tables provide a reconciliation of the changes in
the plans' projected benefit obligations and fair value of assets for the years
ended December 31, 2004 and 2005:
Pension Benefits Other Benefits
-------------------------- --------------------------
2004 2005 2004 2005
-------- -------- ---------- -------
(In thousands)
Change in projected benefit
obligations ("PBO"):
Benefit obligations at beginning of year $362,064 $384,701 $ 233,042 $ 206,309
Service cost 3,335 3,798 2,866 2,056
Interest cost 20,902 21,499 11,033 8,785
Participant contributions - - 929 -
Plan amendment - 876 (39,014) (191,657)
Settlement - - (9,115) -
Actuarial loss 25,659 8,655 12,751 21,536
Benefits paid (27,259) (27,313) (6,183) (8,324)
-------- --------- --------- ---------
Benefit obligations at end of year $384,701 $392,216 $ 206,309 $ 38,705
======== ======== ========= =========
Change in plan assets:
Fair value of plan assets at beginning
of year $372,218 $424,380 $ - $ -
Actual return (loss) on plan assets 79,421 304,154 - -
Employer contributions - - 5,254 8,324
Participant contributions - - 929 -
Benefits paid (27,259) (27,313) (6,183) (8,324)
-------- --------- --------- ---------
Fair value of plan assets at end
of year $424,380 $701,221 $ - $ -
======== ======== ========= =========
Funded status at end of the year:
Plan assets greater (less) than PBO $ 39,679 $309,005 $(206,309) $ (38,705)
Unrecognized actuarial losses (gains) 83,674 (173,892) 107,546 122,978
Unrecognized prior service credit
due to plan amendments - - (36,333) (220,273)
Unrecognized prior service cost
(credit) 10,090 10,039 (1,807) (1,464)
-------- --------- --------- ---------
$133,443 $145,152 $(136,903) $(137,464)
======== ======== ========= =========
Amounts recognized in the balance sheet:
Prepaid pension cost $133,443 $145,152 $ - $ -
Accrued benefit costs:
Current - - - (4,256)
Noncurrent - - (13,478) (133,208)
Liabilities subject to compromise - - (123,425) -
-------- --------- --------- ---------
$133,443 $145,152 $(136,903) $(137,464)
======== ======== ========= =========
The rate assumptions used in determining the actuarial present value of
benefit obligations as of December 31, 2004 and 2005 are shown in the following
table:
Pension Benefits Other Benefits
------------------ --------------------
2004 2005 2004 2005
---- ----- ------- -----
Discount rate 5.65% 5.50% 5.65% 5.50%
Rate of compensation increase 3.00% 3.00% - -
The rate assumptions used in determining the net periodic pension and other
retiree benefit expense during 2003, 2004 and 2005 are shown in the following
table:
Pension Benefits Other Benefits
------------------------------ --------------------------------
2003 2004 2005 2003 2004 2005
---- ---- ----- ------ ---- ------
Discount rate 6.5% 6.0% 5.65% 6.5% 6.0% 5.52%
Expected return on plan assets 10.0% 10.0% 10.0% - - -
Rate of compensation increase 3.0% 3.0% 3.0% - - -
The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31, 2003, 2004 and 2005:
Pension Benefits Other Benefits
------------------------------- ----------------------------------
2003 2004 2005 2003 2004 2005
------ ------ ------- --------- ------ -------
(In thousands)
Service cost $ 3,456 $ 3,335 $ 3,798 $ 2,826 $ 2,866 $ 2,056
Interest cost 21,586 20,902 21,499 11,849 11,033 8,785
Expected return on plan assets (27,376) (35,860) (41,037) - - -
Amortization of unrecognized:
Prior service cost 882 882 926 (343) (343) (343)
Prior service cost due to
plan amendment - - - - (2,681) (7,660)
Actuarial losses 8,350 3,989 3,104 3,171 4,879 6,047
-------- -------- -------- --------- ------- -------
Net periodic benefit cost (credit) 6,898 (6,752) (11,710) 17,503 15,754 8,885
Settlement loss - - - - 5,155 -
-------- -------- -------- --------- ------- -------
Total benefit cost (credit) $ 6,898 $ (6,752) $(11,710) $17,503 $20,909 $ 8,885
======== ======== ======== ======= ======= =======
At December 31, 2005, the accumulated benefit obligation for the Company's
pension and OPEB plans was approximately $385.8 million and $38.7 million,
respectively (2004 - $379.2 million and $206.3 million, respectively).
