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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, 1997
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 10, 1998, 9,354,759 shares of common stock were outstanding. The
aggregate market value of the 4,812,086 shares of voting stock held by
nonaffiliates of the Registrant, as of such date, was approximately $55.9
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")
believes it is a leading manufacturer of steel fabricated wire products,
industrial wire and carbon steel rod for the agricultural, industrial,
construction, original equipment manufacturer and retail consumer markets, and
believes it is the second largest manufacturer of fabricated wire products and
industrial wire in the United States based on tons produced (400,000 in 1997).
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 1997, approximately 69% of the Company's net sales
were generated from sales of fabricated wire products and industrial wire with
the balance generated primarily from sales of rod not used in the Company's
downstream operations. The Company's vertical integration allows it to benefit
from the higher and more stable margins associated with fabricated wire products
as compared to carbon steel rod, as well as from lower production costs of
carbon steel rod as compared to wire fabricators which purchase rod in the open
market. 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 to
non-integrated rod producers. In 1997, the Company had net sales of $354
million.
The Company's fabricated wire products, which comprised 45% of its 1997 net
sales, include fencing, barbed wire, welded and woven hardware cloth, welded and
woven wire mesh 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 such as Home Depot U.S.A., Inc., Lowe's
Companies, Inc. and McCoy's Building Supply Center. A significant proportion of
these products are sold to agricultural, consumer do-it-yourself and other end-
user markets which in management's opinion are typically less cyclical than many
steel consuming end-use markets such as the automotive, construction, appliance
and machinery manufacturing industries. Management believes the Company's
ability to service these customers with a wide range of fabricated wire products
through multiple production and distribution locations provides it a competitive
advantage in accessing these rapidly growing and less cyclical markets.
Approximately 70% of the Company's fabricated wire products net sales are
generated by sales under the RED BRAND trademark, a widely recognized brand name
in the agricultural and construction fencing marketplaces for more than 70
years.
The Company also sells industrial wire, an intermediate product used in the
manufacture of fabricated wire products, to third parties who are generally not
in competition with the Company. The Company's industrial wire customers
include manufacturers of nails, coat hangers, barbecue grills, air conditioners,
tools, refrigerators and other appliances. In 1997, net sales of industrial
wire accounted for 24% 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 1997, open market
sales of rod accounted for 27% of Company net sales. Of these rod sales,
approximately 14% were to Engineered Wire Products, Inc. ("EWP"), a fabricated
wire products company with 1997 sales of $30.2 million. Prior to December 23,
1997, Keystone owned a 20% equity interest in EWP and had rights to acquire the
remaining 80%. On December 23, 1997, Keystone purchased the 80% of EWP not
already owned by the Company for a total purchase price of $11.2 million in
cash, using available funds. EWP is now a wholly-owned subsidiary of Keystone.
EWP broadens Keystone's fabricated wire product lines and in the future may
provide an opportunity to shift additional rod production to a higher margin,
value added fabricated wire product. See "Business -- Products, Markets and
Distributions" and Notes 2 and 13 to the Consolidated Financial Statements.
The Company's operating strategy is to enhance profitability by: (i)
establishing a leading position as a supplier of choice among its fabricated
wire products and industrial wire customers by offering a broad product line and
by satisfying growing customer quality and service requirements; (ii) shifting
its product mix towards higher margin, value-added fabricated wire products;
(iii) achieving manufacturing cost savings and production efficiencies through
capital improvements and investment in new and upgraded wire and steel
production equipment; and (iv) increasing vertical integration through internal
growth and selective acquisitions of fabricated wire products manufacturing
facilities.
During 1997, the Company commenced a three year, $75 million capital
improvements plan to upgrade certain of its plant and equipment and eliminate
production capacity bottlenecks in order to reduce costs and improve production
efficiency. The principal components of the Company's capital improvements plan
include reconfiguring its electric arc furnace, replacing the caster and
upgrading its wire and rod mills. The Company also hired a new operating
management team with experience in implementing similar capital improvements.
Upon the completion of these capital improvements in 1999, the Company expects
to increase its annual steel casting production capacity to 800,000 tons from
655,000 tons. As of December 31, 1997, the Company has spent approximately $26
million of the $75 million planned capital improvements.
The Company is the successor to Keystone Steel & Wire Company, which was
founded in 1889. Contran Corporation ("Contran") and other entities controlled
by Mr. Harold C. Simmons, beneficially own approximately 46% of the Company.
Substantially all of the outstanding voting stock of Contran is held by trusts
established for the benefit of certain children and grandchildren of Mr.
Simmons, of which Mr. Simmons is the sole trustee. The Company may 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 six wire and wire product
fabrication facilities. The manufacturing process commences in the Peoria,
Illinois arc shop with scrap steel being loaded into an electric arc furnace and
converted into molten steel. The molten steel is then transferred to a ladle
refining furnace where the molten steel chemistries and temperatures are
monitored and adjusted to specifications prior to casting. The molten steel is
then transferred from the ladle refining furnace 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 tied, 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 Distribution
The following table sets forth certain information with respect to the
Company's steel and wire product mix in each of the last three years.
Year Ended December 31,
1995 1996 1997
Percent Percent Percent Percent Percent Percent
of Tons of of Tons of of Tons of
Product Shipped Sales Shipped Sales Shipped Sales
Fabricated wire
products 35.0% 49.8% 32.3% 48.7% 32.3% 47.4%
Industrial wire 23.6 23.4 23.1 23.2 25.1 24.8
Carbon steel rod 41.4 26.8 44.6 28.1 42.6 27.8
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 such as Home Depot U.S.A., Inc., Lowe's Companies
Inc. and McCoy's Building Supply Center. Many of the Company's fencing and
related wire products are marketed under the Company's RED BRAND label, a
recognized brand of the Company for more than 70 years. As part of its
marketing strategy, the Company designs merchandise packaging, supportive
product literature and point-of-purchase displays for marketing 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, welded wire mesh, forms and
reinforcing building fabric at its Peoria, Illinois; Sherman, Texas; Caldwell,
Texas; Springdale, Arkansas; Hortonville, Wisconsin and Upper Sandusky, Ohio
facilities. The primary customers for these products are construction
contractors and building materials manufacturers and distributors. The Company
sells approximately 40% of its nails through PrimeSource, Inc., one of the
largest nail distributors in the United States, under PrimeSource's Grip-Rite
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 located in Upper Sandusky, Ohio with a
manufacturer and distributor of wire mesh for use in highway and road
construction. During 1996 and 1997, 11% and 14%, respectively, of Keystone's
rod sales were to EWP. In December 1997, Keystone purchased the 80% of EWP not
already owned by the Company. Keystone paid a total of $11.2 million in cash,
using available funds, to acquire the remaining 80% of EWP and assumed EWP's
liabilities. Management believes EWP broadens its fabricated wire product line
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 a few exceptions, its industrial wire customers do not generally
compete 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 1997, approximately 59% of the rod manufactured by the Company was used
internally to produce wire and fabricated wire products at the Company's six
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.
Industry and Competition
The fabricated wire products, industrial wire and carbon steel rod
businesses 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. Among Keystone's principal competitors in the fabricated wire products
and industrial wire markets are Northwestern Steel & Wire Co., Davis Wire
Corporation and Gilbert & Bennett. Competition in the fabricated wire product
and industrial wire markets is based on a variety of factors, including channels
of distribution, price, delivery performance, product quality, service, and
brand name preference. Since carbon steel rod is a commodity steel product,
management believes the domestic rod market is more competitive than the
fabricated wire products and industrial wire markets, and price is the primary
competitive factor. Among Keystone's principal domestic carbon steel rod
competitors are North Star Steel, GS Technologies, Rariton River and Co-Steel.
The Company also competes with many small independent wire companies who
purchase rod from domestic and foreign sources. Due to the breadth of its
fabricated wire products and industrial wire offerings, its ability to service
diverse geographic and product markets, and the low relative cost of its
internal supply of steel rod, the Company believes that it is well positioned to
compete effectively with non-diversified rod producers and wire companies.
Foreign steel and industrial wire producers also compete with the Company and
other domestic producers.
The domestic steel rod industry has experienced a consolidation over the
past decade, as large integrated steel producers disposed of or, to a
significant degree, discontinued their 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 believes that certain competitors may
increase their rod production capacity in the next few years, which could
adversely affect rod pricing generally and increase competition among rod
manufacturers.
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 a direct order/inventory control 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, all of which is currently available
from numerous sources. 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 fluctuate significantly and product selling prices cannot always be
adjusted, especially in the short-term, to recover the costs of large increases
in scrap prices. The Company has not entered into any long-term contracts for
the purchase or supply of scrap steel and it is, therefore, subject to the price
fluctuation of scrap steel. 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.
Trademarks
The Company has registered the trademark RED BRAND for field fence and
related products. Adopted by the Company in 1924, the RED BRAND trademark has
been widely advertised and enjoys high levels of market recognition. The
Company also maintains other trademarks for various products which have been
promoted in their respective markets.
