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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 1996
Commission file number 1-3919
Keystone Consolidated Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 37-0364250
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1740
Three Lincoln Centre, Dallas, TX 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 458-0028
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 20 , 1997, 9,260,165 shares of common stock were outstanding. The
aggregate market value of the 5,456,056 shares of voting stock held by
nonaffiliates of the Registrant, as of such date, was approximately $48.4
million.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
PART I
ITEM 1. BUSINESS.
GENERAL
Keystone Consolidated Industries, Inc. ("Keystone") or the ("Company") is a
leading manufacturer of steel fabricated wire products and industrial wire for
the agricultural, industrial, construction, original equipment manufacturer and
retail consumer markets. The Company believes it is the second largest
manufacturer of fabricated wire products and industrial wire in the United
States based on tons produced (381,000 in 1996). The Company is vertically
integrated, converting substantially all of its fabricated wire products and
industrial wire from carbon steel rod produced in its steel mini-mill. During
1996, approximately 71% of the Company's net sales were generated from sales of
fabricated wire products and industrial wire with substantially all of the
balance generated from sales of rod not used in the Company's downstream
operations. Moreover, management believes that Keystone's downstream fabricated
wire products and industrial wire businesses better insulate it from the effects
of rod imports and increases in domestic rod production capacity as compared
with non-integrated rod producers. In 1996, the Company had net sales of $331
million.
The Company's fabricated wire products, which comprised 49% of its 1996 net
sales, include fencing, barbed wire, welded and woven hardware cloth and nails.
These products are sold to agricultural, construction, industrial, consumer do-
it-yourself and other end user markets. The Company serves these markets
through distributors, merchandisers and consumer do-it-yourself chains. A
significant proportion of these products are sold to agricultural, consumer do-
it-yourself and other end user markets which in management's opinion are
typically less cyclical than many steel consuming end-use markets such as the
automotive, construction, appliance and machinery manufacturing industries. The
Company believes it has developed a leading competitive position in these less
cyclical markets by offering a breadth of diverse products enabling customers to
source from one provider. Management believes the Company's ability to service
these customers with a breadth of fabricated wire products through multiple
production and distribution locations provides it a competitive advantage in
accessing important channels to rapidly growing markets. Approximately 75% of
the Company's fabricated wire products revenues are generated by sales under the
RED BRAND(R) trademark, a widely recognized brand name in the agricultural and
construction fencing marketplaces for more than 50 years.
The Company sells industrial wire, an intermediary product used in the
manufacture of fabricated wire products, to third parties who are generally not
in competition with the Company. These include manufacturers and producers of
nails, coat hangers, barbecue grills, air conditioners, tools, refrigerators and
other appliances. In 1996, third party sales of industrial wire accounted for
23% of Company net sales. The Company also sells carbon steel rod into the open
market which it is not able to consume in its downstream fabricated wire
products and industrial wire operations. In 1996, open market sales of rod
accounted for 28% of Company net sales. Of these rod sales, approximately 11%
were to Engineered Wire Products, Inc. ("EWP"), a fabricated wire products
company of which Keystone owns a 20% equity interest and has an option to
acquire the remaining 80%. See "Business -- Products, Markets and
Distributions."
Prior to September 1996, Keystone's cash flow was constrained due to large
required annual contributions to the Company's underfunded defined benefit
pension plans. To address the constraints placed upon the Company by these
pension plan obligations, the Company acquired DeSoto, Inc. ("DeSoto") in
September 1996 for $29.3 million (plus the assumption, through a subsidiary, of
DeSoto's liabilities) in a stock-for-stock merger transaction and simultaneously
merged the Keystone defined benefit pension plans with and into the DeSoto
defined benefit pension plan. While DeSoto manufactures household cleaning
products which generated 1996 pro forma revenues of $14.1 million, its principal
asset was a pension plan that was overfunded for financial reporting purposes by
approximately $91.2 million. As a result of the merger of the pension plans,
the Company's resulting pension plan was overfunded for financial reporting
purposes by $104.7 million at December 31, 1996. Management does not expect
Keystone to be required to make contributions to its pension plan in 1997.
Moreover, the Company's pension expense, which was $8.9 million, $8.7 million
and $3.7 million in 1994, 1995, and 1996, respectively, is expected to become a
credit for financial reporting purposes of approximately $3 million in 1997.
See Note 7 to the Consolidated Financial Statements.
The Company is the successor to Keystone Steel & Wire Company, which was
founded in 1889. In 1981, Contran Corporation ("Contran") acquired an interest
in the Company and subsequently acquired a majority of the Company's outstanding
capital stock. Substantially all of the outstanding voting stock of Contran is
held by trusts established for the benefit of the children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is the sole trustee. As a result of the
acquisition of DeSoto, Contran's beneficial ownership of the Company was reduced
to 41%. However, the Company may continue to be deemed to be controlled by
Contran and Mr. Simmons.
The statements in this Annual Report on Form 10-K relating to matters that
are not historical facts including, but not limited to, statements found in this
Item 1 - "Business", in Item 3 - "Legal Proceedings", and in Item 7 -
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations", are forward looking statements that involve a number of risks and
uncertainties. Factors that could cause actual future results to differ
materially from those expressed in such forward looking statements include, but
are not limited to, cost of raw materials, future supply and demand for the
Company's products (including cyclicality thereof), general economic conditions,
competitive products and substitute products, customer and competitor
strategies, the impact of pricing and production decisions, environmental
matters, government regulations and possible changes therein, and the ultimate
resolution of pending litigation and possible future litigation as discussed in
this Annual Report, including, without limitation, the sections referenced
above.
MANUFACTURING
The Company's manufacturing operations consist of an electric arc furnace
steel mill, referred to as a mini-mill, a rod mill and five wire and wire
product fabrication facilities. The manufacturing process commences in the
Peoria, Illinois arc shop with scrap steel being loaded into one of two electric
arc furnaces and converted into molten steel. The molten steel is then
transferred by ladle into a six-strand continuous casting machine from which it
emerges in five-inch square strands that are cut to predetermined lengths,
referred to as billets. These billets, along with any billets purchased from
outside suppliers, are then transferred to the adjoining rod mill.
Upon entering the rod mill, the billets pass through a computer-controlled,
multi-zone recuperative reheat furnace. The heated billets are fed into the
rolling line, where they pass through various finishing stands during the rod
production process. After rolling, the rod is coiled and cooled. After cooling,
the coiled rod passes through inspection stations for metallurgical, surface and
diameter checks. Finished coils are compacted and banded, and either
transferred to the Company's other facilities for processing into wire, nails
and other fabricated wire products or shipped to rod customers.
While the Company does not maintain a significant "shelf" inventory of
finished rod, it generally has on hand approximately a one-month supply of
fabricated wire and wire products inventory which enables the Company to fill
customer orders and respond to shifts in product demand.
PRODUCTS, MARKETS AND DISTRIBUTIONS
The following table sets forth certain information with respect to the
Company's steel and wire product mix in each of the last three years.
YEAR ENDING DECEMBER 31,
1994 1995 1996
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF TONS OF OF TONS OF OF TONS OF
SHIPPED SALES SHIPPED SALES SHIPPED SALES
PRODUCT
Fabricated wire
products 35.5% 50.6% 35.0% 49.8% 32.3% 48.7%
Industrial wire 22.3 22.1 23.6 23.4 23.1 23.2
Carbon steel rod 42.2 27.3 41.4 26.8 44.6 28.1
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Fabricated Wire Products. The Company is one of the leading suppliers in
the United States of agricultural fencing, barbed wire, stockade panels and a
variety of welded and woven wire mesh, fabric and netting for agricultural,
construction and industrial applications. The Company produces these products
at its Peoria, Illinois, Sherman, Texas and Caldwell, Texas facilities. These
products are distributed by the Company through farm supply distributors,
hardlines merchandisers, building and industrial materials distributors and
consumer do-it-yourself chains. Many of the Company's fencing and related wire
products are marketed under the Company's RED BRAND(R) label. As part of its
marketing strategy, the Company designs merchandise packaging, supportive
product literature and point-of-purchase displays for marketing of many of these
products to the retail consumer market. The Company also manufactures products
for residential and commercial construction, including bulk, package and
collated nails, rebar ty wire, stucco netting and reinforcing building fabric at
its Peoria, Illinois, Sherman, Texas, Caldwell, Texas, Springdale, Arkansas and
Hortonville, Wisconsin facilities. The primary customers for these products are
construction contractors and building materials distributors. The Company sells
approximately 35% of its nails through PrimeSource, Inc., one of the largest
nail distributors in the United States, under PrimeSource's Grip-Rite(R) label.
The Company believes that its fabricated wire products are less susceptible
than industrial wire or rod to the cyclical nature of the steel business because
the commodity-priced raw materials used in such products, such as scrap steel,
represent a lower percentage of the total cost of such value-added products when
compared to rod or other less value-added products.
The Company continuously evaluates opportunities to expand its downstream
fabricated wire products operations. During 1994, the Company purchased a 20%
stake in EWP, a joint venture with a manufacturer and distributor of wire mesh
for use in highway and road construction. During 1996, 11% of Keystone's rod
sales were to EWP. Keystone has the option to purchase the remaining 80%
interest in EWP at fair market value during the five year period ending November
1999. Management believes EWP broadens its fabricated wire product offering and
in the future may provide an opportunity to shift additional rod production to a
higher margin, value added fabricated wire product.
Industrial Wire. The Company is one of the largest manufacturers of
industrial wire in the United States. At its Peoria, Illinois, Hortonville,
Wisconsin, Sherman, Texas and Caldwell, Texas facilities, the Company produces
custom-drawn industrial wire in a variety of gauges, finishes and packages for
further consumption by the Company's fabricated wire products operations and for
sale to industrial fabrication and original equipment manufacturer customers.
The Company's drawn wire is used by customers in the production of a broad range
of finished goods, including nails, coat hangers, barbecue grills, air
conditioners, tools, refrigerators and other appliances. Management believes
that with few exceptions, customers of its industrial wire are not generally in
competition with the Company.
Carbon Steel Rod. The Company produces low carbon steel rod at its rod
mill located in Peoria, Illinois. Low carbon steel rod, with carbon content of
up to 0.38%, is more easily shaped and formed than higher carbon rod and is
suitable for a variety of applications where ease of forming is a consideration.
In 1996, approximately 56% of the rod manufactured by the Company was used
internally to produce wire and wire products at the Company's five wire
fabrication facilities. The remainder of the Company's rod production was sold
directly to producers of construction products, fabricated wire products and
industrial wire, including products similar to those manufactured by the
Company.
Household Cleaning Products. The Company manufactures household cleaning
products (primarily powdered and liquid laundry detergents) at its DeSoto
facility located in Joliet, Illinois. For the period from the date of the
DeSoto acquisition in September 1996 through December 31, 1996, DeSoto had net
sales of $2.5 million. DeSoto manufactures most products on a make and ship
basis, and, as such, overall levels of raw materials and finished goods
inventories maintained by DeSoto are relatively nominal. Approximately 81% of
DeSoto's household cleaning products sales from the date of the acquisition by
Keystone through December 31, 1996 were to a single customer, Sears, Roebuck &
Co. ("Sears"). Although the loss of Sears as a customer would have a material
adverse effect on DeSoto's household cleaning products business, management
believes such loss would not have a material adverse effect on the consolidated
operations of the Company.
INDUSTRY AND COMPETITION
The fabricated wire products, industrial wire and carbon steel rod
industries in the United States are highly competitive and are comprised
primarily of several large mini-mill rod producers, many small independent wire
companies and a few large diversified rod and wire producers, such as the
Company. Foreign steel and industrial wire producers also compete with the
Company and other domestic producers. Competition in the fabricated wire
product and wire markets is based primarily on price, delivery performance,
product quality, service, and brand name preference. Since carbon steel rod is
a commodity product, price is the primary competitive factor. While overall
demand for the Company's fabricated wire products and industrial wire is
influenced generally by cyclical changes in the United States economy, the
diversity of end use markets and customers served by the Company somewhat
mitigates the unfavorable effects occasioned by a downturn in any specific end
use market.
The domestic carbon steel rod industry experienced a consolidation of
operations over the past decade, as large integrated steel producers disposed of
or, to a significant degree, discontinued their carbon steel rod and wire
operations. Some of this capacity was replaced by the capacity of domestic
mini-mills and foreign producers. Worldwide overcapacity in the steel industry
continues to exist and since the expiration of certain voluntary restraint
agreements with certain foreign governments in March 1992, imports of wire rod
and certain wire products have increased significantly.
The Company competes with many small independent wire companies who
purchase rod from domestic and foreign sources. The Company believes that its
internal supply of steel rod and integration of fabricated wire products
operations gives it a competitive advantage over non-integrated rod producers
and wire companies.
The Company believes its facilities are well located to serve markets
throughout the continental United States, with principal markets located in the
Midwestern and Southwestern regions. Close proximity to its customer base
provides the Company with certain advantages over foreign and certain domestic
competition including reduced shipping costs, improved customer service and
shortened delivery times. The Company believes higher transportation costs and
the lack of local distribution centers tends to limit foreign producers'
penetration of the Company's principal fabricated wire products, industrial wire
and rod markets, but there can be no assurance this will continue to be the
case. The Company is implementing the initial phases of a direct
order/inventory control information system that is designed to enhance its
ability to serve high volume, retail customers. The Company believes this
system, when fully implemented, will provide the Company with a competitive
advantage in the service of its major retail customers.
RAW MATERIALS AND ENERGY
The principal raw material used in the Company's operations is scrap steel.
