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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, 1998
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 17, 1999, 9,837,495 shares of common stock were outstanding. The
aggregate market value of the 4,922,422 shares of voting stock held by
nonaffiliates of the Registrant, as of such date, was approximately $35.7
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 (497,000 in 1998).
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. 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 1998, the Company had net sales of $370
million. Approximately 80% 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 fabricated wire products, which comprised 59% of its 1998 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, building
supply centers and consumer do-it-yourself chains such as The Home Depot, Inc.,
Lowe's Companies, Inc., Tractor Supply, Co., Ace Hardware Corporation and McCoy
Corporation. A significant proportion of these products are sold to
agricultural, consumer do-it-yourself and other end-user markets which in
management's opinion are typically less cyclical than many steel consuming end-
use markets such as the automotive, construction, appliance and machinery
manufacturing industries. Management believes the Company's ability to service
these customers with a wide range of fabricated wire products through multiple
production and distribution locations provides it a competitive advantage in
accessing these rapidly growing and less cyclical markets. Approximately 60% 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 1998, net sales of industrial
wire accounted for 22% of Company net sales. In addition, 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. During
1998, open market sales of rod accounted for 17% of Company net sales. See
"Business -- Products, Markets and Distributions" and Notes 2 and 12 to the
Consolidated Financial Statements.
The Company's operating strategy is to enhance profitability by:
o 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;
o Shifting its product mix towards higher margin, value-added fabricated
wire products;
o Achieving manufacturing cost savings and production efficiencies
through capital improvements and investment in new and upgraded wire
and steel production equipment; and
o Increasing vertical integration through internal growth and selective
acquisitions of fabricated wire products manufacturing facilities.
During 1997, the Company commenced a $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. As of
December 31, 1998, the Company has completed substantially all of the $75
million planned capital improvements. The principal components of the Company's
capital improvements plan included reconfiguring its electric arc furnace,
replacing the caster and upgrading its wire and rod mills. As a result of these
capital improvements, beginning in 1999, the Company expects to increase its
annual billet production capacity to 1 million tons from 655,000 tons.
Although Keystone's new billet production capacity is 1 million tons, the
Company is limited by its current Illinois Environmental Protection Agency
construction permit to annual billet production of 820,000 tons. Keystone has
applied for modifications to its permits to allow billet production of the 1
million ton capacity.
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 50% of the Company.
Substantially all of Contran's outstanding voting stock is held either by trusts
established for the benefit of certain children and grandchildren of Mr.
Simmons, of which Mr. Simmons is sole trustee, or by Mr. Simmons directly. 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", Item 7 - "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations", and
Item 7A - "Quantitative and Qualitative Disclosures About Market Risks", are
forward looking statements based on management's belief and assumptions using
currently available information. Although the Company believes the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that these expectations will prove to be correct. Such statements
involve risks and uncertainties, including, but 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, the ultimate resolution of pending litigation,
successful implementation of the Company's capital improvements plan, possible
disruptions of normal business activity from Year 2000 issues and any possible
future litigation as discussed in this Annual Report, including, without
limitation, the sections referenced above. Should one or more of these risks
materialize, or should the underlying assumptions prove incorrect, actual
results could differ materially from those forecasted or expected. The Company
assumes no duty to publicly update such statements.
MANUFACTURING
The Company's manufacturing operations consist of an electric arc furnace
mini-mill, a rod mill and six wire and wire product fabrication facilities. The
manufacturing process commences in Peoria, Illinois with scrap steel being
loaded into the 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 into a six-strand continuous casting machine from which it emerges in
five-inch square strands that are cut to predetermined lengths and are 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 reheat furnace and
are then 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,
1996 1997 1998
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 32.3% 48.7% 32.3% 47.4% 46.1% 60.4%
Industrial wire 23.1 23.2 25.1 24.8 24.0 22.6
Carbon steel rod 44.6 28.1 42.6 27.8 29.9 17.0
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 supply centers, building and industrial
materials distributors and consumer do-it-yourself chains such as The Home
Depot, Inc., Lowe's Companies, Inc., Tractor Supply, Co., Ace Hardware
Corporation and McCoy Corporation. Many of the Company's fencing and related
wire products are marketed under the Company's RED BRAND label, a recognized
trademark 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 46% of its nails through PrimeSource, Inc., one of the
largest nail distributors in the United States, under PrimeSource's Grip-Rite
label.
The Company continuously evaluates opportunities to expand its downstream
fabricated wire products operations. During 1994, the Company purchased a 20%
stake in Engineered Wire Products, Inc. ("EWP") a joint venture with a
manufacturer and distributor of wire mesh for use primarily 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. Management believes EWP broadens its fabricated
wire product line and provides an opportunity to shift additional rod production
to a higher margin, value-added fabricated wire product. 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. As a result of the acquisition of EWP, the
Company was able to convert its lower-margin rod sales to EWP, into higher-
margin fabricated wire product sales. This change in product mix between 1997
and 1998 resulted in a decline in overall fabricated wire product selling prices
as EWP's fabricated wire products sell for lower prices than do Keystone's other
fabricated wire products.
In February 1999, Keystone formed "Garden Zone, LLC", a new marketing and
distribution company to supply wire products, wire fencing and wood and plastic
products to the consumer lawn and garden market. The new company was
established as a joint venture between Keystone and two unrelated entities with
Keystone owning 51% of the joint venture. The Company does not anticipate any
significant capital expenditures will be required to fund or operate this joint
venture.
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.
Although Keystone's six wire fabrication facilities on occasion buy rod from
outside suppliers, during 1998, approximately 68% of the rod manufactured by the
Company was used internally to produce wire and fabricated wire products. 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. Keystone's principal competitors in the fabricated wire products and
industrial wire markets are Davis Wire Corporation, Northwestern Steel & Wire
Co., Deacero and Oklahoma Steel and Wire Company. 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 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. In an effort to stem increasing levels of
imported wire rod, in December 1998, Keystone, joined by six other companies
(representing more than 75% of the market), and a labor union petitioned the
U.S. International Trade Commission seeking relief under Section 201 of the
Trade Act of 1974. After investigation, which the Company believes should take
about eight months, The International Trade Commission will make a
recommendation to the President who may impose quotas or duties on wire rod
imported from all countries except Canada and Mexico.
The Company believes 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.
Keystone 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 has implemented a direct order/inventory control system that is
designed to enhance its ability to serve high volume, retail customers. The
Company believes this system 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."
Keystone's manufacturing processes consume large amounts of energy in the
form of electricity and natural gas. The Company purchases electrical energy
for its Peoria 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, and may in the
future, refuse or interrupt service to the Company resulting in decreased
production and increased costs associated with the related downtime. During the
1998 second quarter, Keystone entered into a new service contract with the
electric utility at the Company's Peoria facility. The new contract requires
Keystone to pay higher rates during months with high demands. Overall, the new
contract is expected to increase Keystone's energy costs approximately $2
million per year, as compared to the prior contract.
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
Keystone currently employs approximately 2,100 people, of whom
approximately 1,160 are represented by the Independent Steel Workers' Alliance
("ISWA") at its Peoria, Illinois facilities, approximately 180 are represented
by the International Association of Machinists and Aerospace Workers (Local
1570) ("IAMAW") at its Sherman, Texas facilities and approximately 80 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 2001, respectively. Keystone has begun preliminary discussions with
the ISWA concerning the renewal of its collective bargaining agreement in May
1999. 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 one-third of
the Company's net sales in each of the past three years. No single customer
accounted for more than 8% of the Company's net sales during each of 1996, 1997
or 1998. 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 $30 million at December 31, 1997 and $28 million at
December 31, 1998. The Company does not believe that backlog is a significant
factor in its business, and believes all of the backlog at December 31, 1998
will be filled within 1999.
HOUSEHOLD CLEANING PRODUCTS
DeSoto, Inc. ("DeSoto"), a wholly owned subsidiary of the Company, operated
a division that manufactured household cleaning products (primarily powdered and
liquid laundry detergents) at its facility located in Joliet, Illinois
("Joliet"). Keystone acquired DeSoto in September 1996. In January 1999, the
Company's pension plan, which owned the real property associated with the
operation, and the Company sold the Joliet division. For the period from the
date of Keystone's acquisition of DeSoto in September 1996 through December 31,
1996 and for 1997 and 1998, Joliet had net sales of $2.5 million, $14 million
and $10 million, respectively. Joliet manufactured most products on a make and
ship basis, and, as such, overall levels of raw materials and finished goods
inventories maintained by Joliet were relatively nominal. Approximately 85% of
Joliet's sales for the period from the date of the acquisition by Keystone
through December 31, 1996 and for 1997 and 1998, were to a single customer.
