-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UsyMiHjABxIaSbtWaolWW1MOi4z1MoU3w93AG40yuw7gvLxY6SsNCGTjhZkPmNX1 UKt+hSAd8QOg8tMRVR7pLw== 0000055604-03-000020.txt : 20031119 0000055604-03-000020.hdr.sgml : 20031119 20031119165729 ACCESSION NUMBER: 0000055604-03-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE CONSOLIDATED INDUSTRIES INC CENTRAL INDEX KEY: 0000055604 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 370364250 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03919 FILM NUMBER: 031013453 BUSINESS ADDRESS: STREET 1: 5430 LBJ FWY STE 1740 STREET 2: THREE LINCOLN CENTRE CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144580028 MAIL ADDRESS: STREET 1: 5430 LBJ FWY STE 1740 STREET 2: THREE LINCOLN CENTRE CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: KEYSTONE STEEL & WIRE CO DATE OF NAME CHANGE: 19710506 10-Q 1 kciseptq.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period September 30, 2003 Commission file number 1-3919 Keystone Consolidated Industries, Inc. (Exact name of registrant as specified in its charter) Delaware 37-0364250 - ------------------------------- -------------------- (State or other jurisdiction of I.R.S. Employer incorporation or organization) Identification No.) 5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, TX 75240-2697 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 458-0028 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- Indicate by check mark whether the Registrant is an accelerated Filer (as defined in Rule 12b-2 of the Exchange Act). Yes _____ No X ----- Number of shares of common stock outstanding at November 14, 2003: 10,068,450 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 31, 2002 and September 30, 2003 3-4 Consolidated Statements of Operations - Three months and nine months ended September 30, 2002 and 2003 5-6 Consolidated Statements of Cash Flows - Nine months ended September 30, 2002 and 2003 7 Consolidated Statement of Stockholders' Deficit - Nine months ended September 30, 2003 8 Notes to Consolidated Financial Statements 9-24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25-38 Item 4. Controls and Procedures 39 PART II. OTHER INFORMATION Item 1. Legal Proceedings 40 Item 6. Exhibits and Reports on Form 8-K 40 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, September 30, ASSETS 2002 2003 ----------- ------------- Current assets: Notes and accounts receivable .................. $ 22,578 $ 35,849 Inventories .................................... 50,089 27,729 Prepaid expenses and other ..................... 893 3,093 -------- -------- Total current assets ........................ 73,560 66,671 -------- -------- Property, plant and equipment .................... 373,833 368,737 Less accumulated depreciation .................... 253,849 259,772 -------- -------- Net property, plant and equipment ........... 119,984 108,965 -------- -------- Other assets: Restricted investments ......................... 5,730 5,720 Unrecognized net pension obligation ............ 11,852 11,852 Deferred financing costs ....................... 2,319 1,785 Goodwill ....................................... 752 752 Other .......................................... 1,298 1,208 -------- -------- Total other assets .......................... 21,951 21,317 -------- -------- $215,495 $196,953 ======== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands)
LIABILITIES AND STOCKHOLDERS' DEFICIT December 31, September 30, 2002 2003 ------------ ------------- Current liabilities: Notes payable and current maturities of long-term debt ............................... $ 33,935 $ 68,522 Accounts payable ............................... 23,696 20,078 Accounts payable to affiliates ................. 1,448 2,505 Accrued OPEB cost .............................. 11,372 11,385 Accrued preferred stock dividends .............. 4,683 9,138 Other accrued liabilities ...................... 40,216 40,006 --------- --------- Total current liabilities .................. 115,350 151,634 --------- --------- Noncurrent liabilities: Long-term debt ................................. 63,306 32,240 Accrued OPEB cost .............................. 102,717 108,085 Accrued pension costs .......................... 48,571 53,744 Other .......................................... 20,337 17,497 --------- --------- Total noncurrent liabilities ............... 234,931 211,566 --------- --------- Minority interest ................................ 2 -- --------- --------- Redeemable Series A preferred stock .............. 2,112 2,112 --------- --------- Stockholders' deficit: Common stock ................................... 10,798 10,798 Additional paid-in capital ..................... 48,388 43,933 Accumulated other comprehensive loss - pension liabilities ........................... (170,307) (170,307) Accumulated deficit ............................ (25,767) (52,771) Treasury stock, at cost ........................ (12) (12) --------- --------- Total stockholders' deficit ................ (136,900) (168,359) --------- --------- $ 215,495 $ 196,953 ========= =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three months ended Nine months ended September 30, September 30, 2002 2003 2002 2003 ---- ---- ---- ---- Net sales ....................... $ 83,844 $ 80,452 $ 273,290 $ 258,290 Cost of goods sold .............. 79,510 83,712 249,412 256,287 -------- -------- --------- --------- Gross margin .................. 4,334 (3,260) 23,878 2,003 -------- -------- --------- --------- Selling expense ................. 1,666 1,687 5,240 6,221 General and administrative ...... 5,708 5,418 16,231 13,253 Defined benefit pension expense (credit) 297 1,774 (1,203) 5,174 -------- -------- --------- --------- 7,671 8,879 20,268 24,648 -------- -------- --------- --------- Operating income (loss) ..... (3,337) (12,139) 3,610 (22,645) -------- -------- --------- --------- General corporate income (expense): Corporate expense ............... (645) 87 (2,849) (2,254) Interest expense ................ (937) (942) (4,584) (3,024) Interest income ................. 22 18 63 38 Gain on early extinguishment of debt ........................... -- -- 54,739 -- Gain on sale of business units .. -- 1,073 -- 1,073 Other income (expense), net ..... (12) 34 25 107 -------- -------- --------- --------- (1,572) 270 47,394 (4,060) -------- -------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle ........ (4,909) (11,869) 51,004 (26,705) Provision for income taxes ........ -- -- 21,622 -- Minority interest in after-tax earnings (losses) ............... (108) (33) 166 299 -------- -------- --------- --------- Income (loss) before cumulative effect of change in accounting principle ........................ (4,801) (11,836) 29,216 (27,004) Cumulative effect of change in accounting principle ............. -- -- 19,998 -- -------- -------- --------- --------- Net income (loss) .............. (4,801) (11,836) 49,214 (27,004) Dividends on preferred stock ...... 1,485 1,485 3,198 4,455 -------- -------- --------- --------- Net income (loss) available for common shares .................... $ (6,286) $(13,321) $ 46,016 $ (31,459) ======== ======== ========= =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (In thousands, except per share data)
Three months ended Nine months ended September 30, September 30, 2002 2003 2002 2003 ---- ---- ---- ---- Basic earnings (loss) per share available for common shares: Income (loss) before cumulative effect of change in accounting principle .................... $ (.63) $ (1.32) $ 2.58 $ (3.12) Cumulative effect of change in accounting principle ......... -- -- 1.99 -- ---------- ---------- ---------- ---------- Net income (loss) ........... $ (.63) $ (1.32) $ 4.57 $ (3.12) ========== ========== ========== ========== Basic shares outstanding ........ 10,068 10,068 10,067 10,068 ========== ========== ========== ========== Diluted earnings (loss) per share available for common shares: Income (loss) before cumulative effect of change in accounting principle .................... $ (.63) $ (1.32) $ 1.46 $ (3.12) Cumulative effect of change in accounting principle ......... -- -- 1.00 -- ---------- ---------- ---------- ---------- Net income (loss) ........... $ (.63) $ (1.32) $ 2.46 $ (3.12) ========== ========== ========== ========== Diluted shares outstanding ...... 10,068 10,068 19,967 10,068 ========== ========== ========== ==========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine months ended September 30, 2002 2003 ---- ---- Cash flows from operating activities: Net income (loss) .................................... $ 49,214 $(27,004) Depreciation and amortization ........................ 13,105 12,490 Amortization of deferred financing costs ............. 498 557 Deferred income taxes ................................ 21,622 -- Non-cash defined benefit pension expense (credit) .... (1,203) 5,173 Non-cash OPEB expense ................................ 3,670 5,381 Gain on early extinguishment of debt ................. (54,739) -- Cumulative effect of change in accounting principle .. (19,998) -- Other, net ........................................... 250 (1,136) Change in assets and liabilities: Notes and accounts receivable ...................... (8,499) (14,463) Inventories ........................................ (4,507) 16,373 Accounts payable ................................... 166 (605) Other, net ......................................... 5,468 (4,302) -------- -------- Net cash provided (used) by operating activities . 5,047 (7,536) -------- -------- Cash flows from investing activities: Capital expenditures ................................. (4,803) (2,352) Proceeds from sale of business units ................. -- 3,344 Collection of notes receivable ....................... 1,127 75 Other, net ........................................... 166 (650) -------- -------- Net cash provided (used) by investing activities . (3,510) 417 -------- -------- Cash flows from financing activities: Revolving credit facilities, net ..................... (13,106) 9,102 Other notes payable and long-term debt: Additions .......................................... 15,066 109 Principal payments ................................. (1,025) (2,069) Deferred financing costs paid ........................ (2,472) (23) -------- -------- Net cash provided (used) by financing activities . (1,537) 7,119 -------- -------- Net change in cash and cash equivalents ................ -- -- Cash and cash equivalents, beginning of period ......... -- -- -------- -------- Cash and cash equivalents, end of period ............... $ -- $ -- ======== ======== Supplemental disclosures: Cash paid for: Interest, net of amount capitalized ................ $ 2,739 $ 2,138 Income taxes ....................................... 108 52
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT Nine months ended September 30, 2003 (In thousands)
Accumulated other comprehensive Additional loss - Common paid-in pension Accumulated Treasury stock capital liabilities deficit stock Total ------ ---------- ----------- ---------- -------- ----- Balance - December 31, 2002 $10,798 $ 48,388 $(170,307) $(25,767) $(12) $(136,900) Net loss ................... -- -- -- (27,004) -- (27,004) Preferred stock dividends .. -- (4,455) -- -- -- (4,455) ------- -------- --------- -------- ---- --------- Balance - September 30, 2003 $10,798 $ 43,933 $(170,307) $(52,771) $(12) $(168,359) ======= ======== ========= ======== ==== =========
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and basis of presentation: The consolidated balance sheet of Keystone Consolidated Industries, Inc. ("Keystone" or the "Company") at December 31, 2002 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at September 30, 2003 and the consolidated statements of operations and cash flows for the interim periods ended September 30, 2002 and 2003, and the consolidated statement of common stockholders' deficit for the interim period ended September 30, 2003, have each been prepared by the Company, without audit, in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows, have been made. However, it should be understood that accounting measurements at interim dates may be less precise than at year end. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. Certain information normally included in financial statements prepared in accordance with GAAP has been condensed or omitted, and certain prior year amounts have been reclassified to conform to the current year presentation. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (the "Annual Report"). At September 30, 2003, Contran Corporation ("Contran") and other entities related to Mr. Harold C. Simmons, beneficially owned approximately 50% of the outstanding common stock of the Company. Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Mr. Simmons, of which Mr. Simmons is sole trustee. Keystone may be deemed to be controlled by Contran and Mr. Simmons. At September 30, 2003, Contran also owned 54,956 shares of the 59,399 shares of the Company's outstanding Redeemable Series A Preferred Stock. Effective March 15, 2003, each share of Series A Preferred Stock is convertible, at the option of the holder, into 250 shares of the Company's common stock (equivalent to a $4.00 per share exchange rate). As discussed in Note 4, at September 30, 2003, the Company was not in compliance with certain financial covenants included in its primary revolving credit facility. In addition, Keystone management expects to report a net loss for the year ending December 31, 2003, and management currently believes its available credit facilities may not be sufficient to fund the anticipated needs of the Company's operations and capital expenditures for the foreseeable future. The Company's inability to obtain adequate additional sources of liquidity or achieve sufficient reduction in its operating costs could have a material adverse effect on the Company's ability to continue as a going-concern. Employee stock options. As disclosed in the Annual Report, Keystone accounts for stock-based employee compensation in accordance with Accounting Principles Board Opinion ("APBO") No. 25, Accounting for Stock Issued to Employees, and its various interpretations. 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 was nil during the interim periods ended September 30, 2002 and 2003. The following table presents what the Company's consolidated net income (loss) available for common shares, and related per share amounts, would have been 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.