At December 31, 2002, the accumulated benefit obligation for Keystone's
defined benefit pension plan (the "Plan") approximated $335.6 million. Due to a
decline in the value of the Plan's assets during 2002, and a decrease in the
discount rate from December 31, 2001 to 2002, the Plan's accumulated benefit
obligation at December 31, 2002 exceeded the Plan's assets at that date. As a
result, SFAS No. 87, Employers' Accounting for Pensions, provides that the
Company is required to record an additional minimum liability that is at least
equal to the amount by which the Plan's accumulated benefit obligation exceeds
the Plan's assets (or $182.2 million at December 31, 2002), eliminate any
recorded prepaid pension cost, record an intangible asset equal to the amount of
any unrecognized prior service cost and charge a separate component of
stockholders' equity for the difference. As such, during the fourth quarter of
2002, Keystone recorded an additional minimum pension liability of $182.2
million, an intangible pension asset of $11.9 million and charged a separate
component of stockholders' equity for $170.3 million. During 2003, the Plan's
assets exceeded the accumulated benefit obligation. As such, the previously
recorded additional minimum liability, intangible pension asset were eliminated
through the separate component of stockholders' equity.
During 2003, 2004 and 2005, substantially all of the plan's net assets were
invested in the Combined Master Retirement Trust ("CMRT"), a collective
investment trust sponsored by Contran, to permit the collective investment by
certain master trusts which fund certain employee benefit plans maintained by
Contran, Valhi and related companies, including the Company. Harold C. Simmons
is the sole trustee of the CMRT. Mr. Simmons and two members of Keystone's board
of directors and Master Trust Investment Committee comprise the Trust Investment
Committee for the CMRT.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indicies) utilizing both third-party investment
managers as well as investments directed by Mr. Simmons. The trustee of the CMRT
and the CMRT's Trust Investment Committee actively manage the investments of the
CMRT. Such parties have in the past, and may in the future, change the asset mix
of the CMRT based upon, among other factors, advice they receive from
third-party advisors and their expectations as to what asset mix will generate
the greatest overall long-term rate of return. For 2003, 2004 and 2005, the
assumed long-term rate of return for plan assets invested in the CMRT was 10%.
In determining the appropriateness of such long-term rate of return assumption,
the Company considered, among other things, the historical rate of return for
the CMRT, the current and projected asset mix of the CMRT and the investment
objectives of the CMRT's managers. In addition, the Company receives advice
about appropriate long-term rates of return from the Company's third-party
actuaries. During the 18-year history of the CMRT through December 31, 2005, the
average annual rate of return has been 14.0%. At December 31, 2004, the asset
mix of the CMRT was 77% in U.S. equity securities, 14% in U.S. fixed income
securities, 7% in international equity securities and 2% in cash and other
investments. At December 31, 2005, the asset mix of the CMRT was 86% in U.S.
equity securities, 3% in U.S. fixed income securities, 7% in international
equity securities, 3% in cash and 1% in other investments (primarily real
estate).
With certain exceptions, the trustee of the CMRT has exclusive authority to
manage and control the assets of the CMRT. Administrators of the employee
benefit plans participating in the CMRT, however, have the authority to direct
distributions and transfers of plan benefits under such participating plans. The
Trust Investment Committee of the CMRT has the authority to direct the trustee
to establish investment funds, transfer assets between investment funds and
appoint investment managers and custodians. Except as otherwise provided by law,
the trustee is not responsible for the investment of any assets of the CMRT that
are subject to the management of an investment manager.
The Company may withdraw all or part of the Plan's investment in the CMRT
at the end of any calendar month without penalty.
In general, prior to February 1, 2004, Keystone's post retirement benefit
plans provided certain life insurance, Medicare Part B and medical benefits to
eligible retirees. Effective February 1, 2004, the Company's OPEB plans were
amended to permanently and unilaterally terminate all future medical benefits to
retirees that were not covered under a union contract or an otherwise court
ordered plan. However, these current and future retirees will retain their
existing post-retirement life insurance and Medicare Part B reimbursement
benefits (as only the medical and prescription drug benefits were terminated).
For the groups that did not have Medicare Part B reimbursement, this change
resulted in a settlement of liabilities from the plan. The net loss of $5.2
million due to this settlement is reflected in the 2004 OPEB expense. During
2004, Keystone entered into an agreement (the "1114 Agreement") with retirees
who were covered a union contract or an otherwise court ordered plan (the
"Protected Groups") that substantially reduced the OPEB benefits that will be
paid to the Protected Groups in the future. Under the terms of the 1114
Agreement, the existing medical and prescription drug coverage for the Protected
Groups was terminated (life insurance and Medicare Part B reimbursement benefits
were unchanged) and replaced with a $3.0 million lump sum payment to the
Protected Groups upon the Company's emergence from Chapter 11 and future minimum
monthly fixed payments to all participants (retirees and dependents) in the
Protected Groups. The 1114 Agreement also provided that the future minimum
monthly fixed payments could increase in certain years based on the prior year's
free cash flow, as defined in the 1114 Agreement. Because these future payments
are not based on health care costs, changes in the health care cost trend rate
do not impact future OPEB expense or obligations. See Note 2.