The Company's steel mill is located close to numerous sources of high density
automobile, industrial and railroad scrap which currently is all readily
available. The purchase of scrap steel is highly competitive and its price
volatility is influenced by periodic shortages, freight costs, weather, and
other conditions beyond the control of the Company. The cost of scrap can vary
significantly and product selling prices cannot always be adjusted, especially
in the short-term, to recover the costs of large increases in scrap prices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's manufacturing processes consume large amounts of energy in
the form of electricity and natural gas. The Company purchases electrical
energy for its Peoria facility from a regulated utility under an interruptible
service contract which provides for more economical electricity rates but allows
the utility to refuse or interrupt power to the Company's manufacturing
facilities during periods of peak demand. The utility has in the past refused
or interrupted service to the Company resulting in decreased production and
increased costs associated with the related downtime.
PATENTS AND TRADEMARKS
The Company has registered the trademark RED BRAND(R) for field fence and
related products. The RED BRAND(R) trademark, a registered mark of the Company
and its predecessor for over half a century, has been widely advertised and
enjoys high levels of recognition in its market. The Company also maintains
other trademarks for various products which have been promoted in their
respective markets.
EMPLOYMENT
The Company currently employs approximately 1,900 people, of whom
approximately 1,150 are represented by the Independent Steel Workers Alliance
("ISWA") at its Peoria, Illinois facilities and approximately 180 are
represented by the International Association of Machinists and Aerospace Workers
(Local 1570) ("IAMAW") at its Sherman, Texas facilities. The current collective
bargaining agreement with the ISWA expires in May 1999. In March 1997, the
Company entered into a new three year contract with the IAMAW. The Company
believes its relationship with its employees are good. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CUSTOMERS AND ORDER BACKLOG
The Company sells its products to customers in the agricultural,
industrial, construction, commercial, original equipment manufacturer and retail
markets primarily in the Midwestern and Southwestern regions of the United
States. Customers vary considerably by product and management believes the
Company's ability to offer a broad range of product provides it a competitive
advantage in servicing the diverse needs of its customers.
A listing of end-user markets by products follows:
PRODUCT PRINCIPAL MARKETS SERVED
Fencing products Agricultural, construction, do-it-yourself
Wire mesh products Agricultural, construction
Nails Construction, do-it-yourself
Industrial wire Producers of fabricated wire products
Carbon steel rod Producers of industrial wire and
fabricated wire products
Customers of the Company's industrial wire include manufacturers and
producers of nails, coat hangers, barbecue grills, air conditioners, tools,
refrigerators and other appliances. With few exceptions, these customers are
generally not in competition with the Company. Customers of the Company's
carbon steel rod include other downstream industrial wire and fabricated wire
products companies including manufacturers of products similar to those
manufactured by the Company.
The Company's ten largest customers represented approximately 29%, 30% and
33% of the Company's net sales in 1994, 1995 and 1996, respectively, and no
single customer accounted for more than 7% of the Company's net sales during
each of 1994, 1995 or 1996. The Company's fabricated wire products, industrial
wire and rod business is not dependent upon a single customer or a few
customers, the loss of any one, or a few, of which would have a material adverse
effect on its business.
The Company's backlog of unfilled cancelable fabricated wire products,
industrial wire and rod purchase orders, for delivery generally within three
months, approximated $30 million at December 31, 1995 and $23 million at
December 31, 1996, respectively. The Company does not believe that backlog is a
significant factor in its business.
ENVIRONMENTAL MATTERS
The Company's production facilities are affected by a variety of
environmental laws and regulations, including laws governing the discharge of
water pollutants and air contaminants, the generation, transportation, storage,
treatment and disposal of solid wastes and hazardous substances and the handling
of toxic substances, including certain substances used in, or generated by, the
Company's manufacturing operations. Many of these laws and regulations require
permits to operate the facilities to which they pertain. Denial, revocation,
suspension or expiration of such permits could impair the ability of the
affected facility to continue operations.
The Company believes its current operating facilities are in material
compliance with all presently applicable federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment.
Environmental legislation and regulations have changed rapidly in recent
years and the Company may be subject to increasingly stringent environmental
standards in the future. The Company currently does not expect capital
expenditures related to environmental matters during the near future to be
significant.
Information in Note 15 to the Consolidated Financial Statements is
incorporated herein by reference.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in approximately
3,200 square feet of leased space at 5430 LBJ Freeway, Dallas, Texas 75240-2697.
The Company's fabricated wire products, industrial wire and carbon steel
rod production facilities utilize approximately 2.6 million square feet for
manufacturing and office space, approximately 80% of which is located at the
Company's Peoria, Illinois facility.
The following table sets forth the location, size and general product types
produced for each of the Company's steel and wire facilities, all of which are
owned.
APPROXIMATE
SIZE
(SQUARE FEET)
FACILITY NAME LOCATION PRODUCTS PRODUCED
Keystone Steel & Wire Peoria, IL 2,100,000 Fabricated wire products, industrial wire, carbon
steel rod
Sherman Wire Sherman, TX 294,000 Fabricated wire products and industrial wire
Keystone Fasteners Springdale, AR 76,000 Fabricated wire products
Sherman Wire of Caldwell Caldwell, TX 75,000 Fabricated wire products and industrial wire
Fox Valley Steel & Wire Hortonville, WI 74,000 Fabricated wire products and industrial wire
The Company believes that all of its facilities are well maintained and
satisfactory for their intended purposes.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings. Information required
by this Item is included in Notes 15 and 17 to the Consolidated Financial
Statements, which information is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Keystone's common stock is listed and traded on the New York Stock Exchange
(symbol: KES). The number of holders of record of the Company's common stock as
of March 20, 1997 was 2,598. The following table sets forth the high and low
sales prices of the Company's common stock for the calendar years indicated,
according to published sources.
High Low
1996
First quarter $12.00 $10.00
Second quarter 10.38 9.50
Third quarter 10.00 8.25
Fourth quarter 8.25 6.25
1995
First quarter $13.88 $13.38
Second quarter 13.75 13.38
Third quarter 15.13 13.50
Fourth quarter 15.00 11.13
The Company has not paid cash dividends on its common stock since 1977. In
connection with the acquisition of DeSoto, the Company issued $3,500,000 of 8%
preferred stock to the former preferred stockholders of DeSoto. Quarterly
dividends in the amount of $70,000 on these preferred shares are payable in
December, March, June and September of each year. On December 27, 1996, the
Company paid the first quarterly dividend on these preferred shares. In
addition, in October 1996, DeSoto paid $1,600,000 of dividend arrearages on the
preferred shares outstanding prior to the acquisition by Keystone. The Company
is subject to certain loan covenants under its commercial revolving credit
facility that restrict the ability to pay dividends, including a prohibition
against the payment of dividends on its common stock without lender consent.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Item 7 --
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations."
YEARS ENDED DECEMBER 31,
1992 1993 1994 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE AND PER TON
AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales $316,251 $345,186 $364,435 $345,657 $331,175
Cost of goods sold 278,808 312,665 327,453 312,909 297,149
Gross profit 37,443 32,521 36,982 32,748 34,026
Selling expenses 4,833 5,032 5,101 4,367 3,855
General and administrative
expenses 21,280 20,309 20,675 17,185 22,779
Operating income 16,049 13,077 12,908 11,298 10,730
Interest expense (credit) (1) 3,036 6,575 (1,165) 3,385 3,741
Income before income taxes $ 8,340 $1,130 $12,389 $ 8,078 $4,240
Provision for income taxes 3,194 381 4,828 3,191 1,656
Net income before changes in
accounting principles 5,146 749 7,561 4,887 2,584
Cumulative effect of changes in
accounting principles (2) (69,949) - - - -
Net income (loss) $(64,803) $ 749 $ 7,561 $ 4,887 $ 2,584
Net income (loss) available for
common shares (3) $(64,803) $ 749 $ 7,561 $ 4,887 $ 2,514
YEARS ENDED DECEMBER 31,
1992 1993 1994 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE AND PER TON
AMOUNTS)
Net income before changes in
accounting principles available for
common shares per common and
common equivalent share (4) $ .92 $ .14 $ 1.35 $ .86 $ .38
Weighted average common and common
equivalent shares outstanding 5,572 5,495 5,601 5,654 6,650
OTHER FINANCIAL DATA:
Capital expenditures $ 7,459 $ 7,349 $ 12,742 $ 18,208 $ 18,992
Cash contributions to defined benefit
pension plans 19,933 14,955 20,069 18,702 9,664
Depreciation and amortization 10,525 11,084 11,585 11,961 12,425
OTHER OPERATING DATA:
Product shipments (in tons):
Fabricated wire products 262 257 267 242 222
Industrial wire 121 149 168 164 159
Rod 302 337 316 287 307
Total 686 744 750 693 689
YEARS ENDED DECEMBER 31,
1992 1993 1994 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE AND PER TON
AMOUNTS)
Average selling prices($/ton):
Fabricated wire products $ 681 $ 685 $ 690 $ 707 $ 716
Industrial wire 456 455 479 492 478
Rod 272 296 313 322 298
All products 461 463 484 497 475
Average total production cost per ton $ 406 $ 420 $ 437 $ 452 $ 428
Scrap cost per ton 85 110 125 128 125
As of December 31,
1992 1993 1994 1995 1996
(In thousands)
Balance Sheet Data:
Working capital (deficit) (5) $ 777 $ 6,385 $ 2,529 $ (6,861) $(15,907)
Property, plant and equipment,
net 84,822 80,769 81,147 86,436 92,608
Total assets 202,109 206,654 205,601 198,822 302,368
Notes payable and long-term
debt 34,485 27,190 26,054 29,945 51,780
Stockholders' equity (deficit) (39,036) (50,908) (40,579) (37,493) 31,170
(1) During 1993, the Company accrued approximately $4.0 million for the
estimated cost of interest as a result of an unfavorable U. S. Supreme
Court decision related to the Company's 1983 and 1984 contributions of
certain real property to its pension plans. In 1994, pursuant to the
terms of an agreement with the Internal Revenue Service, the interest due
was reduced to approximately $100,000 and, as such, the Company recorded a
reduction of approximately $3.9 million in the previously accrued
interest.
(2) Relates to adoption of Statement of Financial Accounting Standards
("SFAS"), No. 106 -- "Postretirement Benefits Other Than Pensions"
("OPEB") and SFAS No. 109 -- "Employers' Accounting for Income Taxes".
(3) Includes dividends on preferred stock of $70,000 in 1996.
(4) Primary and fully diluted net income (loss) available for common shares
per common and common equivalent share were the same. See Note 1 to the
Consolidated Financial Statements.
(5) Working capital represents current assets minus current liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Keystone is a leading manufacturer of fabricated wire products, industrial
wire and carbon steel rod for the agricultural, industrial, construction,
original equipment manufacturer and retail consumer markets. The Company's
operations benefit from vertical integration as the Company's mini-mill supplies
carbon steel rod produced from scrap metal to its downstream fabricated wire
products and industrial wire operations. These downstream fabrication
operations accounted for 71% of 1996 net sales. The Company believes it is the
second largest manufacturer of fabricated wire products and industrial wire in
the United States based on tons produced (381,000 in 1996), substantially all of
which is converted from rod produced by the Company. The Company's fabricated
wire products typically yield higher and less volatile gross margins compared to
rod.
The Company's estimated current fabricated wire products and industrial
wire production capacity is 521,000 tons. Utilization of the Company's annual
fabricated wire products and industrial wire production capacity aggregated 83%
in 1994, 77% in 1995 and 78% in 1996. Recent modifications to the Company's
steel making operations increased annual billet production capacity from
approximately 655,000 tons to 700,000 tons, while the current estimated annual
production capacity of the Company's rod mill is approximately 750,000 tons. In
1995 and 1996 the Company's steel making operations operated at near capacity
and, together with billet purchases of 61,000 tons and 46,000 tons in 1995 and
1996, respectively, provided 706,000 tons and 700,000 tons of billets in 1995
and 1996, respectively. Despite comparable billet volumes, rod production
increased 5% from 662,000 tons (88% of estimated capacity) in 1995 to 694,000
tons (93% of estimated capacity) in 1996 due primarily to decreases in year-to-
year billet inventory levels and 12,000 tons of billets that were converted to
rod in 1996 for another manufacturer. Rod production in 1995 was also adversely
impacted by power curtailments and outages under the Company's interruptible
power supply agreement, and the related impact on manufacturing efficiency.
In November 1994, the Company entered into a joint venture agreement and
formed EWP. The Company has a 20% equity interest in EWP together with an
option to acquire the remaining 80%. In 1995, the Company contributed to EWP,
among other things, certain equipment as part of its capital contribution. As a
result, the Company no longer sells most of the fabricated wire products
previously manufactured on the equipment contributed to EWP. During 1996, the
Company manufactured 4,000 tons of these fabricated wire products as compared to
13,000 tons in 1995. However, as part of the joint venture agreement, the
Company supplies EWP with all of its rod requirements. During 1996, the Company
shipped 33,000 tons of rod to EWP as compared to 28,000 tons in 1995.
The Company's profitability is dependent in large part on its ability to
utilize effectively its production capacity, which is affected by the
availability of raw material, plant efficiency and other production factors, and
control its manufacturing costs, which are comprised primarily of raw materials,
energy and labor costs. The Company's primary raw material is scrap steel. The
price of scrap steel is highly volatile and scrap steel prices are affected by
periodic shortages, freight costs, weather and other conditions largely beyond
the control of the Company. Although the average per ton price paid for scrap
by the Company was relatively constant during 1994, 1995 and 1996 ($125, $128
and $125, respectively), prices can vary widely from period-to-period and the
product selling prices cannot always be adjusted, especially in the short-term,
to recover the costs of large increases in scrap prices.