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 13 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 13 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 2.8 million square feet for
manufacturing and office space, approximately 72% 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
Facility Name Location (Square Feet) Products Produced
Keystone Steel & Wire Peoria, IL 2,012,000 Fabricated wire products, industrial wire,
carbon steel rod
Sherman Wire Sherman, TX 299,000 Fabricated wire products and industrial
wire
Engineered Wire Products Upper Sandusky, OH 83,000 Fabricated wire products
Keystone Fasteners Springdale, AR 76,000 Fabricated wire products
Sherman Wire of Caldwell Caldwell, TX 73,000 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 13 and 15 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, 1998.
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 17, 1999 was 1,682. The following table sets forth the high and low
closing sales prices of the Company's common stock for the calendar years
indicated, according to published sources.
High Low
1998
First quarter $12.38 $11.06
Second quarter 12.44 11.00
Third quarter 12.94 7.06
Fourth quarter 8.13 6.63
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
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 were payable in
December, March, June and September of each year. In July 1998, in connection
with the exercise of warrants to purchase 447,900 shares of Keystone common
stock, the Company redeemed all of the outstanding preferred stock. Keystone
paid quarterly dividends on these preferred shares amounting to $70,000,
$280,000 and $157,000 in 1996, 1997 and 1998, 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 facilities and the
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,
1994 1995 1996 1997 1998
(In thousands, except ratios and per share and
per ton amounts)
Statement of Operations Data:
Net sales $364,435 $345,657 $331,175 $354,073 $370,022
Cost of goods sold 327,453 312,909 298,268 316,599 339,625
Gross profit 36,982 32,748 32,907 37,474 30,397
Selling expenses 5,101 4,367 3,855 4,628 6,042
General and administrative
expenses 20,675 17,185 22,779 17,918 19,139
Operating income 12,908 11,141 10,662 23,292 13,033
Interest expense (credit) (1) (1,165) 3,385 3,741 7,612 10,460
Income before income taxes $ 12,389 $ 8,078 $ 4,240 $ 16,909 $ 5,006
Provision for income taxes 4,828 3,191 1,656 4,541 1,095
Net income $ 7,561 $ 4,887 $ 2,584 $ 12,368 $ 3,911
Net income available for common
shares (2) $ 7,561 $ 4,887 $ 2,514 $ 12,088 $ 3,754
Basic net income available for
common shares per share $ 1.36 $ .87 $ .38 $ 1.30 $ .41
Diluted net income available
for common shares per share $ 1.35 $ .86 $ .38 $ 1.28 $ .40
Weighted average common and common
equivalent shares outstanding:
Basic 5,577 5,633 6,554 9,271 9,544
Diluted 5,601 5,654 6,560 9,435 9,669
Other Financial Data:
Cash contributions to defined benefit
pension plans $ 20,069 $ 18,702 $ 9,664 $ - $ -
Capital expenditures 12,742 18,208 18,992 26,294 64,541
Depreciation and amortization 11,585 11,961 12,425 12,815 20,140
Other Operating Data:
Product shipments (in tons):
Fabricated wire products 267 242 222 225 327
Industrial wire 168 164 159 175 170
Carbon steel rod 316 287 307 297 212
Total 751 693 688 697 709
Average selling prices(per ton):
Fabricated wire products $ 690 $ 707 $ 716 $ 710 $ 662
Industrial wire 479 492 478 478 476
Carbon steel rod 313 322 298 317 288
Steel and wire products in total 484 497 475 484 506
Average total production cost per ton $ 437 $ 452 $ 430 $ 437 $ 464
Average scrap purchase cost per ton 125 128 125 122 110
As of December 31,
1994 1995 1996 1997 1998
(In thousands)
Balance Sheet Data:
Working capital (deficit) (3) $ 2,529 $ (6,861) $(15,907) $ 52,684 $ 555
Property, plant and equipment, net 81,147 86,436 92,608 112,754 156,100
Total assets 205,601 198,822 302,368 374,131 405,857
Total debt 26,054 29,945 51,780 106,844 131,764
Redeemable preferred stock - - 3,500 3,500 -
Stockholders' equity (deficit) (40,579) (37,493) 31,170 44,211 53,077
(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, $280,000 and $157,000 in 1996, 1997 and 1998, respectively.
(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 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 (497,000 in 1998).
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 80% of 1998 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.
During 1997, the Company commenced a $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. As of
December 31, 1998, the Company has completed substantially all of the $75
million planned capital improvements. 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. As a result of these
capital improvements, beginning in 1999, the Company expects to increase its
annual billet production capacity to 1 million tons from 655,000 tons. Although
Keystone's new billet production capacity is 1 million tons, the Company is
limited by its current Illinois Environmental Protection Agency construction
permit to annual billet production of 820,000 tons. Keystone has applied for
modifications to its permits to allow production of the 1 million ton capacity.
The Company's steel making operations, together with billet purchases of 67,000
tons and 38,000 tons in 1997 and 1998, respectively, provided 732,000 tons and
679,000 tons of billets in 1997 and 1998, respectively. The current estimated
annual production capacity of the Company's rod mill is 750,000 tons. The lower
billet production and purchase volumes in 1998, resulted in rod production
decreasing 7% from 719,000 tons (96% of estimated capacity) in 1997 to 670,000
tons (89% of estimated capacity). Despite the recent increases to billet
production capacity to 1 million tons, the Company's rod production is
constrained by the rod mill capacity of 750,000 tons. The Company anticipates
any excess billet production will be sold externally. The Company's estimated
current fabricated wire products and industrial wire production capacity is
604,000 tons. Utilization of the Company's annual fabricated wire products and
industrial wire production capacity aggregated 78% in 1996, 82% in 1997 and 85%
in 1998.
In November 1994, the Company entered into a joint venture agreement and
formed Engineered Wire Products, Inc. ("EWP"). The Company had a 20% equity
interest in EWP. In December 1997, Keystone purchased the 80% of EWP not
already owned by the Company (the "EWP Acquisition"). 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
1996 and 1997, the Company shipped 33,000 tons and 41,000 tons, respectively, of
rod to EWP. As a result of the acquisition of EWP, the Company was able to
convert its lower-margin rod sales to EWP, into higher-margin fabricated wire
product sales. This change in product mix between 1997 and 1998 resulted in a
decline in overall fabricated wire product selling prices as EWP's fabricated
wire products sell for lower prices than do Keystone's other fabricated wire
products.
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. Scrap prices can vary widely from
period to period. Although the average per ton price paid for scrap by the
Company was relatively constant during 1996 and 1997 ($125 and $122,
respectively), it was $110 in 1998. 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 believes 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 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, and may in the future, refuse or interrupt service to the
Company resulting in decreased production and increased costs associated with
the related downtime. During the 1998 second quarter, Keystone entered into a
new service contract with the electric utility at the Company's Peoria facility.
The new contract requires Keystone to pay higher rates during months with high
demands. Overall, the new contract is expected to increase Keystone's energy
costs approximately $2 million per year, as compared to the prior contract.
Beginning with the acquisition of DeSoto, Inc. in September 1996, and
through January 1999, the Company was also engaged in the manufacture and
packaging of household cleaning products through its Joliet division. In
January 1999, the Company sold the Joliet division. As the operations of Joliet
were insignificant when compared to the consolidated operations of the Company,
Joliet's results of operations are not separately addressed in the discussion
that follows.
In February 1999, Keystone formed Garden Zone, LLC, a new marketing and
distribution company to supply wire products, wire fencing and wood and plastic
products to the consumer lawn and garden market. The new company was
established as a joint venture between Keystone and two unrelated entities with
Keystone owning 51% of the joint venture.
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, the ultimate
resolution of pending litigation and possible future litigation, and possible
disruptions of normal business activity from Year 2000 issues 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,
1996 1997 1998
(In thousands of tons)
Production volume:
Billets:
Produced 654 665 640
Purchased 46 67 38
Carbon steel rod 694 719 670
Sales volume:
Fabricated wire products 222 225 327
Industrial wire 159 175 170
Carbon steel rod 307 297 212
688 697 709
The following table sets forth the components of the Company's net sales
for the periods indicated.