The Company does not anticipate it will be required to make any
contributions to its defined benefit pension plan during 2006. Keystone
anticipates it will contribute approximately $4.3 million to its post retirement
benefit plans during 2006.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid during the years ending December 31,:
Pension Other
Benefits Benefits
-------- --------
(In thousands)
2006 $ 27,408 $ 4,256
2007 $ 27,308 $ 4,191
2008 $ 27,343 $ 4,419
2009 $ 27,221 $ 2,612
2010 $ 27,116 $ 2,567
2011 - 2015 $137,482 $12,270
The Company also maintains several defined contribution pension plans.
Expense related to these plans was $1.5 million in 2003, $1.3 million in 2004
and $2.3 million in 2005.
Note 11 - Other accrued liabilities
December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Current:
Employee benefits $12,019 $12,085
Self insurance 1,064 4,455
Reorganization costs 2,883 3,057
Environmental - 3,000
Pre-petition unsecured creditor settlement - 1,061
Income taxes 1,405 939
Legal and professional 358 247
Other 1,235 2,780
------- --------
$18,964 $27,624
======= ========
Noncurrent:
Environmental $ - $ 3,921
Workers compensation payments 988 1,595
Other - 61
------- --------
$ 988 $ 5,577
======= ========
In connection with Keystone's emergence from Chapter 11 on August 31, 2005,
the Company's pre-petition unsecured creditors with allowed claims will receive,
among other things, a $5.2 million cash payment. As of December 31, 2005,
approximately 80% of this amount had been distributed to the pre-petition
unsecured creditors. As such, Keystone has recorded a $1.1 million liability to
the pre-petition unsecured creditors at December 31, 2005.
Keystone generally undertakes planned major maintenance activities on an
annual basis, usually in the fourth quarter of each year. These major
maintenance activities are conducted during a shut-down of the Company's steel
and wire rod mills. Repair and maintenance costs incurred in connection with
these major maintenance activities are accrued in advance on a straight-line
basis throughout the year and are included in cost of goods sold.
See Note 15.
Note 12 - Liabilities subject to compromise
December 31,
--------------------------
2004 2005
------- --------
Accrued OPEB cost $123,425 $ -
Environmental 19,432 8,491
6% Notes 16,031 -
Accrued preferred stock dividends 11,846 -
Accounts payable 10,776 850
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 726 244
Disposition of former facilities 665 684
Other 2,117 207
-------- -------
$212,346 $10,476
======== =======
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 pre- and
post-petition 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. In addition, pre-petition unsecured creditors of Keystone
with balances due to them of less than $1,900, were paid in full.
During the fourth quarter of 2004, Keystone received a $5.2 million Court
ordered settlement from a former vendor relative to the Company's Chapter 11
filing and consigned inventory and related balances due to that vendor. The $5.2
million is shown as gain from legal settlement on the Company's 2004 statement
of operations. In connection with negotiations with its pre-petition unsecured
creditors relative to Keystone's emergence from Chapter 11, the Company agreed
to deposit the $5.2 million into a restricted cash account in order to fund the
$5.2 milion cash payment to be paid to the pre-petition unsecured creditors. As
of December 31, 2005, approximately 80% of the funds in this account had been
released to the unsecured creditors. The remaining 20% will be released when the
final cash payment is made to the pre-petition unsecured creditors. As such,
Keystone has recorded a $1.0 million liability to the pre-petition unsecured
creditors which is included in other current accrued liabilities on the
Company's December 31, 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 includes a restricted investment in current assets of $5.4 million
and $1.0 million at December 31, 2004 and 2005, respectively, that will be used
to fund the payment to the pre-petition unsecured creditors.
During the first quarter of 2002, two of the Company's major vendors
representing approximately $16.1 million of trade payables, agreed to be paid
over a five-year period ending in March 2007 with no interest. The repayment of
a portion of such deferred vendor payments could be accelerated if the Company
achieves specified levels of future earnings. As a result of the Company's
Chapter 11 filings, payments under these agreements were discontinued on
February 26, 2004. The balances due under these agreements at December 31, 2004,
are shown in liabilities subject to compromise at December 31, 2004. See Note 2.
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 liabilities related to non-owned sites and other
liabilities at December 31, 2005. See Notes 10 and 11.
The remaining liabilities subject to compromise at December 31, 2005,
relate to Sherman Wire Company.
As a result of the foregoing, the Company recorded a $32.5 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 7,576 3,279 10,855
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
Accrued environmental 868 - 868
Other, net 227 - 227
------- -------- -------
Total liabilities compromised 43,704 20,206 63,910
------- -------- -------
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 $23,218 $ 9,292 $32,510
======= ======= =======
Note 13 - Related party transactions
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
Under the terms of an intercorporate services agreement ("ISA") entered
into between the Company and Contran, employees of Contran will provide certain
management, tax planning, financial and administrative services to the Company
on a fee basis. Such charges are based upon estimates of the time devoted by the
employees of Contran to the affairs of the Company, and the compensation of such
persons. Because of the large number of companies affiliated with Contran, the
Company believes it benefits from cost savings and economies of scale gained by
not having certain management, financial and administrative staffs duplicated at
each entity, thus allowing certain individuals to provide services to multiple
companies but only be compensated by one entity. The ISA fees charged by Contran
to the Company aggregated approximately $1,005,000 in each of 2003 and 2004.