The Company consumes a significant amount of energy in its manufacturing
operations and, accordingly, its profitability can also be adversely affected by
the volatility in the price of coal, oil and natural gas resulting in increased
energy, transportation, freight, scrap and supply costs. The Company purchases
electrical energy for its Peoria, Illinois facility from a regulated utility
under an interruptible service contract which provides for more economical
electricity rates but allows the utility to refuse or interrupt power to the
Company's manufacturing facilities during periods of peak demand. The utility
has in the past refused or interrupted service to the Company resulting in
decreased production and higher costs associated with the related downtime.
As a result of the acquisition of DeSoto in September 1996, the Company is
also engaged in the manufacture and packaging of household cleaning products.
As the operations of DeSoto were insignificant when compared to the consolidated
operations of the Company in 1996 and are expected to continue to be
insignificant in the future, DeSoto's results of operations are not separately
addressed in the discussion that follows.
The statements in this Annual Report on Form 10-K relating to matters that
are not historical facts including, but not limited to, statements found in Item
1 - "Business" and Item 3 - "Legal Proceedings", and in this Item 7 -
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations", are forward looking statements that involve a number of risks and
uncertainties. Factors that could cause actual future results to differ
materially from those expressed in such forward looking statements include, but
are not limited to, cost of raw materials, future supply and demand for the
Company's products (including cyclicality thereof), general economic conditions,
competitive products and substitute products, customer and competitor
strategies, the impact of pricing and production decisions, environmental
matters, government regulations and possible changes therein, and the ultimate
resolution of pending litigation and possible future litigation as discussed in
this Annual Report, including, without limitation, the sections referenced
above.
RESULTS OF OPERATIONS
The following table sets forth selected operating data of the Company as a
percentage of net sales for the periods indicated.
YEARS ENDED DECEMBER 31,
1994 1995 1996
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 89.9 90.5 89.7
Gross profit 10.1 9.5 10.3
Selling expenses 1.4 1.3 1.2
General and administrative expense 5.7 5.0 6.9
Operating income 3.5 3.3 3.2
Income before income taxes 3.4% 2.3% 1.3%
Provision for income taxes 1.3 .9 .5
Net income from continuing
operations 2.1% 1.4%
.8%
Year ended December 31, 1996 compared to year ended December 31, 1995
Net sales decreased 4% to $331.2 million in 1996 from $345.7 million in
1995. Of these sales, fabricated wire products represented $159.2 million (48%)
in 1996 and $171.4 million (50%) in 1995; industrial wire represented $75.8
million (23%) in 1996 and $80.7 million (23%) in 1995; and carbon steel rod
represented $91.8 million (28%) in 1996 and $92.4 million (27%) in 1995.
Fabricated wire product prices increased approximately 1% while shipments
decreased 8% to 222,000 tons in 1996 from 242,000 in 1995. This decrease in
shipments was primarily due to the closing of the Company's West Coast
distribution facility and the contribution of certain equipment to the EWP joint
venture in 1995, as discussed previously. Shipments of fabricated wire products
by Keystone's remaining facilities increased slightly in 1996 but were more than
offset by the decline of 12,000 tons of fabricated wire products due to the
closure of the West Coast distribution facility in 1995. Industrial wire prices
decreased approximately 3% in 1996 while shipments also decreased 3% from 1995
to 1996 (159,000 tons in 1996 from 164,000 tons in 1995). Carbon steel rod
prices decreased 7% as shipments increased 7% from 1995 to 1996(307,000 tons in
1996 from 287,000 tons in 1995). This increase in rod shipments was due in part
to increased purchases by EWP.
Gross profit increased approximately 4% to $34.0 million in 1996 from $32.7
million in 1995. Gross margin increased to 10.3% in 1996 from 9.5% in 1995, as
lower overall product per ton selling prices were more than offset by a more
favorable product sales mix of fabricated wire products, lower scrap and
purchased billet costs and lower pension expense. During 1996, the Company
purchased 654,000 tons of scrap at an average price of $125 per ton as compared
to 1995 purchases of 644,000 tons at an average price of $128 per ton. The
Company purchased 46,000 tons of billets in 1996 at an average price of $227 per
ton as compared to 61,000 tons at $257 per ton in 1995. The DeSoto acquisition
in September 1996 included the simultaneous merger of the Company's and DeSoto's
defined benefit pension plans and, as a result, pension expense decreased 58% in
1996, as compared to 1995. During 1996 and 1995 the Company charged pension
expense of approximately $3.7 million and $8.7 million, respectively, to cost of
goods sold. The Company currently estimates, for financial reporting purposes,
that it will recognize a non-cash pension credit of approximately $3.0 million
in 1997 and, does not anticipate cash contributions for defined benefit pension
plan fundings will be required in 1997. However, future variances from assumed
actuarial rates, including the rate of return on pension plan assets, may result
in increases or decreases in pension expense or credit and future funding
requirements. See Note 7 to the Consolidated Financial Statements.
Selling expenses decreased 11% to $3.9 million in 1996 from $4.4 million in
1995 but remained relatively constant as a percentage of net sales.
General and administrative expenses increased 32.6%, or $5.6 million, in
1996. This increase was primarily a result of higher expenses related to the
Company's environmental remediation project at its Peoria, Illinois facility
($6.7 million in 1996 as compared to $3.6 million in 1995), increased insurance
costs due to abnormally low levels in 1995 and costs incurred in connection with
a possible joint venture that, upon termination of discussions with the
potential joint venture partner, were charged to expense in 1996. At December
31, 1996, the Company's financial statements reflected total accrued liabilities
of $18.1 million to cover estimated remediation costs arising from environmental
issues. Although the Company has established an accrual for estimated future
required environmental remediation costs, there is no assurance regarding the
ultimate cost of remedial measures that might eventually be required by
environmental authorities or that additional environmental hazards, requiring
further remedial expenditures, might not be asserted by such authorities or
private parties. Accordingly, the costs of remedial measures may exceed the
amounts accrued. See Note 15 to the Consolidated Financial Statements.
Interest expense in 1996 was higher than 1995 due principally to higher
average borrowing levels primarily due to decreased profitability in 1996 as
well as payments made in connection with the DeSoto acquisition. Average
borrowings by the Company under its revolving credit facility and term loan
approximated $40.2 million in 1996 as compared to $31.8 million in 1995. During
1996, the average interest rate paid by the Company was 9.3% per annum as
compared to 10.3% per annum in 1995. The Company expects higher average
borrowing levels and interest rates in 1997 will result in increased interest
expense as compared to the 1996 level.
The principal reasons for the difference between the U.S. federal statutory
income tax rate and the Company's effective income tax rates are explained in
Note 5 to the Consolidated Financial Statements. The Company's deferred tax
position at December 31, 1996 is also explained in Note 5 to the Consolidated
Financial Statements and in "-- Liquidity and Capital Resources." The effective
tax rates were comparable between 1996 and 1995.
As a result of the items discussed above, net income during 1996 decreased
to $2.6 million from $4.9 million in 1995, or approximately 47%, and decreased
as a percentage of sales to 0.8% from 1.4%.
Year ended December 31, 1995 compared to year ended December 31, 1994
Net sales decreased 5% to $345.7 million in 1995 from $364.4 million in
1994. Of these sales, fabricated wire products represented $171.4 million (50%)
in 1995 and $183.8 million (50%) in 1994; industrial wire represented $80.7
million (23%) in 1995 and $80.3 million (22%) in 1994; and carbon steel rod
represented $92.4 million (27%) in 1995 and $99.0 million (27%) in 1994. In
1995, fabricated wire product prices increased approximately 3% over 1994
levels, but shipments decreased 9% (242,000 tons in 1995 from 267,000 tons in
1994). The 25,000 ton decrease in sales of fabricated wire products in 1995 as
compared to 1994 was due primarily to a 7,000 ton decrease in shipments from the
West Coast distribution facility (that was eventually closed in late 1995) and
an 8,000 ton decrease in the products manufactured on the equipment that was
contributed to EWP in 1995. Industrial wire prices increased 3% in 1995 as
shipments decreased 2% (164,000 tons in 1995 from 167,000 in 1994). Carbon
steel rod prices also increased approximately 3% in 1995 as shipments decreased
9% (287,000 tons in 1995 as compared to 316,000 in 1994).
Gross profit decreased approximately 12% to $32.7 million in 1995 from
$37.0 million in 1994. Gross profit margin fell to 9.5% in 1995 from 10.1% in
1994, due to increased scrap costs, increased rod conversion costs and increased
costs resulting from production delays due to power refusals and interruptions
and unplanned equipment repairs. During 1995, the Company purchased 644,000
tons of scrap at an average price of $128 per ton as compared to 661,000 tons at
an average price of $125 per ton in 1994. Rod conversion costs in 1995
increased 3.5% to $88 per ton as compared to 1994 costs of $85 per ton. During
1995 and 1994, the Company charged pension expense of approximately $8.7 million
and $8.9 million, respectively, to cost of goods sold.
Selling expenses decreased to $4.4 million in 1995 from $5.1 million in
1994 but remained relatively constant as a percentage of net sales.
General and administrative expenses declined 16.9%, or $3.5 million, from
1994 to 1995. This decline was primarily a result of lower expenses related to
the Company's information systems project, environmental remediation and
disposal of contaminated electric arc furnace dust. During 1995, expenses
related to the Company's environmental remediation efforts and disposal of
contaminated electric arc furnace dust amounted to $3.6 million as compared to
1994 expenses of $6.1 million.
Interest expense related to the Company's various credit facilities in 1995
was higher than 1994 due principally to higher average interest rates and
borrowing levels. During 1995, the average interest rate paid by the Company
was 10.3% per annum as compared to 8.0% per annum in 1994. Average borrowings
by the Company under its revolving credit facility and term loan approximated
$31.8 million in 1995 as compared to $28.3 million in 1994. During 1993, the
Company accrued approximately $4.0 million for the estimated interest cost as a
result of an unfavorable U. S. Supreme Court decision related to the Company's
1983 and 1984 contributions of certain real property to its pension plans. In
1994, pursuant to the terms of an agreement with the Internal Revenue Service,
the interest due was reduced to approximately $100,000 and, as such, the Company
recorded a reduction of approximately $3.9 million in the previously accrued
interest.
The effective tax rates were comparable between 1995 and 1994.
As a result of the items discussed above, net income during 1995 decreased
to $4.9 million from $7.6 million in 1994, or 35%.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had a working capital deficit of $15.9
million, including $34.8 million of notes payable and current maturities of
long-term debt. The outstanding borrowings under the Company's $55 million
revolving credit facility were $31.1 million at December 31, 1996. The amount
of available borrowings under the Company's revolving credit facility is based
on formula-determined amounts of trade receivables and inventories, less the
amount of outstanding letters of credit. Additional available borrowings under
the revolving credit facility, which expires December 31, 1999, were $16.7
million at December 31, 1996. The Company's revolving credit facility requires
daily cash receipts to be used to reduce outstanding borrowings, which results
in the Company maintaining zero cash balances.
The Company had net deferred tax assets of $18.6 million at December 31,
1996, $16.4 million of which are classified as current assets. The majority of
the deferred tax asset relates to expenses accrued for financial reporting
purposes but not yet paid or deductible for income tax purposes, and alternative
minimum tax credit and net operating loss carryforwards. The Company
continually monitors and evaluates the need for, and amount of, a deferred tax
valuation allowance and will in the future, after considering all factors
believed to be relevant, make appropriate adjustments, if any, to such
allowance. See Note 5 to the Consolidated Financial Statements.
During 1996, the Company's operating activities used approximately $.4
million of cash, compared to $12.5 million of cash provided by operating
activities in 1995. In addition to lower earnings in 1996 as compared to 1995,
cash flow from operations was impacted by changes in relative levels of assets
and liabilities, including levels of pension fundings in excess of pension
expense. Defined benefit pension plan contributions ($9.7 million) exceeded
pension expense ($3.7 million) by approximately $6.0 million in 1996. The
acquisition of DeSoto included the simultaneous merger of Keystone's previously
underfunded defined benefit pension plans with and into DeSoto's overfunded
defined benefit pension plan, resulting in a single overfunded plan for
financial reporting purposes. As a result, the Company does not expect to be
required to make contributions to the pension plan during 1997. Future
variances from assumed actuarial rates, including the rate of return on pension
plan assets, may result in increases or decreases to pension expense or credit
and funding requirements in future periods. See Note 7 to the Consolidated
Financial Statements. Immediately following the acquisition of DeSoto, Keystone
was obligated to cause DeSoto to pay approximately $5.9 million to certain of
DeSoto's trade creditors (the "Trade Credit Group") and $1.6 million of
accumulated, unpaid dividends to the former holders of DeSoto's preferred stock.
In addition, DeSoto was required to pay an additional $1.4 million, plus
interest at 8% to the Trade Credit Group before September 27, 1997, which
amounts were paid by DeSoto in February 1997.
Prior to its acquisition by Keystone, DeSoto received a Report of Tax
Examination Changes from the Internal Revenue Service ("IRS") that proposes
adjustments resulting in additional taxes due of $6.5 million and penalties of
$1.4 million, as well as an unspecified amount of interest for the years 1990
through 1993. DeSoto has filed a formal appeal of the proposed adjustments.
The timing of payments required to settle any amounts ultimately due could have
a significant impact on the Company's cash flows.
During 1996, the Company made capital expenditures of approximately $19.0
million primarily related to upgrades of production equipment and an information
systems project at its facility in Peoria, Illinois. Capital expenditures for
1997 are currently estimated to be approximately $22.2 million and are related
primarily to upgrades of production equipment.
The Company incurs significant ongoing costs for plant and equipment and
substantial employee medical benefits for both current and retired employees.