Years Ended December 31,
1996 1997 1998
(In millions)
Fabricated wire products $159.2 $159.9 $216.6
Industrial wire 75.8 83.8 81.0
Carbon steel rod 91.8 94.0 61.1
Household cleaning products and other 4.4 16.4 11.3
$331.2 $354.1 $370.0
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,
1996 1997 1998
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 90.1 89.4 91.8
Gross profit 9.9 10.6 8.2
Selling expenses 1.2 1.3 1.6
General and administrative expense 6.9 5.1 5.2
Overfunded defined benefit pension credit (.3) (1.8) (2.6)
Income before income taxes 1.3% 4.8% 1.4%
Provision for income taxes .5 1.3 .3
Net income .8% 3.5% 1.1%
Year ended December 31, 1998 compared to year ended December 31, 1997
Net sales increased 4.5% in 1998 from 1997. During 1998, fabricated wire
products represented 59% of net sales as compared to 45% in 1997; industrial
wire declined to 22% of net sales in 1998 as compared to 24% in 1997; and carbon
steel rod comprised 17% of 1998 net sales as compared to 27% in 1997. The
primary reason for the change in product mix was the EWP Acquisition in December
1997. Keystone supplied EWP with the majority of EWP's rod requirements prior
to the acquisition. As a result of the EWP Acquisition those sales are now
reflected as sales of fabricated wire products.
Fabricated wire products selling prices declined 7% while shipments
increased 45% in 1998 as compared to 1997. The primary reason for the decline
in fabricated wire product selling prices during 1998 was the EWP Acquisition.
EWP's fabricated wire products sell for lower overall prices than do the
remainder of the Company's fabricated wire products. Industrial wire prices
remained relatively level in 1998 as compared to 1997 prices while shipments
declined 3%. Carbon steel rod selling prices declined 9% during 1998 as
compared to 1997 while shipments declined 28%. The decline in rod shipments to
external customers was due primarily to the EWP Acquisition and an increase in
low cost imported rod during 1998.
Gross profit declined approximately 19% to $30.4 million in 1998 from $37.5
million in 1997. Gross margin declined to 8.2% from 10.6% in 1997 as higher
production costs more than offset higher overall selling prices and lower scrap
costs, the Company's primary raw material. The higher production costs were due
primarily to a new electrical supply contract at the Company's facility in
Peoria, Illinois, unplanned equipment outages during the 1998 first quarter,
power interruptions during the 1998 second quarter and increased costs
associated with the start-up of the Company's capital projects that were
completed during the third and fourth quarters of 1998. The Company believes
these start-up issues will be resolved during the first half of 1999 and the new
equipment will be achieving the expected production cost savings by the start of
the 1999 third quarter. During 1998, the Company purchased 716,000 tons of
scrap at an average price of $110 per ton as compared to 1997 purchases of
697,000 tons at an average price of $122 per ton. The Company purchased 38,000
tons of billets in 1998 at an average price of $196 per ton as compared to
67,000 tons of billets in 1997 at an average price of $238 per ton.
Selling expenses increased 31% to $6.0 million in 1998 from $4.6 million in
1997, but remained relatively constant as a percentage of net sales.
General and administrative expenses increased 7% to $19.1 million in 1998
as compared to $17.9 million in 1997, but remained relatively constant as a
percentage of net sales.
During 1998, Keystone recorded a non-cash pension credit of $9.4 million as
compared to approximately $6.3 million in 1997. The Company currently
estimates, for financial reporting purposes, that it will recognize a non-cash
pension credit of approximately $10 million in 1999 and, does not anticipate
cash contributions for defined benefit pension plan fundings will be required in
1999. 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.
At December 31, 1998, the Company's financial statements reflected total
accrued liabilities of $15.3 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 13 to the
Consolidated Financial Statements.
On August 7, 1997 the Company issued $100 million of 9 5/8% Senior Secured
Notes (the "Senior Notes"). As such, interest expense in 1998 was significantly
higher than 1997. Average borrowings by the Company under its revolving credit
facilities, term loans and the Senior Notes amounted to approximately $110.8
million in 1998 as compared to $32.8 million in 1997. During 1998, the average
interest rate paid by the Company under these debt agreements was 9.6% per annum
as compared to 9.4% in 1997. 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 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, 1998 is also explained in Note 5 to the Consolidated
Financial Statements and in "-- Liquidity and Capital Resources." The effective
tax rates in 1998 and 1997 were 21.9% and 26.9%, respectively.
As a result of the items discussed above, net income during 1998 declined
to $3.9 million from $12.4 million in 1997 and decreased as a percentage of
sales to 1.1% from 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.
Selling expenses increased 20% to $4.6 million in 1997 from $3.9 million in
1996 but remained relatively constant as a percentage of net 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.
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 as a primary result
of the issuance of the Senior Notes. Both the Company's revolving credit
facility and term Loan bore interest at 1% over the prime rate. 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.
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%.
OUTLOOK FOR 1999
The Company's $75 million capital improvements plan was substantially
completed in 1998, and management believes the company will begin achieving the
desired cost savings from this equipment by the start of the 1999 third quarter.
In addition, management believes scrap costs will continue to remain low and
carbon steel rod demand will improve as import prices level off. As such,
although the Company will incur some carryover production issues relative to the
start-up of the new equipment that will negatively impact the 1999 first quarter
and may result in a net loss, management expects the Company to be profitable
for calendar 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $555,000,
including $1.3 million of notes payable and current maturities of long-term debt
as well as outstanding borrowings under the Company's revolving credit
facilities of $28.6 million. The amount of available borrowings under these
revolving credit facilities is based on formula-determined amounts of trade
receivables and inventories, less the amount of outstanding letters of credit.
Under the terms of the indenture related to the Senior Secured Notes, the
Company's ability to borrow in excess of $25 million under its $55 million
revolving credit facility is dependent upon maintenance of a consolidated cash
flow ratio (as defined in the indenture) of at least 2.5 to 1 for the most
recently completed four fiscal quarters. Unused credit available for additional
borrowings under Keystone's $55 million revolving credit facility, which expires
December 31, 1999, and EWP's $6 million revolving credit facility, which expires
June 30, 2000, were $25.5 million and $1.4 million, respectively, at December
31, 1998. All of which could be borrowed under the terms of the Indenture. The
Company's $55 million revolving credit facility requires daily cash receipts be
used to reduce outstanding borrowings, which results in the Company maintaining
zero cash balances when there are balances outstanding under this credit
facility.
During 1998, the Company's operating activities provided approximately
$16.8 million of cash, compared to $11.5 million of cash provided by operating
activities in 1997. Despite the lower earnings in 1998 as compared to 1997,
cash flow from operations increased in 1998 compared to 1997 due to relative
changes in the levels of assets and liabilities. 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 and 1998. Immediately following
the DeSoto acquisition in 1996, 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.
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.
In February 1998, the Company purchased certain agricultural fencing
product manufacturing equipment and related inventory from Insteel Industries,
Inc. ("Insteel"), for approximately $13 million. Keystone also incurred capital
costs of approximately $6 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.
During 1998, the Company made capital expenditures of approximately $64.5
million primarily related to upgrades of production equipment at its facility in
Peoria, Illinois and the Insteel equipment purchase. 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.
Keystone completed the installation of the new caster in the third quarter of
1998. Capital expenditures for 1999 are currently estimated to be approximately
$28 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.
At December 31, 1998, the Company's financial statements reflected accrued
liabilities of $15.3 million for estimated remediation costs arising from
environmental issues. 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.
In February 1999, Keystone formed Garden Zone, LLC, a new marketing and
distribution company to supply wire products, wire fencing and wood and plastic
products to the consumer lawn and garden market. The new company was
established as a joint venture between Keystone and two unrelated entities with
Keystone owning 51% of the joint venture. The Company does not anticipate any
significant capital expenditures will be required to fund or operate this joint
venture.
In January 1999, the Company's pension plan, which owned the real property
associated with the operation and the Company, sold the Joliet division for
aggregate consideration of approximately $1.1 million in cash and $1.4 million
in notes.
The Company does not expect to be required to make contributions to the
pension plan during 1999. 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.
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 facilities will provide
sufficient funds to fund the anticipated needs of its operations and capital
improvements for the year ending December 31, 1999. 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, the inability to negotiate a
satisfactory collective bargaining agreement to replace the expiring agreement
at the Company's Peoria facility, 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 13 and 15 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. Such failures could
materially and adversely effect the Company's results of operations, liquidity
and financial condition.
The Company is in the process of taking an inventory of its information
systems to determine the modifications to existing software and new software
required to mitigate any Year 2000 Issues. The Company's evaluation includes
information systems infrastructure, financial and administrative systems,
process control and manufacturing operating systems as well as significant
vendors and customers. The Company expects this inventory will be completed
during the 1999 first quarter. Because the majority of Keystone's significant
information systems have recently been installed or updated, many of the
Company's systems and related software are already year 2000 compliant.
Keystone is utilizing both internal and external sources to reprogram or
replace and test its software and the Company expects to have its evaluation
completed by the end of the first quarter of 1999 and required modifications
completed prior to December 31, 1999.