Employment
The Company currently employs approximately 2,025 people, of whom
approximately 1,125 are represented by the Independent Steel Workers' Alliance
("ISWA") at its Peoria, Illinois facilities, approximately 175 are represented
by the International Association of Machinists and Aerospace Workers (Local
1570) ("IAMAW") at its Sherman, Texas facilities and approximately 75 are
represented by Local Union #40 - An Affiliate to the International Brotherhood
of Teamsters' Chauffeurs Warehousemen And Helpers of America - AFL-CIO
("IBTCWHA") at its Upper Sandusky, Ohio facility. The current collective
bargaining agreements with the ISWA, IAMAW and IBTCWHA expire in May 1999, March
2000 and November 1998, respectively. The Company believes its relationship
with its employees are good. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Customers
The Company sells its products to customers in the agricultural,
industrial, construction, commercial, original equipment manufacturer and retail
markets primarily in the Midwestern 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 represents a competitive
advantage in servicing the diverse needs of its customers.
A listing of end-user markets by products follows:
Product Principal Markets Served
Fencing products Agricultural, construction, do-it-yourself
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 30%, 33% and
34% of the Company's net sales in 1995, 1996 and 1997, respectively, and no
single customer accounted for more than 7% of the Company's net sales during
each of 1995, 1996 or 1997. 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.
Backlog
The Company's backlog of unfilled cancelable fabricated wire products,
industrial wire and steel rod purchase orders, for delivery generally within
three months, approximated $23 million at December 31, 1996 and $24 million at
December 31, 1997. The Company does not believe that backlog is a significant
factor in its business, and believes all of the backlog at December 31, 1997
will be filled within 1998.
Household cleaning products
DeSoto, Inc. ("DeSoto") a wholly owned subsidiary of the Company,
manufactures household cleaning products (primarily powdered and liquid laundry
detergents) at its facility located in Joliet, Illinois. Keystone acquired
DeSoto in September 1996. For the period from the date of Keystone's
acquisition of DeSoto in September 1996 through December 31, 1996 and for 1997,
DeSoto had net sales of $2.5 million and $14 million, respectively. 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 for both the period from the date of the acquisition by Keystone through
December 31, 1996 and for 1997, 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, such loss would
not have a material adverse effect on the consolidated operations of the
Company.
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 records liabilities related to environmental issues at such
time as information becomes available and is sufficient to support a reasonable
estimate of a range of 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. See Note 15 to the Consolidated Financial
Statements.
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.
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 2.7 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 by the Company.
Approximate
Size
Location (Square Feet)
Facility Name 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
Engineered Wire Products Upper Sandusky, Oh 76,000 Fabricated wire products
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, 1997.
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 10, 1998 was 1,627. 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
1997
First quarter $ 9.75 $ 8.00
Second quarter 10.88 8.13
Third quarter 15.75 10.88
Fourth quarter 14.81 11.44
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
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. The Company paid quarterly
dividends on these preferred shares amounting to $70,000 and $280,000 in 1996
and 1997, respectively. 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 covenants under its commercial
revolving credit facility and Indenture related to its Senior Secured Notes that
restrict its 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,
1993 1994 1995 1996 1997
(In thousands, except ratios and per share and per ton amounts)
Statement of Operations Data:
Net sales $345,186 $364,435 $345,657 $331,175 $354,073
Cost of goods sold 312,665 327,453 312,909 298,268 316,599
Gross profit 32,521 36,982 32,748 32,907 37,474
Selling expenses 5,032 5,101 4,367 3,855 4,628
General and administrative
expenses 20,309 20,675 17,185 22,779 17,918
Operating income 13,077 12,908 11,141 10,662 23,292
Interest expense (credit) (1) 6,575 (1,165) 3,385 3,741 7,612
Income before income taxes $ 1,130 $ 12,389 $ 8,078 $ 4,240 $ 16,909
Provision for income taxes 381 4,828 3,191 1,656 4,541
Net income $ 749 $ 7,561 $ 4,887 $ 2,584 $ 12,368
Net income available for common
shares (2)
$ 749 $ 7,561 $ 4,887 $ 2,514 $ 12,088
Basic net income available for
common shares per share
Years ended December 31,
1993 1994 1995 1996 1997
(In thousands, except ratios and per share and per ton amounts)
$ .14 $ 1.36 $ .87 $ .38 $ 1.30
Diluted net income available
for common shares per share
$ .14 $ 1.35 $ .86 $ .38 $ 1.28
Weighted average common and common
equivalent shares outstanding :
Basic 5,481 5,577 5,633 6,554 9,271
Diluted 5,495 5,601 5,654 6,560 9,435
Other Financial Data:
Cash contributions to defined benefit
pension plans $ 14,955 $ 20,069 $ 18,702 $ 9,664 $ -
Capital expenditures 7,349 12,742 18,208 18,992 26,294
Depreciation and amortization 11,084 11,585 11,961 12,425 12,815
Other Operating Data:
Product shipments (in tons):
Fabricated wire products 257 267 242 222 225
Industrial wire 149 168 164 159 175
Carbon steel rod 337 316 287 307 297
Years ended December 31,
1993 1994 1995 1996 1997
(In thousands, except ratios and per share and per ton amounts)
Total 743 751 693 688 697
Average selling prices(per ton):
Fabricated wire products $ 685 $ 690 $ 707 $ 716 $ 710
Industrial wire 455 479 492 478 478
Carbon steel rod 296 313 322 298 317
Average total production cost per ton $ 420 $ 437 $ 452 $ 430 $ 437
Average scrap purchase cost per ton 110 125 128 125 122
As of December 31,
1993 1994 1995 1996 1997
(In thousands)
Balance Sheet Data:
Working capital (deficit) (3) $ 6,385 $ 2,529 $ (6,861) $(15,907) $ 52,684
Property, plant and equipment, net 80,769 81,147 86,436 92,608 112,754
Total assets 206,654 205,601 198,822 302,368 374,131
Total debt 27,190 26,054 29,945 51,780 106,844
Redeemable preferred stock - - - 3,500 3,500
Stockholders' equity (deficit) (50,908) (40,579) (37,493) 31,170 44,211
(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) Includes dividends on preferred stock of $70,000 in 1996 and $280,000 in
1997.
(3) Working capital (deficit) represents current assets minus current
liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
The Company believes that it 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 and
believes it is the second largest manufacturer of fabricated wire products and
industrial wire in the United States based on tons produced (400,000 in 1997).
The Company's operations benefit from vertical integration as the Company's
mini-mill supplies carbon steel rod produced from scrap steel to its downstream
fabricated wire products and industrial wire operations. These downstream
fabrication operations accounted for 69% of 1997 net sales. The Company's
fabricated wire products typically yield higher and less volatile gross margins
compared to rod. Management believes that Keystone's fabricated wire businesses
insulate it better than other rod producers from the effects of rod imports and
new domestic rod production capacity. Moreover, the Company's rod production
costs have historically been below the market price for rod providing a
significant cost advantage over wire producers who purchase rod as a raw
material.
The Company's estimated current fabricated wire products and industrial
wire production capacity is 601,000 tons. Utilization of the Company's annual
fabricated wire products and industrial wire production capacity aggregated 77%
in 1995, 78% in 1996 and 82% in 1997. 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
1996 and 1997, the Company's steel making operations operated at near capacity
and, together with billet purchases of 46,000 tons and 67,000 tons in 1996 and
1997, respectively, provided 700,000 tons and 732,000 tons of billets in 1996
and 1997, respectively. These increased billet volumes, resulted in rod
production increasing 4% from 694,000 tons (93% of estimated capacity) in 1996
to 719,000 tons (96% of estimated capacity) in 1997.
In November 1994, the Company entered into a joint venture agreement and
formed EWP. The Company had a 20% equity interest in EWP together with an
option to acquire the remaining 80%. On December 23, 1997, Keystone purchased
the 80% of EWP not already owned by the Company (the "EWP Acquisition").
Keystone paid a total of $11.2 million in cash, using available funds, to
acquire the remaining 80% of EWP and assumed EWP's liabilities. EWP is now a
wholly owned subsidiary of Keystone. In 1995, the Company contributed to EWP,
among other things, certain equipment as part of its capital contribution. As a
result, through December 23, 1997 the Company did not sell 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. As part of the joint venture agreement, the
Company supplied EWP with the majority of its rod requirements. EWP then
converted the rod to fabricated wire products which were primarily used in the
concrete pipe and road construction businesses. During 1995, 1996 and 1997, the
Company shipped 28,000 tons, 33,000 tons and 41,000 tons, respectively, of rod
to EWP. Pro forma consolidated net sales and operating income for Keystone in
1997, assuming the EWP acquisition was completed on January 1, 1997,
approximated $371 million and $26 million, respectively.
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
to 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 1995, 1996 and 1997
($128, $125 and $122, respectively), prices can vary widely from period-to-
period and the Company's 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 are insignificant when compared to the consolidated
operations of the Company in 1996 and 1997, 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 the Company's production and sales volume
data for the periods indicated.
Years Ended December 31,
1995 1996 1997
(In thousands of tons)
Production volume:
Billets:
Produced 645 654 665
Purchased 61 46 67
Carbon steel rod 662 694 719
Sales volume:
Fabricated wire products 242 222 225
Industrial wire 164 159 175
Carbon steel rod 287 307 297
693 688 697
The following table sets forth the components of the Company's net sales
for the periods indicated.
Years Ended December 31,
1995 1996 1997
(In millions)
Fabricated wire products $171.4 $159.2 $159.9
Industrial wire 80.7 75.8 83.8
Carbon steel rod 92.4 91.8 94.0
Household cleaning products and other 1.2 4.4 16.4
$345.7 $331.2 $354.1
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,
1995 1996 1997
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 90.5 90.1 89.4
Gross profit 9.5 9.9 10.6
Selling expenses 1.3 1.2 1.3
General and administrative expense 5.0 6.9 5.1
Overfunded defined benefit pension - (.3) (1.8)
credit
Income before income taxes 2.3% 1.3% 4.8%
Provision for income taxes .9 .5 1.3
Net income 1.4% .8% 3.5%
Year ended December 31, 1997 compared to year ended December 31, 1996
Net sales increased 6.9% in 1997 from 1996. Fabricated wire products
represented 45% of net sales in 1997 and 48% in 1996; industrial wire
represented 24% in 1997 and 23% in 1996; and carbon steel rod represented 27% in
1997 and 28% in 1996.