Three months ended Nine months ended September 30, September 30, ------------------ ----------------- 2002 2003 2002 2003 ---- ---- ---- ---- (In thousands) Net income (loss) available for common shares as reported ............ $ (6,286) $ (13,321) $ 46,016 $ (31,459) 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 ......... (43) -- (142) (25) ---------- ---------- ---------- ---------- Pro forma net income (loss) available for common shares .......... $ (6,329) $ (13,321) $ 45,874 $ (31,484) ========== ========== ========== ========== Basic net income (loss) available for common shares per share: As reported .......................... $ (.63) $ (1.32) $ 4.57 $ (3.12) Pro forma ............................ $ (.63) $ (1.32) $ 4.56 $ (3.12) Diluted net income (loss) available for common shares per share: As reported .......................... $ (.63) $ (1.32) $ 2.46 $ (3.12) Pro forma ............................ $ (.63) $ (1.32) $ 2.45 $ (3.12)
Note 2 - 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. During 2003, the Company expanded the composition of its reportable segments. The corresponding segment information for prior periods has been restated to conform to the current year presentation. In addition, the information below also provides disclosure of segment information with respect to each year in the three-year period ended December 31, 2002. The Company's operating segments are organized along its manufacturing facilities and include two reportable segments: (i) Keystone Steel and Wire ("KSW") which manufacturers and sells wire rod, wire and wire products for agricultural, industrial, construction, commercial, original equipment manufacturers and retail consumer markets and, (ii) Engineered Wire Products ("EWP") which manufactures and sells welded wire reinforcement in both roll and sheet form that is utilized in concrete construction products including pipe, pre-cast boxes and applications for use in roadways, buildings and bridges. 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, Garden Zone purchased Keystone's 51% ownership in Garden Zone. In addition, prior to July 2003, Keystone also operated three businesses that did not constitute reportable business segments. These businesses sold wire and wire products for agricultural, industrial, construction, commercial, original manufacturers and retail consumer markets. The results of operations of these businesses are aggregated and included under the "All Other" heading in the following tables. During July 2003, Keystone transferred its operations at one of these three businesses to other Keystone facilities, and during August 2003 Keystone sold another of the businesses. As a result, as of August 2003, the "All Other" heading in the following tables only includes Sherman Wire. Keystone is also engaged in a scrap recycling joint venture through its 50% interest in Alter Recycling Company, L.L.C. ("ARC"), an unconsolidated equity affiliate. KSW's products and EWP's products are distributed primarily in the Midwestern, Southwestern and Southeastern United States. Garden Zone's products were distributed primarily in the Southeastern United States. Business Segment Principal entities Location Keystone Steel & Wire Keystone Steel & Wire Peoria, Illinois Engineered Wire Products Engineered Wire Products Upper Sandusky, Ohio Garden Zone Garden Zone (1) Charleston, South Carolina All other Sherman Wire Sherman, Texas Sherman Wire of Caldwell, Inc. (2) Caldwell, Texas Keystone Fasteners (3) Springdale, Arkansas (1) 51.0% subsidiary - interest sold in July 2003. (2) Transferred operations in July 2003 to Sherman Wire and Keystone Steel & Wire. (3) Business sold in August 2003. The net proceeds from the sale of Garden Zone and Keystone Fasteners aggregated $3.3 million. The gain on the sale of these businesses, as well as the results of operations of each of Garden Zone and Keystone Fasteners are not significant, individually and in the aggregate. Accordingly, the Company has elected not to present their results of operations as discontinued operations for all periods presented due to their immateriality. Keystone evaluates segment performance based on segment operating income, which is defined as income before income taxes and interest expense, exclusive of certain items (such as gains or losses on disposition of business units or sale of fixed assets) and certain general corporate income and expense items (including interest income) which are not attributable to the operations of the reportable operating segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that (i) defined benefit pension expense for each segment is recognized and measured on the basis of estimated current service cost of each segment, with the remainder of the Company's net defined benefit pension expense or credit not allocated to each segment but still is reported as part of operating profit or loss, (ii) segment OPEB expense is recognized and measured based on the basis of the estimated expense of each segment with the remainder of the Company's actual OPEB expense not allocated to each segment but still is reported as part of operating profit or loss, (iii) elimination of intercompany profit or loss on ending inventory balances is not allocated to each segment but still is reported as part of operating profit or loss, (iv) LIFO inventory reserve adjustments are not allocated to each segment but still are reported as part of operating profit or loss, and (v) amortization of goodwill and negative goodwill are included in general corporate expenses and are not allocated to any segment and are not included in total reporting operating profit or loss. General corporate expenses also includes OPEB and environmental expenses relative to facilities no longer owned by the Company. Intercompany sales between reportable segments are generally recorded at prices that approximate market prices to third-party customers. Segment assets are comprised of all assets attributable to each reportable operating segment. Corporate assets consist principally of pension related assets, restricted investments, deferred tax assets and corporate property, plant and equipment.
GAAP Adjustments, Corporate Items Garden All Segment and KSW EWP Zone Other Total Eliminations Total --- --- ------ ----- ------- ------------ ----- (In thousands) Three months ended September 30, 2002: Third party net sales $ 63,679 $10,692 $ 1,190 $ 8,283 $ 83,844 $ - $ 83,844 Intercompany sales 9,420 - 157 2,161 11,738 (11,738) - -------- ------- ------- ------- -------- -------- -------- $ 73,099 $10,692 $ 1,347 $10,444 $ 95,582 $(11,738) $ 83,844 ======== ======= ======= ======= ======== ======== ======== Operating income (loss) $ (1,447) $ 1,025 $ (200) $(1,305) $ (1,927) $ (1,410) $(3,337) ======== ======= ======= ======= ======== ======== ======= Three months ended September 30, 2003: Third party net sales $ 64,712 $11,559 $ 352 $ 3,829 $ 80,452 $ - $ 80,452 Intercompany sales 6,518 - 19 1,756 8,293 (8,293) - -------- ------- ------- ------- -------- -------- -------- $ 71,230 $11,559 $ 371 $ 5,585 $ 88,745 $ (8,293) $ 80,452 ======== ======= ======= ======= ======== ======== ======== Operating income (loss) $ (7,671) $ 1,136 $ (58) $(1,380) $ (7,973) $ (4,166) $(12,139) ======== ======= ======= ======= ======== ======== ======== Nine months ended September 30, 2002: Third party net sales $209,635 $25,914 $ 8,445 $29,296 $273,290 $ - $273,290 Intercompany sales 27,618 - 1,036 7,450 36,104 (36,104) - -------- ------- ------- ------- -------- -------- -------- $237,253 $25,914 $ 9,481 $36,746 $309,394 $(36,104) $273,290 ======== ======= ======= ======= ======== ======== ======== Operating income (loss) $ 3,246 $ 2,515 $ 404 $(2,258) $ 3,907 $ (297) $ 3,610 ======== ======= ======= ======= ======== ======== ======== Nine months ended September 30, 2003: Third party net sales $205,380 $26,853 $11,203 $14,854 $258,290 $ - $258,290 Intercompany sales 23,953 - 879 10,296 35,128 (35,128) - -------- ------- ------- ------- -------- -------- -------- $229,333 $26,853 $12,082 $25,150 $293,418 $(35,128) $258,290 ======== ======= ======= ======= ======== ======== ======== Operating income (loss) $(16,370) $ 2,293 $ 700 $(3,240) $(16,617) $ (6,028) $(22,645) ======== ======= ======= ======= ======== ======== ========
GAAP Adjustments, Corporate Items Garden All Segment and KSW EWP Zone Other Total Eliminations Total --- --- ------ ----- ------- ------------ ----- (In thousands) Year ended December 31, 2002: Third party net sales $243,039 $31,247 $ 9,523 $ 34,171 $317,980 $ - $317,980 Intercompany sales 31,839 - 1,221 9,398 42,458 (42,458) - -------- ------- ------- -------- -------- -------- ----- $274,878 $31,247 $10,744 $ 43,569 $360,438 $(42,458) $317,980 ======== ======= ======= ======== ======== ======== ======== Depreciation and amortization $ 14,693 $ 1,006 $ - $ 1,646 $ 17,345 $ 51 $ 17,396 Operating profit (loss) (3,921) 2,743 85 (2,971) (4,064) (561) (4,625) Identifable segment assets 157,321 18,130 4,186 18,537 198,174 17,321 215,495 Capital expenditures 7,597 164 - 208 7,969 4 7,973 Year ended December 31, 2001: Third party net sales $227,018 $32,409 $ 8,011 $ 41,232 $308,670 $ - $308,670 Intercompany sales 32,124 - 472 8,363 40,959 (40,959) - -------- ------- ------- -------- -------- -------- ----- $259,142 $32,409 $ 8,483 $ 49,595 $349,629 $(40,959) $308,670 ======== ======= ======= ======== ======== ======== ======== Depreciation and amortization $ 15,312 $ 1,043 $ - $ 1,815 $ 18,170 $ (1,178) $ 16,992 Operating profit (loss) (12,779) 4,156 210 (2,603) (11,016) 6,610 (4,406) Identifable segment assets 162,796 18,252 2,812 22,923 206,783 160,117 366,900 Capital expenditures 3,534 269 - 85 3,888 1 3,889 Year ended December 31, 2000: Third party net sales $241,665 $31,909 $ 6,346 $ 58,401 $338,321 $ - $338,321 Intercompany sales 32,232 - 414 8,280 40,926 (40,926) - -------- ------- ------- -------- -------- -------- ----- $273,897 $31,909 $ 6,760 $ 66,681 $379,247 $(40,926) $338,321 ======== ======= ======= ======== ======== ======== ======== Depreciation and amortization $ 15,289 $ 1,067 $ - $ 2,090 $ 18,446 $ (1,222) $ 17,224 Equity in loss of unconsolidated affiliate (281) - - - (281) - (281) Operating profit (loss) (23,989) 3,134 345 (1,964) (22,474) 6,885 (15,589) Identifable segment assets 172,563 19,187 3,990 29,453 225,193 160,510 385,703 Capital expenditures 12,191 352 - 502 13,045 7 13,052
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, 2000 2001 2002 ---- ---- ---- (In thousands) Operating loss $(15,589) $ (4,406) $(4,625) Equity in loss of unconsolidated affiliate (281) - - General corporate items: Interest income 599 253 66 Other income 183 565 34 General income (expenses), net (2,002) (2,232) (4,600) Gain on early extinguishment of debt - - 54,739 Interest expense (15,346) (14,575) (5,569) -------- -------- ------- Income (loss) before income taxes $(32,436) $(20,395) $40,045 ======== ======== =======
Note 3 - Inventories: Inventories are stated at the lower of cost or market. At December 31, 2002 and September 30, 2003, the last-in, first-out ("LIFO") method was used to determine the cost of approximately 77% and 67% respectively, of total inventories and the first-in, first-out or average cost methods were used to determine the cost of other inventories.
December 31, September 30, 2002 2003 ---- ---- (In thousands) Steel and wire products: Raw materials .................................... $ 8,825 $ 5,307 Work in process .................................. 14,920 8,615 Finished goods ................................... 21,178 13,427 Supplies ......................................... 14,710 13,632 ------- ------- 59,633 40,981 Less LIFO reserve ................................ 13,352 13,252 ------- ------- 46,281 27,729 Lawn and garden products - finished goods .......... 3,808 -- ------- ------- $50,089 $27,729 ======= =======
Note 4 - Notes payable and long-term debt:
December 31, September 30, 2002 2003 ---- ---- (In thousands) Revolving credit facilities: Keystone ................................. $ 28,328 $ 35,050 EWP ...................................... 1,362 2,000 Garden Zone .............................. 1,650 -- 8% Notes ................................... 28,908 28,116 6% Notes ................................... 16,031 16,031 9 5/8% Notes ............................... 6,150 6,150 Keystone Term Loan ......................... 4,167 3,229 County Term Loan ........................... 10,000 10,000 Other ...................................... 645 186 -------- -------- 97,241 100,762 Less current maturities .................. 33,935 68,522 -------- -------- $ 63,306 $ 32,240 ======== ========
At September 30, 2003, Keystone was not in compliance with certain financial covenants included in its primary revolving credit facility (the "Keystone Revolver"). Under the terms of the Keystone Revolver, failure to comply with these covenants is considered an event of default and gives the lender the right to accelerate the maturity of both the Keystone Revolver and the Keystone Term Loan. As such, the Keystone Term Loan was classified as a current liability at September 30, 2003. The Company is currently negotiating with the Keystone Revolver and Keystone Term Loan lender to obtain waivers of such financial covenants or otherwise amend the respective loan agreements to cure the defaults. There can be no assurance Keystone will be successful in obtaining such waivers or amendments and if Keystone is unsuccessful there is no assurance the Company would have the liquidity or other financial resources sufficient to repay the applicable indebtedness if such indebtedness is accelerated. The indenture governing Keystone's 8% Notes provides the holders of such Notes with the right to accelerate the maturity of the Notes in the event of a default by Keystone resulting in an acceleration of the maturity of any of the Company's other secured debt. As such, the 8% Notes were also classified as a current liability at September 30, 2003. As a result of Keystone's failure to comply with the financial covenants in its primary revolving credit facility, in October 2003 the lender increased the interest rate on the Keystone revolving credit facility and Keystone Term Loan by .5% per annum, eliminated the Company's LIBOR interest rate option and instituted a $5.5 million reserve against Keystone's borrowing base. In connection with its ongoing discussions with the lender, Keystone continues to evaluate possible restructuring alternatives to improve its overall financial condition. In this regard, Keystone has retained financial advisors to assist the Company in the process of evaluating possible restructuring alternatives. In addition, a wholly-owned subsidiary of Contran has agreed to loan the Company up to an aggregate of $6 million under the terms of a revolving credit facility that, as amended, matures November 30, 2003. This facility is collateralized by the common stock of EWP owned by Keystone. Through November 14, 2003, the Company has not borrowed any amounts under such facility. Note 5 - Income taxes: At September 30, 2003, considering all factors believed to be relevant, including the Company's recent operating results, its expected future near-term productivity rates; cost of raw materials, electricity, labor and employee benefits, environmental remediation, and retiree medical coverage; interest rates; product mix; sales volumes and selling prices; and the fact that accrued OPEB expenses will become deductible over an extended period of time and require the Company to generate significant amounts of future taxable income, the Company believes its gross deferred tax assets do not currently meet the "more-likely-than-not" realizability test. As such, at December 31, 2002, the Company had provided a deferred tax asset valuation allowance of approximately $89.0 million. As a result of the deferred tax asset valuation allowance, the Company does not anticipate recognizing a tax benefit associated with its expected pre-tax losses during 2003 will be appropriate. Accordingly, during the first nine months of 2003, the Company increased the deferred tax asset valuation allowance by approximately $10.1 million. Keystone will continue to review the recoverability of its deferred tax assets, and based on such periodic reviews, Keystone could recognize a change in the valuation allowance related to its deferred tax assets in the future. Summarized below are (i) the differences between the income tax provision (benefit) and the amounts that would be expected by applying the U.S. federal statutory income tax rate of 35% to the income (loss) before income taxes and cumulative effect of change in accounting principle, and (ii) the components of the income tax provision.