Although the Company expects its critical systems to be compliant by
December 31, 1999, there is no assurance these results will be achieved.
However, the impact of a failure of any of the Company's information systems
would be mitigated to the extent that other alternate processes, including
manual processes, were able to meet processing requirements. Presently,
Keystone expects alternate procedures would be able to meet the Company's
processing needs. In addition, excluding recent equipment additions that are
year 2000 compliant, a significant portion of Keystone's plant and equipment is
aged and doesn't include imbedded chip technology susceptible to Year 2000
Issues.
Keystone relys on third parties for raw materials, utilities,
transportation and other key services. In addition, the Company is dependent
upon its customers for cash flow. The Company has initiated formal
communications with its suppliers and customers to determine the extent to which
the Company is vulnerable to those third parties' failure to eliminate their own
Year 2000 Issues. Notwithstanding the Company's efforts, the ability of the
Company to affect the Year 2000 Issues preparedness of such customers and
suppliers is limited. Keystone presently expects to complete these third party
communications during the 1999 second quarter and will at that time begin
developing contingency plans for potential non-compliance by these third
parties. Year 2000 Issues that adversely impact these third parties could also
effect the operations of the Company. There can be no assurance 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 any Year 2000 Issues. The total costs that will be incurred by
Keystone in connection with resolving its Year 2000 Issues will be impacted by
the Company's ability to successfully identify its Year 2000 Issues, the level
of effort required to remediate the issue and the ability of third parties to
successfully address their own Year 2000 Issues. Total costs incurred to date
relative to the remediation of the Company's Year 2000 Issues have been expensed
as incurred and have not been material.
Although not anticipated, the most reasonably likely worst-case scenario of
failure by the Company or its key suppliers or customers to become year 2000
compliant would be short-term slowdown or cessation of manufacturing operations
at one or more facilities and a short-term inability on the part of the Company
to process orders and billings in a timely manner, and to deliver product to
customers.
The costs of the project and the date on which the Company plans to
complete its year 2000 assessment and remediation are based on management's
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 guarantee that
these estimates will be achieved and actual results could differ significantly
from those plans. Specific factors that might cause differences from
management's estimates include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
relevant computer codes, and similar uncertainties. Management believes the
Company is devoting the necessary resources to identify and resolve significant
Year 2000 Issues in a timely manner.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to changes in interest rates relates primarily to
long-term debt obligations. At December 31, 1998, 97% of the Company's long-
term debt was comprised of 9.6% average fixed rate instruments, which minimize
earnings volatility related to interest expense. Keystone does not currently
participate in interest rate-related derivative financial instruments.
The table below presents principal amounts and related weighted-average
interest rates by maturity date for the Company's long-term debt obligations.
CONTRACTED MATURITY DATE FAIR VALUE
1999 2000 2001 2002 2003 Thereafter Total DECEMBER 31, 1998
($IN THOUSANDS)
Fixed-rate debt -
Principal amount $ 749 $735 $526 $154 $ - $100,000 $102,164 $97,574
Weighted-average
interest rate 8.0% 7.9% 8.0% 8.1% - % 9.6% 9.6%
Variable-rate debt-
Principal amount $29,163 $437 $ - $ - $ - $ - $ 29,600 $29,600
Weighted-average
interest rate 8.6% 7.5% - % - % - % - % 8.6%
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 10 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, 1998.
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)).
10.8*-- Keystone Consolidated Industries, Inc. 1992 Incentive Compensation
Plan. (Incorporated by reference to Exhibit 99.1 to Registrant's
Registration Statement on Form S-8 (Registration No. 33-63086)).
10.9*-- Keystone Consolidated Industries, Inc. 1992 Non-Employee Director
Stock Option Plan. (Incorporated by reference to Exhibit 99.2 to
Registrant's Registration Statement on Form S-8 (Registration No. 33-
63086)).
10.10*--Keystone Consolidated Industries, Inc. 1997 Long-Term Incentive Plan.
(Incorporated by reference to Appendix A to Registrant's Schedule 14A
filed April 25, 1997).
10.11*--Amendment to the Keystone Consolidated Industries, Inc. 1997 Long-Term
Incentive Plan. (Incorporated by reference to Registrant's Schedule
14A filed April 24, 1998.)
21 -- Subsidiaries of the Company.
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of PricewaterhouseCoopers LLP
27 -- Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
*Management contract, compensatory plan or agreement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned and dated March __, 1999, 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 __, 1999 by the following
persons on behalf of the registrant and in the capacities indicated:
/s/ GLENN R. SIMMONS /s/ DAVID E. CONNOR
Glenn R. Simmons David E. Connor
Chairman of the Board Director
/s/ J. WALTER TUCKER, JR. /s/ 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 Corporate Controller and
Principal Accounting Officer
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(A) AND 14(D)
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS PAGE
Report of Independent Accountants.................................... F-2
Consolidated Balance Sheets -- December 31, 1997 and 1998........ F-3/F-4
Consolidated Statements of Operations -- Years ended December 31,
1996, 1997 and 1998................................................ F-5
Consolidated Statements of Comprehensive Income - Years ended
December 31, 1996, 1997 and 1998................................... F-6
Consolidated Statements of Redeemable Preferred Stock and Common
Stockholders' Equity (Deficit) -- Years ended
December 31, 1996, 1997 and 1998................................... F-7
Consolidated Statements of Cash Flows -- Years ended December 31,
1996, 1997 and 1998............................................ F-8/F-9
Notes to Consolidated Financial Statements..................... F-10/F-35
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.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Keystone Consolidated Industries, Inc. and Subsidiaries at December 31, 1997 and
1998, and the results of their operations and comprehensive income and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
March 5, 1999
Dallas, Texas
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(In thousands, except share data)
ASSETS 1997 1998
Current assets:
Cash and cash equivalents $ 22,622 $ -
Notes and accounts receivable, net of allowances
of $2,941 and $4,915 37,841 36,786
Inventories 53,930 52,239
Deferred income taxes 18,869 18,985
Prepaid expenses and other 1,175 3,916
Total current assets 134,437 111,926
Property, plant and equipment:
Land, buildings and improvements 49,153 50,637
Machinery and equipment 237,234 299,165
Construction in progress 7,496 4,880
293,883 354,682
Less accumulated depreciation 181,129 198,582
Net property, plant and equipment 112,754 156,100
Other assets:
Restricted investments 7,694 8,624
Prepaid pension cost 111,072 120,516
Deferred financing costs 3,795 3,493
Goodwill 1,229 1,115
Other 3,150 4,083
Total other assets 126,940 137,831
$374,131 $405,857
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1997 and 1998
(In thousands, except share data)
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
1997 1998
Current liabilities:
Notes payable and current maturities of
long-term debt $ 3,789 $ 29,912
Accounts payable 29,679 34,002
Accrued OPEB cost 8,415 10,000
Other accrued liabilities 39,870 37,457
Total current liabilities 81,753 111,371
Noncurrent liabilities:
Long-term debt 103,055 101,852
Accrued OPEB cost 101,370 99,047
Deferred income taxes 2,963 6,162
Negative goodwill 25,421 24,065
Other 11,858 10,283
Total noncurrent liabilities 244,667 241,409
Redeemable preferred stock, no par value; 500,000
shares authorized; 435,456 and nil shares issued
3,500 -
Stockholders' equity:
Common stock, $1 par value, 12,000,000 shares
authorized; 9,300,267 and 9,838,629 shares issued
at stated value 10,029 10,569
Additional paid-in capital 47,191 51,763
Accumulated deficit (12,997) (9,243)
Treasury stock - 1,134 shares, at cost (12) (12)
Total stockholders' equity 44,211 53,077
$374,131 $405,857
Commitments and contingencies (Notes 13, 14 and 15).
