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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 [FEE REQUIRED] --
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
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: (214) 458-0028
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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 1, 1994, 5,592,751 shares of common stock were outstanding. The
aggregate market value of the 2,180,468 shares of voting stock held by
nonaffiliates of the Registrant, as of such date, was approximately $25.6
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.
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PART I
ITEM 1. BUSINESS.
GENERAL
Keystone Consolidated Industries, Inc. ("Keystone" or the "Company"),
incorporated in Delaware in 1955, is the successor to Keystone Steel & Wire
Company, which was founded in 1889. The Company is a diversified manufacturer of
carbon steel rod, wire and a wide range of wire products for a variety of end
uses. The Company's operations are conducted by four divisions, Keystone Steel &
Wire, Keystone Fasteners, Sherman Wire ("Sherman") and KeyWest Wire, and two
wholly-owned subsidiaries, Wire Products Company and Sherman Wire of Caldwell,
Inc. Keystone owns and operates five plants in Illinois, Texas, Arkansas and
Wisconsin and leases one distribution facility in California. Product
distribution is concentrated primarily in the midwestern and southwestern
regions of the United States.
At December 31, 1993, Contran Corporation ("Contran") held, directly or
indirectly, approximately 62% of the Company's outstanding common stock. All of
Contran's outstanding common stock is held by trusts established for the benefit
of the children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
the sole trustee. Mr. Simmons, Chairman of the Board and Chief Executive Officer
of Contran, may be deemed to control Contran and the Company.
MANUFACTURING AND DISTRIBUTION
The Company's manufacturing operations consist of a steel mill, a carbon
steel rod mill and five wire and wire product fabrication facilities. The steel
mill, rod mill and the Company's largest wire facility are located in Peoria,
Illinois. The manufacturing process commences in the steel mill with scrap steel
being loaded into an electric arc furnace and converted into molten steel. The
molten steel is then transferred by ladle into a six-strand continuous casting
machine that produces five-inch square strands that are cut to predetermined
lengths, referred to as billets. These billets, along with any billets purchased
from outside suppliers, are then transferred to the adjoining on-site rod mill.
Upon entering the rod mill, the billets pass through a computer-controlled,
multi-zone recuperative reheat furnace. The heated billets are fed into the
rolling line, where they pass through various finishing stands during the rod
production process. After rolling, the rod is coiled and control cooled and then
passed through inspection stations for metallurgical, surface and diameter
checks. Finished coils are compacted and banded, and then either transferred to
the Company's fabrication facilities for processing into wire, nails and other
wire products or shipped to rod customers.
While the Company does not maintain a significant "shelf" inventory of
finished rod, it generally does have on hand approximately a one-month supply of
wire products inventory which enables the Company to respond to customer orders
and shifts in product demand.
The Company operates production facilities utilizing approximately 2.5
million square feet for manufacturing and office space, approximately 85% of
which is located at Peoria, Illinois. The Company also leases 121,000 square
feet of warehouse and office space in California.
PRODUCTS AND MARKETS
The Company produces carbon steel rod, wire and a wide range of wire
products for agricultural, industrial, construction, commercial, original
equipment manufacturers ("OEM") and retail consumer markets.
Carbon Steel Rod. The Company produces carbon steel rod at its Peoria rod
mill. In 1993, approximately 53% of the rod manufactured by the Company was used
internally at the Company's five wire mills and fabrication facilities and
approximately 47% was sold directly to producers of construction products, wire
and wire products, including products similar to those manufactured by the
Company. The Company believes its
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ability to internally convert a large portion of its rod production into a wide
variety of wire and wire products provides significant opportunities for
improving margins and enhances marketing flexibility, compared to non-integrated
or single product rod producers. Sales of carbon steel rod were $84.1 million in
1991, $82.4 million in 1992 and $99.9 million in 1993.