Nine months ended September 30, 2002 2003 ---- ---- (In thousands) Expected tax provision (benefit), at statutory rate $17,851 $(9,347) U.S. state income taxes, net 2,315 (732) Deferred tax asset valuation allowance 1,429 10,056 Other, net 27 23 ------- ------- Income tax provision (benefit) $21,622 $ - ======= ======= Comprehensive provision (benefit) for income taxes: Currently refundable: U.S. federal $ (28) $ (20) U.S. state 28 20 ------- ------- Net currently refundable - - Deferred income taxes, net 21,622 - ------- ------- $21,622 $ - ======= ======= Comprehensive provision for income taxes allocable to: Income before cumulative effect of change in accounting principle $21,622 $ - Cumulative effect of change in accounting principle - - ------- ------- $21,622 $ - ======= =======
Note 6 - Other accrued liabilities:
December 31, September 30, 2002 2003 ---- ---- (In thousands) Current: Employee benefits $ 11,455 $ 11,624 Self insurance 10,336 10,671 Environmental 8,103 8,006 Deferred vendor payments 3,338 3,338 Legal and professional 1,176 970 Disposition of former facilities 659 668 Interest 318 124 Other 4,831 4,605 -------- -------- $ 40,216 $ 40,006 ======== ======== Noncurrent: Deferred vendor payments $ 10,252 $ 8,090 Environmental 7,087 6,745 Workers compensation payments 2,309 1,963 Interest 298 601 Other 391 98 -------- -------- $ 20,337 $ 17,497 ======== ========
Note 7 - Environmental matters: 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 24 governmental and private actions associated with environmental matters, including waste disposal sites and facilities currently or previously owned, operated or used by Keystone, certain of which are on the United States Environmental Protection Agency's (the "U.S. EPA") Superfund National Priorities List or similar state lists. These proceedings seek cleanup costs, damages for personal injury or property damage and/or damages for injury to natural resources. Certain of these proceedings involve claims for substantial amounts. Although Keystone may be jointly and severally liable for such costs, in most cases, it is only one of a number of PRPs who may also be jointly and severally liable. On a quarterly basis, Keystone evaluates the potential range of its liability at sites where it has been named as a PRP or defendant by analyzing and estimating the range of reasonably possible costs to Keystone. Such costs include, among other things, expenditures for remedial investigations, monitoring, managing, studies, certain legal fees, clean-up, removal and remediation. Keystone believes it has provided adequate accruals ($14.8 million at September 30, 2003) for these matters at 13 sites for which Keystone believes its liability is probable and reasonably estimable, but Keystone's ultimate liability may be affected by a number of factors, including the imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes in remedial alternatives and costs, the allocation of such costs among PRPs, the solvency of other PRPs or a determination that Keystone is potentially responsible for the release of hazardous substances at other sites, any of which could result in expenditures in excess of amounts currently estimated by Keystone to be required for such matters. In addition, with respect to other PRPs and the fact that the Company may be jointly and severally liable for the total remediation cost at certain sites, the Company could ultimately be liable for amounts in excess of its accruals due to, among other things, reallocation of costs among PRPs or the insolvency of one or more PRPs. In addition, the actual timeframe for payments by Keystone for these matters may be substantially in the future. Keystone believes it is not possible to estimate the range of costs for seven sites. For these sites, generally the investigation is in the early stages, and it is either unknown as to whether or not the Company actually had any association with the site, or if the Company had association with the site, the nature of its responsibility, if any, for the contamination at the site and the extent of contamination. The timing on when information would become available to the Company to allow the Company to estimate a range of loss is unknown and dependent on events outside the control of the Company, such as when the party alleging liability provides information to the Company. The upper end of the range of reasonably possible costs to Keystone for sites for which it is possible to estimate costs (16 sites) is approximately $20.6 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 8 sites as to which no estimate of liability can presently be made because the respective investigations are in early stages. The extent of CERCLA liability cannot be determined until the Remedial Investigation/Feasibility Study ("RI/FS") is complete, the U.S. EPA issues a Record of Decision ("ROD") and costs are allocated among PRPs. The extent of liability under analogous state cleanup statutes and for common law equivalents is subject to similar uncertainties. The exact time frame over which the Company makes payments with respect to its accrued environmental costs is unknown and is dependent upon, among other things, the timing of the actual remediation process which in part depends on factors outside the control of the Company. At each balance sheet date, the Company makes an estimate of the amount of its accrued environmental costs which will be paid out over the subsequent 12 months, and the Company classifies such amount as a current liability. The remainder of the accrued environmental costs are classified as a noncurrent liability. More detailed descriptions of certain legal proceedings relating to environmental matters are set forth below. A summary of activity in the Company's environmental accruals for the nine month period ended September 30, 2003 is as follows:
Nine months ended September 30, 2003 (In thousands) Balance at beginning of period ............................ $ 15,190 Payments .................................................. (439) -------- Balance at end of period .................................. $ 14,751 ========
The Company is currently involved in the closure of inactive waste disposal units at its Peoria facility pursuant to a closure plan approved by the Illinois Environmental Protection Agency ("IEPA") in September 1992. The original closure plan provides for the in-place treatment of seven hazardous waste surface impoundments and two waste piles to be disposed of as special wastes. The Company recorded an estimated liability for remediation of the impoundments and waste piles based on a six-phase remediation plan. The Company adjusts the recorded liability for each Phase as actual remediation costs become known. During 1995, the Company began remediation of Phases II and III and completed these Phases, as well as Phase IV during 1996. During 1998 and 1999 the Company did not have any significant remediation efforts relative to Phases V and VI. During 2000, Keystone began preliminary efforts relative to Phase V. Pursuant to agreements with the IEPA and Illinois Attorney General's office, the Company is depositing $75,000 per quarter into a trust fund. The Company must continue these quarterly deposits and cannot withdraw funds from the trust fund until the fund balance exceeds the sum of the estimated remaining remediation costs plus $2 million. At December 31, 2002 and September 30, 2003 the trust fund had balances of $5.1 million and $5.3 million, respectively, which amounts are included in other noncurrent assets because the Company does not expect to have access to any of these funds until after September 30, 2004. In February 2000, Keystone received a notice from the U.S. EPA giving formal notice of the U.S. EPA's intent to issue a unilateral administrative order to Keystone pursuant to section 3008(h) of the Resource Conservation and Recovery Act ("RCRA"). The draft order enclosed with this notice would require Keystone to: (1) investigate the nature and extent of hazardous constituents present at and released from five alleged solid waste management units at the Peoria facility; (2) investigate hazardous constituent releases from "any other past or present locations at the Peoria facility where past waste treatment, storage or disposal may pose an unacceptable risk to human health and the environment"; (3) complete by June 30, 2001 an "environmental indicators report" demonstrating the containment of hazardous substances that could pose a risk to "human receptors" and further demonstrating that Keystone "has stabilized the migration of contaminated groundwater at or from the facility;" (4) submit by January 30, 2002 proposed "final corrective measures necessary to protect human health and the environment from all current and future unacceptable risks of releases of hazardous waste or hazardous constituents at or from the Peoria facility; and (5) complete by June 30, 2001 the closure of the sites discussed in the preceding paragraph now undergoing RCRA closure under the supervision of the IEPA. Keystone has complied with deadlines in the draft order. During the fourth quarter of 2000, Keystone entered into a modified Administrative Order on Consent, which may require the Company to conduct cleanup activities at certain solid waste management units at its Peoria facility depending on the results of soil and groundwater sampling and risk assessment to be conducted by Keystone during future periods pursuant to the order. In March 2000, the Illinois Attorney General (the "IAG") filed and served a seven-count complaint against Keystone for alleged violations of the Illinois Environmental Protection Act, 415 ILCS 5/31, and regulations implementing RCRA at Keystone's Peoria facility. The complaint alleges Keystone violated RCRA in failing to prevent spills of an alleged hazardous waste on four separate occasions during the period from June 1995 through January 1999. The complaint also alleges the Company illegally "stored", "disposed of" and manifested the same allegedly hazardous waste on some or all of those occasions. In addition, the complaint alleges these hazardous waste spills resulted in groundwater pollution in violation of the Illinois Environmental Protection Act. The complaint further alleges Keystone improperly disposed of hazardous waste on two occasions at a landfill not permitted to receive such wastes. The complaint seeks the maximum statutory penalties allowed which ranges up to $50,000 for each violation and additional amounts up to $25,000 for each day of violation. Keystone has answered the complaint and proceedings in the case have been stayed pending the outcome of settlement negotiations between Keystone and the IAG's office. In June 2000, the IAG filed a Complaint For Injunction And Civil Penalties against Keystone. The complaint alleges the Company's Peoria facility violated its National Pollutant Discharge Elimination System ("NPDES") permit limits for ammonia and zinc discharges from the facility's wastewater treatment facility into the Illinois River. The complaint alleges specific violations of the 30-day average ammonia limit in the NPDES permit for three months in 1996, 11 months in 1997, 12 months in 1998, 11 months in 1999 and the first two months of 2000. The complaint further alleges two violations of the daily maximum limit for zinc in October and December of 1999. Keystone has answered the complaint and proceedings in the case have been stayed pending the outcome of settlement negotiations between the Company and the IAG's office. "Superfund" sites The Company is subject to federal and state "Superfund" legislation that imposes cleanup and remediation responsibility upon present and former owners and operators of, and persons that generated hazardous substances deposited upon, sites determined by state or federal regulators to contain hazardous substances. Keystone has been notified by U.S. EPA that the Company is a PRP under the federal "Superfund" legislation for the alleged release or threat of release of hazardous substances into the environment at eight sites. These situations involve cleanup of landfills and disposal facilities which allegedly received hazardous substances generated by discontinued operations of the Company. Although Keystone believes its comprehensive general liability insurance policies provide indemnification for certain costs the Company incurs at the "Superfund" sites discussed below, it has only recorded receivables for the estimated insurance recoveries at three of those sites. During prior years, the Company has received payments from certain of its insurers in exchange for releasing such insurers from coverage for certain years of environmental related liabilities. Such amounts are included in Keystone's self insurance accruals. In July 1991, the United States filed an action against a former division of the Company and four other PRPs in the United States District Court for the Northern District of Illinois (Civil Action No. 91C4482) seeking to recover investigation and remediation costs incurred by U.S. EPA at the Byron Salvage Yard, located in Byron, Illinois. In April 1992, Keystone filed a third-party complaint in this civil action against 15 additional parties seeking contribution in the event the Company is held liable for any response costs at the Byron site. Neither the Company nor the other designated PRPs are performing any investigation of the nature and extent of the contamination. In December 1996, Keystone, U.S. EPA and the Department of Justice entered into the Fifth Partial Consent Decree to settle Keystone's liability for EPA response costs incurred at the site through April 1994 for a payment of $690,000. Under the agreement Keystone is precluded from recovering any portion of the $690,000 settlement payment from other parties to the lawsuit. In January 1997, Keystone paid the $690,000 settlement. Keystone will remain potentially liable for EPA response costs incurred after April 30, 1994, and natural resource damage claims, if any, that may be asserted in the future. Keystone recovered a portion of the $690,000 payment from its insurer. In March 1997, U.S. EPA issued a Proposed Remedial Action Plan ("PRAP") recommending that a limited excavation of contaminated soils be performed at an estimated cost of $63,000, that a soil cover be placed over the site, an on-site groundwater pump and treat system be installed and operated for an estimated period of 15 years, and that both on-site and off-site groundwater monitoring be conducted for an indefinite period. U.S. EPA's cost estimate for the recommended plan is $5.1 million. U.S. EPA's estimate of the highest cost alternatives evaluated but not recommended in the PRAP is approximately $6 million. The Company filed public comments on May 1, 1997, objecting to the PRAP. In March 1999, Keystone and other PRP's received a CERCLA special notice letter notifying them for the first time of a September 1998 ROD and requesting a commitment on or before May 19, 1999 to perform soils work required by that ROD that was estimated to cost approximately $300,000. In addition, the special notice letter also requested the PRPs to reimburse U.S. EPA for costs incurred at the