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1996, 1997 and 1998
(In thousands, except per share data)
1996 1997 1998
Revenues and other income:
Net sales $331,175 $354,073 $370,022
Interest 50 1,218 594
Other, net 539 2,053 212
331,764 357,344 370,828
Costs and expenses:
Cost of goods sold 298,268 316,599 339,625
Selling 3,855 4,628 6,042
General and administrative 22,779 17,918 19,139
Overfunded defined benefit pension credit (1,119) (6,322) (9,444)
Interest 3,741 7,612 10,460
327,524 340,435 365,822
Income before income taxes 4,240 16,909 5,006
Provision for income taxes 1,656 4,541 1,095
Net income 2,584 12,368 3,911
Dividends on preferred stock 70 280 157
Net income available for common shares $ 2,514 $ 12,088 $ 3,754
Net income per share available for common
shares:
Basic $ .38 $ 1.30 $ .41
Diluted $ .38 $ 1.28 $ .40
Weighted average common and common
equivalent shares outstanding:
Basic 6,554 9,271 9,544
Diluted 6,560 9,435 9,669
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1996, 1997 and 1998
(In thousands)
1996 1997 1998
Net income $2,584 $12,368 $3,911
Other comprehensive income -
Net pension liabilities adjustment:
Pre-tax amount 5,826 - -
Less income tax provision 2,272 - -
Total other comprehensive income 3,554 - -
Comprehensive income $6,138 $12,368 $3,911
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1996, 1997 and 1998
(In thousands)
Common stockholders' equity (deficit)
Redeemable Additional
preferred Common Stock paid-in
stock Shares Amount capital
Balance - December 31,1995 $ - 5,638 $6,362 $20,013
Net income - - - -
Other comprehensive income - - - -
Issuance of stock - DeSoto 5,100 3,500 3,500 25,813
acquisition
Issuance of stock- other - 52 58 521
Preferred dividends declared 70 - - -
Preferred dividends paid (1,670) - - -
Merger of pension plans, net - - - -
Balance December 31, 1996 3,500 9,190 9,920 46,347
Net income - - - -
Issuance of stock - 109 109 844
Preferred dividends declared 280 - - -
Preferred dividends paid (280) - - -
Balance December 31, 1997 3,500 9,299 10,029 47,191
Net income - - - -
Exercise of warrants and
redemption of preferred stock,
net (3,500) 448 448 3,753
Issuance of stock - other - 92 92 819
Preferred dividends declared 157 - - -
Preferred dividends paid (157) - - -
Balance - December 31, 1998 $ - 9,839 $10,569 $51,763
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) (continued)
Years ended December 31, 1996, 1997 and 1998
(In thousands)
Common Stockholders' Equity
Accumulated
other
comprehensive Total common
income - pension stockholders'
liabilities equity
adjustment (deficit)
Accumulated Treasury
(deficit) Stock
Balance -
December 31,1995 $(36,257) $(27,599) $ (12) $(37,493)
Net income - 2,584 - 2,584
Other comprehensive
income 3,554 - - 3,554
Issuance of stock -
DeSoto acquisition - - - 29,313
Issuance of stock- other - - - 579
Preferred dividends
declared - (70) - (70)
Preferred dividends paid - - - -
Merger of pension plans,
net 32,703 - - 32,703
Balance December 31, 1996 - (25,085) (12) 31,170
Net income - 12,368 - 12,368
Issuance of stock - - - 953
Preferred dividends
declared - (280) - (280)
Preferred dividends paid - - - -
Balance December 31, 1997 - (12,997) (12) 44,211
Net income - 3,911 - 3,911
Exercise of warrants and
redemption of preferred
stock, net - - - 4,201
Issuance of stock - other - - - 911
Preferred dividends
declared - (157) - (157)
Preferred dividends paid - - - -
Balance -
December 31, 1998
$ - $ (9,243) $ (12) $53,077
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998
(In thousands)
1996 1997 1998
Cash flows from operating activities:
Net income $ 2,584 $ 12,368 $ 3,911
Depreciation and amortization 12,425 12,815 20,140
Amortization of deferred financing costs 181 455 509
Deferred income taxes (1,249) 1,573 3,078
Other, net 974 2,425 1,571
Change in assets and liabilities:
Notes and accounts receivable (2,209) (1,978) (2,027)
Inventories (102) (9,671) 1,691
Accounts payable (3,873) (6,455) 4,323
Pensions (5,991) (6,322) (9,444)
Other, net (2,700) 6,249 (6,947)
Net cash provided by operating
activities
40 11,459 16,805
Cash flows from investing activities:
Capital expenditures (18,992) (26,294) (64,541)
Acquisition of businesses (1,008) (11,285) -
Proceeds from disposition of property
and equipment 29 2,720 11
Other, net 168 212 (448)
Net cash used by investing activities (19,803) (34,647) (64,978)
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996, 1997 and 1998
(In thousands)
1996 1997 1998
Cash flows from financing activities:
Revolving credit facilities, net $ 16,534 $(31,095) $ 26,110
Other notes payable and long-term debt:
Additions 9,495 100,294 95
Principal payments (4,194) (19,535) (1,285)
Preferred stock dividend payments (1,670) (280) (157)
Deferred financing costs paid (425) (3,918) (207)
Common stock issued, net 23 344 995
Net cash provided by financing
activities
19,763 45,810 25,551
Net change in cash and cash equivalents - 22,622 (22,622)
Cash and cash equivalents, beginning of year - - 22,622
Cash and cash equivalents, end of year $ - $ 22,622 $ -
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized $ 4,058 $ 4,068 $ 10,903
Income taxes 2,210 4,253 217
Common stock contributed to employee
benefit plan $ 522 $ 578 $ 617
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
50% owned by Contran Corporation ("Contran") and entities affiliated with
Contran. Substantially all of Contran's outstanding voting stock is held either
by trusts established for the benefit of certain children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is sole trustee, or by Mr. Simmons
directly. The Company may be deemed to be controlled by Contran and Mr.
Simmons.
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 prior year amounts have been reclassified to conform with
the 1998 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, 1997 and 1998 were 52-week years.
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 1996, 1997 and 1998 amounted
to $419,000, $483,000 and $878,000, 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
$12,501,000, $14,434,000 and $20,849,000 during the years ended December 31,
1996, 1997 and 1998, 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. 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 financial statements . See also Notes 2, 12 and 16.
Retirement plans and post-retirement benefits other than pensions.
Accounting and funding policies for retirement plans and post retirement
benefits other than pensions ("OPEB") are described in Note 7.
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 $.6
million in 1996, $.7 million in 1997 and $1.1 million in 1998.
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 191,000,
171,000 and 163,000 in 1996, 1997 and 1998, respectively.
Deferred financing costs. Deferred financing costs relate 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 and $964,000 at December 31, 1997 and 1998, respectively. Amortization
of deferred financing costs in 1996, 1997 and 1998 amounted to $181,000,
$455,000 and $509,000, respectively.
Goodwill. Goodwill, representing the excess of cost over the fair value of
individual net assets acquired in the December 1997 EWP acquisition, is
amortized by the straight-line method over 10 years (remaining life of 9 years
at December 31, 1998) and is stated net of accumulated amortization of
approximately $113,000 at December 31, 1998. Amortization of goodwill in 1998
amounted to $113,000.
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 17.75 years at December 31, 1998) and is stated net of
accumulated amortization of approximately $1,695,000 and $3,051,000 at December
31, 1997 and 1998, respectively. Amortization of negative goodwill in 1996,
1997 and 1998 amounted to $76,000, $1,619,000 and $1,356,000, 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
approximately 3.5 million shares of its common stock (approximately $29.3
million at the $8.375 per share market price on September 27, 1996) and 435,456
shares of Keystone preferred stock ($3.5 million redemption value beginning on
July 21, 1997) in exchange for all of the outstanding common stock and preferred
stock, respectively, of DeSoto. Each DeSoto common stockholder received .7465
of a share of Keystone common stock for each share of DeSoto common stock.
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 9.
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 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 financial
statements subsequent to this acquisition. The purchase price has been
allocated to the individual assets acquired and liabilities assumed of EWP based
upon estimated fair values.
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 78% and
76% of the inventories held at December 31, 1997 and 1998, respectively. The
first-in, first-out or average cost methods are used to determine the cost of
all other inventories.
December 31,
1997 1998
(In thousands)
Raw materials:
Steel and wire products $17,609 $17,400
Household cleaning products 854 650
18,463 18,050
Work in process -
Steel and wire products 15,475 8,642
Finished products:
Steel and wire products 16,707 12,797
Household cleaning products 150 249
16,857 13,046
Supplies -
Steel and wire products 16,290 16,894
67,085 56,632
Less LIFO reserve:
Steel and wire products 13,096 4,334
Household cleaning products 59 59
13,155 4,393
$53,930 $52,239
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT
December 31,
1997 1998
(In thousands)
9 5/8% Senior Secured Notes, due August 2007 $100,000 $100,000
Commercial credit agreements:
Revolving credit facility - Keystone - 24,580
Revolving credit facility - EWP 2,471 4,000
Term loan - EWP 1,603 1,020
Other 2,770 2,164
106,844 131,764
Less current maturities 3,789 29,912
$103,055 $101,852
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.
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 in the Indenture) of at least 2.5 to
1 for the most recently completed four fiscal quarters. 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. The effective interest rate was 9.5% and 8.75% at December 31, 1997 and
1998, 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,
1998). At December 31, 1998, unused credit available for additional borrowings
under this credit facility were $25.5 million, all of which could be borrowed
under the terms of the Indenture. 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.