Drawn Carbon Steel Wire. The Company believes it is one of the largest
manufacturers of carbon steel wire in the United States. At its Peoria, Sherman
and Caldwell plants, the Company produces custom-drawn carbon steel wire in a
variety of gauges, finishes and packages for industrial fabrication and OEM
customers. The Company's drawn wire is used by these customers in the production
of a broad range of finished goods including nails, coat hangers, barbecue
grills, air conditioners, tools, refrigerators and other appliances. Sales of
drawn wire were $47.5 million in 1991, $55.2 million in 1992 and $67.8 million
in 1993.
Fencing and Related Wire Products. The Company believes it is a leading
supplier 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 through farm supply
distributors, hardlines merchandisers and building and industrial materials
distributors. Many of these fencing and related wire products are marketed under
the Company's RED BRAND(R) label. As part of its marketing strategy, the Company
designs merchandise packaging, product supportive literature and
point-of-purchase displays for marketing of many of these products to the retail
consumer market. Sales of fencing and related wire products were $96.2 million
in 1991, $101.9 million in 1992 and $102.2 million in 1993.
Construction Products. The Company manufactures products for residential
and commercial construction, including nails, pipe reinforcing fabric, rebar ty
wire, stucco netting and reinforcing building fabric. The primary customers for
these products are construction contractors and building materials distributors.
The Company sells most of its nails through PrimeSource, Inc., one of the
largest nail distributors in the United States, under the latter's Grip-Rite(R)
label. Sales of construction products were $74.3 million in 1991, $76.8 million
in 1992 and $75.3 million in 1993.
INDUSTRY AND COMPETITION
The carbon steel rod, wire and wire products industries in the United
States are highly competitive and are comprised primarily of several large
mini-mill rod producers, many small independent wire companies and a few large
diversified rod and wire producers, such as the Company. Foreign steel and wire
producers also compete with the Company and other domestic producers. Since
carbon steel rod is a commodity steel product, price is the primary competitive
factor. Competition in the wire and fabricated wire product categories is based
primarily on price, delivery performance, product quality, service, and brand
name preference.
Although some economic conditions affecting the domestic steel industry
have improved in recent years, many problems remain unresolved. Worldwide
overcapacity continues to exist. The Voluntary Restraint Agreements, negotiated
in the mid-80's by the United States government with foreign governments to
curtail steel imports, expired in March 1992. Since that time, imports of wire
rod and certain wire products have increased approximately 20%.
The domestic carbon steel rod industry experienced a consolidation of
operations over the past decade, as large integrated steel producers disposed of
or, to a significant degree, discontinued their carbon steel rod and wire
operations. Some of this capacity was replaced by the capacity of domestic
mini-mills and foreign producers. The mini-mills are typically modern,
relatively small and low cost steel rod producers that, like the Company, make
steel from scrap with the electric arc furnace process. The Company also
competes with many small independent wire companies who purchase rod from
domestic and foreign sources. The Company believes that, as one of the few
domestic diversified rod and wire producers, it is well positioned to compete
effectively with non-diversified rod producers and wire companies. This is due
to its broad range of fabricated wire products, its diverse geographic and
product markets, and its low cost internal supply of steel rod.
The Company also 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
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its customer base provides the Company with certain advantages over foreign and
certain domestic competition by reducing its shipping costs and allowing
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 rod, wire and
wire products markets, but there can be no assurance this will continue to be
the case.
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 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.
Environmental legislation and regulations have changed rapidly in recent
years and it is likely that the Company will be subject to increasingly
stringent environmental standards in the future. See Item 7 -- "Management's
Discussion And Analysis Of Financial Condition And Results Of
Operations -- Liquidity and Capital Resources" regarding capital expenditures
expected to be incurred in 1994 for environmental related items.
Information in Note 14 to the Consolidated Financial Statements is
incorporated herein by reference.
RAW MATERIALS AND ENERGY
The principal raw material used in the Company's operations is scrap steel,
which currently is readily available. The Company's Peoria steel mill is located
close to numerous sources of high density automobile, industrial and railroad
scrap. The purchase of scrap steel is highly competitive and its price
volatility is influenced by periodic shortages, freight costs, weather,
speculation by scrap brokers and other conditions beyond the control of the
Company. The cost of scrap can vary significantly and product selling prices
cannot always be adjusted, especially in the short-term, to recover the costs of
large increases in scrap prices. See Item 7 -- "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations."