During 2005, the ISA fees charged by Contran to the Company aggregated
approximately $1.0 million. At December 31, 2004, the Company owed Contran
approximately $3.8 million, primarily for ISA fees. Such amount was included in
payables to affiliates ($821,000) and liabilities subject to compromise ($3.0
million) on the Company's December 31, 2004, balance sheet. See Note 12. In
addition, Keystone purchased certain aircraft services from Valhi in the amount
of $52,000 in 2003 and $17,000 in 2004.
Tall Pines Insurance Company ("Tall Pines") and EWI RE, Inc. provide for or
broker certain insurance policies for Contran and certain of its subsidiaries
and affiliates, including the Company. Tall Pines is a wholly-owned subsidiary
of Valhi, Inc., a majority-owned subsidiary of Contran, and EWI is a
wholly-owned subsidiary of NL Industries, Inc., a majority-owned subsidiary of
Valhi. Consistent with insurance industry practices, Tall Pines and EWI receive
commissions from the insurance and reinsurance underwriters and/or assess fees
for the policies they provide or broker. The aggregate premiums paid to Tall
Pines (including amounts paid to Valmont Insurance Company, another subsidiary
of Valhi that was merged into Tall Pines in 2004), and EWI were $2.2 million in
2003, $2.1 million in 2004 and $2.9 million in 2005. These amounts principally
included payments for insurance and reinsurance premiums paid to third parties,
but also included commissions paid to Tall Pines and EWI. Tall Pines purchases
reinsurance for substantially all of the risks it underwrites. In the Company's
opinion, the amounts that the Company paid for these insurance policies and the
allocation among the Company and its affiliates of relative insurance premiums
are reasonable and similar to those they could have obtained through unrelated
insurance companies and/or brokers. The Company expects these relationships with
Tall Pines and EWI will continue in 2006.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for any uninsured loss.
Dallas Compressor Company, a subsidiary of Contran, sells compressors and
related services to Keystone. During 2003, 2004 and 2005 Keystone purchased
products and services from Dallas Compressor Company in the amount of $1,000,
$20,000 and $33,000, respectively.
EWPFLLC had agreed to loan the Company up to an aggregate of $6 million
through February 29, 2004. Borrowings would have accrued interest at the prime
rate plus 3%, and would have been collateralized by the stock of EWP. In
addition, the Company paid a commitment fee of .375% on the unutilized portion
of the facility. The terms of this loan were approved by the independent
directors of the Company. The loan matured in February 2004. During 2003,
Keystone paid EWPFLLC unused line fees of $23,000, related to this facility. In
addition, during 2004, Keystone paid EWPFLLC a $100,000 facility fee in
connection with the EWP DIP Facility and during 2004 and 2005, the Company also
paid EWPFLLC $305,000 and $362,000, respectively, in interest on the EWP DIP
facility. See Note 2.
During 2004, Keystone entered into a scrap supply agreement with Alter
Trading Corporation ("ATC"). The Company sources the majority of its ferrous
scrap supply from ATC under this agreement. ATC owns the 50% interest in ARC
that is not owned by Keystone. During 2004 and 2005, Keystone purchased
approximately $99.9 million and $132.4 million of ferrous scrap from ATC.
Note 14 - Quarterly financial data (unaudited)
March 31, June 30, September 30, December 31,
--------- ---------- ------------- ------------
(In thousands, except per share data)
Year ended December 31, 2005:
Net sales $89,537 $88,992 $ 84,770 $104,246
Gross profit 5,055 1,958 8,916 14,075
Reorganization costs 3,294 2,687 4,342 (15)
Gain on cancellation of debt - - 32,349 161
Net income (loss) $(1,276) $(3,659) $ 34,104 $ 10,063
======= ======= ======== ========
Basic net income (loss)
per share available for common shares $ (.13) $ (.36) $ 3.61 $ 1.01
======= ======= ======== ========
Diluted net income (loss) per share
available for common shares $ (.13) $ (.36) $ 1.64 $ 1.01
======= ======= ======== ========
Year ended December 31, 2004:
Net sales $67,177 $101,827 $112,505 $82,826
Gross profit (loss) (1,433) 18,709 19,965 4,862
Reorganization costs 1,927 3,092 3,257 2,882
Net gain on legal settlement - - - 5,284
Net (income) loss $(7,638) $ 10,993 $ 10,887 $ 1,818
======= ======= ======== ========
Basic net income (loss)
per share available for common shares $ (.88) $ 1.09 $ 1.08 $ .18
======= ======= ======== ========
Diluted net income (loss) per share
available for common shares $ (.88) $ .39 $ .39 $ .06
======= ======= ======== ========
During the fourth quarter of 2004, based on an actuarial valuation, the
Company recorded a decrease in 2004 OPEB expense and liability of approximately
$2.2 million resulting in OPEB expense for the year 2004 of $20.9 million. The
Company had previously estimated OPEB expense for 2004 would approximate $23.1
million.