In April 1998, EWP renewed its $6 million revolving credit agreement (the
"EWP Revolver"). The EWP Revolver expires in June 2000. Prior to April 1998,
the EWP Revolver bore interest at the prime rate or Federal Funds rate, as
defined in the agreement, plus .75% (9.25% at December 31, 1997). Under the
terms of the renewal, EWP has the option to borrow under the EWP Revolver at
either the prime rate or LIBOR plus 2.25% depending on the term of the
borrowings. At December 31, 1998, all borrowings under the EWP Revolver bore
interest at 8.1%. EWP's term loan is due June 30, 2000 and is payable in
quarterly installments of $145,750 plus accrued interest. At December 31, 1998,
unused credit available for additional borrowings under this credit facility
were $1.4 million, all of which could be borrowed under the terms of the
Indenture. Prior to April 1998, interest on the term loan was payable at the
prime rate or Federal Funds rate, as defined in the credit agreement, plus 1%
(9.5% at December 31, 1997). Subsequent to April 1998, EWP's term note accrues
interest at LIBOR plus 2.25% (7.5% at December 31, 1998). 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, substantially all of the Company's notes
payable and long-term debt reprice with changes in interest rates. The
aggregate fair value of the Senior Notes, based on quoted market prices at
December 31, 1998, approximated $95.4 million. The book value of all other
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)
1999 $ 29,912
2000 1,172
2001 526
2002 154
2003 -
2004 and thereafter 100,000
$131,764
At December 31, 1998, total collateralized obligations, including deferred
pension contributions (see Note 7), amounted to $134.2 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,
1996 1997 1998
(In thousands)
Expected tax expense, at statutory rate $ 1,484 $ 5,918 $ 1,752
U.S. state income taxes, net 11 253 280
Amortization of negative goodwill - (567) (475)
Settlement of income tax audit - (1,500) -
Other, net 161 437 (462)
Provision for income taxes charged to
results of operations 1,656 4,541 1,095
Stockholders' equity - pension component 2,272 - -
Comprehensive provision for income taxes $ 3,928 $ 4,541 $ 1,095
Comprehensive provision for income taxes:
Currently payable (refundable):
U.S. federal $ 5,428 $ 5,536 $(1,883)
U.S. state 788 384 (100)
Benefit of loss carry forwards (23) (841) -
Alternative minimum tax credits (3,288) (2,111) -
Net currently payable 2,905 2,968 (1,983)
Deferred income taxes, net 1,023 1,573 3,078
$ 3,928 $ 4,541 $ 1,095
The Company was subject to the regular U.S. federal statutory income tax
rate of 35%, during 1996, 1997 and 1998, but during 1996 utilized alternative
minimum tax credit carry forwards to reduce its current federal income tax
payable. At December 31, 1998, the Company had approximately $1.3 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,
1997 1998
Assets Liabilities Assets Liabilities
(In thousands)
Tax effect of temporary differences relating to:
Inventories $ 1,779 $ - $ 2,542 $ -
Property and equipment - (5,382) - (4,452)
Prepaid pension - (43,285) - (47,001)
Accrued OPEB cost 42,854 - 42,530 -
Accrued liabilities and other deductible
differences 15,740 - 14,641 -
Other taxable differences - (7,500) - (6,707)
Net operating loss carryforwards 9,955 - 9,937 -
Alternative minimum tax credit carryforwards 1,745 - 1,333 -
Gross deferred tax assets (liabilities) 72,073 (56,167) 70,983 (58,160)
Reclassification, principally netting by tax
jurisdiction (53,204) 53,204 (51,998) 51,998
Net deferred tax asset (liability) 18,869 (2,963) 18,985 (6,162)
Less current deferred tax asset 18,869 - 18,985 -
Noncurrent deferred tax asset (liability) $ - $(2,963) $ - $ (6,162)
As a result of the DeSoto Acquisition, at December 31, 1998, 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 $2.4 million was used in 1997.
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 500,000 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.
During 1997, the Company granted all remaining options available under the
Company's 1992 Option Plan. At December 31, 1998, there were 268,066 options
outstanding under this plan. Also during 1997, the Company terminated its 1992
Non-Employee Director Stock Option Plan (the "Director Plan"). At December 31,
1998, there were 22,000 options outstanding under this plan.
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"). 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 Keystone options exchanged for the former DeSoto options
expired in September 1998. Also effective with the DeSoto Acquisition, the
former DeSoto 1992 stock plan was terminated.
Changes in outstanding options, including options outstanding under the
former 1992 Option Plan, the Director Plan and 15,000 options outstanding under
another plan which was terminated in a prior year, all 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, 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) 6.20 (23,130)
Canceled (18,733) 8.75- 15.81 (234,980)
Outstanding at December 31, 1996 404,996 5.86- 13.56 3,639,634
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
Exercised (39,061) 5.86- 10.50 (280,483)
Canceled (90,634) 6.36- 13.94 (921,524)
Outstanding at December 31, 1998 402,066 $8.13-$13.94 $3,653,724
The following table summarizes weighted average information about fixed
stock options outstanding at December 31, 1998.
Outstanding Exercisable
Weighted Average Weighted Average
Range of Remaining Remaining
Exercise Contractual Exercise Contractual Exercise
Prices Options Life Price Options Life Price
$ 8.13-$11.25 347,066 7.2 years $ 8.37 213,520 6.9 years $ 8.46
$12.86-$13.94 55,000 6.6 $13.59 31,550 5.0 $13.34
402,066 7.1 $ 9.09 245,070 6.7 $ 9.09
At December 31, 1998, options to purchase 245,070 shares were exercisable
(none at prices lower than the December 31, 1998 quoted market price of $8.13
per share) and options to purchase an additional 108,926 shares will become
exercisable in 1999. At December 31, 1998, an aggregate of 403,000 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
were exercised by the warrantholders in July 1998.
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
1996 and 1997.
Years ended December 31,
1996 1997
Risk-free interest rate 6.7% 6.7%
Dividend yield - -
Volatility factor .44 .44
Weighted average expected life 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,
1996 1997 1998
(In thousands except per
share amounts)
Net income available for common shares -
as reported $2,514 $12,088 $3,754
Net income available for common shares -
pro forma $2,448 $11,752 $3,343
Basic net income available for common
shares per common and common equivalent
share - as reported $ .38 $ 1.30 $ .41
Basic net income available for common
shares per common and common equivalent
share - pro forma $ .37 $ 1.26 $ .37
Weighted average fair value per share of
options granted during the year $ 5.41 $ 6.37 $ -
NOTE 7 - PENSIONS AND OTHER POST RETIREMENT BENEFITS PLANS
Keystone sponsors several pension plans and other post retirement benefit
plans for its employees. The following tables provide a reconciliation of the
changes in the plans' benefit obligations and fair value of assets for the years
ended December 31,:
Pension Benefits Other Benefits
1997 1998 1997 1998
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $281,915 $296,159 $ 99,533 $108,395
Service cost 2,368 2,798 1,304 1,477
Interest cost 20,229 20,177 7,395 7,111
Plan participants' contributions - - 727 758
Actuarial loss 12,627 15,928 7,791 3,442
Acquisition 535 - - -
Benefits paid (21,515) (22,548) (8,355) (9,741)
Benefit obligation at end of year 296,159 312,514 108,395 111,442
Change in plan assets:
Fair value of plan assets at beginning
of year 328,783 358,150 - -
Actual return on plan assets 50,324 17,633 - -
Acquisition 558 - - -
Company contributions - - 7,628 8,983
Plan participants' contributions - - 727 758
Benefits paid (21,515) (22,548) (8,355) (9,741)
Fair value of plan assets at end of year 358,150 353,235 - -
Funded status 61,991 40,721 (108,395) (111,442)
Unrecognized net loss 44,319 76,786 2,818 6,260
Unrecognized prior service credit - - (4,208) (3,865)
Unrecognized net obligation 4,762 3,009 - -
Prepaid (accrued) benefit cost 111,072 120,516 (109,785) (109,047)
Less current portion - - (8,415) (10,000)
Noncurrent portion $111,072 $120,516 $(101,370) $(99,047)
The assumptions used in the measurement of the Company's benefit
obligations at December 31, are shown in the following table:
Pension Benefits Other Benefits
1996 1997 1998 1996 1997 1998
Discount rate 7.5% 7.0% 6.5% 7.5% 7.0% 6.5%
Expected return on plan assets 10.0% 10.0% 10.0% - - -
Rate of compensation increase 3.0% 3.0% 3.0% - - -
For measurement purposes, a 6.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease gradually to 5% in 2006 and remain at that level thereafter.