The Company's manufacturing processes also consume large amounts of energy
in the form of electricity and natural gas. The Company purchases its electrical
energy for its Peoria plant from a regulated utility under an interruptible
service contract which provides for more economical electricity rates.
PATENTS AND TRADEMARKS
The Company has registered the trademark "RED BRAND" for field fence and
related products. The "RED BRAND" trademark has been widely advertised and, in
management's opinion, enjoys high levels of market recognition and brand
preference. The Company maintains other trademarks for various products which
have been promoted in their respective markets. While the Company owns one
patent relating to product packaging, the loss of such would not have a material
adverse effect on the financial condition of the Company.
EMPLOYMENT
The Company currently employs approximately 1,900 persons, of whom
approximately 1,200 are represented by the Independent Steel Workers Alliance
("ISWA") at its Peoria, Illinois facilities and approximately 150 are
represented by the International Association of Machinists and Aerospace Workers
(Local 1570) ("IAMAW") at its Sherman, Texas facilities. The current collective
bargaining agreement with the ISWA expires in May 1996 and the Sherman
collective bargaining agreement with the IAMAW expires in February 1997. The
Company believes its labor relations are satisfactory.
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CUSTOMERS
The Company 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.
ORDER BACKLOG
The Company's backlog of unfilled cancelable purchase orders, for delivery
within generally three months, approximated $23 million and $33 million at
December 31, 1992 and 1993, respectively. The Company does not believe that
backlog is a significant factor in its business.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located in approximately
3,000 square feet of leased space at 5430 LBJ Freeway, Dallas, Texas 75240-2697.
See Item 1 -- "Business" for a description of the Company's manufacturing
and distribution facilities. In management's opinion, the Company's facilities
represent an adequate resource for the purpose for which they are intended and
are suitable for the manufacture and sale of carbon steel rod, wire and wire
products.
Production facilities (with the exception of certain leased equipment) are
owned by the Company and collateralize a revolving line of credit and certain
long-term debt and pension obligations.
The current estimated annual capacity of the rod mill is approximately
750,000 tons; however, rod production is restricted by the Company's steel
making operations, which have an annual productive capacity of approximately
655,000 tons. From time to time the Company purchases billets from other
suppliers, resulting in increased utilization of the rod mill. The Company
purchased 106,000 tons of billets in 1993 and the rod mill operated at
approximately 95% of capacity. The Company will purchase billets in 1994;
however, the amounts purchased will depend on price and other market conditions.
Based on the Company's 1994 operating plan, which anticipates purchasing 72,000
tons of billets, the rod mill is expected to operate at approximately 94% of
estimated total capacity in 1994.
The estimated current annual wire and wire products capacity is
approximately 539,000 tons. Utilization of the Company's annual wire and wire
products productive capacity was 70% in 1991, 72% in 1992 and 77% in 1993.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings. Information required
by this Item is included in Note 14 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, 1993.
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 February 25, 1994 was 1,250. The following table sets forth the high and low
sales prices of the Company's common stock for the calendar years indicated,
according to published sources.
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HIGH LOW
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1993
First quarter.......................................... $10.88 $ 9.38
Second quarter......................................... 12.25 8.50
Third quarter.......................................... 10.38 7.75
Fourth quarter......................................... 11.00 8.75
1992
First quarter.......................................... $13.50 $10.75
Second quarter......................................... 12.63 10.38
Third quarter.......................................... 12.25 10.63
Fourth quarter......................................... 12.50 9.00
No cash dividends have been paid since 1977. The Company is subject to
certain loan covenants that restrict its ability to pay dividends, including a
prohibition against the payment of dividends without lender consent under its
commercial revolving credit facility.