During the fourth quarter of 2004, Keystone received a $5.2 million
settlement from a former vendor relative to the Company's Chapter 11 filing and
consigned inventory and related balances due to that vendor. The $5.2 million is
shown as gain from legal settlement on the Company's 2004 statement of
operations. In connection with negotiations with its pre-petition unsecured
creditors relative to Keystone's emergence from Chapter 11, the Company agreed
to deposit the $5.2 million into a restricted cash account. Approximately 80% of
the funds in this account were released to the pre-petition unsecured creditors
upon Keystone's emergence from Chapter 11. The remaining 20% will be released
when the final cash payment is made to the pre-petition unsecured creditors. The
balance in this account is shown as a restricted investment in current assets on
the Company's December 31, 2004 and 2005 balance sheets.
See Notes 2, 4, 8 and 10.
Note 15 - Environmental matters
As a result of the Chapter 11 filings on February 26, 2004, litigation
relating to prepetition claims against the filing companies, including Keystone
and Sherman Wire Company ("Sherman"), was stayed. Upon emergence from Chapter 11
on August 31, 2005, the pre-petition litigation claims against Sherman 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 sites ($7.7 million) and an owned Sherman site ($.8 million)
continue to be negotiated and adjudicated subsequent to Keystone's emergence
from Chapter 11. See Note 12. In general, as a result of the Company's Chapter
11 reorganization and discharge when it exited bankruptcy in August 2005, any
future government or third-party private actions against Keystone arising from
its alleged pre-petition responsibility for hazardous contamination at any
environmental sites that are not owned by Keystone have been barred. The
Company's Chapter 11 discharge does not affect the Company's liability for
hazardous contamination of property that was owned by Keystone as of the
petition date and any associated clean up costs remains the responsibility of
the Company.
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.
Although Keystone believes its comprehensive general liability insurance
policies provide indemnification for certain costs the Company incurs with
respect to its environmental remediation obligations, it has only recorded
receivables for the estimated insurance recoveries at three of those sites.
Accrued receivables related to these matters were $323,000 at December 31, 2004.
During 2003 and 2005, the Company received approximately $32,000 and
$382,000, 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.
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 ($15.4 million
at December 31, 2005, $8.5 million of which is reflected in liabilities subject
to compromise on the Company's December 31, 2005 balance sheet) for these
matters at 10 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
five 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 the
14 sites for which it is possible to estimate costs is approximately $16.3
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 three years ended December 31, 2005 is
as follows:
Years ended December 31,
-----------------------------------
2003 2004 2005
---- ---- ------
(In thousands)
Balance at beginning of period $20,209 $19,766 $19,432
Expense - - -
Payments (475) (334) (3,534)
Cancellation of debt - - (868)
Reclassification 32 - 382
------- ------- -------
Balance at end of period $19,766 $19,432 $15,412
======= ======= =======
Amounts recognized in the balance sheet:
Other accrued liabilities - current $13,044 $ - $ 3,000
Other accrued liabilities - noncurrent 6,722 - 3,921
Liabilities subject to compromise - 19,432 8,491
------- ------- -------
$19,766 $19,432 $15,412
======= ======= =======
Approximately $8.5 million of the Company's $15.4 million recorded
environmental accrual at December 31, 2004 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
December 31, 2005 balance sheet relates to sites involving Sherman or one of its
predecessors. Sherman's environmental liabilities continue to be negotiated and
adjudicated subsequent to Keystone's emergence from Chapter 11 on August 31,
2005. See Note 12.
Sites no longer subject to compromise at December 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 (the "IAG") office, the
Company is depositing $75,000 per quarter into a trust fund. Prior to 2005, the
Company was required to continue these quarterly deposits and could not withdraw
funds from the trust fund until the fund balance exceeded the sum of the
estimated remaining remediation costs plus $2 million. During 2005, this
agreement was modified such that the IEPA and IAG now permit Keystone to
withdraw funds from the trust fund as the site is remediated. However, the
requirement for the Company to make quarterly deposits of $75,000 in to the
trust fund remains until such time as the site is completely remediated. During
2005, Keystone paid approximately $3.6 million in remediation costs for this
site and through December 31, 2005, had received approximately $1.6 million in
funds from the trust fund. At December 31, 2004 and 2005, the trust fund had a
balance of $5.7 million and $4.5 million, respectively, which amounts were
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 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.
Sites still subject to compromise at December 31, 2005.