site since May 1994 in the amount of $1.1 million, as well as for all future costs the U.S. EPA will incur at the site in overseeing the implementation of the selected soils remedy and any future groundwater remedy. Keystone refused to agree to the U.S. EPA's past and future cost demand. In August 1999, U.S. EPA issued a groundwater PRAP with an estimated present value cost of $3 million. Keystone filed public comments opposing the PRAP in September 1999. In October 2002, Keystone and the other remaining PRPs entered into a second Consent Decree with the U.S. EPA, in order to resolve their liability for performance of the U.S. EPA's September 1998 ROD for a soils remedy at the site, for the performance of the U.S. EPA's December 1999 ROD for remedial action regarding the groundwater component of Operable Unit No. 4 at the site, for payment of U.S. EPA's site costs incurred since May 1994 as well as future U.S. EPA oversight costs, and for the transfer of certain funds that may be made available to the PRPs as a result of a consent decree reached between U.S. EPA and another site PRP. Under the terms of the second Consent Decree, and the PRP Agreement was executed to implement the PRPs' performance under that decree, Keystone is required to pay approximately $700,000 (of which approximately $600,000 has already been paid into a PRP Group trust fund), and would remain liable for 18.57% of future U.S. EPA oversight costs as well as a similar share of any unanticipated cost increases in the soils remedial action work. (Under the agreements, the City of Byron, Illinois, would assume responsibility for any cost overruns associated with the municipal water supply components of the groundwater contamination remedy.) The U.S. EPA served the PRP Group in February 2003 with its first oversight cost claim under the second Consent Decree, in the amount of $186,000 for the period from March 1, 2000 to November 25, 2002. Keystone's share of that claim is approximately $35,000. The U.S. EPA has also requested changes to the groundwater monitoring program at the site that may require future increases in the PRP Group's groundwater monitoring reserves. In September 2002, the IAG served a demand letter on Keystone and 3 other PRP's seeking recovery of approximately $1.3 million in state cleanup costs incurred at the Byron Salvage Yard site. The PRP's are currently negotiating with the IAG in an attempt to settle this claim. The four PRP's named in the demand letter are also attempting to include other site PRP's in the negotiations. It remains possible that these negotiations could fail and that Keystone's ultimate liability for the Byron Salvage Yard site could increase in a subsequent settlement agreement or as a result of litigation. In September 1991, the Company along with 53 other PRPs, executed a consent decree to undertake the immediate removal of hazardous wastes and initiate a RI/FS of the Interstate Pollution Control site located in Rockford, Illinois. The Company's percentage allocation within the group of PRPs agreeing to fund this project is currently 2.14%. However, the Company's ultimate allocation, and the ultimate costs of the RI/FS and any remedial action, are subject to change depending, for example, upon: the number and financial condition of the other participating PRPs, field conditions and sampling results, results of the risk assessment and feasibility study, additional regulatory requirements, and the success of a contribution action seeking to compel additional parties to contribute to the costs of the RI/FS and any remedial action. The RI/FS began in 1993, was completed in 1997 and approved by IEPA in 1998. In the summer of 1999, IEPA selected a capping and soil vapor extraction remedy estimated by the PRP group to have a present value cost of approximately $2.5 million. IEPA may also demand reimbursement of future oversight costs. The three largest PRPs at the site are negotiating a consent order with IEPA for the performance of the site remedy. Keystone expects to participate with the larger PRPs in the performance of that remedy based on its RI/FS allocation percentage. In August 1987, Keystone was notified by U.S. EPA that it is a PRP responsible for the alleged hazardous substance contamination of a site previously owned by the Company in Cortland, New York. Four other PRPs participated in the RI/FS and a contribution action is pending against eleven additional viable companies which contributed wastes to the site. Following completion of the RI/FS, U.S. EPA published in November 1997, a PRAP for the site that recommends the excavation and disposal of contaminated soil, installation of an impervious cap over a portion of the site, placement of a surface cover over the remainder of the site and semi-annual groundwater monitoring until drinking water standards are met by natural attenuation. U.S. EPA estimates the costs of this recommended plan to be $3.1 million. The highest cost remedy evaluated by U.S. EPA but not recommended in the PRAP is estimated by U.S. EPA to have a cost of $19.8 million. In September 1998, Keystone and four other PRPs who had funded the prior remedial actions and RI/FS signed a proposed Consent Decree with U.S. EPA calling for them to be "nonperforming parties" for the implementation of a March 1998 Record of Decision. Under this Consent Decree, Keystone could be responsible for an unspecified share of U.S. EPA's future costs in the event that changes to the existing ROD are required. Prior to its acquisition by Keystone, DeSoto, Inc. ("DeSoto") was notified by U.S. EPA that it is one of approximately 50 PRPs at the Chemical Recyclers, Inc. site in Wylie, Texas. In January 1999, DeSoto changed its name to Sherman Wire Company ("Sherman"). Under a consent order with the U.S. EPA, the PRP group has performed a removal action and an investigation of soil and groundwater contamination. Such investigation revealed certain environmental contamination. It is anticipated U.S. EPA will order further remedial action, the exact extent of which is not currently known. Sherman is paying on a non-binding interim basis, approximately 10% of the costs for this site. Remediation costs, at Sherman's present allocation level, are estimated at a range of from $1.5 million to $4 million. In 1984, U.S. EPA filed suit against DeSoto by amending a complaint against Midwest Solvent Recovery, Inc. et al ("Midco"). DeSoto was a defendant based upon alleged shipments to an industrial waste recycling storage and disposal operation site located in Gary, Indiana. The amended complaint sought relief under CERCLA to force the defendants to clean up the site, pay non-compliance penalties and reimburse the government for past clean up costs. In June 1992, DeSoto settled its portion of the case by entering into a partial consent decree, and all but one of the eight remaining primary defendants and 93 third party defendants entered into a main consent decree. Under the terms of the partial consent decree, DeSoto agreed to pay its pro rata share (13.47%) of all costs under the main consent decree. In addition to certain amounts included in the trust fund discussed below, Sherman also has certain funds available in other trust funds due it under the partial consent decree. These credits can be used by Sherman (with certain limitations) to fund its future liabilities under the partial consent decree. In 1995, DeSoto was notified by the Texas Natural Resource Conservation Commission ("TNRCC") that there were certain deficiencies in prior reports to TNRCC relative to one of its non-operating facilities located in Gainesville, Texas. During 1999, Sherman entered into TNRCC's Voluntary Cleanup Program. Remediation costs are presently estimated to be between $1.2 million and $2 million. Investigation activities are on-going including additional soil and groundwater sampling. In December 1991, DeSoto and approximately 600 other PRPs were named in a complaint alleging DeSoto and the PRPs generated wastes that were disposed of at a Pennsauken, New Jersey municipal landfill. The plaintiffs in the complaint were ordered by the court to show in what manner the defendants were connected to the site. The plaintiffs provided an alleged nexus indicating garbage and construction materials from DeSoto's former Pennsauken facility were disposed of at the site and such waste allegedly contained hazardous material to which DeSoto objected. The claim was dismissed without prejudice in August 1993. In 1996, DeSoto received an amended complaint containing the same allegations. This matter is in discovery stage at September 30, 2003. Sherman has denied any liability with regard to this matter and expects to vigorously defend the action. Sherman has received notification from the TNRCC stating that DeSoto is a PRP at the Material Recovery Enterprises Site near Ovalo, Texas, with approximately 3% of the total liability. The matter has been tendered to the Valspar Corporation ("Valspar") pursuant to a 1990 agreement whereby Valspar purchased certain assets of DeSoto. Valspar has been handling the matter under reservation of rights. At the request of Valspar, Sherman has signed a participation agreement which would require Sherman to pay no less than 3% of the remediation costs. Valspar continues to pay for legal fees in this matter and has reimbursed Sherman for all assessments. In addition to the sites discussed above, Sherman is allegedly involved at various other sites and in related toxic tort lawsuits in which it does not currently expect to incur significant liability. Under the terms of a 1990 asset sale agreement, DeSoto established two trust funds totaling $6 million to fund potential clean-up liabilities relating to the assets sold. Sherman has access to the trust funds for any expenses or liabilities it incurs relative to environmental claims relating to the sites identified in the trust agreements. The trust funds are primarily invested in United States Treasury securities and are classified as restricted investments on the balance sheet. In October 2000, one of the trust's term expired and the $3.6 million trust balance was returned to Sherman. As of December 31, 2002 and September 30, 2003, the balance in the trust fund was approximately $385,000 and $136,000 respectively. Note 8 - Other commitments and contingencies: Current litigation 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 and the Insurance Company are in the process of commencing a mediation. If the mediation process is not successful, 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. 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. Note 9 - 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 effect of the assumed conversion of the Series A Convertible Preferred Stock was antidilutive in the three months ended September 30, 2002 period and the three and nine month periods ended September 30, 2003. The dilutive effect of the assumed conversion of the Series A Preferred Stock in the nine month ended September 30, 2002 period is calculated from its issuance in March 2002. Keystone stock options were omitted from the calculation because they were antidilutive in all periods presented.
Three months ended Nine months ended September 30, September 30, 2002 2003 2002 2003 ---- ---- ---- ---- (In thousands) Numerator: Net income (loss) before cumulative effect of change in accounting principle $(4,801) $(11,836) $29,216 $(27,004) Less Series A Preferred Stock dividends (1,485) (1,485) (3,198) (4,455) ------- -------- ------- -------- Basic net income (loss) before cumulative effect of change in accounting principle (6,286) (13,321) 26,018 (31,459) Series A Preferred Stock dividends - - 3,198 - ------- -------- ------- --------- Diluted net income (loss) before cumulative effect of change in accounting principle $(6,286) $(13,321) $29,216 $(31,459) ======= ======== ======= ======== Denominator: Average common shares outstanding 10,068 10,068 10,067 10,068 Dilutive effect of Series A Preferred Stock - - 9,900 - ------- -------- ------- --------- Diluted shares 10,068 10,068 19,967 10,068 ======= ======== ======= ========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERALL RESULTS OF OPERATIONS: Keystone believes it is a leading manufacturer of steel fabricated wire products, industrial wire and wire rod for the agricultural, industrial, construction, original equipment manufacturer and retail consumer markets. Historically, the Company has experienced greater sales and profits during the first half of the year due to the seasonality of sales in principal wire products markets, including the agricultural and construction markets. Keystone is also engaged in scrap recycling through ARC and through July 2003, was engaged in the distribution of wire, plastic and wood lawn and garden products to retailers through Garden Zone. As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions that statements in this Quarterly Report on Form 10-Q relating to matters that are not historical facts including, but not limited to, statements found in this "Management's Discussion And Analysis Of Financial Condition And Results Of Operations," are forward-looking statements that represent management's beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as "believes", "intends", "may", "should", "could", "anticipates," "expected" or comparable terminology, or by discussions of strategies or trends. Although Keystone believes the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such forward-looking statements. While it is not possible to identify all factors, Keystone continues to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in the Company's other filings with the Securities and Exchange Commission including, but not limited to; o Future supply and demand for the Company's products (including cyclicality thereof), o Customer inventory levels, o Changes in raw material and other operating costs (such as ferrous scrap and energy) o General economic conditions, o Competitive products and substitute products, o Changes in customer and competitor strategies, o The impact of pricing and production decisions, o The possibility of labor disruptions, o Environmental matters (such as those requiring emission and discharge standards for existing and new facilities), o Government regulations and possible changes therein, o Significant increases in the cost of providing medical coverage to employees and retirees, o The ability to successfully obtain reductions in the Company's operating costs, o The ability of the Company to successfully renegotiate the terms of certain of its indebtedness, o The ultimate resolution of pending litigation, o International trade policies of the United States and certain foreign countries, o Any possible future litigation, and o Other risks and uncertainties as discussed in this Quarterly Report and the Annual Report, including, without limitation, the section referenced above. Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. Keystone disclaims any intention or obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. The following table sets forth Keystone's steel and wire production, ferrous scrap costs, sales volume and pricing data for the periods indicated.