As such, the Company 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. As a result of this process,
the Company has in the past, and may in the future, reduce controllable costs,
modify product mix, acquire and dispose of businesses, restructure certain
indebtedness, and raise additional equity capital. The Company will continue to
evaluate the need for similar actions or other measures in the future in order
to meet its obligations. The Company also routinely evaluates acquisitions of
interests in, or combinations with, companies related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities or increasing the indebtedness of the Company.
Management believes the cash flows from operations together with the funds
available under its revolving credit facility will provide sufficient funds to
meet its anticipated operating and capital expenditure needs for the year ending
December 31, 1997. 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, working capital requirements,
interest rates, repayments of long-term debt, capital expenditures, and
available borrowings under its revolving credit facility. However,
liabilities under environmental laws and regulations with respect to the clean-
up and disposal of wastes, any significant increases in the cost of providing
medical coverage to active and retired employees or an unfavorable result of
DeSoto's IRS examination, could have a material adverse effect on the future
liquidity, financial condition and results of operations of the Company.
Additionally, significant declines in the Company's end user markets or market
share, the inability to maintain satisfactory billet and rod production levels,
or other unanticipated costs, if significant, could result in a need for funds
greater than the Company currently has available. There can be no assurance the
Company would be able to obtain an adequate amount of additional financing. See
Notes 15 and 17 to the Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is contained in a separate section
of this report. See Index of Financial Statements and Financial Statement
Schedule on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
disclosure provided under the captions "Election of Directors" and "Executive
Officers" in Keystone's Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report (the "Keystone Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
disclosure provided under the caption "Executive Compensation" in the Keystone
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
disclosure provided under the caption "Security Ownership" in the Keystone Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
disclosure provided under the caption "Certain Business Relationships and
Related Transactions" in the Keystone Proxy Statement. See also Note 11 to the
Consolidated Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1), (2) The Index of Consolidated Financial Statements and Financial
Statement Schedule is included on page F-1 of this report.
(a)(3) Exhibits
Included as exhibits are the items listed in the Exhibit Index. The
Company will furnish a copy of any of the exhibits listed below upon
payment of $4.00 per exhibit to cover the costs to the Company in
furnishing the exhibits. The Company agrees to furnish to the
Commission upon request copies of any instruments not included herein
defining the rights of holders of long-term debt of the Company.
Exhibit No. Exhibit
2.1 -- Agreement and Plan of Reorganization, dated as of June 26, 1996,
between Registrant and DeSoto, Inc. (Incorporated by reference to
Exhibit 2.1 of Registrant's Registration Statement on Form S-4
(Registration No. 333-09117)).
3.1 -- Certificate of Incorporation, as amended and filed with the Secretary
of State of Delaware (Incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1990.)
3.2 -- Bylaws of the Company, as amended and restated December 30, 1994
(Incorporated by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.)
4.1 -- First Amendment to Amended and Restated Revolving Loan And Security
Agreement dated as of September 27, 1996 between Registrant and
Congress Financial Corporation (Central). (Incorporated by reference
to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996).
4.2 -- First Amendment to Term Loan and Security Agreement dated as of
September 27, 1996 between Registrant and Congress Financial
Corporation (Central). (Incorporated by reference to Exhibit 4.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.)
10.1 -- Intercorporate Services Agreement with Contran Corporation dated as of
January 1, 1996. (Incorporated by reference to Exhibit 10.3 to
Registrant's Registration Statement on Form S-4 (Registration No. 333-
09117)).
10.3 -- Preferred Stockholder Waiver and Consent Agreement between Registrant,
Coatings Group, Inc., Asgard, Ltd. and Parkway M&A Capital Corporation,
(collectively, the "Sutton Entities") dated June 26, 1996.
(Incorporated by reference to Exhibit 10.7 to Registrant's Registration
Statement on Form S-4 (Registration No. 333-09117)).
10.4 -- Warrant Conversion Agreement between the Sutton Entities and
Registrant dated June 26, 1996. (Incorporated by reference to Exhibit
10.9 to Registrant's Registration Statement on Form S-4 (Registration
No. 333-09117)).
10.5 -- Stockholders Agreement by and Among Registrant, the Sutton Entities,
DeSoto and Contran, dated June 26, 1996. (Incorporated by reference to
Exhibit 10.10 to Registrant's Registration Statement on Form S-4
(Registration No. 333-09117)).
21 -- Subsidiaries of the Company.
23 -- Consent of Coopers & Lybrand, L.L.P.
27 -- Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned and dated April 14, 1997, thereunto duly
authorized.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
(Registrant)
/s/ GLENN R. SIMMONS
Glenn R. Simmons
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below and dated as of April 14, 1997 by the following
persons on behalf of the registrant and in the capacities indicated:
/s/ GLENN R. SIMMONS /s/ DAVID E. CONNOR
Glenn R. Simmons David E. Connor
Chairman of the Board Director
/s/ J. WALTER TUCKER, JR. /s/ RICHARD N. ULLMAN
J. Walter Tucker, Jr. Richard N. Ullman
Vice Chairman of the Board Director
/s/ THOMAS E. BARRY /s/ WILLIAM P. LYONS
Thomas E. Barry William P. Lyons
Director Director
/s/ PAUL M. BASS, JR. /s/ ROBERT W. SINGER
Paul M. Bass, Jr. Robert W. Singer
Director President and
Chief Executive Officer
/s/ DONALD A. SOMMER /s/ HAROLD M. CURDY
DONALD A. SOMMER Harold M. Curdy
Director Vice President -- Finance,
Treasurer and Principal
Financial Officer
/s/ WILLIAM SPIER /s/ BERT E. DOWNING, JR.
William Spier Bert E. Downing, Jr.
Director Controller and Principal
Accounting Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned and dated April 14, 1997, thereunto duly
authorized.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
(Registrant)
Glenn R. Simmons
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below and dated as of April 14, 1997 by the following
persons on behalf of the registrant and in the capacities indicated:
Glenn R. Simmons David E. Connor
Chairman of the Board Director
J. Walter Tucker, Jr. Richard N. Ullman
Vice Chairman of the Board Director
Thomas E. Barry William P. Lyons
Director Director
Paul M. Bass, Jr. Robert W. Singer
Director President and
Chief Executive Officer
Donald A. Sommer Harold M. Curdy
Director Vice President -- Finance,
Treasurer and Principal
Financial Officer
William Spier Bert E. Downing, Jr.
Director Controller and Principal
Accounting Officer
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(A) AND 14(D)
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
FINANCIAL STATEMENTS
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets -- December 31, 1995 and 1996........... F-3/F-4
Consolidated Statements of Operations -- Years ended December 31,
1994, 1995 and 1996................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) -- Years
ended December 31, 1994, 1995 and 1996................................ F-6
Consolidated Statements of Cash Flows -- Years ended December 31,
1994, 1995 and 1996............................................... F-7/F-8
Notes to Consolidated Financial Statements......................... F-9/F-34
FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts ........................S-1
Schedules I, III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Keystone Consolidated Industries, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Keystone Consolidated Industries, Inc. and Subsidiaries as
listed in the Index of Consolidated Financial Statements and Financial Statement
Schedule on page F-1 of this Annual Report on Form 10-K. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Keystone Consolidated Industries, Inc. and Subsidiaries as of December 31, 1996
and 1995, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
February 28, 1997
Dallas, Texas
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
(In thousands, except share data)
ASSETS 1995 1996
Current assets:
Notes and accounts receivable, net of allowances
of $537 and $469 $ 31,363 $ 35,974
Inventories 35,631 36,533
Deferred income taxes 3,685 16,381
Prepaid expenses 2,026 1,542
Total current assets 72,705 90,430
Property, plant and equipment:
Land, buildings and improvements 45,715 47,309
Machinery and equipment 187,577 198,488
Leasehold improvements 1,204 1,221
Construction in progress 11,263 15,423
245,759 262,441
Less accumulated depreciation 159,323 169,833
Net property, plant and equipment 86,436 92,608
Other assets:
Restricted investments 2,410 7,691
Unrecognized net pension obligation 8,427 -
Prepaid pension cost - 104,726
Deferred income taxes 24,485 2,181
Other 4,359 4,732
Total other assets 39,681 119,330
$198,822 $302,368
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1995 and 1996
(In thousands, except share data)
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
1995 1996
Current liabilities:
Notes payable and current maturities of
long-term debt $ 18,750 $ 34,760
Accounts payable 26,534 34,419
Accounts payable to affiliates 39 159
Accrued pension cost 7,170 -
Accrued OPEB cost 7,776 8,368
Other accrued liabilities 19,297 28,631
Total current liabilities 79,566 106,337
Noncurrent liabilities:
Long-term debt 11,195 17,020
Accrued pension cost 39,222 -
Accrued OPEB cost 97,868 100,818
Negative goodwill - 27,057
Other 8,464 16,466
Total noncurrent liabilities 156,749 161,361
Redeemable preferred stock, no par value;
500,000 shares authorized; 435,456 shares issued - 3,500
Stockholders' equity (deficit):
Common stock, $1 par value, 12,000,000 shares
authorized; 5,637,641 and 9,190,139 shares issued
at stated value 6,362 9,920
Additional paid-in capital 20,013 46,347
Net pension liabilities adjustment (36,257) -
Accumulated deficit (27,599) (25,085)
Treasury stock - 1,134 shares, at cost (12) (12)
Total stockholders' equity (deficit) (37,493) 31,170
$198,822 $302,368
Commitments and contingencies (Notes 15, 16 and 17).
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1994, 1995 and 1996
(In thousands, except per share data)
1994 1995 1996
Revenues and other income:
Net sales $364,435 $345,657 $331,175
Other, net 18 267 589
364,453 345,924 331,764
Costs and expenses:
Cost of goods sold 327,453 312,909 297,149
Selling 5,101 4,367 3,855
General and administrative 20,675 17,185 22,779
Interest - notes payable & long-term debt 2,688 3,385 3,741
Interest credit related to excise tax (3,853) - -
352,064 337,846 327,524
Income before income taxes 12,389 8,078 4,240
Provision for income taxes 4,828 3,191 1,656
Net income 7,561 4,887 2,584
Dividends on preferred stock - - 70
Net income available for common shares $ 7,561 $ 4,887 $ 2,514
Net income available for common shares per
common and common equivalent share $ 1.35 $ .86 $ .38
Weighted average common and common
equivalent shares outstanding 5,601 5,654 6,560
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1994, 1995 and 1996
(In thousands)
Common stockholders' equity (deficit)
Redeemable Additional Net pension
preferred Common stock paid-in liabilities Accumulated Treasury
stock Shares Amount capital adjustment (deficit) stock
Balance - December 31, 1993 $ - 5,515 $6,244 $18,803 $(35,317) $(40,047) $(591)
Net income - - - - - 7,561 -
Pension adjustments - - - - 1,530 - -
Purchase of treasury stock - - - - - - (43)
Issuance of stock - 79 69 590 - - 622
Balance - December 31, 1994 - 5,594 6,313 19,393 (33,787) (32,486) (12)
Net income - - - - - 4,887 -
Pension adjustments - - - - (2,470) - -
Issuance of stock - 44 49 620 - - -
Balance - December 31,1995 - 5,638 6,362 20,013 (36,257) (27,599) (12)
Net income - - - - - 2,584 -
Pension adjustments - - - - 3,554 - -
Issuance of stock - Acquisition 5,100 3,500 3,500 25,813 - - -
Issuance of stock- other - 52 58 521 - - -
Preferred dividends declared 70 - - - - (70) -
Preferred dividends paid (1,670) - - - - - -
Merger of pension plans, net - - - - 32,703 - -
Balance December 31, 1996 $3,500 9,190 $9,920 $46,347 $ - $(25,085) $ (12)
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
Cash flows from operating activities:
Net income $ 7,561 $ 4,887 $ 2,584
Depreciation and amortization 11,585 11,961 12,425
Deferred income taxes 4,175 1,750 (1,249)
Other, net 1,877 945 730
25,198 19,543 14,490
Change in assets and liabilities:
Accounts receivable (3,555) 10,379 (2,209)
Inventories (317) 103 (102)
Accounts payable 4,309 (2,036) (3,873)
Pensions (11,125) (10,042) (5,991)
Accrued excise tax and related interest (5,054) (1,033) (1,033)
Other, net 3,234 (4,416) (1,667)
Net cash provided (used) by operating
activities 12,690
12,498 (385)
Cash flows from investing activities:
Capital expenditures (12,742) (18,208) (18,992)
Acquisition costs - - (1,008)
Collection of notes receivable 555 1,711 168
Proceeds from disposition of property
and equipment 17 106 29
Net cash used by investing
activities (12,170) (16,391) (19,803)
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
Cash flows from financing activities:
Revolving credit facility, net $ 2,620 $ 8,030 $ 16,534
Other notes payable and long-term debt:
Additions 208 81 9,495
Principal payments (3,964) (4,220) (4,194)
Preferred stock dividend payments - - (1,670)
Common stock issued, net 616 2 23
Net cash provided (used) by financing
activities (520) 20,188
3,893
Net change in cash and cash equivalents - - -
Cash and cash equivalents, beginning of year - - -
Cash and cash equivalents, end of year $ - $ - $ -
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized $ 2,831 $ 3,673 $ 4,058
Income taxes 1,721 1,560 2,210
Business combination:
Net assets consolidated:
Noncash assets $ - $ - $ 99,663
Liabilities - - (37,109)
Negative goodwill - - (27,133)
- - 35,421
Redeemable preferred stock issued,
including accumulated dividends - - (5,100)
Common stock issued - - (29,313)
Cash paid $ - $ - $ 1,008
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Prior to September 27, 1996, Keystone Consolidated Industries, Inc.