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,
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1989 1990 1991 1992 1993
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income statement data:
Net sales................................. $297,887 $302,477 $302,132 $316,251 $345,186
Gross profit.............................. 33,979 37,792 37,454 37,443 32,521
Interest expense.......................... 6,839 5,427 4,322 3,036 6,575
Income from continuing operations......... $ 8,082 $ 8,328 $ 9,769 $ 5,146 $ 749
Discontinued operations................... -- (1,320) -- -- --
Extraordinary items(C).................... 3,967 3,146 3,502 -- --
Cumulative effect of changes in accounting
principles(A).......................... -- -- -- (69,949) --
-------- -------- -------- -------- --------
Net income (loss)................. $ 12,049 $ 10,154 $ 13,271 $(64,803) $ 749
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Per share data:
Income (loss) per common and common
equivalent share(B):
Continuing operations.................. $ 1.46 $ 1.48 $ 1.75 $ .92 $ .14
Discontinued operations................ -- (.24) -- -- --
Extraordinary items(C)................. .72 .56 .62 -- --
Cumulative effect of changes in
accounting principles(A)............. -- -- -- (12.53) --
-------- -------- -------- -------- --------
Net income (loss)................. $ 2.18 $ 1.80 $ 2.37 $ (11.61) $ .14
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Cash dividends declared................... $ -- $ -- $ -- $ -- $ --
-------- -------- -------- -------- --------
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Balance sheet data (at year end):
Total assets.............................. $173,562 $179,525 $182,077 $202,109 $206,654
Notes payable and current long-term
debt................................... 19,596 27,383 23,406 23,741 8,148
Long-term debt............................ 21,358 17,539 13,884 10,744 19,042
Noncurrent accrued pension cost........... 44,531 68,335 55,462 51,638 60,102
Noncurrent accrued OPEB cost.............. 4,674 3,929 3,109 93,727 96,336
Stockholders' equity (deficit)............ 25,437 10,947 27,149 (39,036) (50,908)
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(A) Relates to adoption of Statement of Financial Accounting Standards ("SFAS")
No. 106 -- "Postretirement Benefits Other Than Pensions" ("OPEB") and SFAS
No. 109 -- "Employers' Accounting for Income Taxes."
(B) Fully diluted net income per common and common equivalent share in 1989 was
$2.17. For the other years presented, primary and fully diluted net income
per common and common equivalent share were the same. See Note 1 to the
Consolidated Financial Statements.
(C) Extraordinary items relate to income tax benefits resulting from utilization
of loss carryforwards. Subsequent to adoption of SFAS No. 109 in 1992 such
items are not classified as extraordinary items.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating, investing and financing activities are
summarized below.
YEARS ENDED DECEMBER 31,
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1991 1992 1993
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(IN THOUSANDS)
Net cash provided (used) by:
Operating activities:
Net income (loss)....................................... $13,271 $(64,803) $ 749
Depreciation............................................ 9,996 10,525 11,084
Noncash OPEB cost....................................... -- 3,207 2,195
Cumulative effect of changes in accounting principles... -- 69,949 --
Other, net.............................................. 14 239 (1,078)
Changes in assets and liabilities, net.................. (6,523) (9,044) 1,649
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16,758 10,073 14,599
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Investing activities:
Capital expenditures.................................... (9,271) (7,459) (7,349)
Other, net.............................................. 123 191 505
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(9,148) (7,268) (6,844)
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Financing activities:
Net borrowings (repayments)............................. (7,632) (2,805) (7,295)
Issuance (repurchase) of common stock................... 22 -- (460)
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(7,610) (2,805) (7,755)
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Net cash provided (used) by operating, financing and
investing activities.................................. $ -- $ -- $ --
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In addition to earnings being higher in 1991 than in either 1992 or 1993,
fluctuations in cash flow from operations were impacted by changes in relative
levels of assets and liabilities, including levels of pension contributions in
each year. Pension contributions approximated $12 million in 1991, $20 million
in 1992, and $15 million in 1993. The 1993 pension contributions included a $2.3
million payment to the pension plans in order to avoid a second tier excise tax
related to an adverse May 1993 U.S. Supreme Court decision (see Note 14 to the
Consolidated Financial Statements). The minimum required pension contributions
in 1994 are currently estimated to be approximately $14 million.