Fabricated wire product prices decreased approximately 1% while shipments
increased 1% in 1997 from 1996. During 1997, industrial wire prices remained
level with 1996 prices while shipments increased 10% from 1996. Carbon steel
rod prices increased 6% as shipments decreased 3% from 1996 to 1997.
Gross profit increased approximately 13.9% to $37.4 million in 1997 from
$32.9 million in 1996. Gross margin increased to 10.6% in 1997 from 9.9% in
1996 as increased selling prices and lower pension expense and scrap costs more
than offset higher rod conversion costs. During 1997, the Company purchased
697,000 tons of scrap at an average price of $122 per ton as compared to 1996
purchases of 654,000 tons at an average price of $125 per ton. The Company
purchased 67,000 tons of billets in 1997 at an average price of $238 per ton as
compared to 46,000 tons at $227 per ton in 1996.
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 charged to cost of goods sold in 1997 was nil as compared to
1996 when the Company charged pension expense of approximately $3.7 million to
cost of goods sold. During 1997, the Company recorded a non-cash pension credit
of approximately $6.3 million and currently estimates, for financial reporting
purposes, that it will recognize a non-cash pension credit of approximately $9
million in 1998 and, does not anticipate cash contributions for defined benefit
pension plan fundings will be required in 1998. 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 increased 20% to $4.6 million in 1997 from $3.9 million in
1996 but remained relatively constant as a percentage of sales.
General and administrative expenses decreased 21.3%, or $4.9 million, in
1997. This decrease was primarily a result of lower environmental expenses in
1997 partially offset by a $2.4 million charge to bad debt expense recorded in
the fourth quarter of 1997 resulting from a severe deterioration in a customer's
financial condition. At December 31, 1997, the Company's financial statements
reflected total accrued liabilities of $16.1 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.
In August 1997, the Company recorded a pre-tax gain in other income of
approximately $1.8 million resulting from the sale of a building that was used
by one of the Company's former operating divisions. The operating division was
sold in 1989, but the Company retained the building.
Interest expense in 1997 was higher than 1996 due principally to higher
average borrowing levels and higher average interest rates. On August 7, 1997,
the Company issued $100 million of 9 5/8% Senior Secured Notes (the "Senior
Notes"). The net proceeds to the Company from the issuance of the Senior Notes
were approximately $96.3 million. The Company used $52.4 million of the net
proceeds from the issuance of the Senior Notes to repay borrowings under the
Company's revolving credit facility and to retire amounts outstanding under the
Company's term loan (the "Term Loan"). Both the Company's revolving credit
facility and Term Loan bore interest at 1% over the prime rate (effective rate
of 9.5% on December 31, 1997) and had an original maturity date of December 31,
1999. Average borrowings by the Company under its revolving credit facility and
Term Loan approximated $32.8 million in 1997 as compared to $40.2 million in
1996. During 1997, the average interest rate paid by the Company under its
revolving credit facility and Term Loan was 9.4% per annum as compared to 9.3%
in 1996. As a result of the issuance of the Senior Notes, the Company expects
higher average borrowing levels and interest rates in 1998 will result in
increased interest expense as compared to the 1997 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, 1997 is also explained in Note 7 to the Consolidated
Financial Statements and in "-- Liquidity and Capital Resources." During the
fourth quarter of 1997, based upon revisions in the Company's estimate of
liabilities for income taxes, Keystone reduced its consolidated accrual for
income taxes by $1.5 million. This change in estimate considered a settlement
with the Internal Revenue Service (the "IRS"), in the 1997 fourth quarter, of a
matter related to an appeal of proposed adjustments by the IRS for the 1990
through 1993 tax years on a more favorable basis than originally anticipated.
The effective tax rates in 1997 and 1996 were 26.9% and 39.1%, respectively.
As a result of the items discussed above, net income during 1997 increased
to $12.4 million from $2.6 million in 1996 and increased as a percentage of
sales to 3.5% from 0.8%.
Year ended December 31, 1996 compared to year ended December 31, 1995
Net sales decreased 4% in 1996 from 1995. Fabricated wire products
represented 48% of sales in 1996 and 50% in 1995; industrial wire represented
23% in both 1996 and 1995; and carbon steel rod represented 28% in 1996 and 27%
in 1995.
Fabricated wire product prices increased approximately 1% while shipments
decreased 8% in 1996 from 1995. This decrease in shipments was primarily due to
the closing of the Company's West Coast distribution facility and, as discussed
previously, the contribution of certain equipment to the EWP joint venture in
1995. 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. Carbon steel
rod prices decreased 7% as shipments increased 7% from 1995 to 1996. This
increase in rod shipments was due in part to increased purchases by EWP.
Gross profit increased approximately 1% to $32.9 million in 1996 from $32.7
million in 1995. Gross margin increased to 9.9% 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. As a result of the
DeSoto acquisition in September 1996, 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.
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.
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 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 and decreased as a percentage of sales
to 0.8% from 1.4%.
Liquidity And Capital Resources
On August 7, 1997, the Company issued the Senior Notes which are due in
August 2007 and are collateralized by a second priority lien on substantially
all of the existing and future fixed assets of the Company. A portion of the
$96.3 million net proceeds was used to retire the Company's term loan and repay
borrowings under the Company's revolving credit facility. The balance of the
net proceeds are available for the Company's general corporate purposes,
including financing capital expenditures. The Senior Notes were issued pursuant
to an indenture (the "Indenture") which, among other things, provides for
optional redemptions, mandatory redemptions and certain covenants including
provisions that, among other things, limit the ability of the Company to sell
capital stock of subsidiaries, enter into sale and leaseback transactions and
transactions with affiliates, create new liens and incur additional debt. The
Indenture also limits the ability of the Company to pay dividends or make other
restricted payments, as defined.
At December 31, 1997, the Company had working capital of $52.7 million,
including $22.6 million of cash and cash equivalents. The Company did not have
any outstanding borrowings under its $55 million revolving credit facility at
December 31, 1997. 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.
Under the terms of the Indenture, the Company's ability to borrow in excess of
$25 million under the revolving credit facility is dependent upon maintenance of
a Consolidated Cash Flow Ratio (as defined), for the most recently completed
four fiscal quarters of at least 2.5 to 1. Available borrowings under the
revolving credit facility, which expires December 31, 1999, were $54.4 million
at December 31, 1997. However, under the terms of the Indenture, borrowings
under the revolving credit facility as of December 31, 1997 would be limited to
approximately $53 million.
During 1997, the Company's operating activities provided approximately
$11.5 million of cash, compared to $40,000 of cash provided by operating
activities in 1996. In addition to higher earnings in 1997 as compared to 1996,
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. During 1997, Keystone was not required to fund any contributions to
its defined benefit pension plan and the Company recorded a pension credit of
approximately $6.3 million. Defined benefit pension plan contributions ($9.7
million) exceeded pension expense ($3.7 million) by approximately $6.0 million
in 1996. The Company does not expect to be required to make contributions to
the pension plan during 1998. 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. During the third
quarter of 1997, DeSoto received approximately $4.7 million from one of its
insurers in exchange for releasing the insurer from coverage for certain years
of environmental related liabilities. Such amount is included in the Company's
self insurance accruals at December 31, 1997. Immediately following the DeSoto
acquisition, Keystone was obligated to, and did, cause DeSoto to pay certain of
DeSoto's trade creditors (the "Trade Credit Group") 80% of the balance of the
trade payables then due to the Trade Credit Group. The remaining 20% of the
balance ($1.4 million) due to the Trade Credit Group, plus interest at 8%, was
paid by DeSoto in February 1997.
The Company repaid the outstanding borrowings under the revolving credit
facility and Term Loan with a portion of the net proceeds of the offering of the
Senior Notes. In addition, the Company anticipates applying the remaining net
proceeds to fund a portion of its capital improvements plan and for general
corporate purposes. Until used, the net proceeds of the Senior Notes will be
invested in short-term investment grade securities or money market funds.
Prior to its acquisition by Keystone, DeSoto received a Report of Tax
Examination Changes from the IRS that proposed adjustments resulting in
additional taxes, penalties, and interest for the years 1990 through 1993.
DeSoto filed a formal appeal of the proposed adjustments, and in prior years,
accrued an estimate of its liability related to this matter. In the fourth
quarter of 1997, DeSoto settled the matter with the IRS for a payment of
approximately $2.6 million, including interest of approximately $1.1 million.
Such payment was less than previously accrued amounts and, as such, in the 1997
fourth quarter, Keystone reduced its consolidated accrual for income taxes by
$1.5 million.
During 1997, the Company made capital expenditures of approximately $26.3
million primarily related to upgrades of production equipment and an information
systems project at its facility in Peoria, Illinois. During 1997, the Company
commenced a three year, $75 million capital improvement plan to upgrade certain
of its plant and equipment and eliminate production capacity bottlenecks in
order to reduce costs and improve production efficiency. The principal
components of the Company's capital improvements plan include reconfiguring its
electric arc furnace, replacing the caster and upgrading its wire and rod mills.