("Keystone" or the "Company") was a majority-owned subsidiary of Contran
Corporation ("Contran"). Substantially all of Contran's outstanding voting stock
is held by trusts established for the benefit of the children and grandchildren
of Harold C. Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons may be
deemed to control Contran. On September 27, 1996, the Company acquired DeSoto,
Inc. ("DeSoto") and DeSoto became a wholly-owned subsidiary of Keystone. As a
result of the Company issuing approximately 3.5 million shares of common stock
in connection with the DeSoto acquisition, Contran's direct and indirect
ownership of the Company declined to approximately 41% at December 31, 1996.
Contran may to be deemed to control the Company.
Principles of consolidation and management's estimates. The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany accounts and balances have been
eliminated. Certain 1994 and 1995 amounts have been reclassified to conform
with the 1996 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Ultimate actual results may, in some instances, differ
from previously estimated amounts.
Fiscal year. The Company's fiscal year is 52 or 53 weeks and ends on the
last Sunday in December. Each of fiscal 1994 and 1996 were 52-week years and
1995 was a 53-week year.
Net sales. Sales are recorded when products are shipped.
Property, plant, equipment and depreciation. Property, plant and equipment
are stated at cost. Repairs, maintenance and minor renewals are expensed as
incurred. Improvements which substantially increase an asset's capacity or alter
its capabilities are capitalized.
Depreciation is computed using principally the straight-line method over
the estimated useful lives of 10 to approximately 30 years for buildings and
improvements and three to 12 years for machinery and equipment. Depreciation
expense amounted to $11,585,000, $11,961,000 and $12,501,000 during the years
ended December 31, 1994, 1995 and 1996, respectively.
Investment in joint venture. The Company has a 20% interest in a joint
venture and accounts for the investment by the equity method. Differences
between the cost of the investment and the Company's pro rata share of the joint
venture's separately-reported net assets, if any, are allocated among the assets
and liabilities of the joint venture based upon estimated relative fair values.
Such differences, which were not material at December 31, 1996, are charged or
credited to income as the joint venture depreciates, amortizes or disposes of
the related net assets. The Company's investment in the joint venture is
included in other assets on the accompanying balance sheet. Earnings from the
joint venture, which are not material, are recorded in other income.
Retirement plans and post-retirement benefits other than pensions.
Accounting and funding policies for retirement plans and post retirement
benefits other than pensions ("OPEB") are described in Notes 7 and 9,
respectively.
Environmental liabilities. The Company records liabilities related to
environmental issues at such time as information becomes available and is
sufficient to support a reasonable estimate of range of loss. If the Company is
unable to determine that a single amount in an estimated range is more likely,
the minimum amount of the range is recorded. Costs of future expenditures for
environmental remediation obligations are not discounted to their present value.
Recoveries of environmental remediation costs from other parties are recorded as
assets when their receipt is deemed probable.
Income taxes. Deferred income tax assets and liabilities are recognized
for the expected future tax effects of temporary differences between the income
tax and financial reporting carrying amounts of assets and liabilities.
Advertising costs. Advertising costs, expensed as incurred, were $1
million in 1994, $.9 million in 1995 and $.6 million in 1996.
Income per share. Income per share is based on the weighted average number
of common and common equivalent shares outstanding during each year.
Outstanding stock options and other common stock equivalents are excluded from
the computations when the effect of their assumed exercise is antidilutive.
Negative goodwill. Negative goodwill, representing the excess of fair
value over cost of individual net assets acquired in the DeSoto acquisition, is
amortized by the straight-line method over 20 years (remaining life of 19.75
years at December 31, 1996) and is stated net of accumulated amortization of
approximately $76,000 at December 31, 1996.
Employee Stock Options. The Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and its various interpretations. Under APBO No. 25,
no compensation cost is generally recognized for fixed stock options in which
the exercise price is not less than the market price on the grant date.
Compensation cost recognized by the Company in accordance with APBO No. 25 has
not been significant in each of the past three years.
NOTE 2 - ACQUISITION
On September 27, 1996, the stockholders of Keystone and DeSoto approved the
merger of the two companies (the "Acquisition"), in which DeSoto became a
wholly-owned subsidiary of Keystone. DeSoto manufactures household cleaning
products including powdered and liquid laundry detergents and performs contract
manufacturing and packaging of household cleaning products. Keystone issued
approximately 3.5 million shares of its common stock (approximately $29.3
million at the $8.375 per share market price on September 27, 1996) and 435,456
shares of Keystone preferred stock ($3.5 million redemption value beginning on
July 21, 1997) in exchange for all of the outstanding common stock and preferred
stock, respectively, of DeSoto. Each DeSoto common stockholder received .7465
of a share of Keystone common stock for each share of DeSoto common stock.
In connection with the Acquisition, Keystone assumed certain options to
purchase DeSoto common stock and converted them to options to acquire
approximately 147,000 shares of Keystone common stock at prices of $5.86 to
$13.56 per share. Keystone also assumed certain DeSoto warrants giving holders
the right to acquire the equivalent of 447,900 shares of Keystone common stock
at a price of $9.38 per share.
The Acquisition included the simultaneous merger of Keystone's three
underfunded defined benefit pension plans with and into DeSoto's overfunded
defined benefit pension plan, which resulted in an overfunded plan for financial
reporting purposes. See Note 7.
Pursuant to the Merger Agreement, Keystone was obligated to, and has caused
DeSoto to pay, approximately $5.9 million to certain of DeSoto's trade creditors
who were parties to a trade composition agreement with DeSoto. DeSoto was
required to pay an additional $1.4 million, plus interest at 8%, to such trade
creditors before September 27, 1997, and such amounts were paid by DeSoto in
February 1997. Additionally, Keystone was obligated to immediately pay to the
holders of DeSoto preferred stock approximately $1.6 million in accumulated,
unpaid dividends, which amounts were also paid. See Note 10.
As a result of these and other transactions related to the Acquisition,
Keystone required additional funding from its primary lender. In order to
obtain such additional funds, Keystone received the consent of the Pension
Benefit Guaranty Corporation (the "PBGC") to increase Keystone's allowable
borrowings by $20 million upon consummation of the Acquisition and the merger of
the Keystone defined benefit pension plans with and into the DeSoto defined
benefit pension plan. The PBGC's consent was required due to prior agreements
with the PBGC whereby Keystone agreed to certain borrowing restrictions.
Keystone accounted for the Acquisition by the purchase method of accounting
and, accordingly, DeSoto's results of operations and cash flows are included in
the Company's consolidated financial statements subsequent to the Acquisition.
The purchase price has been allocated to the individual assets acquired and
liabilities assumed of DeSoto based upon preliminary estimated fair values. The
actual allocation of the purchase price may be different from the preliminary
allocation due to adjustments in the purchase price and refinements in estimates
of the fair values of the net assets acquired.
The following pro forma financial information has been prepared assuming
the Acquisition and the simultaneous merger of the defined benefit pension plans
occurred as of January 1, 1995. The pro forma financial information also
reflects adjustments to assume that (i) the April 1996 sale of DeSoto's Union
City, California business, and (ii) the 1995 sales of DeSoto's businesses in
Thornton and South Holland, Illinois had both occurred on December 31, 1994.
The pro forma financial information is not necessarily indicative of actual
results had the transactions occurred at the beginning of the periods, nor do
they purport to represent results of future operations of the merged companies.
Years ended December 31,
1995 1996
(Unaudited)
(In millions, except per share data)
Revenues and other income $364.0 $343.4
Net income $ 9.2 $ 3.3
Net income available to common stockholders $ 8.7 $ 2.9
Net income per Keystone common share $ .93 $ .31
Pro forma net periodic pension expense for 1995 and 1996, assuming the
Acquisition and pension plan merger occurred January 1, 1995, approximates $5.3
million and $1.7 million, respectively, as compared to historical pension
expense of $8.7 million and $3.7 million for 1995 and 1996, respectively.
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost or market. The last-in,
first-out ("LIFO") method is used to determine the cost of approximately 73% and
72% of the inventories held at December 31, 1995 and 1996, respectively. The
first-in, first-out or average cost methods are used to determine the cost of
all other inventories.
December 31,
1995 1996
(In thousands)
Raw materials:
Steel and wire products $12,669 $12,548
Household cleaning products - 526
12,669 13,074
Work in process -
Steel and wire products 13,825 12,824
Finished products:
Steel and wire products 10,258 9,954
Household cleaning products - 96
10,258 10,050
Supplies -
Steel and wire products 13,552 13,612
50,304 49,560
Less LIFO reserve:
Steel and wire products 14,673 12,996
Household cleaning products - 31
14,673 13,027
$35,631 $36,533
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT
December 31,
1995 1996
(In thousands)
Commercial credit agreements:
Revolving credit facility $14,561 $31,095
Term loan 13,050 19,166
Urban and Community Development Assistance Grants,
interest at 8%, due in semi-annual installments
through 2003 1,444 1,267
Other 890 252
29,945 51,780
Less current maturities 18,750 34,760
$11,195 $17,020
In connection with the Acquisition, the Company's $35 million revolving
credit facility was amended and increased to $55 million. See Note 2. The
revolving credit facility, as amended, is collateralized primarily by the
Company's trade receivables and inventories, bears interest at 1% over the prime
rate and matures December 31, 1999. During 1995 and 1994 the facility bore
interest at 1.5% over the prime rate. The effective interest rate was 10.25%
and 9.25% at December 31, 1995 and 1996, respectively. The amount of available
borrowings is based on formula-determined amounts of trade receivables and
inventories, less the amount of outstanding letters of credit (approximately $.3
million at December 31, 1996). At December 31, 1996, the additional available
borrowings under this credit facility were $16.7 million. This credit facility
requires the Company's daily cash receipts to be used to reduce the outstanding
borrowings, which results in the Company maintaining zero cash balances.
Also in connection with the Acquisition, the Company's term loan was
increased from $10.5 million to $20 million and the proceeds therefrom were used
to reduce the revolving credit facility. The term loan, as amended, also bears
interest at the prime rate plus 1% and is due in monthly installments of $.3
million plus accrued interest through November 1999 with one final installment
of the remaining principal and interest on December 31, 1999. The term loan is
with the same financial institution that provides the Company's revolving credit
facility and requires compliance with the restrictive covenants, security
agreement and certain other terms of the revolving credit facility and is
further collateralized by the Company's property, plant and equipment. The term
loan becomes due and payable if the Company terminates its revolving credit
facility.
The Company's credit agreements contain restrictive covenants, including
certain minimum working capital and net worth requirements and a prohibition
against the payment of dividends on Keystone common stock without lender
consent. Substantially all of the Company's notes payable and long-term debt
reprice with changes in interest rates, and the book value of such
indebtedness is deemed to approximate market value.
The aggregate maturities of notes payable and long-term debt are shown in
the table below.
Year ending December 31, Amount
(In thousands)
1997 $34,760
1998 3,619
1999 12,757
2000 242
2001 262
2002 and thereafter 140
$51,780
At December 31, 1996, total collateralized obligations, including deferred
pension contributions (see Note 7), amounted to $58.3 million.
NOTE 5 - INCOME TAXES
Summarized below are (i) the differences between the provision for income
taxes and the amounts that would be expected using the U. S. federal statutory
income tax rate of 35%, and (ii) the components of the comprehensive provision
for income taxes.
Years ended December 31,
1994 1995 1996
(In thousands)
Expected tax expense, at statutory rate $ 4,336 $ 2,827 $ 1,484
U.S. state income taxes, net 557 171 11
Other, net (65) 193 161
Provision for income taxes charged to
results of operations 4,828 3,191 1,656
Stockholders' equity - pension component 978 (1,580) 2,272
Comprehensive provision for income taxes $ 5,806 $ 1,611 $ 3,928
Comprehensive provision for income taxes:
Currently payable:
U.S. federal $ 943 $ 3,095 $ 5,428
U.S. state 294 254 788
Benefit of loss carry forwards (2,247) (1,271) (23)
Alternative minimum tax liability (credits) 1,663 (637) (3,288)
Net currently payable 653 1,441 2,905
Deferred income taxes, net 5,153 170 1,023
$ 5,806 $ 1,611 $ 3,928
Prior to the Acquisition, the Company believed a portion of its gross
deferred tax assets did not meet a "more likely than not" relizability test and
accordingly, provided a $30 million valuation allowance. As a result of the
Acquisition and related transactions, Keystone eliminated the $30 million
deferred tax asset valuation allowance as part of the purchase price allocation
for the Acquisition. The net deferred tax asset valuation allowance amounted to
$30 million at December 31, 1995. There was no change in the valuation
allowance during 1994 or 1995.
During 1995 and 1996, the Company was subject to the regular U.S. federal
statutory income tax rate of 35%, but utilized alternative minimum tax credit
carry forwards to reduce its current federal income tax payable to an amount
equal to the alternative minimum tax. At December 31, 1996, the Company had
approximately $3.2 million of alternative minimum tax credit carry forwards
which have no expiration date.
The components of the net deferred tax asset are summarized below.