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. Any
further liability of Sherman Wire related to this site will be discharged in 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 also has certain funds available in
other trust funds due it under the partial consent decree. These credits can be
used by Sherman (with certain limitations) to fund its future liabilities under
the partial consent decree. 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. Any further liability of Sherman related to
this site will be discharged in 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 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 the Chapter 11 proceedings.
Sherman has received notification from the TNRCC stating that DeSoto is a
PRP at the Material Recovery Enterprises Site near Ovalo, Texas, with
approximately 3% of the total liability. The matter has been tendered to the
Valspar Corporation ("Valspar") pursuant to a 1990 agreement whereby Valspar
purchased certain assets of DeSoto. Valspar has been handling the matter under
reservation of rights. At the request of Valspar, Sherman 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. Any further liability of Sherman
related to this site will be discharged in the Chapter 11 proceedings.
In November 2003, Sherman 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 requested the U.S. EPA to provide any
documentation that allegedly connects Sherman to the site. Subsequently, the
U.S. EPA produced documents that may show that Sherman wastes were sent to the
site. There were no claims related to this site filed 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 was allegedly involved at
various other sites and in related toxic tort lawsuits which 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.
Under the terms of a 1990 asset sale agreement, DeSoto established a trust
fund to fund potential clean-up liabilities relating to the assets sold. Sherman
Wire had access to the trust fund for any expenses or liabilities it incurs
relative to environmental claims relating to the site identified in the trust
agreement. The trust fund was primarily invested in United States Treasury
securities and was classified as restricted investments on the balance sheet. As
of December 31, 2003, the balance in the trust fund was approximately $135,000.
During 2004, under its terms, the trust fund was liquidated.
Sherman also has access to a trust fund relative to another environmental
site for any expenses or liabilities it incurs relative to environmental claims
at that site. The trust fund is included in restricted investments on the
balance sheet. As of December 31, 2004 and 2005, the balance in this trust fund
was approximately $248,000 and $254,000, respectively.
See Note 11.
Sites compromised as a result of confirmation of the Company's plan of
reorganization.
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. Pursuant to a settlement
agreement, the PRP group was given a $125,000 allowed claim in Keystone's
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 be 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. The Company's emergence from Chapter 11 proceedings in August 2005
precludes subsequent claims against Keystone related to this site.
Note 16 - Lease commitments
At December 31, 2005, the Company is obligated under certain operating
leases through 2010. Future commitments under these leases are summarized below.
Lease commitment
----------------
(In thousands)
2006 $495
2007 155
2008 119
2009 97
2010 31
----
$897
====
Note 17 - 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 received a letter from a law firm advising them that
Sears Roebuck & Co. ("Sears") had been named as a defendant in a lead paint
personal injury case. Sears claimed contractual indemnity against Sherman and
demanded that Sherman defend and indemnify Sears with regard to any losses or
damages Sears may sustain in the case. Sears was named as an additional insured
on insurance policies, in which DeSoto, the manufacturer of the paint, was the
named insured. Additional demands were made by Sears in 2002 with regard to
additional lead paint cases. DeSoto's insurance carriers were notified of the
action and asked to indemnify Sherman with respect to the complaint. Sherman has
not indemnified Sears and is unaware if the insurors have agreed to indemnify
Sears.
In May 2002, the Company was notified by an insurance company of a
declaratory complaint filed in Cook County Illinois by Sears against the
insurance company and a second insurance company (collectively the "Insurance
Companies") relative to a certain lead paint personal injury litigation against
Sears. It is the Company's understanding that the declaratory complaint has
since been amended to include all lead paint cases where Sears has been named as
a defendant as a result of paint sold by Sears that was manufactured by DeSoto
(now Sherman). 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. Sherman believes the request for indemnification is
invalid. However, such Insurance Company has refused to accept Sherman's
response and has demanded that Sherman participate in mediation in accordance
with the terms of a prior settlement agreement. Sherman 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.
Product supply agreement
In 1996, Keystone entered into a fifteen-year product supply agreement (the
"Supply Agreement") with a vendor. The Supply Agreement provides, among other
things, that the vendor will construct a plant at the Company's Peoria facility
and, after completion of the plant, provide Keystone with all, subject to
certain limitations, of its gaseous oxygen and nitrogen needs for a 15-year
period ending in 2011. In addition to specifying rates to be paid by the
Company, including a minimum facility fee of approximately $1.2 million per
year, the Supply Agreement also specifies provisions for adjustments to the
rates and term of the Supply Agreement. Purchases made pursuant to the Supply
Agreement during 2003, 2004 and 2005 amounted to $1.4 million, $1.9 million and
$2.7 million, respectively.
Keystone is party to a product supply agreement with another vendor that
expires in December 2006. The agreement requires Keystone to annually purchase
10,000 rolls of product from the vendor at an average price of approximately $83
per roll, but the agreement can be cancelled by Keystone with a 180-day notice.