Capital expenditures for 1998 are currently estimated to be approximately $57
million and are related primarily to upgrades of, as well as additional,
production equipment. These capital expenditures will be funded using available
cash and borrowing availability under the Company's revolving credit facilities.
In December 1997, DeSoto entered into an agreement to settle its liability
as a potentially responsible party with respect to alleged hazardous substance
contamination of the American Chemical Site, a chemical recycling facility
located in Griffith, Indiana, for a cash payment of $1.6 million. Such amount
was within the previously accrued balance and DeSoto expects to pay the $1.6
million during the first half of 1998.
In February 1998, the Company entered into an agreement with Insteel Wire
Products Company ("Insteel"), to purchase Insteel's agricultural fencing product
manufacturing equipment and related inventory for approximately $13 million,
subject to any adjustment due to a physical inventory. Keystone expects to
incur additional capital costs of $6 to $9 million to relocate and integrate
such equipment into its manufacturing facilities. As part of the agreement with
Insteel, Keystone also acquired Insteel's former customer list and certain other
records and Insteel agreed not to compete with Keystone in the North American
agricultural fencing products business for a period of five years.
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. The Company's
ability to incur new debt in the future is limited by the terms of the
Indenture.
Management believes the cash flows from operations together with available
cash and the funds available under its revolving credit facility will be
sufficient funds to fund the anticipated needs of its operations and capital
improvements plan for the year ending December 31, 1998. 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 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.
Year 2000 Issue
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
programs that have date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities.
The Company is in the process of evaluating the modifications to existing
software and new software required to mitigate the Year 2000 Issue. The Company
has also initiated formal communications with its significant suppliers and
large customers to determine the extent to which the Company is vulnerable to
those third parties failure to minimize their own Year 2000 Issue. The Company
will utilize both internal and external sources to reprogram or replace and test
its software, and it expects to complete its evaluation in the first half of
1998 and to have any required modifications completed prior to December 31,
1999. However, if such modifications are not made, or are not completed timely,
the year 2000 Issue could have a material impact on the operations of the
Company. In addition, there can be no assurance that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company. Because the Company has not completed the evaluation of its Year 2000
Issue, it is not able to quantify the costs that may be incurred in order to
eliminate its Year 2000 Issue.
The date on which the Company plans to complete any necessary year 2000
modifications is based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
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)).
2.2 -- Share Purchase Agreement, dated as of December 23, 1997, between
Registrant and Price Brothers Company (Incorporated by reference to
Exhibit 2.1 to the Registrant's Form 8-K filed January 16, 1998)
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
Registrant'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 Registrant'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.)
4.3 -- Indenture dated as of August 7, 1997 relating to the Registrant's 9
5/8% Senior Secured Notes due 2007 (Incorporated by reference to Exhibit
4.1 to the Registrant's Form 8-K filed September 4, 1997.)
10.1 -- Intercorporate Services Agreement with Contran Corporation dated as of
January 1, 1997.
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)).
10.6 -- Registration Rights Agreement Dated as of August 7, 1997, among the
Registrant, Wasserstein Perella Securities, Inc. and PaineWebber
Incorporated (Incorporated by reference to Exhibit 99.1 to the
Registrant's Form 8-K filed September 4, 1997.)
10.7 -- The Combined Master Retirement Trust between Valhi, Inc. and Harold C.
Simmons as restated effective July 1, 1995 (Incorporated by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form S-4
(Registration No. 333-35955)).
21 -- Subsidiaries of the Company.
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- 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,
1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned and dated March 24, 1998, thereunto duly
authorized.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
(Registrant)
/s/ GLENN R. SIMMONS
Glenn R. Simmons
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below and dated as of March , 1998 by the following
persons on behalf of the registrant and in the capacities indicated:
/s/ GLENN R. SIMMONS /s/ RICHARD N. ULLMAN
Glenn R. Simmons Richard N. Ullman
Chairman of the Board Director
/s/ J. WALTER TUCKER, JR. /s/ WILLIAM P. LYONS
J. Walter Tucker, Jr. William P. Lyons
Vice Chairman of the Board Director
/s/ THOMAS E. BARRY /s/ ROBERT W. SINGER
Thomas E. Barry Robert W. Singer
Director President and
Chief Executive Officer
/s/ PAUL M. BASS, JR. /s/ HAROLD M. CURDY
Paul M. Bass, Jr. 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
/s/ DAVID E. CONNOR
David E. Connor
Director
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Items 8, 14(a) and 14(d)
Index of Consolidated Financial Statements and Financial Statement Schedule
Page
Financial Statements
Report of Independent Accountants...................................... F-2
Consolidated Balance Sheets -- December 31, 1996 and 1997.......... F-3/F-4
Consolidated Statements of Operations -- Years ended December 31,
1995, 1996 and 1997.................................................. F-5
Consolidated Statements of Stockholders' Equity (Deficit) -- Years
ended December 31, 1995, 1996 and 1997............................... F-6
Consolidated Statements of Cash Flows -- Years ended December 31,
1995, 1996 and 1997.............................................. F-7/F-8
Notes to Consolidated Financial Statements........................ F-9/F-36
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, 1997
and 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997 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.
March 2, 1998
Dallas, Texas
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
(In thousands, except share data)
ASSETS 1996 1997
Current assets:
Cash and cash equivalents $ - $ 22,622
Notes and accounts receivable, net of allowances
of $469 and $2,941 35,974 37,841
Inventories 36,533 53,930
Deferred income taxes 16,381 18,869
Prepaid expenses 1,542 1,175
Total current assets 90,430 134,437
Property, plant and equipment:
Land, buildings and improvements 47,309 49,153
Machinery and equipment 198,488 237,234
Leasehold improvements 1,221 -
Construction in progress 15,423 7,496
262,441 293,883
Less accumulated depreciation 169,833 181,129
Net property, plant and equipment 92,608 112,754
Other assets:
Restricted investments 7,691 7,694
Prepaid pension cost 104,726 111,072
Deferred financing costs 332 3,795
Deferred income taxes 2,181 -
Goodwill - 1,229
Other 4,400 3,150
Total other assets 119,330 126,940
$302,368 $374,131
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1996 and 1997
(In thousands, except share data)
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
1996 1997
Current liabilities:
Notes payable and current maturities of
long-term debt $ 34,760 $ 3,789
Accounts payable 34,419 29,679
Accounts payable to affiliates 159 -
Accrued OPEB cost 8,368 8,415
Other accrued liabilities 28,631 39,870
Total current liabilities 106,337 81,753
Noncurrent liabilities:
Long-term debt 17,020 103,055
Accrued OPEB cost 100,818 101,470
Deferred income taxes - 2,963
Negative goodwill 27,057 25,421
Other 16,466 11,758
Total noncurrent liabilities 161,361 244,667
Redeemable preferred stock, no par value;
500,000 shares authorized; 435,456 shares issued
3,500 3,500
Stockholders' equity:
Common stock, $1 par value, 12,000,000 shares
authorized; 9,190,139 and 9,299,133 shares
issued 9,920 10,029
at stated value
Additional paid-in capital 46,347 47,191
Accumulated deficit (25,085) (12,997)
Treasury stock - 1,134 shares, at cost (12) (12)
Total stockholders' equity 31,170 44,211
$302,368 $374,131
Commitments and contingencies (Notes 15, 16 and 17).