December 31,
1995 1996
Assets Liabilities Assets Liabilities
(In thousands)
Tax effect of temporary differences relating to:
Inventories $ 1,866 $ - $ 2,202 $ -
Property and equipment - (8,189) - (5,792)
Accrued pension cost 10,603 - - -
Prepaid pension - - - (40,843)
Accrued OPEB cost 41,202 - 42,583 -
Accrued liabilities and other deductible
differences 7,325 - 14,317 -
Other taxable differences - (1,183) - (6,228)
Net operating loss carry forwards - - 9,109 -
Alternative minimum tax credit carryforwards 6,546 - 3,214 -
Valuation allowance (30,000) - - -
Gross deferred tax assets (liabilities) 37,542 (9,372) 71,425 (52,863)
Reclassification, principally netting by tax
jurisdiction (9,372)
9,372 (52,863) 52,863
Net deferred tax asset (liability) 28,170 - 18,562 -
Less current deferred tax asset, net of prorata
allocation of valuation allowance in 1995
3,685 - 16,381 -
Noncurrent deferred tax asset (liability) $24,485 $ - $ 2,181 $ -
Significant fluctuations in several components of the net deferred tax
asset resulted from the Acquisition and simultaneous merger of the Company's
pension plans, including the pre-acquisition net operating loss carryforwards
generated by DeSoto which are approximately $9.1 million and which expire from
2003 through 2009. These net operating loss carry forwards can be used to
reduce the future taxable income of the Company, subject to certain
statutorially-imposed limitations. A nominal amount of the acquired net
operating loss carryforward was utilized in 1996 subsequent to the Acquisition.
Prior to the Acquisition, DeSoto received a Report of Tax Examination
Changes from the Internal Revenue Service that proposes adjustments resulting in
additional taxes due of $6.5 million and penalties of $1.4 million, as well as
an unspecified amount of interest for the years 1990 through 1993. DeSoto has
filed a formal appeal of the proposed adjustments, and the Company believes the
resolution of this matter will not have a material adverse effect on the
Company's financial position or results of operations. At December 31, 1996,
DeSoto has accrued an estimate of its liability related to this matter.
NOTE 6 - STOCK OPTIONS, WARRANTS AND STOCK APPRECIATION RIGHTS PLAN
The Company's 1992 Option Plan permits the granting of stock options, SARs
and restricted stock to key employees of the Company or its parent or
subsidiaries for up to 300,000 shares of the Company's common stock, subject to
certain adjustments. The 1992 Option Plan provides for the grant of options
that qualify as incentive stock options and for options which are not so
qualified. Incentive stock options are granted at a price not less than 100% of
the fair market value of such stock on the date of grant. The exercise price of
all options and SARs, the length of period during which the options or SARs may
be exercised, and the length of the restriction period for restricted stock
awards are determined by the Incentive Compensation Committee of the Board of
Directors.
The Keystone Consolidated Industries, Inc. 1992 Non-Employee Director Stock
Option Plan (the "Director Plan") provides that each non-employee director of
the Company will annually be automatically granted an option to purchase 1,000
shares of the Company's common stock. Options are granted at a price equal to
the fair market value of such stock on the date of the grant, vest one year from
the date of the grant and expire five years from the date of the grant. Up to
50,000 shares of the Company's common stock may be issued pursuant to the
Director Plan.
Prior to the Acquisition, DeSoto granted stock options to certain
employees, consultants, and non-employee directors under a DeSoto stock plan
adopted in 1992 (the "DeSoto Options"). The options granted to employees and
consultants were qualified stock options (the "ISO Options") and the options
granted to non-employee directors were non-qualified options. The ISO Options
vest equally over the three years subsequent to the first anniversary of the
grant date and are exercisable for a period of 10 years from the grant date.
The non-qualified options are exercisable immediately upon grant and are
exercisable for a period of 10 years from the grant date. All options were
granted at prices equal to the fair market value of the stock on the dates the
options were granted. Upon consummation of the Acquisition, each then
outstanding DeSoto Option was assumed by Keystone and converted into an option
to acquire that number of shares of Keystone Common Stock equal to the number of
shares of DeSoto Common Stock subject to such DeSoto Option multiplied by .7465
(the "Exchange Ratio"). The exercise price of such DeSoto Options was also
adjusted by dividing such exercise price by the Exchange Ratio. The other terms
of the DeSoto Options, including vesting schedules, remain unchanged. The
Keystone options exchanged for the former DeSoto options expire two years from
the date of the Acquisition. Also effective with the Acquisition, the former
DeSoto 1992 stock plan was terminated.
Changes in outstanding options, including 25,000 options outstanding under
a prior plan pursuant to which no further grants can be made are summarized in
the table below.
Price per Amount payable
Options share upon exercise
Outstanding at December 31, 1993 179,500 $ 8.53-15.81 $1,950,304
Granted 9,900 10.25-11.25 106,475
Exercised (61,500) 8.53-15.77 (535,252)
Canceled (16,300) 8.75-15.77 (226,825)
Outstanding at December 31, 1994 111,600 8.75-15.81 1,294,702
Granted 5,000 13.38 66,875
Exercised (200) 8.75 (1,750)
Canceled (21,000) 15.77 (331,102)
Outstanding at December 31, 1995 95,400 8.75-15.81 1,028,725
Granted 185,000 8.13-11.00 1,517,500
Assumed in Acquisition 147,062 5.86-13.56 1,351,519
Exercised (3,733) 6.20 (23,130)
Canceled (18,733) 8.75-15.81 (234,980)
Outstanding at December 31, 1996 404,996 $5.86-13.56 $3,639,634
The following table summarizes weighted average information about fixed
stock options outstanding at December 31, 1996.
Outstanding Exercisable
Weighted Average Weighted Average
Range of Remaining Remaining
Exercise Contractual Exercise Contractual Exercise
Prices Options Life Price Options Life Price
$5.86-$8.75 264,170 7.4 years $ 8.01 67,970 2.3 years $ 7.53
$9.21-$13.56 140,826 1.9 $10.82 132,886 1.7 $10.82
404,996 5.5 $ 8.99 200,856 1.9 $ 9.71
During 1994, the Company awarded 19,200 shares of restricted stock under
the terms of the 1992 Option Plan as partial consideration for compensation that
had been accrued at December 31, 1993. The restricted stock vested 40% six
months after the award date, increasing to 70% 18 months after the award date
and 100% two years after the award date. During 1994 and 1996, 1,800 and 700
shares, respectively, of restricted stock were forfeited. At December 31, 1996,
all remaining shares had been issued.
At December 31, 1996, options to purchase 200,856 shares were exercisable
(43,670 shares exercisable at prices lower than the December 31, 1996 quoted
market price of $8.25 per share) and options to purchase an additional 82,120
shares will become exercisable in 1997. At December 31, 1996, an aggregate of
82,700 shares were available for future grants under the 1992 Option Plan and
the Director Plan.
Prior to the Acquisition, DeSoto had granted warrants to the holders of
DeSoto preferred stock to purchase 1,200,000 shares of DeSoto common stock at an
exercise price of $7.00 per share. In connection with the Acquisition, warrants
to purchase 600,000 shares were terminated and the remaining 600,000 warrants
were converted to warrants to purchase 447,900 shares of Keystone common stock
at an exercise price of $9.38 per share. The warrants are exercisable through
July 1998. At December 31, 1996, none of the warrants to purchase Keystone
common stock had been exercised.
Had the Company elected to account for stock-based employee compensation
for all awards granted after 1994 in accordance with the fair value based
accounting method of SFAS No. 123, the impact on the Company's reported net
income available to common stockholders and related per share amounts for 1995
and 1996 would not be material.
NOTE 7 - EMPLOYEE BENEFIT PLANS
Prior to the Acquisition, the Company maintained three noncontributory
defined benefit pension plans covering most of its employees. The Acquisition
included the simultaneous merger of Keystone's three underfunded defined benefit
pension plans with and into DeSoto's single overfunded defined benefit pension
plan (the "Plan") resulting in an overfunded plan for financial reporting
purposes. As a result, Keystone's unrecognized pension obligation asset,
additional minimum pension liability and pension liabilities adjustment
component of stockholders' equity at September 27, 1996 were eliminated.
Pension benefits are based on a combination of stated percentages of each
employee's wages and the method of calculating benefits under each of the former
plans remain unchanged as a result of the plan merger. At December 31, 1996,
approximately 68% of the Plan assets were invested in a collective investment
trust (the "Collective Trust") formed by Valhi, Inc., a majority-owned
subsidiary of Contran, to permit the collective investment by trusts which
implement employee benefit plans maintained by Contran, Valhi and related
companies, including the Company. The remainder of the Plan assets at December
31, 1996 were invested in United States Treasury Notes, corporate bonds and
notes, investment partnerships, time deposits, commercial paper, interest rate
futures, forward exchange contracts, foreign currency, certain real estate
leased by the Company, various mutual funds invested in bonds, equity and real
estate, mortgages and other short-term investments. Prior to the Acquisition,
significantly all of the pension plan assets were invested in the Collective
Trust. Harold C. Simmons is the sole trustee and the sole member of the Trust
Investment Committee for such trust.
In addition, during years prior to the Acquisition, DeSoto sold four of its
real properties to its pension plan for approximately $10.6 million. Those
properties are still owned by the Plan and are leased to DeSoto. These real
properties amounted to approximately 3% of the Plan's assets at December 31,
1996. See Note 16.
The Company's funding policy is to contribute amounts equal to, or
exceeding, minimum funding requirements of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The Company was granted funding
waivers from the Internal Revenue Service ("IRS") to defer the annual pension
plan contributions for the 1980, 1984 and 1985 plan years, which, in the
aggregate, amounted to $31.7 million. The deferred amounts, with interest, were
payable by the Company over fifteen years. At December 31, 1996, the remaining
balance of such deferred contributions was approximately $6.5 million. These
deferred contributions are collateralized by a lien on all of the Company's
assets. Due to the merger of the pension plans, the Company will no longer be
required to make these deferred contributions provided the Plan maintains a
specified funded status.
The components of net periodic pension cost are presented in the table
below.
Years ended December 31,
1994 1995 1996
(In thousands)
Service cost $ 2,601 $ 1,811 $ 2,214
Interest cost on projected benefit obligation 13,691 14,460 15,258
Actual (return)/loss on plan assets 1,272 (22,633) (37,968)
Net amortization and deferral (8,621) 15,022 24,170
Net periodic pension cost $ 8,943 $ 8,660 $ 3,674
The Company evaluates the discount rate used in determining the actuarial
present values of its pension obligations in response to changes in interest
rate trends and, if appropriate, adjusts the rate annually. The discount rate
used at December 31, 1996 was 7.5% (1995 - 7.5%, 1994 - 8.5%). The 1% decrease
in 1995 resulted in, among other things, an increase in noncurrent pension
liability of $14.7 million and a $9.0 million charge to stockholders' deficit.
Future variances from actuarially assumed rates, including the rate of
return on pension plan assets, may result in increases or decreases to prepaid
pension costs, deferred taxes, pension expense or credit, and funding
requirements.
The assumed rate of increase in future compensation levels and long-term
rate of return on assets were 3% and 10%, respectively. The vested benefit
obligation includes the actuarial present value of the vested benefits to which
an active employee is entitled if employment was terminated immediately.
The following table sets forth the actuarially estimated obligations and
funded status of the Company's various defined benefit pension plans and the
Company's accrued pension cost.
December 31,
1995 1996
(In thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation $182,612 $272,855
Accumulated benefit obligation $183,143 $273,792
Projected benefit obligation $192,192 $281,915
Plan assets at fair value 136,752 328,783
Plan assets in excess of (less than) projected
benefit obligation (55,440) 46,868
Unrecognized net loss from experience different from
actuarial assumptions 54,589 51,291
Unrecognized net obligation being amortized over
15-19 years 8,373 6,567
Adjustment required to recognize minimum liability (53,914) -
Total prepaid (accrued) pension cost (46,392) 104,726
Less current portion (7,170) -
Noncurrent prepaid (accrued) pension cost $(39,222) $104,726
The Company maintains several defined contribution plans covering most of
its employees. The Company contributes the lesser of an amount equal to the
participants' contributions or a formula established by the Board of Directors.
Expense related to these plans was $2.4 million in 1994, $2.3 million in 1995
and $2.2 million in 1996.
NOTE 8 - OTHER ACCRUED LIABILITIES
December 31,
1995 1996
(In thousands)
Current:
Salary, wages, vacations and other employee expenses $ 9,342 $11,085
Environmental 4,111 5,354
Accrued excise tax and related interest 1,033 -
Disposition of former facilities 301 3,518
Self insurance 1,247 1,585
Legal and professional 310 1,542
Other 2,953 5,547
$19,297 $28,631
Noncurrent:
Environmental $ 6,677 $12,787
Deferred gain - 2,383
Other 1,787 1,296
$ 8,464 $16,466
The deferred gain relates to the sale of certain DeSoto properties to
DeSoto's pension plan. See Note 16.
NOTE 9 - POST RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company currently provides, in addition to pension benefits, medical
and life insurance benefits for certain retired employees of currently owned
businesses as well as for certain retirees of businesses which have been sold or
discontinued. Certain retirees are required to contribute to the cost of their
benefits. Under plans currently in effect, most active employees would be
entitled to receive OPEB upon retirement. OPEB expense for the years ended
December 31, 1994, 1995 and 1996 was composed of the following:
December 31,
1994 1995 1996
(In thousands)
Service cost $1,396 $ 985 $1,189
Interest cost on projected benefit obligation 7,421 7,123 6,967
Amortization of prior service cost (343) (343) (343)
Amortization of (gains) losses - (331) 9
Total OPEB expense $8,474 $7,434 $7,822
The following table sets forth the actuarial present value of the estimated
accumulated OPEB obligations, none of which have been funded.
December 31,
1995 1996
(In thousands)
Actuarial present value of accumulated
OPEB obligations:
Current retirees $ 69,701 $ 72,886
Fully eligible active plan participants 1,636 1,026
Other active plan participants 25,263 25,621
96,600 99,533
Unrecognized net gain from experience different
from actuarial assumptions 4,150 5,102
Unrecognized prior service credit 4,894 4,551
Total accrued OPEB cost 105,644 109,186
Less current portion 7,776 8,368
Noncurrent accrued OPEB cost $ 97,868 $100,818
The rates used in determining the actuarial present value of the
accumulated OPEB obligations were (i) discount rate - 7.5% in 1996 and 1995 and
(ii) rate of increase in future health care costs - 7% in 1997, gradually
declining to 5% in 2006 and thereafter. If the health care cost trend rate was
increased by one percentage point, OPEB expense would have increased $1.0
million in 1996 and the actuarial present value of accumulated OPEB obligations
at December 31, 1996 would have increased $9.4 million.