Three months ended Nine months ended September 30, September 30, 2002 2003 2002 2003 ---- ---- ---- ---- (Tons in thousands) Production volume (tons): Billets 202 172 586 510 Wire rod 182 158 556 490 Average per-ton ferrous scrap purchase cost $102 $117 $ 93 $114 Sales volume(tons): Fabricated wire products 71 63 230 202 Industrial wire 24 25 76 77 Wire rod 75 82 236 232 Billets - 5 - 15 ---- ---- ---- ---- 170 175 542 526 ==== ==== ==== ==== Per-ton selling prices: Fabricated wire products $672 $657 $685 $677 Industrial wire $452 $453 $448 $445 Wire rod $321 $317 $304 $312 Billets $ - $172 $ - $196 All steel and wire products $486 $454 $486 $468
The following table sets forth the components of the Company's net sales for the periods indicated.
Three months ended Nine months ended September 30, September 30, 2002 2003 2002 2003 ---- ---- ---- ---- (In millions) Steel and wire products: Fabricated wire products $47.7 $41.3 $157.8 $136.5 Industrial wire 10.7 11.5 34.1 34.2 Wire rod 23.9 26.1 71.9 72.3 Billets - .9 - 3.1 Other .4 .3 1.0 1.0 ----- ----- ------ ------ 82.7 80.1 264.8 247.1 Lawn and garden products 1.1 .4 8.5 11.2 ----- ----- ------ ------ $83.8 $80.5 $273.3 $258.3 ===== ===== ====== ======
The following table sets forth selected operating data of the Company as a percentage of net sales for the periods indicated.
Three months ended Nine months ended September 30, September 30, 2002 2003 2002 2003 ---- ---- ---- ---- Net sales ......................... 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold ................ 94.8 (104.1) 91.3 99.2 ------- ------- ------- ------- Gross margin ...................... 5.2 % (4.1)% 8.7 % .8 % ======= ======= ======= ======= Selling expense ................... 2.0 % 2.1 % 1.9 % 2.4 % General and administrative expense 6.8 % 6.7 % 5.9 % 5.1 % Defined benefit pension expense (credit) ......................... .4 % 2.2 % (.4)% 2.0 % Corporate expense (income) ........ .8 % (.1)% 1.0 % .9 % Gain on early extinguishment of debt ............................. - % - % (20.0)% - % Income (loss) before income taxes and cumulative effect of change in accounting principle ............. (5.9)% (14.8)% 18.7 % (10.3)% Income tax provision .............. -- -- 7.9 -- Minority interest in after-tax earnings ........................ (.1) (.1) .1 .2 ------- ------- ------- ------- Net income (loss) before cumulative effect of change in accounting principle ........................ (5.8)% (14.7)% 10.7 % (10.5)% ======= ======= ======= =======
Net sales of $80.5 million in the 2003 third quarter were down 4% from $83.8 million during the same period in 2002. The decline in sales was due primarily to a $32 per-ton decline in steel and wire product selling prices and a $700,000 decline in Garden Zone's sales all partially offset by a 3% increase in shipment volume of the Company's steel and wire products. Shipments of wire rod increased 9% while per-ton selling prices of wire rod declined 1%. Industrial wire shipments during the 2003 third quarter increased 4% from the 2002 third quarter while per-ton selling prices remained relatively constant. Fabricated wire product shipments declined 11% during the 2003 third quarter as compared to the 2002 third quarter while per-ton selling prices declined 2%. In addition, during the third quarter of 2003, Keystone sold 5,000 tons of billets as compared to none sold during the 2002 third quarter. The lower per-ton selling price of the Company's steel and wire products during the 2003 third quarter adversely impacted total net sales by $5.4 million. Management believes the decline in shipment volume of wire products during the 2003 third quarter was due to softening demand due in part to high levels of imported steel and wire products. Although high levels of imported steel and wire products continue, these import levels have been somewhat mitigated by former competitors of the Company exiting the marketplace. However, despite this decline in domestic production capacity, rod imports have filled the resulting production shortfall and as such, per-ton selling prices continue to be adversely impacted by the availability of high levels of imported wire rod. The decline in Garden Zone's sales during the third quarter of 2003 as compared to the 2002 third quarter was due to Keystone selling its 51% interest in Garden Zone during July of 2003. Net sales of $258.3 million in the first nine months of 2003 were down 6% from $273.3 million in the first nine months of 2002. This decline in sales was primarily due to a 3% decline in shipments of Keystone's steel and wire products and an $18 per-ton decline in selling prices of the Company's steel and wire products partially offset by a $2.7 million increase in Garden Zone's sales during the first nine months of 2003. Garden Zone's sales during the first nine months of 2003 prior to Keystone's sale of its interest in Garden Zone amounted to $11.2 million as compared to $8.5 million during the first nine months of the same period in 2002. Wire rod shipments during the first nine months of 2003 declined 2% over the first nine months of 2002 while per-ton selling prices increased 3%. Industrial wire shipments during the first nine months of 2003 increased 1% over the first nine months of 2002 while per-ton selling prices declined 1%. Fabricated wire products shipments during the first nine months of 2003 declined 12% as compared to the first nine months of 2002 while per-ton selling prices declined 1%. Despite increases in per-ton selling prices of wire rod, overall average per-ton selling prices declined between the first nine months of 2002 and 2003 due to declines in the per-ton selling prices of industrial wire and fabricated wire products. Management believes the decline in shipment volume during the first nine months of 2003 was due to large volumes of imported product throughout the nine month period and softening demand due in part to prolonged winter weather throughout most of the United States and uncertainties regarding military action in the Middle East during the first six months of 2003. Billet production during the third quarter of 2003 decreased 30,000 tons or 15% to 172,000 tons from 202,000 tons during the third quarter of 2002. The primary reason for the lower production levels during the 2003 third quarter was intentional production curtailments as a result of weakening demand and excess inventory levels. Wire rod production during the third quarter of 2003 declined to 158,000 tons as compared to production of 182,000 tons in the 2002 third quarter, primarily as a result of the lower billet production during the 2003 third quarter. Billet production during the first nine months of 2003 declined by 76,000 tons to 510,000 tons from 586,000 tons during the first nine months of 2002. The primary reason for the lower production levels in the first nine months of 2003 was intentional production curtailments as a result of weakening demand and excess inventory levels. Lower wire rod production during the first nine months of 2003, as compared to the first nine months of 2002, resulted in a decline of 66,000 tons of wire rod produced during the first nine months of 2003 to 490,000 tons from 556,000 tons during the first nine months of 2002. The low wire rod production throughout the first nine months of 2003 was due primarily to the lower billet production throughout the nine month period and unplanned production outages during the 2003 first quarter to effect repairs to the Company's rod mill. Gross profit during the 2003 third quarter declined to a negative $3.3 million from a $4.3 million profit in the 2002 third quarter as the Company's gross margin declined from 5.2% in the 2002 period to a negative 4.1% in the 2003 third quarter. This decline in gross margin was due primarily to the lower overall average per-ton steel and wire product selling prices and higher costs for ferrous scrap, Keystone's primary raw material. The higher ferrous scrap costs during the 2003 third quarter adversely impacted gross profit by approximately $2.9 million. Gross profit during the first nine months of 2003 declined to $2.0 million from $23.9 million in the first nine months of 2002 as the Company's gross margin declined from 8.7% to .8%. This decline in gross margin was due primarily to lower overall average per-ton selling prices of the Company's steel and wire products combined with substantially higher costs for ferrous scrap as well as higher costs for natural gas all partially offset by increased production efficiencies in the Company's steel and wire mills. The higher costs for ferrous scrap and natural gas adversely impacted gross profit by $11.9 million and $3.3 million, respectively. In addition, during the first nine months of 2002, Keystone received $800,000 of insurance proceeds from business interruption policies related to incidents in prior years as compared to none received during the first nine months of 2003. Selling expense of $1.7 million during the third quarter of 2003 approximated selling expenses during the 2002 third quarter. Selling expense of $6.2 million during the first nine months of 2003 was approximately $981,000 higher than the same period in 2002. The primary reasons for the increased selling expenses during the 2003 periods were increased advertising costs and employee related expenses. General and administrative expenses during the 2003 third quarter declined from $5.7 million in the 2002 third quarter to $5.4 million due primarily to lower employee related and travel costs. Due to the decline in general and administrative expenses during each of the first three quarters of 2003 as compared to each of the 2002 first three quarters, general and administrative expenses for the first nine months of 2003 declined $2.9 million from $16.2 million in 2002 to $13.3 million in 2003. During the third quarter of 2003, Keystone recorded defined benefit pension expense of $1.8 million as opposed to $297,000 recorded in the third quarter of 2002. During the first nine months of 2003, Keystone recorded defined benefit pension expense of $5.2 million as opposed to a $1.2 million credit recorded during the first nine months of 2002. Keystone currently anticipates the total 2003 pension expense will approximate $6.9 million. The anticipated higher pension expense in 2003 is due primarily to a $50 million decline in plan assets during 2002 and the resulting lower expected return on plan assets component of defined benefit pension plan expense. However, cash contributions by the Company for defined benefit pension plans will not be required in 2003. General corporate expenses during the third quarter of 2003 declined from $645,000 during the 2002 third quarter to an $87,000 credit. The primary reason for this decline was due primarily to lower employee related and legal and professional costs during the 2002 third quarter. General corporate expenses during the first nine months of 2003 in the amount of $2.3 million were approximately $600,000 lower than general corporate expenses during the first nine months of 2002 due primarily to lower employee related and legal and professional costs. Interest expense in the third quarter of 2003 approximated the interest expense during the third quarter of 2002. Average borrowings by Keystone approximated $101.9 million in the third quarter of 2003 as compared to $97.1 million in the third quarter of 2002. During the third quarter of 2003, Keystone's weighted-average interest rate was 2.6% per annum as compared to 2.9% per annum in the third quarter of 2002. Interest expense in the first nine months of 2003 was lower than the first nine months of 2002 due principally to lower debt levels and interest rates. Average borrowings by Keystone approximated $104.9 million in the first nine months of 2003 as compared to $110.5 million in the first nine months of 2002. During the first nine months of 2003, Keystone's weighted-average interest rate was 2.8% per annum as compared to 4.9% per annum in the first nine months of 2002. As a result of the Company's debt restructuring completed in March 2002, Keystone recognized a $54.7 million pre-tax gain ($33.1 million net of tax) in the first nine months of 2002. In July 2003, Garden Zone purchased Keystone's 51% ownership in Garden Zone for approximately $1.1 million in cash. In addition, Garden Zone repaid a $493,000 advance that had been made in a prior year, and Keystone was released from its guarantee of 51% of Garden Zone's revolving credit facility. Keystone reported a pre-tax gain of approximately $786,000 in the third quarter of 2003 as a result of this transaction. In August 2003, Keystone sold substantially all of the assets of its Keystone Fasteners business for $2.2 million in cash. Keystone reported a pre-tax gain of approximately $287,000 in the third quarter of 2003 as a result of this transaction. The principal reasons for the difference between the U.S. federal statutory income tax rate and the Company's effective income tax rates are explained in Note 5 to the Consolidated Financial Statements. At September 30, 2003, the Company had recorded a deferred tax asset valuation allowance of $99.1 million resulting in no net deferred tax assets. Keystone periodically reviews the recoverability of its deferred tax assets to determine whether such assets meet the "more-likely-than-not" recognition criteria. The Company will continue to review the recoverability of its deferred tax assets, and based on such periodic reviews, Keystone could recognize a change in the recorded valuation allowance related to its deferred tax assets in the future. As a result of the deferred tax asset valuation allowance, the Company does not anticipate recognizing a tax benefit associated with its expected pre-tax losses during 2003 will be appropriate. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. As a result of adopting SFAS No. 142, negative goodwill of approximately $20.0 million recorded at December 31, 2001 was eliminated as a cumulative effect of change in accounting principle. As a result of the items discussed above, Keystone recorded a net loss during the third quarter of 2003 of $11.8 million as compared to a net loss of $4.8 million in the third quarter of 2002, and a net loss during the first nine months of 2003 of $27.0 million as compared to net income in the first nine months of 2002 of $49.2 million. SEGMENT RESULTS OF OPERATIONS: Keystone's operating segments are defined as components of consolidated operations about which separate financial information is available that is regularly evaluated by the chief operating decision maker in determining how to allocate resources and in assessing performance. The Company's chief operating decision maker is Mr. David L. Cheek, President and Chief Executive Officer of Keystone. Each operating segment is separately managed, and each operating segment represents a strategic business unit offering different products. During 2003, the Company expanded the composition of its reportable segments. The corresponding segment information for prior periods has been restated to conform to the current year presentation. See Note 2 to the Consolidated Financial Statements. The Company's operating segments are organized along its manufacturing facilities and include two reportable segments: (i) Keystone Steel and Wire ("KSW") which manufacturers and sells wire rod, wire and wire products for agricultural, industrial, construction, commercial, original equipment manufacturers and retail consumer markets and, (ii) Engineered Wire Products ("EWP") which manufactures and sells welded wire reinforcement in both roll and sheet form that is utilized in concrete construction products including pipe, pre-cast boxes and applications for use in roadways, buildings and bridges. Prior to July 2003, the Company owned a 51% interest in Garden Zone, a distributor of wire, plastic and wood lawn and garden products to retailers. In July 2003, Keystone sold its 51% ownership in Garden Zone. In addition, prior to July 2003, Keystone also operated three businesses that did not constitute reportable business segments. These businesses sell wire and wire products for agricultural, industrial, construction, commercial, original manufacturers and retail consumer markets. The results of operations of these businesses are aggregated and included under the "All Other" heading in the following tables. During July 2003, Keystone transferred its operations at one of these three businesses to other Keystone facilities, and during August 2003 Keystone sold another of the businesses. As a result, as of August 2003, the "All Other" heading in the following tables only includes Sherman Wire. The net proceeds from the sale of Garden Zone and Keystone Fasteners aggregated $3.3 million. The gain on the sale of these businesses, as well as the results of operations of each of Garden Zone and Keystone Fasteners are not significant, individually and in the aggregate. Accordingly, the Company has elected not to present their results of operations as discontinued operations for all periods presented due to their immateriality. The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that (i) defined benefit pension expense for each segment is recognized and measured on the basis of estimated current service cost of each segment, with the remainder of the Company's net defined benefit pension expense or credit not allocated to each segment but still is reported as part of operating profit or loss, (ii) segment OPEB expense is recognized and measured based on the basis of the estimated expense of each segment, with the remainder of the Company's actual OPEB expense not allocated to each segment but still is reported as part of operating profit or loss, (iii) elimination of intercompany profit or loss on ending inventory balances is not allocated to each segment but still is reported as part of operating profit or loss, (iv) LIFO inventory reserve adjustments are not allocated to each segment but still are reported as a part of operating profit or loss, and (v) amortization of goodwill and negative goodwill are included in general corporate expenses and are not allocated to any segment and are not included in total reported operating profit or loss. General corporate expense also includes OPEB and environmental expense relative to facilities no longer owned by the Company. Intercompany sales between reportable segments are generally recorded at prices that approximate market prices to third-party customers.