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1995, 1996 and 1997
(In thousands, except per share data)
1995 1996 1997
Revenues and other income:
Net sales $345,657 $331,175 $354,073
Interest 157 50 1,218
Other, net 110 539 2,053
345,924 331,764 357,344
Costs and expenses:
Cost of goods sold 312,909 298,268 316,599
Selling 4,367 3,855 4,628
General and administrative 17,185 22,779 17,918
Overfunded defined benefit pension credit - (1,119) (6,322)
Interest 3,385 3,741 7,612
337,846 327,524 340,435
Income before income taxes 8,078 4,240 16,909
Provision for income taxes 3,191 1,656 4,541
Net income 4,887 2,584 12,368
Dividends on preferred stock - 70 280
Net income available for common shares $ 4,887 $ 2,514 $ 12,088
Net income per share available for common
shares:
Basic $ .87 $ .38 $ 1.30
Diluted $ .86 $ .38 $ 1.28
Weighted average common and common
equivalent shares outstanding:
Basic 5,633 6,554 9,271
Diluted 5,654 6,560 9,435
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1995, 1996 and 1997
(In thousands)
Common stockholders' equity (deficit)
Total common
Redeemable Additional Net pension stockholders'
preferred Common stock paid-in liabilities Accumulated Treasury equity
stock Shares Amount capital adjustment (deficit) stock (deficit)
Balance - December 31, 1994 $ - 5,594 $ 6,313 $19,393 $(33,787) $(32,486) $(12) $(40,579)
Net income - - - - - 4,887 - 4,887
Pension adjustments - - - - (2,470) - - (2,470)
Issuance of stock - 44 49 620 - - - 669
Balance - December 31,1995 - 5,638 6,362 20,013 (36,257) (27,599) (12) (37,493)
Net income - - - - - 2,584 - 2,584
Pension adjustments - - - - 3,554 - - 3,554
Issuance of stock - DeSoto acquisition 5,100 3,500 3,500 25,813 - - - 29,313
Issuance of stock- other - 52 58 521 - - - 579
Preferred dividends declared 70 - - - - (70) - (70)
Preferred dividends paid (1,670) - - - - - - -
Merger of pension plans, net - - - - 32,703 - - 32,703
Balance December 31, 1996 3,500 9,190 9,920 46,347 - (25,085) (12) 31,170
Net income - - - - - 12,368 - 12,368
Issuance of stock - 109 109 844 - - - 953
Preferred dividends declared 280 - - - - (280) - (280)
Preferred dividends paid (280) - - - - - - -
$3,500 9,299 $10,029 $47,191 $ - $(12,997) $ (12) $ 44,211
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997
(In thousands)
1995 1996 1997
Cash flows from operating activities:
Net income $ 4,887 $ 2,584 $ 12,368
Depreciation and amortization 11,961 12,425 12,815
Amortization of deferred financing costs 147 181 455
Deferred income taxes 1,750 (1,249) 1,573
Other, net 858 974 2,425
Change in assets and liabilities:
Notes and accounts receivable 10,379 (2,209) (1,978)
Inventories 103 (102) (9,671)
Accounts payable (2,036) (3,873) (6,455)
Pensions (10,042) (5,991) (6,322)
Other, net (5,449) (2,700) 6,249
Net cash provided by operating
activities
12,558 40 11,459
Cash flows from investing activities:
Capital expenditures (18,208) (18,992) (26,294)
Acquisition of businesses - (1,008) (11,285)
Collection of notes receivable 1,711 168 212
Proceeds from disposition of property
and equipment
106 29 2,720
Net cash used by investing activities (16,391) (19,803) (34,647)
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1995, 1996 and 1997
(In thousands)
1995 1996 1997
Cash flows from financing activities:
Revolving credit facility, net $ 8,030 $ 16,534 $(31,095)
Other notes payable and long-term debt:
Additions 81 9,495 100,294
Principal payments (4,220) (4,194) (19,535)
Preferred stock dividend payments - (1,670) (280)
Deferred financing costs paid (60) (425) (3,918)
Common stock issued, net 2 23 344
Net cash provided by financing
activities
3,833 19,763 45,810
Net change in cash and cash equivalents - - 22,622
Cash and cash equivalents, beginning of year - - -
Cash and cash equivalents, end of year $ - $ - $ 22,622
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized $ 3,673 $ 4,058 $ 4,068
Income taxes 1,560 2,210 4,253
Common stock contributed to employee
benefit plan $ 597 $ 522 $ 578
Business combination:
Net assets consolidated:
Noncash assets $ - $ 99,663 $ 22,321
Liabilities - (37,109) (9,500)
Goodwill - - 1,229
Negative goodwill - (27,133) -
- 35,421 14,050
Redeemable preferred stock issued,
including accumulated dividends - (5,100) -
Common stock issued - (29,313) -
Recorded equity in joint venture - - (2,765)
Cash paid $ - $ 1,008 $ 11,285
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
Keystone Consolidated Industries, Inc. ("Keystone" or the "Company") is
46% owned by Contran Corporation ("Contran") and entities affiliated with
Contran. Substantially all of Contran's outstanding voting stock is held by
trusts established for the benefit of certain children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons may be
deemed to control Contran. Contran may 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 1995 and 1996 amounts have been reclassified to conform
with the 1997 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 1996 and 1997 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. Interest cost capitalized in 1995, 1996 and 1997 amounted
to $317,000, $419,000 and $483,000, respectively. 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 30 years for buildings and improvements and
three to 12 years for machinery and equipment. Depreciation expense amounted to
$11,961,000, $12,501,000 and $14,434,000 during the years ended December 31,
1995, 1996 and 1997, respectively.
Investment in joint venture. Prior to December 23, 1997, the Company had a
20% interest in a joint venture, Engineered Wire Products, Inc. ("EWP"), and
accounted for the investment by the equity method. Differences between the cost
of the investment and the Company's pro rata share of EWP's separately-reported
net assets, if any, were allocated among the assets and liabilities of the joint
venture based upon estimated relative fair values. The Company's investment in
the joint venture at December 31, 1996 is included in other assets on the
accompanying balance sheet. Earnings from the joint venture, which were not
material, were recorded in other income. On December 23, 1997, Keystone
acquired the 80% ownership interest of the joint venture not already owned by
the Company. Subsequent to this acquisition, the former joint venture became a
wholly-owned subsidiary of Keystone and, as such, is consolidated in Keystone's
balance sheet at December 31, 1997 and will be consolidated in Keystone's
statements of operations and cash flows beginning January 1, 1998. See also
Notes 2 and 13.
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 $.9
million in 1995, $.6 million in 1996 and $.7 million in 1997.
Income per share. Basic income per share is based upon the weighted
average number of common shares actually outstanding during each year. Diluted
income per share includes the impact of outstanding dilutive stock options and
warrants. The weighted average number of shares of outstanding stock options
and warrants which were excluded from the calculation of diluted earnings per
share because their impact would have been antidilutive approximated 13,000,
191,000 and 171,000 in 1995, 1996 and 1997, respectively.
Deferred financing costs. Deferred financing costs related primarily to
the issuance of the Company's 9 5/8% Senior Secured Notes (the "Senior Notes")
and are
amortized by the straight-line method over 10 years (term of the Senior Notes).
Deferred financing costs are stated net of accumulated amortization of $455,000
at December 31, 1997. Amortization of deferred financing costs in 1995, 1996
and 1997 amounted to $147,000, $181,000 and $455,000, respectively.
Goodwill. Goodwill, representing the excess of cost over the fair value of
individual net assets acquired in the 1997 EWP acquisition, will be amortized by
the straight-line method over 10 years. There was no amortization of goodwill
during 1997.
Negative goodwill. Negative goodwill, representing the excess of fair
value over cost of individual net assets acquired in the 1996 acquisition of
DeSoto, Inc., ("DeSoto"), is amortized by the straight-line method over 20 years
(remaining life of 18.75 years at December 31, 1997) and is stated net of
accumulated amortization of approximately $76,000 and $1,695,000 at
December 31, 1996 and 1997, respectively. Amortization of negative goodwill in
1996 and 1997 amounted to $76,000 and $1,619,000, respectively.
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 - Acquisitions
DeSoto. On September 27, 1996, the stockholders of Keystone and DeSoto
approved the merger of the two companies (the "DeSoto Acquisition"), in which
DeSoto became a wholly-owned subsidiary of Keystone. Keystone issued
approximat
ely 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.
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.
In connection with the DeSoto 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. Due to the immateriality of the fair value of
the options and warrants exchanged in connection with the DeSoto Acquisition
(approximately $1.2 million), Keystone did not include such value in the
purchase price allocation.
The DeSoto Acquisition included the concurrent 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 DeSoto 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.
Keystone accounted for the DeSoto 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
DeSoto Acquisition. The purchase price has been allocated to the individual
assets acquired and liabilities assumed of DeSoto based upon preliminary
estimated fair values.
EWP. In November 1994, the Company entered into a Joint Venture Agreement
with an unrelated party and formed EWP, a manufacturer and distributor of wire
mesh for the concrete pipe and road construction business, which previously
operated as a division of Price Brothers Company ("PBC") of Dayton, Ohio. 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 gave the Company the exclusive option to
acquire the remaining 80% interest in EWP at fair market value for a period of
five years. On December 23, 1997, Keystone acquired the remaining 80% of EWP
(the "EWP Acquisition") and EWP became a wholly-owned subsidiary of Keystone.
Keystone paid $11.2 million in cash to acquire PBC's 80% interest in the joint
venture using available funds on hand.
Keystone accounted for the step acquisition of EWP by the purchase method
of accounting and, accordingly, EWP is consolidated in Keystone's balance sheet
at December 31, 1997 and will be consolidated in Keystone's statements of
operations and cash flow beginning January 1, 1998. The purchase price has been
allocated to the individual assets acquired and liabilities assumed of EWP 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.
Unaudited pro forma financial information. The following unaudited pro
forma financial information has been prepared assuming (i) the EWP Acquisition
occurred as of January 1, 1996, (ii) the September 1996 DeSoto Acquisition and
the simultaneous merger of the two companies' defined benefit pension plans
occurred on January 1, 1996, (iii) the April 1996 sale of DeSoto's Union City,
California business occurred on December 31, 1995, and (iv) Keystone's August
1997 $100 million bond offering and application of the net proceeds therefrom
occurred on January 1, 1996. 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 combined companies.
Years ended December 31,
1996 1997
(Unaudited)
(In millions, except per share
data)
Revenues and other income $357.2 $374.3
Operating income $ 11.3 $ 25.8
Net income (loss) $ (.4) $ 11.9
Net income available to common stockholders $ (.8) $ 11.6
Net income (loss) available for common
shares per common share - diluted $ (.09) $ 1.23
Pro forma net periodic pension expense for 1996, assuming the DeSoto
Acquisition and pension plan merger occurred January 1, 1996, approximates $1.7
million as compared to historical pension expense of $3.7 million.
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 72% and
78% of the inventories held at December 31, 1996 and 1997, respectively. The
first-in, first-out or average cost methods are used to determine the cost of
all other inventories.