The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31,:
Pension Benefits Other Benefits
1996 1997 1998 1996 1997 1998
(In thousands)
Service cost $ 2,214 $ 2,368 $ 2,798 $1,189 $1,304 $1,477
Interest cost 15,258 20,229 20,177 6,967 7,395 7,111
Expected return on plan assets (17,717) (31,807) (34,729) - - -
Amortization of unrecognized:
Net obligation of January 1, 1987 1,810 1,810 1,810 - - -
Prior service cost (4) (4) (4) (343) (343) (343)
Net loss (gains) 2,113 1,082 504 9 (29) -
Net periodic benefit cost (credit) $3,674 $ (6,322) $ (9,444) $7,822 $8,327 $8,245
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 methods of calculating benefits under each of the
former plans remain unchanged as a result of the plan merger. At December 31,
1998, approximately 97% 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, 1998 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, 1998, 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. Two of these properties are still
owned by the Plan and are leased to DeSoto at December 31, 1998. These two real
properties amounted to approximately 1% of the Plan's assets at December 31,
1998. In January 1999, the Plan sold one of the remaining two properties to a
third party. See Note 14.
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, 1998, the remaining balance of such deferred contributions was
approximately $2.4 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 over-funded status.
Keystone currently provides, in addition to pension benefits, medical and
life insurance benefits for certain retirees. Under plans currently in effect,
most active employees would be entitled to receive OPEB upon retirement.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
Change in Health Care Cost Trend
1% Increase 1% Decrease
(In thousands)
Increase (decrease):
Effect on total of service and interest
cost components for the year ended
December 31, 1998 $ 1,101 $ (913)
Effect on postretirement benefit
obligation at December 31, 1998 $12,387 $(10,422)
The Company also maintains several defined contribution pension plans.
Expense related to these plans was $2.2 million in 1996, $2.4 million in 1997
and $2.9 million in 1998.
NOTE 8 - OTHER ACCRUED LIABILITIES
December 31,
1997 1998
(In thousands)
Current:
Salary, wages, vacations and other employee expenses $12,275 $11,560
Environmental 7,498 7,165
Self insurance 6,605 6,950
Interest 4,146 4,054
Disposition of former facilities 2,306 1,452
Legal and professional 1,199 795
Other 5,841 5,481
$39,870 $37,457
Noncurrent:
Environmental $ 8,606 $ 8,175
Deferred gain 1,987 821
Other 1,265 1,287
$11,858 $10,283
The deferred gain relates to the sale of certain DeSoto properties to
DeSoto's pension plan. See Note 14.
NOTE 9 - REDEEMABLE PREFERRED STOCK:
In connection with the DeSoto Acquisition, Keystone issued 435,456 shares
of Keystone Series A 8% Senior Preferred Stock for all of the outstanding
preferred stock of DeSoto. The preferred stock could 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"). Under certain conditions, Keystone was required to redeem the
preferred stock at a cash redemption price equal to the Liquidation Preference,
to the maximum extent legally permissible including within ten days after the
exercise of any warrants to purchase Keystone common stock by any of the
warrantholders and preferred stockholders.
In July 1998, the warrantholders exercised their warrants and Keystone
redeemed all of the outstanding preferred stock at the aggregate $3.5 million
redemption price. Net cash proceeds to the Company approximated $701,000.
NOTE 10 - 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 14.
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 $79,000 in 1996, $62,000 in 1997 and $77,000 in
1998.
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 $465,000 in 1996, $540,000 in
1997 and $639,000 in 1998. In addition, the Company purchased certain aircraft
services from Valhi in the amount of $172,000 in 1996, $175,000 in 1997 and
$160,000 in 1998.
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 $689,000 in 1996,
$127,000 in 1997 and $320,000 in 1998.
EWI RE, Inc. ("EWI") arranges for and brokers certain of the Company's
insurance policies. Parties related to Contran own 90% of the outstanding
common stock of EWI, and a son-in-law of Mr. Simmons manages the operations of
EWI. Consistent with insurance industry practices, EWI receives a commission
from the insurance underwriters for the policies that it arranges or brokers.
The Company paid an aggregate of approximately $.8 million for such policies in
1998.
NOTE 11 - QUARTERLY FINANCIAL DATA (UNAUDITED)
March 31, June 30, September 30, December 31,
(In thousands, except per share data)
Year ended December 31, 1998:
Net sales $96,104 $105,919 $87,125 $80,874
Gross profit 7,931 10,082 5,918 6,466
Net income (loss) $ 2,202 $ 4,068 $ (707) $(1,652)
Net income (loss) available for common shares $ 2,132 $ 3,998 $ (724) $(1,652)
Basic net income (loss) available for common
shares per common and common equivalent share $ .23 $ .43 $ (.07) $ (.18)
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
During the fourth quarter of 1997 and 1998, Keystone recorded a charge to
bad debt expense of $2.4 million and $.7 million, respectively, resulting from
severe deterioration in customers' financial condition.
NOTE 12 - OPERATIONS
Through December 31, 1998, 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.
In January 1999, the Company sold its household cleaning products division.
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. Sales by
the Company to EWP during 1996 and in 1997 prior to the EWP Acquisition
amounted to $9.9 million and $12.9 million, respectively.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that pension expense for
each segment is recognized and measured on the basis of estimated current
service cost of each segment. The remainder of the Company's net overfunded
defined benefit pension credit is included in net general corporate expenses.
In addition, amortization of goodwill and negative goodwill are included in
general corporate expenses and are not allocated to each segment. General
corporate expenses also includes OPEB and environmental expenses relative to
facilities no longer owned by the Company. Keystone evaluates performance based
on profit or loss from operations before interest and income taxes not including
nonrecurring gains and losses. The Company does not engage in intersegment
sales. Segment assets are comprised of all assets attributable to each
reportable operating segment. Corporate assets consist principally of pension
related assets, restricted investments, deferred tax assets and corporate
property, plant and equipment.
Keystone's reportable segments are strategic business units that offer
different profits products and services. The segments are managed separately
because each business requires different technology and marketing strategies.
Steel and Household
Wire Cleaning Segment
Products Products Total Corporate Total
Year ended December 31, 1998:
(In thousands)
Revenues $359,993 $10,029 $370,022 $ - $370,022
Depreciation and amortization 21,317 52 21,369 (1,229) 20,140
Operating profit (loss) 14,400 (1,367) 13,033 - 13,033
Identifiable segment assets 252,172 2,311 254,483 151,374 405,857
Capital expenditures 64,308 217 64,525 16 64,541
Year ended December 31, 1997:
Revenues $340,099 $13,974 $354,073 $ - $354,073
Depreciation and amortization 14,296 7 14,303 (1,488) 12,815
Equity in earnings of unconsolidated
affiliates 408 - 408 - 408
Operating profit 22,446 846 23,292 - 23,292
Identifiable segment assets 210,114 2,184 212,298 161,833 374,131
Capital expenditures 26,085 117 26,202 92 26,294
Year ended December 31, 1996:
Revenues $328,656 $2,519 $331,175 $ - $331,175
Depreciation and amortization 12,257 - 12,257 168 12,425
Equity in earnings of unconsolidated
affiliates 225 - 225 - 225
Operating profit (loss) 10,791 (129) 10,662 - 10,662
Identifiable segment assets 166,400 2,620 169,020 133,348 302,368
Capital expenditures 18,908 - 18,908 84 18,992
Years ended December 31,
1996 1997 1998
(In thousands)
Operating profit $10,662 $23,292 $ 13,033
General corporate items:
Interest income 50 1,218 594
General income (expenses), net (2,731) 11 1,839
Interest expense (3,741) (7,612) (10,460)
Income before income taxes $ 4,240 $16,909 $ 5,006
All of the Company's assets are located in the United States. Information
concerning geographic concentration of net sales based on location of customer
is as follows:
Year ended December 31,
1996 1997 1998
(In thousands)
United States $329,665 $350,850 $366,731
Canada 1,463 2,802 3,242
Great Britain 47 418 24
Other - 3 25
$331,175 $354,073 $370,022
NOTE 13 - ENVIRONMENTAL MATTERS
At December 31, 1998, the Company's financial statements reflected total
accrued liabilities of $15.3 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 and 1998 the Company did not have any significant remediation
efforts relative to Phases V and VI. At December 31, 1998, the Company has a
$9.9 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 $75,000 per quarter into a
trust fund. The Company must continue these quarterly deposits and cannot
withdraw funds from the trust fund until the fund balance exceeds the sum of the
estimated remaining remediation costs plus $2 million. At December 31, 1997 and
1998 the trust fund had balances of $3.1 million and $3.6 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, 1998, 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 both December 31, 1997 and 1998, the Company had
accrued a total liability related to these sites of $431,000. The Company
believes its comprehensive general liability insurance policies provide
indemnification for certain costs the Company incurs at the three "Superfund"
sites discussed below and has recorded receivables for the estimated insurance
recoveries.