Principal Business Segment entities Location Products Keystone Steel & Wire Keystone Steel & Wire Peoria, IL Billets, wire rod, industrial wire and fabricated wire products Engineered Wire Products Engineered Wire Products Upper Sandusky, Fabricated wire products OH Garden Zone Garden Zone (1) Charleston, SC Wire, wood and plastic lawn and garden products All Other Sherman Wire Sherman, TX Industrial wire and fabricated wire products Sherman Wire of Caldwell(2) Caldwell, TX Industrial wire and fabricated wire products Keystone Fasteners(3) Springdale, AR Fabricated wire products
(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.
Three months ended Nine months ended September 30, September 30, --------------------- ----------------- 2002 2003 2002 2003 ---- ---- ---- ---- (In thousands) Revenues: Keystone Steel and Wire ......... $ 73,099 $ 71,230 $ 237,253 $ 229,333 Engineered Wire Products ........ 10,692 11,559 25,914 26,853 Garden Zone ..................... 1,347 371 9,481 12,082 All other ....................... 10,444 5,585 36,746 25,150 Elimination of intersegment revenues ...................... (11,738) (8,293) (36,104) (35,128) -------- --------- --------- --------- $ 83,844 $ 80,452 $ 273,290 $ 258,290 ======== ========= ========= ========= Operating profit (loss): Keystone Steel and Wire ......... $ (1,447) $ (7,671) $ 3,246 $ (16,370) Engineered Wire Products ........ 1,025 1,136 2,515 2,293 Garden Zone ..................... (200) (58) 404 700 All Other ....................... (1,305) (1,380) (2,258) (3,240) GAAP adjustments and eliminations (1,410) (4,166) (297) (6,028) -------- --------- --------- --------- $ (3,337) $ (12,139) $ 3,610 $ (22,645) ======== ========= ========= =========
Keystone Steel & Wire KSW's 2003 third quarter net sales of $71.2 million declined approximately $1.9 million, or 3%, from the same period during 2002 due to lower shipment volumes and lower overall per-ton product selling prices. During the 2003 third quarter, KSW sold 2,000 less tons of product than the 2002 third quarter. KSW's per-ton product selling prices during the 2003 third quarter were approximately $6 per-ton lower than the per-ton selling prices of the 2002 third quarter. During the first nine months of 2003, KSW's net sales of $229.3 million declined $7.9 million or 3%, from the first nine months of 2002 due primarily to lower shipment volumes partially offset by higher product per-ton selling prices. During the first nine months of 2003, KSW sold 23,000 less tons of product than the first nine months of 2002 at per-ton selling prices that were $3 per-ton higher than the same period in 2002. During both the three and nine month periods ended September 30, 2003, approximately 10% of KSW's net sales were made to other Keystone entities. The majority of these sales were sales of wire rod. During the third quarter of 2003, KSW recorded a $7.7 million operating loss as compared to a $1.4 million operating loss recorded during the 2002 third quarter due primarily to the lower selling prices and higher ferrous scrap and natural gas costs during the 2003 third quarter. KSW recorded a $16.4 million operating loss during the first nine months of 2003 as compared to $3.2 million of operating income recorded during the first nine months of 2002 due primarily to the lower selling prices and higher ferrous scrap and natural gas costs during the 2003 second and third quarters all partially offset by increased production efficiencies in KSW's steel and wire mills. In addition, during the first nine months of 2002, KSW received $800,000 of insurance proceeds from business interruption policies related to incidents in prior years as compared to none received in the same period during 2003. Engineered Wire Products EWP's sales of $11.6 million during the third quarter of 2003 were approximately 8% higher than sales during the third quarter of 2002 of $10.7 million due primarily to higher shipment volume as well as higher per-ton product selling prices. EWP's shipment volume during the 2003 third quarter increased 6% over the same quarter in 2002 and per-ton product selling prices increased 2%. EWP's sales of $26.9 million during the first nine months of 2003 were approximately 4% higher than sales during the first nine months of 2003 of $25.9 million due primarily to a 2% increase in both shipment volume and per-ton product selling prices. During the third quarter of 2003, EWP recorded $1.1 million of operating profit as compared to an operating profit of $1.0 million recorded in the 2002 third quarter. This 11% increase in operating profit was primarily a result of increased per-ton product selling prices partially offset by an increase in the cost of wire rod, EWP's primary raw material. EWP purchases substantially all of its wire rod requirements from KSW. Despite increased sales by EWP during the 2003 first nine months as compared to the same periods in 2002, operating income during the first nine months of 2003 declined by $222,000 to $2.3 million. The primary reason for the decline in EWP's operating income levels during the first nine months of 2003 as compared to the first nine months of 2002 was an increase in the cost of wire rod. Garden Zone Keystone sold its 51% interest in Garden Zone in July 2003. As such, Keystone only included in its results of operations for the 2003 third quarter, 18 days of Garden Zone's operations during the 2003 third quarter as compared to a full quarter included during the 2002 third quarter. As a result, Garden Zone's net sales during the three months ended September 30, 2003 declined to $400,000 as compared to $1.3 million during the third quarter of 2002. Despite only recording a partial quarter of sales during the 2003 third quarter, Garden Zone's net sales during the first nine months of 2003 increased to $12.1 million as compared to $9.5 million during the first nine months of 2002. The primary reason for the increased sales during the first nine months of 2003 was increased market penetration by Garden Zone. Garden Zone recorded an operating loss of $58,000 during the third quarter of 2003 as compared to a $200,000 operating loss during the 2002 third quarter and Garden Zone recorded operating income of $700,000 during the first nine months of 2003 as compared to $404,000 during the first nine months of 2002. The increased operating profit during the first nine months of 2003 as compared to the first nine months of 2002 was due primarily to the increased sales levels during that same period. All Other Keystone transferred its operations at one of these three locations (Sherman Wire of Caldwell, Inc.) during July 2003 to Sherman Wire and Keystone Steel & Wire and sold a second one of these locations (Keystone Fasteners) during August 2003. Primarily as a result of these transactions, net sales during the third quarter of 2003 at these three locations declined by $4.9 million to approximately $5.6 million as compared to $10.4 million during the third quarter of 2002. During the first nine months of 2003, these three locations recorded net sales of $25.7 million as compared to $36.7 million during the first nine months of 2002. In addition to the 2003 third quarter disposition and termination of operations, the primary reason for the decline in sales during the first nine months of 2003 was lower shipment volumes and lower per-ton product selling prices. During the third quarter of 2003 and the first nine months of 2003, shipment volume at these locations declined 46% and 28%, respectively from the same periods in 2002 due primarily to lower volume at the Sherman Wire of Caldwell facility. In addition, shipment volume at Keystone Fasteners during the 2003 periods was also down significantly from the same periods during 2002 due primarily to increased competition from import producers. In prior periods, the Sherman Wire of Caldwell facility provided substantially all of Keystone Fastener's industrial wire requirements. During 2003, the Company began transitioning the manufacturing of Keystone Fastener's industrial wire to other Keystone facilities. See Note 10 to the Consolidated Financial Statements. The per-ton product selling prices for these locations during the 2003 third quarter and the first nine months of 2003 declined by 2% and 5%, respectively from the same periods during 2002. Keystone Fasteners purchased substantially all of its industrial wire requirements, their primary raw material, from either Sherman Wire or Sherman Wire of Caldwell, Inc. During the third quarter of 2003, these three locations recorded an operating loss of $1.4 million as compared to a $1.3 million operating loss during the 2002 third quarter and during the first nine months of 2003, these three locations recorded an operating loss of $3.2 million as compared to a $2.3 million operating loss during the first nine months of 2002. The primary reasons for the increased operating losses during the 2003 periods was the lower sales volume and overall per-ton product selling prices and higher cost for wire rod. These locations purchase substantially all of their wire rod requirements from KSW. 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 $528,000 during the three months ended September 30, 2002 and defined benefit pension expense of $1.0 million during the three months ended September 30, 2003. GAAP adjustments and eliminations included a defined benefit pension credit of $3.7 million during the nine months ended September 30, 2002 and defined benefit pension expense of $2.9 million during the nine months ended September 30, 2003. During the three month and nine month periods ended September 30, 2002, GAAP adjustments and eliminations included OPEB expense of $1.6 million and $3.8 million, respectively. GAAP adjustments and eliminations during both the three and nine month periods ended September 30, 2003, included OPEB expense of $3.2 million. Outlook for 2003 Due to continued high levels of steel and wire product imports, management currently believes capacity utilization and shipment volumes in 2003 will be less than 2002 levels and overall average per-ton selling prices for the year 2003 will be less than those of 2002. In addition, management currently believes these volumes and overall average per-ton selling prices combined with anticipated continued higher energy costs, higher scrap costs, an $8.4 million increase in defined benefit pension expense and a $3.2 million increase in OPEB expense will result in Keystone recording a loss before income taxes and cumulative effect of change in accounting principle for calendar 2003 in excess of the comparable amount in 2002 (exclusive of the $54.7 million gain in 2002 on early extinguishment of debt). The Company does not currently anticipate that recognizing a tax benefit associated with its pre-tax losses during 2003 will be appropriate. LIQUIDITY AND CAPITAL RESOURCES: The Company's cash flows from operating activities are affected by the seasonality of its business as sales of certain products used in the agricultural and construction industries are typically highest during the second quarter and lowest during the fourth quarter of each year. These seasonal fluctuations impact the timing of production, sales and purchases and have typically resulted in a use of cash from operations and increases in the outstanding balance under the Company's revolving credit facilities during the first quarter of each year. At September 30, 2003 Keystone had negative working capital of $85.0 million, including $2.1 million of notes payable and current maturities of long-term debt, $29.3 million of long-term debt classified as current as a result of the Company's failure to comply with certain financial covenants in the Keystone Revolver as well as outstanding borrowings under the Company's revolving credit facilities of $37.1 million. The amount of available borrowings under these revolving credit facilities is based on formula-determined amounts of trade receivables and inventories, less the amount of outstanding letters of credit. At September 30, 2003, unused credit available for borrowing under Keystone's $45 million revolving credit facility (the "Keystone Revolver"), which expires in March 2005 and EWP's $7 million revolving credit facility, which expires in June 2004, (the "EWP Revolver") were $2.9 million and $5.0 million, respectively. The Keystone Revolver requires daily cash receipts be used to reduce outstanding borrowings, which results in the Company maintaining zero cash balances when there are balances outstanding under this credit facility. A wholly-owned subsidiary of Contran has agreed to loan Keystone up to an aggregate of $6 million under the terms of a revolving credit facility that matures on November 30, 2003. Through November 14, 2003, the Company had not borrowed any amounts under such facility. Relative changes in assets and liabilities generally result from the timing of production, sales and purchases. Such relative changes can significantly impact the comparability of cash flow from operations from period to period, as the statement of operations impact of such items may occur in a different period from when the underlying cash transaction occurs. For example, raw materials may be purchased in one period, but the payment for such raw materials may occur in a subsequent period. Similarly, inventory may be sold in one period, but the cash collection of the receivable may occur in a subsequent period. During the first nine months of 2003, notes and accounts receivable increased by $14.5 million and inventories declined by $16.4 million. These changes in accounts receivable and inventory balances from December 31, 2002 to September 30, 2003 are consistent with trends in prior years. The Company's business is highly seasonal due to Keystone's principal wire products markets, including the agricultural and construction markets. As a result of this seasonality, the Company must typically build inventory levels during the first and fourth quarters of each year in order to serve its customers thoughout the peak selling season that generally lasts through May of each year. During the second and third quarters of each year, these high inventory levels are reduced as the inventory is converted to sales and there is a corresponding seasonal increase in accounts receivable balances. The seasonal decline in inventory levels did not occur during the 2002 period due to abnormally low levels of inventory at the end of 2001. Liquidity constraints during the last quarter of 2001 prevented the Company from building its normal inventory levels. These liquidity constraints were resolved during the first and second quarter of 2002. Keystone's cash flows from operations declined from a net $5.0 million of cash provided in the first nine months of 2002 to a net $7.5 million of cash used in the first nine months of 2003. The $12.5 million net reduction is due primarily to (i) the $26.3 million decline in operating income (loss) during such periods (ii) a higher amount of net cash provided from changes in the Company' inventories, receivables, payables and accruals of $14.1 million in the first nine months of 2003. Relative changes in accounts receivable are affected by, among other things, the timing of sales and the collection of the resulting receivable. Relative changes in inventories, accounts payable and accrued liabilities are affected by, among other things, the timing of raw material purchases and the payment for such purchases and the relative difference between production volume and sales volume. Keystone's total debt balances during the first nine months of 2003 increased by $7.1 million. The Company's operations used $7.5 million of cash, capital expenditures amounted to $2.4 million and Keystone made principal payments of $2.1 million on long-term debt. In addition, the company received $3.3 million in total proceeds from the sale of its interest in Garden Zone and the sale of substantially all the assets of its Keystone Fasteners business. These uses of cash resulted in an increase of $9.1 million in borrowings under the Company's revolving credit facilities. During the first nine months of 2003, Keystone made capital expenditures of $2.4 million as compared to $4.8 million in the first nine months of 2002. Capital expenditures for calendar year 2003 are currently estimated to be approximately $3.0 million and are related primarily to upgrades of production equipment. Keystone currently anticipates these capital expenditures will be funded using cash flows from operations together with borrowing availability under the Company's credit facilities. See Notes 7 and 8 to the Consolidated Financial Statements for discussions of the Company's environmental liabilities and current litigation. The Company periodically reviews the recoverability of its deferred tax assets to determine whether such assets meet the "more-likely-than-not" recognition criteria. At September 30, 2003, after 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 the gross deferred tax assets may not currently meet the "more-likely-than-not" realizability test. As such, at September 30, 2003 the Company has a deferred tax asset valuation allowance of approximately $12.6 million. The Company will continue to review the recoverability of its deferred tax assets, and based on such periodic reviews, the Company could change the valuation allowance related to its deferred tax assets in the future. The Company does not currently expect it will be appropriate to recognize a tax benefit associated with its expected pre-tax losses during 2003. Keystone incurs significant ongoing costs for plant and equipment and substantial employee medical benefits for both current and retired employees. As such, Keystone is vulnerable to business downturns and increases in costs, and accordingly, routinely compares its liquidity requirements and capital needs against its estimated future operating cash flows. In addition to planned reductions in fixed costs and announced increases in certain product selling prices, Keystone is taking additional action towards improving its liquidity. These actions include, but are not limited to, reducing inventory levels through more efficient production schedules, modifying coverages and participant contribution levels of medical plans for both employees and retirees, attempting to restructure certain indebtedness, restructuring the terms of its collective bargaining agreement with the labor union at its Peoria facility to reduce the Company's operating costs and reducing capital expenditures. With respect to the Company's attempt to restructure the terms of its collective bargaining agreement, the Company has initiated discussions in an attempt to renegotiate the existing terms of the collective bargaining agreement that currently expires in 2006. The Company is seeking, among other things, to achieve modifications that will result in a reduction of its annual operating costs at the Peoria facility. Discussions with union representatives are ongoing and no specific terms or agreement has been reached to date. Keystone has also sold, and may in the future consider, the sale of certain divisions or subsidiaries that are not necessary to achieve the Company's long-term business objectives. However, there can be no assurance Keystone will be successful in any of these or other efforts, or that if successful, they will provide sufficient liquidity for the Company's operations during the next year. At September 30, 2003, Keystone was not in compliance with certain financial covenants included in the Keystone Revolver. Under the terms of the Keystone Revolver, failure to comply with these covenants is considered an event of default and gives the lender the right to accelerate the maturity of both the Keystone Revolver and the Keystone Term Loan. The Company is currently negotiating with the Keystone Revolver and Keystone Term Loan lender to obtain waivers of such financial covenants or otherwise amend the respective loan agreements to cure the defaults. As a result of these events of default, the lender has placed a $5.5 million reserve on the Company's available borrowing base. There can be no assurance Keystone will be successful in obtaining such waivers or amendments, and if Keystone is unsuccessful, there is no assurance the Company would have the liquidity or other financial resources sufficient to repay the Keystone Revolver and the Keystone Term Loan if such indebtedness is accelerated. 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 acceleration of the maturity of any of the Company's other secured debt. The prolonged downturn in the steel industry and the $5.5 million reserve placed on the Company's available borrowing base by the lender on Keystone's primary revolving credit facility continue to adversely effect Keystone's liquidity and capital resources. In response, the Company has been required to defer capital expenditures, defer maintenance expenditures and delay payments to vendors and other creditors to the extent possible. Despite these measures, the Company's availability under its primary revolving credit facility is extremely limited and a significant portion of the Company's accounts payable are past due compared to stated terms. Keystone continues to evaluate possible restructuring alternatives to improve its overall financial condition. In this regard, and as a result of ongoing negotiations with its lenders, the Company has retained financial advisors to assist the Company in the process of evaluating possible restructuring alternatives. Management currently believes funds available under the Company's credit facilities may not be sufficient to fund the anticipated needs of the Company's operations and capital improvements for the year ending December 31, 2003. This belief is based upon management's assessment of various financial and operational factors, including, but not limited to, assumptions relating to product shipments, product mix and selling prices, production schedules, productivity rates, raw materials, electricity, labor, employee benefits and other fixed and variable costs, interest rates, repayments of long-term debt, capital expenditures, and available borrowings under the Company's credit facilities. There are many factors that could cause actual future results to differ materially from management's current assessment, as discussed above, and actual results could differ materially from those forecasted or expected which could materially adversely effect the future liquidity, financial condition and results of operations of the Company. Additionally, significant declines in the Company's end-user markets or market share, the inability to maintain satisfactory billet and wire rod production levels, or other unanticipated costs, if significant, could result in a need for funds greater than the Company currently has available. The Company's inability to obtain adequate additional sources of liquidity, or its inability to successfully restructure the terms of its collective bargaining agreement to allow the Company to reduce its operating costs, could have a material adverse effect on Keystone's ability to continue as a going-concern. There can be no assurance the Company would be able to obtain an adequate amount of additional liquidity. See Notes 13 and 15 to the Consolidated Financial Statements in the Annual Report. ITEM 4. CONTROLS AND PROCEDURES The Company maintains a system of disclosure controls and procedures. The term "disclosure controls and procedures," as defined by regulations of the Securities and Exchange Commission ("SEC"), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the SEC under the Act is accumulated and communicated to the Company's management, including its principal executive officer and its principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Each of David L. Cheek, the Company's President and Chief Executive Officer, and Bert E. Downing, Jr., the Company's Vice President, Chief Financial Officer, Corporate Controller and Treasurer, have evaluated the Company's disclosure controls and procedures as of September 30, 2003. Based upon their evaluation, these executive officers have concluded that the Company's disclosure controls and procedures are effective as of the date of such evaluation. The Company also maintains a system of internal controls over financial reporting. The term "internal control over financial reporting," as defined by regulations of the SEC, means a process designed by, or under the supervision of, the Company's principal executive and principal financial officers, or persons performing similar functions, and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("GAAP)", and includes those policies and procedures that: o Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company, o Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and o Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's consolidated financial statements. There has been no change to the Company's system of internal controls over financial reporting during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's system of internal controls over financial reporting. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Reference is made to disclosure provided under the caption "Current litigation" in Notes 7 and 8 to the Consolidated Financial Statements. ITEM 6. Exhibits and Reports on Form 8-K (a) The Company has retained a signed original of any exhibit listed below that contains signatures, and the Company will provide any such exhibit to the Commission or its staff upon request. The following exhibit is included herein: 4.1 Fifth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of August 31, 2003, by and between Registrant and EWP Financial LLC. 4.2 Sixth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of September 30, 2003, by and between Registrant and EWP Financial LLC. 4.3 Seventh Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of October 31, 2003, by and between Registrant and EWP Financial LLC. 31.1 Certification. 31.2 Certification. 32.1 Certification. (b) Reports on Form 8-K filed during the quarter ended September 30, 2003: August 14, 2003 - Reported Item 5. S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Keystone Consolidated Industries, Inc. (Registrant) Date: November 19, 2003 By /s/Bert E. Downing, Jr. ------------------------------------- Bert E. Downing, Jr. Vice President, Chief Financial Officer, Corporate Controller and Treasurer (Principal Financial and Accounting Officer) EX-4.1 3 kciexh41.txt FIFTH AMENDMENT TO AMENDED AND RESTATED EWP BRIDGE LOAN AGREEMENT This FIFTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (this "Amendment") is made and entered into as of August 27, 2003 between KEYSTONE CONSOLIDATED INDUSTRIES, INC., a Delaware corporation ("Keystone"), and the lenders listed in Annex I hereto (individually a "Lender" and collectively, the "Lenders"). Recitals A. Keystone and the Lenders have entered into that certain Amended and Restated EWP Bridge Loan Agreement dated as of November 21, 2001, as amended by the First Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of March 18, 2002 between Keystone and the Lenders, the Second Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of December 31, 2002 between Keystone and the Lenders, the Third Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of June 30, 2003 between Keystone and the Lenders and as further amended by the Fourth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of July 31, 2003 between Keystone and the Lenders (collectively, the "Loan Agreement"). B. Keystone and the Lenders wish to amend the Loan Agreement as provided herein. C. Capitalized terms used but not otherwise defined herein shall have the same meanings given to such terms in the Loan Agreement. Agreement In consideration of the foregoing and the mutual covenants and agreements herein, the parties hereto do hereby agree as follows. Section 1. Amendment to Loan Agreement. Section 3.3 of the Loan Agreement shall be amended by deleting such section in its entirety and replacing it with the following: 3.3. Maturity Date. Unless the same shall become due earlier as a result of acceleration of the maturity, the Loans shall mature on September 30, 2003 (the "Maturity Date"), at which time the outstanding principal balance of the Loans and all accrued and unpaid interest and commitment fees shall become due and payable. Section 2. Effect on Loan Agreement and Notes. Upon the effectiveness of this Amendment, all Notes outstanding immediately prior to such effectiveness shall be deemed amended as necessary or appropriate to reflect the terms and conditions set forth in the Loan Agreement as modified by this Amendment, and in the event of a conflict between any term or condition of such Notes and the Loan Agreement as so modified, the Loan Agreement as so modified shall control, notwithstanding any provision of such Notes or the Loan Agreement to the contrary. Except as modified by this Amendment, the Loan Agreement and such Notes are in all respects ratified and confirmed and all of the terms, conditions and provisions thereof shall remain in full force and effect. Section 3. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the state of Texas without giving effect to any choice or conflict of law provision or rule (whether of the state of Texas or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the state of Texas. Section 4. Headings. The section headings contained in this Amendment are for reference purposes only and will not affect in any way the meaning or interpretation of this Amendment. Section 5. Counterparts; Facsimile. This Amendment may be separately executed in counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. This Amendment when executed may be validly delivered by facsimile or other electronic transmission. Section 6. Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction, shall as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. [Remainder of page intentionally left blank. Signature page follows.] The parties hereto have caused this Amendment to be executed by the undersigned thereunto duly authorized as of the date first written above. KEYSTONE: KEYSTONE CONSOLIDATED INDUSTRIES, INC. By: ---------------------------------------------------- Name: ---------------------------------------------------- Title: ---------------------------------------------------- THE LENDERS: EWP FINANCIAL LLC By: ----------------------------------------------------- Name: ----------------------------------------------------- Title: ----------------------------------------------------- ANNEX I