December 31,
1996 1997
(In thousands)
Raw materials:
Steel and wire products $12,548 $17,609
Household cleaning products 526 854
13,074 18,463
Work in process -
Steel and wire products 12,824 15,475
Finished products:
Steel and wire products 9,954 16,707
Household cleaning products 96 150
10,050 16,857
Supplies -
Steel and wire products 13,612 16,290
49,560 67,085
Less LIFO reserve:
Steel and wire products 12,996 13,096
Household cleaning products 31 59
13,027 13,155
$36,533 $53,930
Note 4 - Notes payable and long-term debt
December 31,
1996 1997
(In thousands)
9 5/8% Senior Secured Notes, due August 2007 $ - $100,000
Commercial credit agreements:
Revolving credit facility - Keystone 31,095 -
Revolving credit facility - EWP - 2,471
Term loan - Keystone 19,166 -
Term loan - EWP - 1,603
Other 1,519 2,770
51,780 106,844
Less current maturities 34,760 3,789
$17,020 $103,055
On August 7, 1997, the Company issued the Senior Notes. The Senior Notes
are due in August 2007 and are collateralized by a second priority lien on
substantially all of the existing and future fixed assets of the Company. A
portion of the $96.3 million net proceeds was used to prepay and terminate the
Company's term loan and repay outstanding borrowings under the Company's
revolving credit facility.
The Senior Notes were issued pursuant to an Indenture (the "Indenture")
which, among other things, provides for optional redemptions, mandatory
redemptions and certain covenants, including provisions that, among others
things, limit the ability of the Company to sell capital stock of subsidiaries,
enter into sale and leaseback transactions and transactions with affiliates,
create new liens and incur additional debt. In addition, under the terms of the
Indenture, the Company's ability to borrow in excess of $25 million under the
Company's $55 million revolving credit facility is dependent upon maintenance of
a Consolidated Cash Flow Ratio (as defined) for the most recently completed four
fiscal quarters of at least 2.5 to 1. The Indenture also limits the ability of
the Company to pay dividends or make other restricted payments, as defined.
The Company's $55 million revolving credit facility (the "Keystone
Revolver") 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 the facility bore interest at 1.5% over the prime rate. The
effective interest rate was 9.25% and 9.5% at December 31, 1996 and 1997,
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 $.6 million at December 31, 1997). At December
31, 1997, the additional available borrowings under this credit facility were
$54.4 million. However, under the terms of the Indenture, borrowings under the
Keystone Revolver at December 31, 1997 would be limited to approximately $53
million. The Keystone Revolver requires the Company's daily cash receipts to be
used to reduce the outstanding borrowings, which results in the Company
maintaining zero cash balances when there is a balance outstanding on the
Keystone Revolver. The Keystone Revolver contains 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.
EWP has available $6 million under a revolving credit agreement (the "EWP
Revolver") that expires March 31, 1998. EWP is presently negotiating with its
lender for a two year extension of the EWP Revolver. Interest is payable at
either the prime rate or federal funds rate, as defined in the credit agreement,
plus .75% (9.25% at December 31, 1997). EWP's term loan is due June 30, 2000
and is payable in quarterly installments of $145,750 plus accrued interest at
the prime rate or federal funds rate, as defined in the credit agreement, plus
1% (9.5% at December 31, 1997). EWP's inventories, accounts receivable and
property, plant and equipment are collateralized under the EWP Revolver and
EWP's term loan. These agreements contain covenants with respect to working
capital, additional borrowings, payment of dividends and certain other matters.
Excluding the Senior Notes and EWP equipment acquisition debt,
substantially all of the Company's notes payable and long-term debt reprice with
changes in interest rates. The book value of all 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)
1998 $ 3,789
1999 1,277
2000 1,118
2001 506
2002 154
2003 and thereafter 100,000
$106,844
At December 31, 1997, total collateralized obligations, including deferred
pension contributions (see Note 7), amounted to $111.4 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,
1995 1996 1997
(In thousands)
Expected tax expense, at statutory rate $ 2,827 $ 1,484 $ 5,918
U.S. state income taxes, net 171 11 253
Amortization of negative goodwill - - (567)
Settlement of income tax audit - - (1,500)
Other, net 193 161 437
Provision for income taxes charged to
results of operations 3,191 1,656 4,541
Stockholders' equity - pension component (1,580) 2,272 -
Comprehensive provision for income taxes $ 1,611 $ 3,928 $ 4,541
Comprehensive provision for income taxes:
Currently payable:
U.S. federal $ 3,095 $ 5,428 $ 5,536
U.S. state 254 788 384
Benefit of loss carry forwards (1,271) (23) (841)
Utilization of alternative minimum tax credits (637) (3,288) (2,111)
Net currently payable 1,441 2,905 2,968
Deferred income taxes, net 170 1,023 1,573
$ 1,611 $ 3,928 $ 4,541
Prior to the DeSoto 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 DeSoto Acquisition and related transactions, Keystone eliminated the $30
million deferred tax asset valuation allowance as part of the purchase price
allocation for the DeSoto Acquisition.
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. At December
31, 1997, the Company had approximately $1.7 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,
1996 1997
Assets Liabilities Assets Liabilities
(In thousands)
Tax effect of temporary differences relating
to:
Inventories $ 2,202 $ - $ 1,779 $ -
Property and equipment - (5,792) - (5,382)
Prepaid pension - (40,843) - (43,285)
Accrued OPEB cost 42,583 - 42,854 -
Accrued liabilities and other deductible
differences 14,317 - 15,740 -
Other taxable differences - (7,915) - (7,500)
Net operating loss carryforwards 10,796 - 9,955 -
Alternative minimum tax credit carryforwards 3,214 - 1,745 -
Gross deferred tax assets (liabilities) 73,112 (54,550) 72,073 (56,167)
Reclassification, principally netting by tax
jurisdiction
(54,550) 54,550 (53,204) 53,204
Net deferred tax asset (liability) 18,562 - 18,869 (2,963)
Less current deferred tax asset 16,381 - 18,869 -
Noncurrent deferred tax asset (liability) $ 2,181 $ - $ - $(2,963)
As a result of the DeSoto Acquisition, the Company has pre-acquisition net
operating loss carryforwards generated by DeSoto which are approximately $24.7
million and which expire from 2003 through 2010. These net operating loss
carryforwards 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
DeSoto Acquisition and in 1997 $2.4 million was used.
Prior to the DeSoto Acquisition, DeSoto received a Report of Tax
Examination Changes from the Internal Revenue Service (the "IRS") that proposed
adjustments resulting in additional taxes, penalties and interest for the years
1990 through 1993. DeSoto filed a formal appeal of the proposed adjustments,
and in prior years, accrued an estimate of its liability related to this matter.
During the fourth quarter of 1997, DeSoto settled the matter with the IRS for a
payment of approximately $2.6 million, including interest of approximately $1.1
million. Such payment was less than previously accrued amounts and, as such, in
the fourth quarter of 1997, Keystone reduced its consolidated accrual for income
taxes by $1.5 million.
Note 6 - Stock options, warrants and stock appreciation rights plan
In 1997, the Company adopted its 1997 Long-Term Incentive Plan (the "1997
Plan"). Under the 1997 Plan, the Company may make awards that include, but need
not be limited to, one or more of the following types: stock options, SARs,
restricted stock, performance grants and any other type of award deemed
consistent with the purposes of the plan. Subject to certain adjustments, an
aggregate of not more than 300,000 shares of the Company's common stock may be
issued under the 1997 Plan. Stock options granted under the 1997 Plan may
include options that qualify as incentive stock options as well as options which
are not so qualified. Incentive stock options are granted at a price not less
than 100%, or in certain instances, 110% of a fair market value of such stock
on the date of the grant. Stock options granted under the 1997 Plan may be
exercised over a period of ten, or in certain instances, five years. The
vesting period, exercise price, length of period during which awards can be
exercised, and restriction periods of all awards are determined by the
Incentive Compensation Committee of the Board of Directors.
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. During 1997, the Company granted all remaining options available
under the 1992 Plan.
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. During 1997, the Director Plan was terminated.
Prior to the DeSoto 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 DeSoto 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 DeSoto
acquisition. Also effective with the DeSoto Acquisition, the former DeSoto 1992
stock plan was terminated.
Changes in outstanding options, including 15,000 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
share upon exercise
Options
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 DeSoto acquisition 147,062 5.86-13.56 1,351,519
Exercised (3,733) (23,130)
6.20
Canceled (18,733) 8.75-15.81 (234,980)
Outstanding at December 31, 1996 404,996 5.86-13.56 3,639,634
Granted 167,000 8.13-13.94 1,613,625
Exercised (35,235) 9.71-10.50 (343,778)
Canceled (5,000) 10.75 (53,750)
Outstanding at December 31, 1997 531,761 $ 5.86-13.94 $4,855,731
The following table summarizes weighted average information about fixed
stock options outstanding at December 31, 1997.
Outstanding Exercisable
Weighted Average Weighted Average
Range of Remaining Remaining
Exercise Contractual Exercise Contractual Exercise
Prices Options Life Price Options Life Price
$5.86-$9.25 398,635 7.4 years $ 8.13 151,635 5.1 years $ 7.98
$9.71-$13.94 133,126 4.2 $12.13 91,166 1.7 $11.38
531,761 6.6 $ 9.13 242,801 3.8 $ 9.25
At December 31, 1997, options to purchase 242,801 shares were exercisable
(204,513 shares exercisable at prices lower than the December 31, 1997 quoted
market price of $12.00 per share) and options to purchase an additional 121,760
shares will become exercisable in 1998. At December 31, 1997, an aggregate of
198,000 shares were available for future grants under the 1997 Plan.
Prior to the DeSoto 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 DeSoto
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, 1997, none of the warrants
to purchase Keystone common stock had been exercised.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options granted subsequent to 1994 in accordance with
the fair value based accounting method of SFAS No. 123. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for options granted in
1995, 1996 and 1997.