In July 1991, the United States filed an action against a former division
of the Company and four other PRP's in the United States District Court for the
Northern District of Illinois (Civil Action No. 91C4482) seeking to recover
investigation and remediation costs incurred by U.S. EPA at the Byron Salvage
Yard, located in Byron, Illinois. In April 1992, Keystone filed a third-party
complaint in this civil action against 15 additional parties seeking
contribution in the event the Company is held liable for any response costs at
the Byron site. Neither the Company nor the other designated PRPs are
performing any investigation of the nature and extent of the contamination. In
December 1996, Keystone, U.S. EPA and the Department of Justice entered into the
Fifth Partial Consent Decree to settle Keystone's liability for EPA response
costs incurred at the site through April 1994 for a payment of $690,000. Under
the agreement Keystone is precluded from recovering any portion of the $690,000
settlement payment from other parties to the lawsuit. In January 1997, Keystone
paid the $690,000 settlement. Keystone will remain potentially liable for EPA
response costs incurred after April 30, 1994, and natural resource damage
claims, if any, that may be asserted in the future. Keystone recovered a
portion of the $690,000 payment from its insurer. In March 1997, U.S. EPA
issued a Proposed Remedial Action Plan ("PRAP") recommending that a limited
excavation of contaminated soils be performed at an estimated cost of $63,000,
that a soil cover be placed over the site, an on-site groundwater pump and treat
system be installed and operated for an estimated period of 15 years, and that
both on-site and off-site groundwater monitoring be conducted for an indefinite
period. U.S. EPA's cost estimate for the recommended plan is $5.1 million.
U.S. EPA's estimate of the highest cost alternatives evaluated but not
recommended in the PRAP is approximately $6 million. The Company filed public
comments on May 1, 1997, objecting to the PRAP. On March 9, 1999 U.S. EPA
served the Company with a Special Notice of Liability requesting that the
Company and ten other identified PRPs perform a soils remedy at the site with an
estimated present value cost of $359,000, and that the PRPs reimburse U.S. EPA
for its past costs of $1,075,806 ($985,001 if the PRPs commit to meet all of
U.S. EPA's demands within 60 days of the special notice). U.S. EPA has further
demanded that the PRPs commit to pay all of U.S. EPA's future costs at the site,
which would primarily be for oversight of the implementation of the soils
remedy. U.S. EPA has not yet notified the Company of any final decision
concerning what, if any, groundwater remedy has been selected for the site.
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. Four other PRPs
participated in the RI/FS and a contribution action is pending against eleven
additional viable companies which contributed wastes to the site. Following
completion of the RI/FS, U.S. EPA published in November 1997, a PRAP for the
site that recommends the excavation and disposal of contaminated soil,
installation of an impervious cap over a portion of the site, placement of a
surface cover over the remainder of the site and semi-annual groundwater
monitoring until drinking water standards are met by natural attenuation. U.S.
EPA estimates the costs of this recommended plan to be $3.1 million. The
highest cost remedy evaluated by U.S. EPA but not recommended in the PRAP is
estimated by U.S. EPA to have a cost of $19.8 million. In September 1998,
Keystone and four other PRPs who had funded the prior remedial actions and RI/FS
signed a proposed Consent Decree with U.S. EPA calling for them to be
"nonperforming parties" for the implementation of a March 1998 Record of
Decision. Under this proposed Consent Decree, Keystone is responsible for an
unspecified share of U.S. EPA's past site costs of $686,000. The proposed
Consent Decree was lodged by U.S. EPA with the District Court in February 1999,
with a public comment period of at least 30 days. 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 and $4.8 million accrued at December 31, 1997 and 1998, respectively,
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, 1998. 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 and 1998.
Prior to the DeSoto acquisition, DeSoto was notified by U.S. EPA that it is
one of approximately 50 PRPs at the Chemical Recyclers, Inc. site in Wylie,
Texas. Under a consent order with the U.S. EPA, the PRP group has performed a
removal action and an investigation of soil and groundwater contamination. Such
investigation revealed certain environmental contamination. It is anticipated
U.S. EPA will order further remedial action, the exact extent of which is not
currently known. 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, 1998 current estimates of
total remaining remediation costs related to this site are approximately $35
million. In addition to certain amounts included in the trust fund discussed
below, DeSoto also has certain funds available in other trust funds 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. DeSoto has submitted an application with the TNRCC to
participate in the State Voluntary Cleanup Program. The application is pending.
Potential additional remediation costs, if any are required, are presently
estimated to be between $1 million to $5 million.
In December 1991, DeSoto and approximately 600 other PRPs were named in a
complaint alleging DeSoto and the PRPs generated wastes that were disposed of at
a Pennsauken, New Jersey municipal landfill. The plaintiffs in the complaint
were ordered by the court to show in what manner the defendants were connected
to the site. The plaintiffs provided an alleged nexus indicating garbage and
construction materials from DeSoto's former Pennsauken facility were disposed of
at the site and such waste allegedly contained hazardous material to which
DeSoto objected. The claim was dismissed without prejudice in August 1993. In
1996, DeSoto received an amended complaint containing the same allegations.
This matter is in discovery stage at December 31, 1998. DeSoto has denied any
liability with regard to this matter and expects to vigorously defend the
action.
During December 1997, DeSoto entered into a agreement with U.S. EPA to
settle DeSoto's alleged liability with respect to the American Chemical Site
("ACS"), a chemical recycling facility located in Griffith, Indiana for a
payment of approximately $1.6 million, which was within the previously accrued
balance and which was paid in 1998.
In addition to the sites discussed above, DeSoto is allegedly involved at
various other sites and in related toxic tort lawsuits which DeSoto does not
currently expect to incur significant liability.
Under the terms of a 1990 asset sale agreement, DeSoto established a $6
million trust fund to fund potential clean-up liabilities relating to the assets
sold. The trust agreement expires on October 26, 2000. DeSoto has access to the
trust fund for any expenses or liabilities incurred by DeSoto regarding
environmental claims relating to the sites identified in the trust agreement.
The trust fund is primarily invested in United States Treasury securities and is
classified as a restricted investment on the balance sheet. As of December 31,
1997 and 1998, the balance in the trust fund was approximately $4.2 million and
$4.5 million, respectively.
NOTE 14 - 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. During 1998, the Plan sold the Columbus, Georgia and South
Holland, Illinois locations. As part of the terms of the sale of the South
Holland, Illinois location, DeSoto leased back the property for a period of two
years. DeSoto has subleased the Union City, California location and continues
to make monthly rental payments to the pension plan for the amount by which its
rental obligation exceeds the subtenant's rental obligations. In January 1999,
the Plan sold the Joliet location, and DeSoto was released from the lease.
Annual rental obligations under this lease, included in the table below,
amounted to $155,370 through August 2002.
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 and 1998, amounted to approximately $209,000, $832,000 and $679,000,
respectively.
In addition, the Company is obligated under certain other operating leases
through 2003.
Future commitments under these leases, net of subleases are summarized
below.
(In thousands)
Lease Sub
commitment rents Net
1999 $2,244 $263 $1,981
2000 1,659 263 1,396
2001 821 247 574
2002 337 150 187
2003 6 - 6
$5,067 $923 $4,144
NOTE 15 - 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. Subsequently, three of the four cases were dismissed. DeSoto
has denied any liability and will vigorously defend the remaining action.
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
and 1998 amount to $391,000 and $399,000, respectively.
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 33% of steel and wire product sales in 1996 and 1998, and 34% in
1997. These customers accounted for approximately one-third of steel and wire
products notes and accounts receivable at both December 31, 1997 and 1998.
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. During
1998, this percentage increased to 85% of household cleaning product sales.
Receivables from Sears at December 31, 1997 and 1998 amounted to approximately
91% ($1.0 million) and 76% ($1.5 million), respectively, of receivables related
to sales of household cleaning products.
NOTE 16 - JOINT VENTURE
In February 1999, Keystone formed "Garden Zone, LLC", a new marketing and
distribution company to supply wire products, wire fencing and wood and plastic
products to the consumer lawn and garden market. The new company was
established as a joint venture between Keystone and two unrelated entities with
Keystone owning 51% of the joint venture. The Company does not anticipate any
significant capital expenditures will be required to fund or operate this joint
venture.
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, 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
Year ended December 31, 1998:
Allowance for doubtful accounts and
notes receivable $ 2,941 $2,019 $ 45 $ - $4,915
(A) Amounts relate to the acquisition of DeSoto in 1996 and EWP in 1997.