% of Total Name of Lender Address of Lender Commitment Commitment EWP Financial LLC Three Lincoln Centre $6,000,000 100% 5430 LBJ Freeway Suite 1700 Dallas, Texas 75240 Total Commitment Amount:................................ $6,000,000
EX-4.2 4 kciexh42.txt SIXTH AMENDMENT TO AMENDED AND RESTATED EWP BRIDGE LOAN AGREEMENT This SIXTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (this "Amendment") is made and entered into as of September 30, 2003 between KEYSTONE CONSOLIDATED INDUSTRIES, INC., a Delaware corporation ("Keystone"), and the lenders listed in Annex I hereto (individually a "Lender" and collectively, the "Lenders"). Recitals A. Keystone and the Lenders have entered into that certain Amended and Restated EWP Bridge Loan Agreement dated as of November 21, 2001, as amended by the First Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of March 18, 2002 between Keystone and the Lenders, the Second Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of December 31, 2002 between Keystone and the Lenders, the Third Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of June 30, 2003 between Keystone and the Lenders, the Fourth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of July 31, 2003 between Keystone and the Lenders and as further amended by the Fifth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of August 27, 2003 between Keystone and the Lenders (collectively, the "Loan Agreement"). B. Keystone and the Lenders wish to amend the Loan Agreement as provided herein. C. Capitalized terms used but not otherwise defined herein shall have the same meanings given to such terms in the Loan Agreement. Agreement In consideration of the foregoing and the mutual covenants and agreements herein, the parties hereto do hereby agree as follows. Section 1. Amendment to Loan Agreement. Section 3.3 of the Loan Agreement shall be amended by deleting such section in its entirety and replacing it with the following: 3.3. Maturity Date. Unless the same shall become due earlier as a result of acceleration of the maturity, the Loans shall mature on October 31, 2003 (the "Maturity Date"), at which time the outstanding principal balance of the Loans and all accrued and unpaid interest and commitment fees shall become due and payable. Section 2. Effect on Loan Agreement and Notes. Upon the effectiveness of this Amendment, all Notes outstanding immediately prior to such effectiveness shall be deemed amended as necessary or appropriate to reflect the terms and conditions set forth in the Loan Agreement as modified by this Amendment, and in the event of a conflict between any term or condition of such Notes and the Loan Agreement as so modified, the Loan Agreement as so modified shall control, notwithstanding any provision of such Notes or the Loan Agreement to the contrary. Except as modified by this Amendment, the Loan Agreement and such Notes are in all respects ratified and confirmed and all of the terms, conditions and provisions thereof shall remain in full force and effect. Section 3. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the state of Texas without giving effect to any choice or conflict of law provision or rule (whether of the state of Texas or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the state of Texas. Section 4. Headings. The section headings contained in this Amendment are for reference purposes only and will not affect in any way the meaning or interpretation of this Amendment. Section 5. Counterparts; Facsimile. This Amendment may be separately executed in counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. This Amendment when executed may be validly delivered by facsimile or other electronic transmission. Section 6. Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction, shall as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. [Remainder of page intentionally left blank. Signature page follows.] The parties hereto have caused this Amendment to be executed by the undersigned thereunto duly authorized as of the date first written above. KEYSTONE: KEYSTONE CONSOLIDATED INDUSTRIES, INC. By: ------------------------------------------ Bert E. Downing, Jr., Vice President, Chief Financial Officer, Corporate Controller and Treasurer THE LENDERS: EWP FINANCIAL LLC By: ------------------------------------------ Bobby D. O'Brien Vice President, Chief Financial Officer and Treasurer
ANNEX I % of Total Name of Lender Address of Lender Commitment Commitment EWP Financial LLC Three Lincoln Centre $6,000,000 100% 5430 LBJ Freeway Suite 1700 Dallas, Texas 75240 Total Commitment Amount:................................ $6,000,000
EX-4.3 5 kciexh43.txt SEVENTH AMENDMENT TO AMENDED AND RESTATED EWP BRIDGE LOAN AGREEMENT This SEVENTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (this "Amendment") is made and entered into as of October 31, 2003 between KEYSTONE CONSOLIDATED INDUSTRIES, INC., a Delaware corporation ("Keystone"), and the lenders listed in Annex I hereto (individually a "Lender" and collectively, the "Lenders"). Recitals A. Keystone and the Lenders have entered into that certain Amended and Restated EWP Bridge Loan Agreement dated as of November 1, 2001, as amended by the First Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of March 18, 2002 between Keystone and the Lenders, the Second Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of December 31, 2002 between Keystone and the Lenders, the Third Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of June 30, 2003 between Keystone and the Lenders, the Fourth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of July 31, 2003 between Keystone and the Lenders, the Fifth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of August 27, 2003 between Keystone and the Lenders and as further amended by the Sixth Amendment to Amended and Restated EWP Bridge Loan Agreement dated as of September 30, 2003 between Keystone and the Lenders (collectively, the "Loan Agreement"). B. Keystone has requested that the Lenders provide an extension to the Loan Agreement and Keystone the ability to request and receive standby letters of credit against the available loan commitment under the Loan Agreement. C. Keystone and the Lenders wish to amend the Loan Agreement as provided herein. D. Capitalized terms used but not otherwise defined herein shall have the same meanings given to such terms in the Loan Agreement. Agreement In consideration of the foregoing and the mutual covenants and agreements herein, the parties hereto do hereby agree as follows. Section 1. Amendments to Loan Agreement. The following amendments to the Loan Agreement are hereby effective as of the date of this Amendment. (a) A new Section 2.4 is added to the Loan Agreement to read in its entirety as follows. 2.4 Letters of Credit. (a) Commitment. Upon the written application of the Company and such terms and conditions as the Agent may reasonably require, Agent will issue, until 15 days prior to the Maturity Date, standby letters of credit to beneficiaries designated by the Company for terms that expire no later than the Maturity Date. The Company will pay a letter of credit fee associated with issuance of the letters of credit, payable quarterly in arrears, equal to 3% per annum multiplied by the undrawn amount of outstanding letters of credit during the preceding quarter on a prorated basis. (b) Participation. Each of the Lenders will participate, in accordance with its Commitment percentage set forth in Annex 1 (the "Commitment Percentage"), in the Agent's risks and obligations under such letters of credit and in the Company's obligations for immediate reimbursement of the amount of any drawings made by the beneficiaries (which includes successors and transferees) under any letter of credit. This participation will be as a primary obligor to Agent and not as a surety for the Company. Each of the Lenders will pay to Agent such Lender's Commitment Percentage of any drawing made under any letter of credit within 24 hours of receipt of notice from Agent of such drawing regardless of the existence of an Event of Default, or any offset, defense or counterclaim of the Company. (c) Reduction in Availability. Upon issuance of a letter of credit under this Section, the amount of the total Commitments under this Agreement will be reduced in an equivalent amount, but no interest or fees (except Agent's letter of credit fees) will be payable on such amount until a drawing is made on such letter of credit. (d) Reimbursement. The Company promises and agrees to immediately reimburse Agent for the amount of any drawing made by any beneficiary under any letter of credit issued by Agent upon the application hereunder of the Company without offset, defense, or counterclaim against Agent other than payment resulting from gross negligence of Agent and without regard to any claims, offsets, defenses, or counterclaims that the Company has or may claim to have against its liability to the beneficiary of such letter of credit. If not reimbursed on the same Business Day and if the Company is not then insolvent or the subject of any insolvency proceeding, the amount so paid by Agent will be deemed to be a Loan in that amount to the Company as of the date when the draw is paid and will bear interest as provided for in this Agreement. (b) Section 3.3 of the Loan Agreement is amended by deleting such section in its entirety and replacing it in its entirety with the following. 3.3. Maturity Date. Unless the same shall become due earlier as a result of acceleration of the maturity, the Loans shall mature on November 30, 2003 (the "Maturity Date"), at which time the outstanding principal balance of the Loans and all accrued and unpaid interest and commitment fees shall become due and payable. Section 2. Effect on Loan Agreement and Notes. Upon the effectiveness of this Amendment, all Notes or outstanding immediately prior to such effectiveness shall be deemed amended as necessary or appropriate to reflect the terms and conditions set forth in the Loan Agreement as modified by this Amendment, and in the event of a conflict between any term or condition of such Notes and the Loan Agreement as so modified, the Loan Agreement as so modified shall control, notwithstanding any provision of such Notes or the Loan Agreement to the contrary. Except as modified by this Amendment, the Loan Agreement and such Notes are in all respects ratified and confirmed and all of the terms, conditions and provisions thereof shall remain in full force and effect. Section 3. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the state of Texas without giving effect to any choice or conflict of law provision or rule (whether of the state of Texas or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the state of Texas. Section 4. Headings. The section headings contained in this Amendment are for reference purposes only and will not affect in any way the meaning or interpretation of this Amendment. Section 5. Counterparts; Facsimile. This Amendment may be separately executed in counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. This Amendment when executed may be validly delivered by facsimile or other electronic transmission. Section 6. Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction, shall as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. [Remainder of page intentionally left blank. Signature page follows.] The parties hereto have caused this Amendment to be executed by the undersigned thereunto duly authorized as of the date first written above. KEYSTONE: KEYSTONE CONSOLIDATED INDUSTRIES, INC. By: --------------------------------------------- Bert E. Downing, Jr. Vice President, Chief Financial Officer, Corporate Controller and Treasurer THE LENDERS: EWP FINANCIAL LLC By: --------------------------------------------- Bobby D. O'Brien Vice President, Chief Financial Officer and Treasurer
ANNEX I % of Total Name of Lender Address of Lender Commitment Commitment EWP Financial LLC Three Lincoln Centre $6,000,000 100% 5430 LBJ Freeway Suite 1700 Dallas, Texas 75240 Total Commitment Amount:................................ $6,000,000
EX-31.1 6 kciexh311.txt Exhibit 31.1 CERTIFICATIONS I, David L. Cheek, the President and Chief Executive Officer of Keystone Consolidated Industries, Inc. certify that: 1) I have reviewed this quarterly report on Form 10-Q of Keystone Consolidated Industries, Inc.; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 19, 2003 /s/ David L. Cheek - ------------------------------------- David L. Cheek President and Chief Executive Officer EX-31.2 7 kciexh312.txt Exhibit 31.2 CERTIFICATIONS I, Bert E. Downing, Jr., the Vice President, Chief Financial Officer, Corporate Controller and Treasurer of Keystone Consolidated Industries, Inc. certify that: 1) I have reviewed this quarterly report on Form 10-Q of Keystone Consolidated Industries, Inc.; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 19, 2003 /s/ Bert E. Downing, Jr. - ----------------------------------------- Bert E. Downing, Jr. Vice President, Chief Financial Officer, Corporate Controller and Treasurer EX-32.1 8 kciexh321.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Keystone Consolidated Industries, Inc. (the Company) on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David L. Cheek, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ David L. Cheek /s/ Bert E. Downing, Jr. - ----------------------- ------------------------------- David L. Cheek Bert E. Downing, Jr. President and Chief Executive Officer Vice President and Chief November 19, 2003 Financial Officer November 19, 2003 Note: The certification the registrant furnished in this exhibit is not deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. Registration Statements or other documents filed with the Securities and Exchange Commission shall not incorporate this exhibit by reference, except as otherwise expressly stated in such filing. -----END PRIVACY-ENHANCED MESSAGE-----