Years ended December 31,
1995 1996 1997
Risk-free interest rate 6.3% 6.7% 6.7%
Dividend yield - - -
Volatility factor .46 .44 .44
Weighted average expected life 5 years 10 years 10 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the stock price volatility.
Because Keystone's options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in the Company's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of the granted options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income available for common shares and primary net income
available for common shares per common and common equivalent share were as
follows:
Years ended December 31,
1995 1996 1997
(In thousands except per
share amounts)
Net income available for common shares -
as reported $4,887 $2,514 $12,088
Net income available for common shares -
pro forma $4,870 $2,448 $11,752
Basic net income available for common
shares per common and common equivalent
share - as reported $ .87 $ .38 $ 1.30
Basic net income available for common
shares per common and common equivalent
share - pro forma $ .87 $ .37 $ 1.26
Weighted average fair value per share of
options granted during the year $ 6.55 $ 5.41 $ 6.37
Note 7 - Employee benefit plans
Prior to the DeSoto Acquisition, the Company maintained three
noncontributory defined benefit pension plans covering most of its employees.
The DeSoto 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, 1997,
approximately 93% of the Plan's assets were invested in a collective investment
trust (the "Collective Trust") formed by Valhi, Inc. ("Valhi"), 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's assets at
December 31, 1997 were invested in United States Treasury Notes, corporate bonds
and notes, investment partnerships, time deposits, commercial paper, certain
real estate leased by the Company, various mutual funds invested in bonds,
equity and real estate, mortgages and other short-term investments. Harold C.
Simmons is the sole trustee and the sole member of the Trust Investment
Committee for such trust, and receives no compensation for serving in such
capacities.
As of December 31, 1997, the Collective Trust directly holds, among other
things, less than one percent of the outstanding common stock of each of the
Company, Valhi and Tremont Corporation (an affiliate of Contran).
With certain exceptions, the trustee of the Collective Trust has exclusive
authority to manage and control the assets of the Collective Trust.
Administrators of the employee benefit plans participating through their
company's master trust in the Collective Trust, however, have the authority to
direct distributions and transfers of plan benefits under such participating
plans. The trust investment committee of the Collective Trust has the authority
to direct the trustee to establish investment funds, transfer assets between
investment funds and appoint investment managers and custodians. Except as
otherwise provided by law, the trustee is not responsible for the investment of
any assets of the Collective Trust that are subject to the management of an
investment manager.
Generally, the trustee cannot (i) invest more than 25% of the Collective
Trust assets in securities of a single entity (although divestiture is not
required if this limit is exceeded due to subsequent changes in the fair value
of investments) or (ii) acquire an equity interest in a company unless the
trustee determines in good faith that no entity that Harold C. Simmons controls
(a "Related Entity") has a material equity interest in such company. Such good
faith is conclusively presumed if no Related Entity holds voting securities of
such company or if the Collective Trust and all Related Entities do not own in
the aggregate five percent of the outstanding voting securities of such company
and do not request or accept representation of such company's board of
directors.
The Company may withdraw all or part of the Plan's investment in the
Collective Trust at the end of any calendar month without penalty.
In addition, during years prior to the DeSoto 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, 1997. See Note 16.
As a result of the EWP Acquisition, the Company also has a defined benefit
pension plan covering EWP's hourly employees.
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, 1997, the remaining
balance of such deferred contributions was approximately $4.5 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 (credit) are presented in the
table below.
Years ended December 31,
1995 1996 1997
(In thousands)
Service cost $ 1,811 $ 2,214 $ 2,368
Interest cost on projected benefit obligation 14,460 15,258 20,229
Actual (return)/loss on plan assets (22,633) (37,968) (50,324)
Net amortization and deferral 15,022 24,170 21,405
Net periodic pension cost (credit) $ 8,660 $ 3,674 $ (6,322)
The Company evaluates the discount rate used in determining the actuarial
present value 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, 1997 was 7.0% (7.5% in both 1995 and 1996).
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 prepaid pension cost.
December 31,
1996 1997
(In thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation $272,855 $287,124
Accumulated benefit obligation $273,792 $288,175
Plan assets at fair value $328,783 $358,150
Projected benefit obligation 281,915 296,159
Plan assets in excess of projected benefit obligation 46,868 61,991
Unrecognized net loss from experience different from
actuarial assumptions 51,291 44,319
Unrecognized net obligation being amortized over
15-19 years 6,567 4,762
Total prepaid pension cost $104,726 $111,072
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 $2.3 million in 1995, $2.2 million in 1996
and $2.4 million in 1997.
Note 8 - Other accrued liabilities
December 31,
1996 1997
(In thousands)
Current:
Salary, wages, vacations and other employee expenses $11,085 $12,275
Environmental 5,354 7,498
Self insurance 1,585 6,605
Interest 452 4,146
Disposition of former facilities 3,518 2,306
Legal and professional 1,542 1,199
Other 5,095 5,841
$28,631 $39,870
Noncurrent:
Environmental $12,787 $ 8,606
Deferred gain 2,383 1,987
Other 1,296 1,165
$16,466 $11,758
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, 1995, 1996 and 1997 was composed of the following:
December 31,
1995 1996 1997
(In thousands)
Service cost $ 985 $1,189 $1,304
Interest cost on projected benefit obligation 7,123 6,967 7,395
Amortization of prior service cost (343) (343) (343)
Amortization of (gains) losses (331) 9 (29)
Total OPEB expense $7,434 $7,822 $8,327
The following table sets forth the actuarial present value of the estimated
accumulated OPEB obligations, none of which have been funded.
December 31,
1996 1997
(In thousands)
Actuarial present value of accumulated
OPEB obligations:
Current retirees $ 72,886 $ 79,080
Fully eligible active plan participants 1,026 752
Other active plan participants 25,621 28,563
99,533 108,395
Unrecognized net gain (loss) from
experience different 5,102 (2,818)
from actuarial assumptions
Unrecognized prior service credit 4,551 4,208
Total accrued OPEB cost 109,186 109,785
Less current portion 8,368 8,415
Noncurrent accrued OPEB cost $100,818 $101,370
The rates used in determining the actuarial present value of the
accumulated OPEB obligations were (i) discount rate - 7.5% in 1996 and 7.0% in
1997 and (ii) rate of increase in future health care costs - 6.5% in 1998,
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 1997 and the actuarial present value of accumulated OPEB
obligations at December 31, 1997 would have increased $10.3 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.
Note 10 - Redeemable preferred stock:
In connection with the DeSoto 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 at any time,
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"). Keystone must redeem the preferred stock at a cash redemption
price equal to the Liquidation Preference, to the maximum extent legally
permissible (i) on July 1, 2000; (ii) 30 days after a change of control of
Keystone; or (iii) if, within ten days after the exercise of any warrants to
purchase Keystone common stock by any of the warrantholders and preferred
stockholders, such exercising warrantholders and preferred stockholders holding
at least fifty percent (50%) of the outstanding shares of Keystone preferred
stock request redemption at fair market value in writing, provided, however,
that Keystone will be required to redeem Keystone preferred stock only to the
extent
that redemption payments are equal to the aggregate cash proceeds to Keystone
upon the exercise of such warrants. 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, 1997, 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 $50,000 in 1995, $79,000 in 1996 and $62,000 in 1997.
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 $500,000 in 1995, $465,000 in
1996 and $540,000 in 1997. In addition, the Company purchased certain aircraft
services from Valhi in the amount of $150,000 in 1995, $172,000 in 1996 and
$175,000 in 1997.
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 $39,000 in 1995,
$689,000 in 1996 and $127,000 in 1997.
Note 12 - Quarterly financial data (unaudited)
March 31, June 30, September 30, December 31,
(In thousands, except per share data)
Year ended December 31, 1997:
Net sales $89,149 $103,232 $85,046 $76,646
Gross profit 8,358 13,431 8,157 7,528
Net income $ 1,624 $ 4,347 $ 3,699 $ 2,698
Net income available for common shares $ 1,554 $ 4,277 $ 3,629 $ 2,628
Basic net income available for common shares
per common and common equivalent share $ .17 $ .46 $ .39 $ .28
Year ended December 31, 1996:
Net sales $79,463 $90,655 $82,703 $78,354
Gross profit 5,076 7,367 8,172 12,292
Net income (loss) $(1,137) $ 810 $ 792 $ 2,119
Net income (loss) available for common
shares $(1,137) $ 810 $ 792 $ 2,049
Basic net income (loss) available for common
shares per common and common equivalent
share $ (.20) $ .14 $ .14 $ .22
Due to the timing of the issuance of common stock in connection with the
DeSoto 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.
During the fourth quarter of 1997, Keystone recorded a charge to bad debt
expense of $2.4 million resulting from a severe deterioration in a customer's
financial condition. Also see Note 5.
Note 13 - Joint venture
Prior to the EWP Acquisition, the Company accounted for its interest in EWP
under the equity method. At December 31, 1996, the Company's investment in EWP
amounted to $2.4 million and is included in other assets at December 31, 1996.
Earnings from the Company's investment in EWP amounted to $125,000, $225,000 and
$408,000 in 1995, 1996 and in 1997 prior to the EWP Acquisition, respectively,
and are recorded in other income. Sales by the Company to EWP during 1995, 1996
and in 1997 prior to the EWP Acquisition amounted to $13.5 million, $9.9 million
and $12.9 million, respectively. Receivables from EWP amounted to $508,000 at
December 31, 1996. Inventory purchased from the Company and held by EWP at
December 31, 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 prior to December 23, 1997. On that
date, Keystone acquired the 80% of EWP not already owned by the Company,
resulting in EWP becoming a wholly-owned subsidiary of Keystone.