The Company evaluates the discount rate used in valuing its OPEB
liabilities in response to changes in interest rate trends and, if appropriate,
adjusts the rate annually. A one percent change in the discount rate results in
an approximate $8 million change in accumulated OPEB obligation.
NOTE 10 - REDEEMABLE PREFERRED STOCK:
In connection with the Acquisition, Keystone issued 435,456 shares of
Keystone Series A Senior Preferred Stock for all of the outstanding preferred
stock of DeSoto. The preferred stock may be redeemed by Keystone, in whole or,
from time to time, in part, at a cash redemption price equal to $8.0375 per
share (an aggregate of $3.5 million) plus all accrued but unpaid dividends
thereon, whether or not earned or declared (the "Liquidation Preference"), at
any time after July 21, 1997 or at certain other times. Dividends are payable
to holders of the preferred stock quarterly, at the rate of 8% of the
Liquidation Preference. If such dividends are in arrears for four quarterly
periods, dividends for any subsequent quarterly periods are payable to holders
of the preferred stock at the rate of 10% of the Liquidation Preference. At
December 31, 1996, there were no dividend arrearages with respect to the
preferred stock.
Holders of the preferred stock are entitled to one vote for each share of
such stock, voting together as one class with holders of Keystone's common
stock. If the accrued dividends for two or more quarterly dividend periods
shall not have been paid to holders of any shares of the Company's preferred
stock, holders of a majority of such stock shall have the exclusive right,
voting as a separate class, to elect two directors of Keystone.
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company may be deemed to be controlled by Harold C. Simmons (see
Note 1). Corporations that may be deemed to be controlled by or affiliated with
Mr. Simmons sometimes engage in various transactions with related parties,
including the Company. Such transactions may include, among other things,
management and expense sharing arrangements, advances of funds on open account,
and sales, leases and exchanges of assets. It is the policy of the Company to
engage in transactions with related parties on terms, in the opinion of the
Company, no less favorable to the Company than could be obtained from unrelated
parties. Depending upon the business, tax and other objectives then relevant,
the Company may be a party to one or more such transactions in the future. See
also Note 16.
J. Walter Tucker, Jr., Vice Chairman of the Company, is a principal
stockholder of Tucker & Branham, Inc., Orlando, Florida. Although the Company
does not pay Mr. Tucker a salary, the Company has contracted with Tucker &
Branham, Inc. for management consulting services by Mr. Tucker. Fees paid to
Tucker & Branham, Inc. were $66,000 in 1994, $50,000 in 1995 and $79,000 in
1996.
Under the terms of an Intercorporate Services Agreement with Contran,
Contran and related companies perform certain management, financial and
administrative services for the Company on a fee basis. Aggregate fees incurred
by the Company pursuant to this agreement were $640,000 in 1994, $500,000 in
1995 and $465,000 in 1996. In addition, the Company purchased certain
aircraft services from Valhi in the amount of $128,000 in 1994, $150,000 in
1995 and $172,000 in 1996.
Certain of Keystone's property, liability and casualty insurance risks are
insured or partially reinsured by a captive insurance subsidiary of Valhi. The
premiums paid in connection therewith were approximately $98,000 in 1994,
$39,000 in 1995 and $689,000 in 1996.
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
March 31, June 30, September 30, December 31,
(In thousands, except per share data)
Year ended December 31, 1996:
Net sales $79,463 $90,655 $82,703 $78,354
Gross profit 5,076 7,367 8,172 13,411
Net income (loss) $(1,137) $ 810 $ 792 $ 2,119
Net income (loss) available for common shares $(1,137) $ 810 $ 792 $ 2,049
Net income (loss) available for common shares
per common and common equivalent share $ (.20) $ .14 $ .14 $ .22
Year ended December 31, 1995:
Net sales $90,768 $95,482 $82,921 $76,486
Gross profit 7,491 11,255 6,539 7,463
Net income (loss) available for common shares $ 255 $ 2,876 $ 759 $ 997
Net income (loss) available for common shares per
common and common equivalent share $ .05 $ .50 $ .14 $ .17
Due to the timing of the issuance of common stock in connection with the
Acquisition, the sum of 1996 net income (loss) available for common shares per
common and common equivalent share is different than net income (loss) available
for common shares per common and common equivalent share for the full year.
NOTE 13 - JOINT VENTURE
In November 1994, the Company entered into a Joint Venture Agreement with
an unrelated party and formed Engineered Wire Products, Inc. ("EWP"), a
manufacturer and distributor of wire mesh, which previously operated as a
division of the unrelated party. The Company obtained a 20% interest in EWP, in
exchange for contributions of $1 million in cash and equipment in 1994 and $1
million in cash and inventory in 1995. In connection with the Joint Venture
Agreement, the Company also entered into a Shareholders' Agreement which gives
the Company the exclusive option to acquire the remaining 80% interest in EWP at
fair market value for a period of five years. The Company accounts for its
interest in EWP under the equity method. At December 31, 1995 and 1996, the
Company's investment in EWP amounted to $2.1 million and $2.4 million,
respectively, and is included in other assets. Earnings from the Company's
investment in EWP amounted to $21,000, $125,000 and $225,000 in 1994, 1995 and
1996, respectively, and are recorded in other income. The Company's underlying
equity in net assets of EWP amounted to $1.5 million and $1.7 million at
December 31, 1995 and 1996, respectively. Sales by the Company to EWP during
1994, 1995 and 1996 amounted to $2.3 million, $13.5 million and $9.9 million,
respectively. The Company did not have any receivables from EWP at December 31,
1995 and receivables from EWP amounted to $508,000 at December 31, 1996.
Inventory purchased from the Company and held by EWP at December 31, 1995 and
1996 was insignificant.
NOTE 14 - OPERATIONS
The Company's operations are comprised of two segments; the manufacture and
sale of carbon steel rod, wire and wire products for agricultural, industrial,
construction, commercial, original equipment manufacturers and retail consumer
markets and the manufacture and sale of household cleaning products. The
Company's steel and wire products are distributed primarily in the Midwestern
and Southwestern United States. The Company's household cleaning products are
sold primarily to a single customer, Sears.
Business Segment Principal entities Location
Steel and wire products Keystone Steel & Wire Peoria, Illinois
Sherman Wire Sherman, Texas
Sherman Wire
of Caldwell, Inc. Caldwell, Texas
Keystone Fasteners Springdale, Arkansas
Fox Valley Steel & Wire Hortonville, Wisconsin
Engineered Wire Products* Upper Sandusky, Ohio
Household cleaning products DeSoto Joliet, Illinois
* Unconsolidated 20% equity affiliate.
Years ended December 31,
1994 1995 1996
(In millions)
Net sales:
Steel and wire products $364.4 $345.7 $328.7
Household cleaning products - - 2.5
$364.4 $345.7 $331.2
Operating income (loss):
Steel and wire products $ 12.9 $ 11.3 $ 10.9
Household cleaning products - - (.2)
12.9 11.3 10.7
General expenses and other, net (credit) 1.7 (.2) 2.8
Interest expense (credit) (1.2) 3.4 3.7
Income before income taxes $ 12.4 $ 8.1 $ 4.2
All of the Company's capital expenditures and depreciation expense during
the years ended December 31, 1994, 1995 and 1996 related to the Company's steel
and wire products segment.
December 31,
1995 1996
(In millions)
Identifiable assets:
Business segments:
Steel and wire products $157.3 $166.4
Household cleaning products - 2.6
157.3 169.0
Corporate 41.5 133.4
$198.8 $302.4
Corporate assets consist principally of pension related assets, restricted
investments, deferred tax assets and corporate property, plant and equipment.
Export sales were $2.8 million in 1994, $.9 million in 1995 and $1.5
million in 1996. These export sales were primarily to Canada and Mexico in 1994
and Canada in 1995 and 1996.
NOTE 15 - ENVIRONMENTAL MATTERS
At December 31, 1996, the Company's financial statements reflected total
accrued liabilities of $18.1 million to cover estimated remedial costs arising
from environmental issues, including those discussed below. Although the
Company has established an accrual for estimated future required environmental
remediation costs, there is no assurance regarding the ultimate cost of remedial
measures that might eventually be required by environmental authorities or that
additional environmental hazards, requiring further remedial expenditures, might
not be, asserted by such authorities or private parties. Accordingly, the costs
of remedial measures may exceed the amounts accrued.
The Company has adopted Statement of Position 96-1, "Environmental
Remediation Liabilities," ("SOP 96-1"). The impact on the Company's financial
statements of adoption of SOP 96-1 in 1996 was not material.
Peoria facility
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 the remediation of Phase I, which was completed in 1994, the Company
discovered additional contaminated soils and recorded a charge of $3.1 million
for the treatment and disposal costs related to the additional soils. During
1995, the Company began remediation of Phases II and III and completed these
Phases, as well as Phase IV during 1996. In addition, the Company began
remediation of Phase V during 1996. During 1995, additional contaminated soils
were discovered and the Company recorded a charge of $2.4 million for the
remediation costs for Phases II and III. During 1996, the Company's actual
remediation costs for Phase IV was greater than the recorded accrual and as
such, the Company recorded an additional charge of $2.8 million. In addition,
based on new cost estimates developed in 1996, the Company recorded an
additional charge of $3.6 million (approximately $2.0 million in the fourth
quarter) representing the estimated costs remaining to be incurred relating to
the uncompleted phases. At December 31, 1996, the Company has a $9.1 million
accrual representing the estimated costs remaining to be incurred relating to
the remediation efforts, exclusive of capital improvements. The remediation is
currently expected to be complete in 1998. Pursuant to agreements with the IEPA
and Illinois Attorney General's office, the Company is depositing $3 million
into a trust fund over a six-year period ending July 1999. The Company 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, 1995 and
1996 the trust fund had balances of $2.4 million and $2.8 million, respectively,
which amounts are included in other noncurrent assets because the Company does
not expect to have access to any of these funds until after 1998.
"Superfund" sites - Keystone
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.
The Company has been notified by the United States Environmental Protection
Agency ("U.S. EPA") that the Company is a potentially responsible party ("PRP")
under the federal "Superfund" legislation for the alleged release or threat of
release of hazardous substances into the environment at three sites. These
situations involve cleanup of landfills and disposal facilities which allegedly
received hazardous substances generated by discontinued operations of the
Company. At December 31, 1995 and 1996, the Company had accrued a total
liability related to these three sites of $1,121,000. The Company believes its
comprehensive general liability insurance policies provide indemnification for
certain costs the Company incurs at the three "Superfund" sites discussed below
and has recorded receivables for the estimated insurance recoveries.
In July 1991, the United States filed an action against a former division
of the Company and four other PRP's 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.
U.S. EPA has possession of the site, is conducting the remedial investigation.
In July 1993, the U.S. EPA made available for inspection records documenting
approximately $10 million in investigation and remediation costs incurred at the
site and produced copies of the laboratory results on groundwater samples taken
as a part of the ongoing remedial investigation. During 1994, U.S. EPA released
its remedial investigation study showing ground water contamination, however
U.S. EPA has not completed a feasibility study or risk assessment for the site.
Until U.S.
EPA releases its Final Record of Decision, the Company will not know whether
U.S. EPA will require any further groundwater remediation measures. 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 has a verbal
agreement with its insurer to recover a portion of the $690,000 payment.
In September 1991, the Company along with 53 other PRP's, executed a
consent decree to undertake the immediate removal of hazardous wastes and
initiate a Remedial Investigation/Feasibility Study ("RI/FS") of the Interstate
Pollution Control site located in Rockford, Illinois. The Company's percentage
allocation within the group of PRP's 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 project manager for the engineering firm
conducting the RI/FS at the site has concluded the least expensive remedial
option would be to cap the site and install and operate a soil vapor extraction
system, at an estimated cost of approximately $2.6 million. The remedial
investigation and feasibility study is expected to be completed during 1997.
The Company's current allocated share of the estimated least expensive remedial
option is $56,000.
In August 1987, the Company 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. There are four other
PRPs participating in the RI/FS and a contribution action is pending against
eleven additional viable companies which contributed wastes to the site. An
estimate made by the principal engineering firm responsible for the management
of the RI/FS indicated the cost of the least expensive remedial option is
approximately $3 million. This option would involve the construction of a site
cap and ground water monitoring. The likelihood that U.S. EPA will select this
option will depend on, among other things, the results of the EPA's evaluation
of the feasibility study. The Company's estimated share of the least expensive
remedial option is $375,000.
DeSoto
DeSoto is also subject to federal and state "Superfund" legislation and has
been notified by U.S. EPA that it is a PRP under the federal "Superfund"
legislation for the alleged release or threat of release of hazardous substances
into the environment at several sites. DeSoto is also involved in remediation
efforts at other non "Superfund" sites. All of these situations involve cleanup
of landfills and other facilities which allegedly received hazardous substances
generated by discontinued operations of DeSoto. DeSoto has a total of $7.7
million accrued at December 31, 1996 relative to these sites. Such accruals
were recorded by DeSoto prior to the Acquisition. Although some insurance
coverage is available to DeSoto relative to these sites, DeSoto has not recorded
receivables for expected insurance proceeds at December 31, 1996.