Purchases made pursuant to this contract during 2003, 2004 and 2005 amounted to
$539,000, $819,000 and $743,000, respectively.
Concentration of credit risk
All of the Company's segments perform ongoing credit evaluations of their
customers' financial condition and, generally, require no collateral from their
customers.
Keystone Steel & Wire. KSW sells its products to agricultural, industrial,
construction, commercial, original equipment manufacturers and retail
distributors primarily in the Midwestern, Southwestern and Southeastern regions
of the United States. KSW's ten largest external customers accounted for
approximately 41% of its net sales in 2003, 47% in 2004 and 45% in 2005. These
customers accounted for approximately 51% of KSW's notes and accounts receivable
at December 31, 2004 and 66% at December 31, 2005. KSW's net sales to other
Keystone segments accounted for approximately 11% of its sales in 2003, 14% in
2004 and 13% in 2005. These intercompany customers accounted for 4% of KSW's
notes and accounts receivable at December 31, 2004 and 5% at December 31, 2005.
No single external customer accounted for more than 10% of KSW's sales during
each of 2003 and 2004. During 2005, a single customer accounted for 11% of KSW's
sales. No other single customer accounted for more than 10% of KSW's sales
during 2005.
Engineered Wire Products. EWP sells its products to concrete pipe
manufacturers and retail distributors primarily in the Midwest and East Coast
regions of the United States. EWP's ten largest customers accounted for
approximately 52% of its net sales in 2003, 49% in 2004 and 54% in 2005. These
customers accounted for approximately 40% of EWP's notes and accounts receivable
at December 31, 2004 and 48% at December 31, 2005. An external single customer
accounted for 10% of EWP's net sales during 2003 and another single external
customer accounted for 11% of EWP's net sales in 2003 and a third external
customer accounted for 13% of EWP's net sales in 2005. No other single customer
accounted for more than 10% of EWP's net sales during 2003, 2004 or 2005. EWP
does not sell products to other Keystone segments.
Sherman/KWP. The Company's businesses in this segment sell their products
to agricultural, industrial, construction, commercial, original equipment
manufacturers and retail distributors primarily in the Midwestern, Southwestern
and Southeastern regions of the United States. This segment's ten largest
external customers accounted for approximately 40% of its net sales in 2003, 28%
in 2004 and 25% in 2005. These customers accounted for approximately 85% of this
segment's notes and accounts receivable at December 31, 2004 and 75% at December
31, 2005. This segments' net sales to other Keystone segments accounted for
approximately 36% of its sales net in 2003, 62% in 2004 and 69% in 2005. These
intercompany customers accounted for approximately 6% of this segment's notes
and accounts receivable at December 31, 2004 and 5% of this segment's notes and
accounts receivable at December 31, 2005. No single external customer accounted
for more than 10% of this segment's net sales during 2003. During 2004, a single
customer accounted for 19% of this segment's net sales. No other single customer
accounted for more than 10% of this segment's net sales during 2004. During
2005, a single customer accounted for 16% of this segment's net sales. No other
single customer accounted for more than 10% of this segment's net sales during
2005.
Lawn and garden products. Garden Zone sold its products primarily to
retailers in the Southeastern United States. Garden Zone's ten largest customers
accounted for 94% of its net sales in 2003. Garden Zone did not sell significant
levels of product to other Keystone segments during 2003. A single external
customer accounted for 50% of Garden Zone's net sales during 2003. Another
external customer also accounted for 10% of Garden Zone's net sales during 2003.
Note 18 - Earnings per share:
Net income (loss) per share is based upon the weighted average number of
common shares and dilutive securities. A reconciliation of the numerators and
denominators used in the calculations of basic and diluted earnings per share
computations of income (loss) before cumulative effect of change in accounting
principle is presented below. The Company discontinued accruing dividends on its
preferred stock upon filing for Chapter 11 on February 26, 2004. Keystone stock
options were omitted from the calculation because they were antidilutive in all
periods presented.
Years ended December 31,
---------------------------------------
2003 2004 2005
------- ------ ----
(In thousands)
Numerator:
Net income (loss) before cumulative
effect of change in accounting
principle $(37,517) $16,060 $39,232
Cancellation of Series A Preferred Stock - - 2,112
Less Series A Preferred Stock
dividends (5,940) (1,223) -
-------- -------- --------
Basic net income (loss) (43,347) 14,837 41,344
Series A Preferred Stock dividends 5,940 1,223 -
-------- -------- --------
Diluted net income (loss) $(37,517) $16,060 $41,344
======== ======== =======
Denominator:
Average common shares outstanding 10,068 10,068 10,046
Dilutive effect of Series A
Preferred Stock - 17,975 11,983
-------- -------- --------
Diluted shares 10,068 28,043 22,029
======== ======== =======
Note 19 - Accounting principles newly adopted in 2003, 2004 and 2005:
Asset retirement obligations. The Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations, January 1, 2003. Under SFAS No. 143, the fair
value of a liability for an asset retirement obligation covered under the scope
of SFAS No. 143 is recognized in the period in which the liability is incurred,
with an offsetting increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its future value, and the
capitalized cost is depreciated over the useful life of the related asset.