Years ended December 31,
1995 1996 1997
(In millions)
Net sales:
Steel and wire products $345.7 $328.7 $340.1
Household cleaning products - 2.5 14.0
$345.7 $331.2 $354.1
Operating income (loss):
Steel and wire products $ 11.1 $ 10.8 $ 22.5
Household cleaning products - (.1) .8
11.1 10.7 $ 23.3
General expenses and other, net (.2) 2.8 -
(credit)
Interest expense, net 3.2 3.7 6.4
Income before income taxes $ 8.1 $ 4.2 $ 16.9
Significantly all of the Company's capital expenditures and depreciation
expense during the years ended December 31, 1995, 1996 and 1997 related to the
Company's steel and wire products segment.
December 31,
1996 1997
(In millions)
Identifiable assets:
Business segments:
Steel and wire products $166.4 $210.1
Household cleaning products 2.6 2.2
169.0 212.3
Corporate 133.4 161.8
$302.4 $374.1
Corporate assets consist principally of pension related assets, restricted
investments, deferred tax assets and corporate property, plant and equipment.
Export sales were $.9 million in 1995, $1.5 million in 1996 and $3.2
million in 1997. These export sales were primarily to Canada.
Note 15 - Environmental matters
At December 31, 1997, the Company's financial statements reflected total
accrued liabilities of $16.1 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. 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, 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.
During 1997 the Company did not have any significant remediation efforts
relative to Phases V and VI. At December 31, 1997, 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 which are
not expected to be material. 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, 1996 and 1997 the
trust fund had balances of $2.8 million and $3.1 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 1999. At December 31,
1997, the Company is in the process of investigating a possible alternate
remediation plan that could significantly reduce the remaining estimated costs
to complete the remediation of this site.
"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, 1996 and 1997, the Company had
accrued a total liability related to these sites of $1,121,000 and $431,000,
respectively. 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 recovered a
portion of the $690,000 payment from its insurer. In March 1997, U.S. EPA
issued a Proposed Remedial Action Plan ("PRAP") recommending that a limited
excavation of contaminated soils be performed at an estimated cost of $63,000,
that a soil cover be placed over the site, that an on-site groundwater pump and
treat system be installed and operated for an estimated period of 15 years, and
that both on-site and off-site groundwater monitoring be conducted for an
indefinite period. U.S. EPA's cost estimate for the recommended plan is
$5,059,000. U.S. EPA's estimate of the highest cost alternatives evaluated but
not recommended in the PRAP is approximately $6
million. The Company filed public comments on May 1, 1997, objecting to the
PRAP. U.S. EPA has yet to issue its Final Record of Decision.
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 RI/FS began in 1993 and was
completed in 1997. To date, no remedial decision has been made for this site.
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.
Following completion of the RI/FS, U.S. EPA published in November 1997, a PRAP
for the site that recommends the excavation and disposal of contaminated soil,
installation of an impervious cap over a portion of the site, placement of a
surface cover over the remainder of the site and semi-annual groundwater
monitoring until drinking water standards are met by natural attenuation. U.S.
EPA estimates the costs of this recommended plan to be $3.1 million. The
highest cost remedy evaluated by U.S. EPA but not recommended in the PRAP is
estimated by U.S. EPA to have a cost of $19.8 million. The public comment
period for the PRAP has closed, but U.S. EPA has yet to issue its Final Record
of Decision for the site remedy. 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 $6.4
million accrued at December 31, 1997 relative to these sites. Such accruals
were recorded by DeSoto prior to the acquisition by Keystone. Although some
insurance coverage is available to DeSoto relative to certain of these sites,
DeSoto has not recorded receivables for expected insurance proceeds at December
31, 1997. During the third quarter of 1997, DeSoto received approximately $4.7
million from one of its insurers in exchange for releasing the insurer from
coverage for certain years of environmental related liabilities. Such amount is
included in the Company's self insurance accruals at December 31, 1997.
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. During December 1997, DeSoto entered into a
tentative agreement to settle its liability with
respect to this site for an additional payment of approximately $1.6 million.
Such amount was within the previously accrued balance.
Prior to the DeSoto 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. It is anticipated U.S. EPA will
order further remedial action, the exact extent of which is not currently known.
DeSoto is paying 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, 1997 current estimates of
total remaining remediation costs related to this site are approximately $20
million. In addition to certain amounts (totaling approximately $1.1 million at
December 31, 1997) included in the trust fund discussed below, DeSoto also has
certain funds available in other trust funds (totaling $1.1 million at December
31, 1997) 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. Potential additional remediation costs, if any are required, 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. In March 1997, DeSoto
entered into a settlement agreement and resolved its liability at this site for
an additional 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, 1997. 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
approximately 27 other sites and in related toxic tort lawsuits which DeSoto
does not expect to incur 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 into a
separate trust with respect to a specific site; the agreement governing that
separate trust portion of the trust expires on October 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 $490,000 during 1997 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 and 1997 was approximately $4.5 million and $4.2 million,
respectively.
Note 16 - Lease commitments
During years prior to the DeSoto 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 DeSoto
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.
In addition, EWP is obligated under certain operating leases through 2001.
Payments, net of subtenant rent payments, under these leases during the
period from the date of the Acquisition through December 31, 1996 and during
1997, amounted to approximately $209,000 and $832,000, respectively.
Future commitments under these leases, net of subleases are summarized
below.
(In thousands)
Lease Sub
commitment rents Net
1998 $1,347 $ 356 $ 991
1999 1,326 263 1,063
2000 1,306 263 1,043
2001 1,225 248 977
2002 921 150 771
2003 and thereafter 782 - 782
$6,907 $1,280 $5,627
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, three of the four
cases were dismissed, but such dismissals are being appealed by the plaintiffs.
In 1991 an 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. 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 accrued
$300,000 relative to this case at December 31, 1996. Such accrual was recorded
prior to the DeSoto acquisition. During 1997, DeSoto settled this action for an
amount within the previously accrued balance.
The Company is also engaged in various legal proceedings incidental to its
normal business activities. In the opinion of the Company, none of such
proceedings is material in relation to the Company's consolidated financial
position, results of operations or liquidity.
Product supply agreement
In 1996, 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. The vendor's plant was completed during the third
quarter of 1997. Purchases made pursuant to the Supply Agreement during 1997
amount to $391,000.
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 steel and wire customers accounted for approximately
30% of steel and wire product sales in 1995, 33% in 1996 and 34% in 1997, and
approximately 27% and 30% of steel and wire products notes and accounts
receivable at December 31, 1996 and 1997, 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 both the period from the DeSoto
acquisition through December 31, 1996, and in 1997, sales to Sears accounted for
approximately 81% of total sales related to household cleaning products.
Receivables from Sears at December 31, 1996 and 1997 amounted to approximately
88% ($2 million) and 91% ($1.0 million), respectively, of receivables related to
sales of household cleaning products.
General. As discussed in Note 7, prior to the DeSoto acquisition, the
assets of the Company's pension plan were primarily invested in the Collective
Trust, and at December 31, 1997 approximately 93% of the pension plan assets
were invested in the Collective Trust. Securities of a single issuer composed
approximately 18% of the Collective Trusts' net assets at December 31, 1996.
The common stock of this issuer is publicly traded on a national exchange.
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. During 1997, the
stock's high and low sales prices were $62.06 and $41.50 per share,
respectively. During 1997 the Collective Trust sold these shares back to the
issuer at a price of $55 per share, in exchange for cash of $28.2 million and an
interest bearing note due in September 1998 for $28.2 million. The note is
collateralized by the stock sold back to the issuer. The interest bearing note
composed approximately 7% of the Collective Trust's net assets at December 31,
1997.
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
of period expenses recoveries) Other (A) period
Description
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) $ -
Year ended December 31, 1997:
Allowance for doubtful accounts and
notes receivable $ 469 $2,513 $ 61 $ 20 $ 2,941
(A) Amounts relate to the acquisition of DeSoto in 1996 and EWP in 1997.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
Page Numbers:
manually
Exhibit No. signed copy
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)).
2.2 Share Agreement, dated as of December 23, 1997, between
Registrant and Price Brothers Company (Incorporated by
reference to Exhibit 2.1 to the Registrant's Form 8-K
filed January 16, 1998)
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 Registrant'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
Registrant'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).
4.3 Indenture dated as of August 7, 1997 relating to the
Registrant's 9 5/8% Senior Secured Notes due 2007
(Incorporated by reference to Exhibit 4.1 to the
Registrant's Form 8-K filed September 4, 1997.)
10.1 Intercorporate Services Agreement with Contran Corporation
dated as of January 1, 1997.
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)).
10.6 Registration Rights Agreement Dated as of August 7, 1997,
among the Registrant, Wasserstein Perella Securities, Inc.
and PaineWebber Incorporated (Incorporated by reference to
Exhibit 99.1 to the Registrant's Form 8-K filed September
4, 1997.)
10.7 The Combined Master Retirement Trust between Valhi, Inc.
and Harold C. Simmons as restated effective July 1, 1995
(Incorporated by reference to Exhibit 10.2 to the
Registrant's (Registration No. 333-35955) Registration
Statement on Form S-4).
21 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 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,
1997.