U.S. EPA has notified DeSoto it is a PRP responsible for the alleged
hazardous substance contamination of the American Chemical Site ("ACS"), a
chemical recycling facility located in Griffith, Indiana. The U.S. EPA alleges
that DeSoto's discontinued operations sent its wastes directly to ACS during the
1950's
through the 1980's and has assigned an allocation level of approximately 5.7% to
DeSoto. Cleanup costs have previously been estimated to range from $40 million
to $85 million. In prior years DeSoto has paid approximately $207,000 towards
the cleanup of this site. DeSoto expects to vigorously defend any additional
proceedings against it.
Prior to the Acquisition, DeSoto was notified by U.S. EPA that it is one of
50 PRPs at the Chemical Recyclers, Inc. site in Wylie, Texas. Under a consent
order from 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. Certain PRPs that allegedly did
not produce chlorinated solvents may argue they should not be responsible for
groundwater cleanup or that responsibility should not be based on pure volume,
but toxicity should be taken into account in allocating responsibility. It is
not presently known whether DeSoto sent any chlorinated solvents to the site.
It is anticipated U.S. EPA will order further remedial action, the exact extent
of which is not currently known. DeSoto has been allocated on a non-binding
interim basis, approximately 10% of the costs for this Site.
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. At December 31, 1996 current estimates of
total remaining remediation costs related to this site are approximately $20
million.
In addition to certain amounts (totaling approximately $1.0 million at
December
31, 1996) included in the trust fund discussed below, DeSoto also has certain
credits (totaling $1.2 million at December 31, 1996) due to it under the partial
consent decree. These credits can be used by DeSoto (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 DeSoto
reports to TNRCC relative to one of DeSoto's non-operating facilities located in
Gainesville, Texas. In response to the TNRCC letter, DeSoto engaged an
environmental consulting firm to report on additional potential remediation
costs. Additional remediation costs are presently estimated to be between $1
million to $5 million.
In December 1994, DeSoto was named in a complaint filed in the United
States District Court for the Northern District of Indiana. The complaint
alleges DeSoto and numerous other parties are jointly and severally responsible
under the Comprehensive Environmental Response, Compensation and Liability Act
for the cleanup and future cleanup, plus costs and legal fees at the Ninth
Avenue Site in Gary, Indiana. The complaint also alleges DeSoto is responsible
for its allocable share of such expenses and costs. DeSoto has entered into a
settlement agreement which would resolve its liability at this site for a
payment of $490,000.
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 contained hazardous material. In December 1992, the
plaintiffs
responded claiming enough information had been provided, to which DeSoto
objected. The claim was dismissed without prejudice in August 1993. In 1996,
DeSoto received an amended complaint containing the same allegations. This
matter is in discovery stage at December 31, 1996. DeSoto has denied any
liability with regard to this matter and expects to vigorously defend the
action.
In addition to the sites discussed above, DeSoto is allegedly involved at
26 other sites at which DeSoto does not expect significant liability.
Under the terms of a 1990 asset purchase agreement of one of DeSoto's
former businesses with Sherwin-Williams, $6.0 million of the sale's proceeds
were used to establish a trust fund to fund potential clean-up liabilities. The
trust agreement expires on October 26, 2000, or when the trust is depleted,
whichever occurs first. A portion of the trust has been set aside with respect
to a specific site; the agreement governing that portion of the trust expires on
O ctober 26, 2008. DeSoto has access to the trust fund, subject to Sherwin-
Williams' approval, for any expenses or liabilities incurred by DeSoto regarding
environmental claims relating to the sites identified in the trust agreement.
Sherwin-Williams has access to the trust fund, subject to DeSoto's approval, for
any expenses or liabilities incurred as a result of DeSoto's failure to meet its
obligations relating to the sites identified in the agreement. DeSoto was
reimbursed approximately $131,000 during the period from the date of the
Acquisition through December 31, 1996 from the trust to cover waste site
payments. The balance in the trust fund, primarily invested in United States
Treasury securities and classified as a restricted investment on the balance
sheet, as of December 31, 1996 was approximately $4.5 million.
NOTE 16 - LEASE COMMITMENTS
During years prior to the Acquisition, DeSoto completed the sale of its
real
properties in Joliet, Illinois, Columbus, Georgia, South Holland, Illinois and
Union City, California, to a real property trust created by DeSoto's pension
plan. This trust paid a total of approximately $10.6 million in cash for the
properties and entered into ten-year leases of the properties to DeSoto.
DeSoto's initial annual rental obligations under these leases totaled
approximately $1.1 million plus insurance, taxes and maintenance. The gain on
the sale of these properties is being amortized over the period of the related
leases and is included in other accrued liabilities. See Note 8. The amount
paid to DeSoto by the trust and DeSoto's annual rental obligation were based
upon independent appraisals and approved by DeSoto's Board of Directors.
Subsequent to these sale and lease-back transactions, and prior to the
Acquisition, DeSoto ceased operations at its Columbus, Georgia and South
Holland, Illinois locations. In addition, DeSoto sold its business in Union
City, California. DeSoto has subleased the Columbus, Georgia and Union City,
California locations and continues to make monthly rental payments to the
pension plan for the amount by which its rental obligation exceeds the
subtenants' rental obligations.
Payments, net of subtenant rent payments, under these leases during the
period from the date of the Acquisition through December 31, 1996, amounted to
approximately $209,000.
Future commitments under these leases, net of subleases are summarized
below.
(In thousands)
Lease Sub
commitment rents Net
1997 $1,367 $ 482 $ 885
1998 1,261 260 1,001
1999 1,261 263 998
2000 1,261 263 998
2001 1,220 247 973
2002 and thereafter 1,703 150 1,553
$8,073 $1,665 $6,408
NOTE 17 - OTHER COMMITMENTS AND CONTINGENCIES
Current litigation
In 1992, a claim was filed against DeSoto in the Eastern Division of the
Danish High Court by an insurance carrier to a third party, for property damage
allegedly incurred when a fertilizer product manufactured by the third party,
containing a chemical sold to that party by one of DeSoto's discontinued
operations, allegedly caused or promoted, a fungus infection resulting in
failure of certain tomato crops in the United Kingdom. The damages alleged are
approximately $1.4 million. DeSoto's defense, with a reservation of rights, has
been undertaken by one of its insurance carriers. The matter continues to
proceed in Denmark, where jurisdiction has been conceded. During 1996, DeSoto
received a report from its Danish counsel that an independent expert had largely
confirmed DeSoto's position that its product was not the cause of the alleged
damage.
During 1996, DeSoto and more than 60 others were named as defendants in
four litigations in which the estates of four individuals who died of leukemia
allege their deaths were a result of exposure to benzene during the individual's
maritime careers. All four cases were tendered to DeSoto's insurance carrier
who have hired and provided defense counsel. Subsequently, one of the four
cases was dismissed, but such dismissal is being appealed by the plaintiff.
In 1991 action was filed in the District Court of Tarrant County, Texas,
by various emergency healthcare providers against DeSoto, among others, claiming
damages for alleged personal injuries purportedly related to an industrial
accident involving a DeSoto employee at its former facility in Fort Worth,
Texas. The case is set for trial in 1997. DeSoto's liability insurance
covering this matter is subject to a $500,000 self insurance retention. At
December
31, 1996, DeSoto had paid approximately $200,000 for the defense and partial
settlement of this litigation and has accrued $300,000 relative to this case at
December 31, 1996. Such accrual was recorded prior to the Acquisition.
In August 1995, DeSoto commenced an action in the United States District
Court for the District of New Jersey, seeking contract and declaratory relief
with respect to environmental insurance coverage that DeSoto purchased from
Liberty Mutual Insurance Company. The suit is currently pending in the United
States District Court.
The Company is also engaged in various legal proceedings incidental to its
normal business activities. In the opinion of the Company, none of such
proceedings is material in relation to the Company's consolidated financial
position, results of operations or liquidity.
Settled litigation
During 1993, the Company accrued an aggregate of $7.1 million for the
estimated cost of excise taxes ($3.2 million) and related interest ($3.9
million) as a result of an unfavorable U.S. Supreme Court decision related to
the Company's 1983 and 1984 contributions of certain real property to its
pension plans. In addition, to avoid a second tier $9.6 million excise tax, the
Company made a "correction" payment of $2.3 million to its pension plans. In
1994, pursuant to the terms of a Closing Agreement with the IRS, the Company
made an additional "correction" payment of approximately $3.3 million to its
pension plans and agreed to pay a total of $3.1 million in excise taxes and
interest, in three equal installments, over a two-year period beginning in June
1994. As a result, in 1994 the Company recorded a $4 million reduction in
previously accrued expenses related to this matter. At December 31, 1995 the
remaining accrued liability related to this matter amounted to approximately $1
million which was subsequently paid in 1996.
Product supply agreement
In 1996, the Company entered into a long-term product supply agreement (the
"Supply Agreement") with a vendor. The Supply Agreement provides, among other
things, that the vendor will construct a plant at the Company's Peoria, Illinois
facility and, after completion of the plant, provide the Company with all,
subject to certain limitations, of its gaseous oxygen and nitrogen needs for a
15 year period. In addition to specifying rates to be paid by the Company,
including a minimum facility fee of approximately $1.2 million per year, the
Supply Agreement also specifies provisions for adjustments to the rates and term
of the Supply Agreement. At December 31, 1996 the vendor's plant was under
construction.
Concentration of credit risk
Steel and Wire Products. The Company sells its products to agricultural,
industrial, construction, commercial, original equipment manufacturers and
retail distributors primarily in the Midwestern and Southwestern regions of the
United States. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers. The Company's ten largest customers accounted for approximately 29%
of steel and wire product sales in 1994, 30% in 1995 and 33% in 1996, and
approximately 33% and 27% of steel and wire products notes and accounts
receivable at December 31, 1995 and 1996, respectively.
Household cleaning products. The Company sells its household cleaning
products to primarily one customer, Sears, Roebuck & Co. ("Sears"). The Company
extends industry standard terms to its household cleaning products customers
and, generally requires no collateral. During the period from the Acquisition
through December 31, 1996, sales to Sears accounted for approximately 81% of
totals sales related to household cleaning products. Receivables from Sears at
December 31, 1996 amounted to approximately $2 million or 88% of receivables
related to sales of household cleaning products.
General. As discussed in Note 7, prior to the Acquisition, the assets of
the Company's pension plan were primarily invested in the Collective Trust, and
at December 31, 1996 approximately 68% of the pension plan assets were invested
in the Collective Trust. Securities of a single issuer composed approximately
20% and 18%, respectively, of the Collective Trusts' net assets at December 31,
1995 and 1996, respectively. The common stock of this issuer is publicly traded
on a national exchange. During 1995, the stock's high and low sales prices were
$67.63 and $27.25 per share, respectively, and was $35.25 at the end of the
year. During 1996, the stock's high and low sales prices were $50.63 and $35.63
per share, respectively, and was $47.63 at the end of the year.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND
QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at Charged to Deductions Balance at
beginning costs and (net of end of
Description of period expenses recoveries) Other (A) period
Year ended December 31, 1994:
Allowance for doubtful accounts and
notes receivable
$ 435 $ 128 $ (10) $ - $ 553
Deferred tax asset valuation allowance $30,000 $ - $ - $ - $30,000
Year ended December 31, 1995:
Allowance for doubtful accounts and
notes receivable
$ 553 $ 232 $ (248) $ - $ 537
Deferred tax asset valuation allowance $30,000 $ - $ - $ - $30,000
Year ended December 31, 1996:
Allowance for doubtful accounts and
notes receivable
$ 537 $ 190 $ (288) $ 30 $ 469
Deferred tax asset valuation allowance $30,000 $ - $ - $(30,000) $ -
[FN]
(A) Amounts relate to the acquisition of DeSoto.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
signed copy
Agreement and Plan of Reorganization, dated as of June 26,
1996, between Registrant and DeSoto, Inc. (Incorporated by
reference to Exhibit 2.1 of Registrant's Registration
Statement on Form S-4 (Registration No. 333-09117)).
Certificate of Incorporation, as amended and filed with
the
Secretary of State of Delaware (Incorporated by reference
to Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990.)
Bylaws of the Company, as amended and restated December
30,
1994 (Incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994.)
First Amendment to Amended and Restated Revolving Loan and
Security Agreement dated as of September 27, 1996 between
Registrant and Congress Financial Corporation (Central).
(Incorporated by reference to Exhibit 4.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.)
First Amendment to Term Loan and Security Agreement dated
as of September 27, 1996 between Registrant and Congress
Financial Corporation (Central). (Incorporated by
reference to Exhibit 4.2 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996).
Intercorporate Services Agreement with Contran Corporation
dated as of January 1, 1996. (Incorporated by reference
to
Exhibit 10.3 to Registrant's Registration Statement on
Form
S-4 (Registration No. 333-09117)).
Preferred Stockholder Waiver and Consent Agreement between
Registrant, Coatings Group, Inc., Asgard, Ltd. and Parkway
M&A Capital Corporation, (collectively the "Sutton
Entities") dated June 26, 1996. (Incorporated by
reference
to Exhibit 10.7 to Registrant's Registration Statement on
Form S-4 (Registration No. 333-09117)).
Warrant Conversion Agreement between the Sutton Entities
and Registrant dated June 26, 1996. Incorporated by
reference to Exhibit 10.9 to Registrant's Registration
Statement on Form S-4 (Registration No. 333-09117)).
Stockholders Agreement by and Among Registrant, the Sutton
Entities, DeSoto and Contran, dated June 26, 1996.
(Incorporated by reference to Exhibit 10.10 to
Registrant's
Registration Statement on Form S-4 (Registration No. 333-
09117)).
Subsidiaries of the Company.
Consent of Coopers & Lybrand, L.L.P.
Financial Data Schedule.
-K were filed during the quarter ended December 31,
1996.