Future revisions in the estimated fair value of the asset retirement obligation,
due to changes in the amount and/or timing of the expected future cash flows to
settle the retirement obligation, are accounted for prospectively as an
adjustment to the previously-recognized asset retirement cost. Upon settlement
of the liability, an entity will either settle the obligation for its recorded
amount or incur a gain or loss upon settlement. The Company does not have any
asset retirement obligations which are covered under the scope of SFAS No. 143,
and as such, the effect, to the Company of adopting SFAS No. 143 was not
material.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost was recognized at the date an exit plan was adopted, which
may or may not have been the date at which the liability was incurred. The
effect to the Company of adopting SFAS No. 146 as of January 1, 2003 was not
material as the Company was not involved in any exit or disposal activities
covered by the scope of the new standards as of such date.
Variable interest entities. The Company began complying with the
consolidation requirements of FASB Interpretation ("FIN") No. 46R, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51, as amended, at
March 31, 2004. The Company does not believe it has any material involvement
with any variable interest entity (as that term is defined in FIN No. 46R)
covered by the scope of FIN No. 46R, and therefore the impact of adopting the
consolidation requirements of FIN No. 46R did not have a significant effect on
the Company's consolidated financial statements.
Note 20 - Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. Based on guidance issued by the U.S. Securities and Exchange
Commission, the Company will adopt SFAS No. 123R, "Share-Based Payment," as of
January 1, 2006. SFAS No. 123R, among other things, eliminates the alternative
in existing GAAP to use the intrinsic value method of accounting for stock-based
employee compensation under APBO No. 25. Upon adoption of SFAS No. 123R, the
Company will generally be required to recognize the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award, with the cost recognized over the period during which
an employee is required to provide services in exchange for the award
(generally, if the vesting period of the award). No compensation cost will be
recognized in the aggregate for equity instruments for which the employee does
not render the requisite service (generally, the instrument is forfeited before
it has vested). The grant-date fair value will be estimated using option-pricing
models (e.g. Black-Scholes or a lattice model). Under the transition
alternatives permitted under SFAS No. 123R, the Company will apply the new
standard to all new awards granted on or after January 1, 2006, and to all
awards existing as of December 31, 2005 which are subsequently modified,
repurchased or cancelled. Additionally, as of January 1, 2006, the Company will
be required to recognize compensation cost for the portion of any non-vested
award existing as of December 31, 2005 over the remaining vesting period.
Because all of the Company's stock options were cancelled upon the Company's
emergence from Chapter 11 on August 31, 2005, the effect of adopting SFAS No.
123R will not be significant in so far as it relates to existing stock options.
Should the Company, however, grant a significant number of options in the
future, the effect on the Company's consolidated financial statements could be
material.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Keystone Consolidated Industries, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated March 31, 2006, appearing in the 2005 Annual Report to Shareholders of
Keystone Consolidated Industries, Inc. (which report and consolidated financial
statements are included in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in the index on page F-1 of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
March 31, 2006
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at charged to Deductions Balance at
beginning costs and (net of end of
Description of period expenses recoveries) period
----------- --------- ---------- ----------- ----------
Year ended December 31, 2003:
Allowance for doubtful accounts and
notes receivable $ 1,762 $ (406) $1,009 $ 347
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Allowance for inventory obsolescence $ 3,490 $ 299 $ 42 $ 3,747
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LIFO reserve $13,352 $ (215) $ - $13,137
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Deferred tax asset valuation allowance $20,046 $ 19,088 $ - $39,134
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Major repair and maintenance accrual $ - $ 61 $ 61 $ -
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Year ended December 31, 2004:
Allowance for doubtful accounts and
notes receivable $ 347 $ 111 $ 10 $ 448
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Allowance for inventory obsolescence $ 3,747 $ 2,174 $ 86 $ 5,835
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LIFO reserve $13,137 $ 14,078 $ - $27,215
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Deferred tax asset valuation allowance $39,134 $ (8,808) $ - $30,326
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Major repair and maintenance accrual $ - $ 1,642 $1,289 $ 353
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Year ended December 31, 2005:
Allowance for doubtful accounts and
notes receivable $ 448 $ 238 $ 235 $ 451
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Allowance for inventory obsolescence $ 5,835 $ (1,372) $ 114 $ 4,349
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LIFO reserve $27,215 $(12,003) $ - $15,212
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Deferred tax asset valuation allowance $30,326 $(19,651) $ - $10,675
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Major repair and maintenance accrual $ 353 $ 1,196 $1,549 $ -
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