In December 1993, the Company entered into a new $20 million term loan with
the financial institution that also provides the Company's $35 million revolving
credit facility. The new term loan bears interest at the prime rate plus 1% and
is due through 1996. The Company used $6.8 million of the proceeds to prepay the
Company's prior term loan, which bore interest at the prime rate plus 2.5%, and
the balance of the proceeds
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was applied to reduce outstanding revolving borrowings. This refinancing
contributed significantly to the Company's increase in working capital at
December 31, 1993 compared to the end of 1992.
The amount of available borrowings under the Company's $35 million
commercial revolving credit facility, which expires December 31, 1996, is based
on formula-determined amounts of trade receivables and inventories, less the
amount of outstanding letters of credit. Additional available borrowings under
the revolving credit facility were $30.7 million at December 31, 1993.
Capital expenditures are currently estimated to be approximately $18
million in 1994, including approximately $2.1 million for environmentally
related items. A significant portion of the increase in 1994 capital
expenditures over the prior two years relates to upgrades of production
equipment and information systems at the Company's Peoria, Illinois facility.
Reference is made to Note 14 to the Consolidated Financial Statements for a
description of certain environmental matters relating to the Peoria facility.
Due to the continuing escalation of costs of employee health care benefits,
the Company continues to monitor its numerous employee health and welfare
benefits plans and has implemented various plan modifications during 1993 which
provide certain cost savings, including a more equitable sharing of health care
costs for both retirees and active employees.
Effective December 31, 1993, due primarily to the continued general decline
in interest rates, the Company changed the discount rate used in determining the
actuarial present values of its pension obligations from 9.5% to 7.5%. This
change resulted in, among other things, an increase in the Company's noncurrent
pension cost liability and a charge to stockholders' deficit. Variances from
actuarially assumed rates, including the rate of return on pension plan assets,
will continue to result in additional increases or decreases in these accounts,
as well as deferred taxes, pension expense and funding requirements in future
periods. See Note 7 to the Consolidated Financial Statements.
Effective December 31, 1993, the Company also changed the discount rate
used in determining the actuarial present value of its "OPEB" obligations from
9.5% to 7.5%. Such change in the discount rate does not impact the Company's
cash flows, as payments for OPEB costs continue to be made when incurred.
At December 31, 1993, the Company has recorded net deferred tax assets of
$33.5 million, which amount is net of a valuation allowance of $30 million.
Approximately $8.7 million of the Company's deferred tax debits relate to net
operating loss and alternative minimum tax credit carryforwards which are
expected to be utilized in the next few years (since returning to profitability
in 1989, following completion of its rod mill modernization and disposal of its
unprofitable fasteners and plastics business, the Company has realized almost $4
million of net tax benefits from losses accumulated in prior years and no
carryforwards have expired). The remainder of the Company's gross deferred tax
debits related primarily to expenses, principally OPEB and pensions, that have
been accrued for financial reporting purposes but have not yet been paid or
become deductible for income tax purposes. While the Company currently expects
that its long-term profitability should ultimately be sufficient to enable it to
realize full benefit of these future tax deductions, considering all factors
believed to be relevant, including the Company's recent profitability, its
expected future near-term levels of profitability, and the fact that accrued
OPEB and pension expenses will become deductible over an extended period of time
and require the Company to generate significant future taxable income, the
Company believes that a portion of the gross deferred tax assets may not
currently meet a "more likely than not" realizability test and, accordingly, the
Company has provided a deferred tax valuation allowance. The Company will
continue to monitor and evaluate the need for, and amount of, a deferred tax
valuation allowance and will in the future, after considering all factors
believed to be relevant, make appropriate adjustments in such allowance.
The Company incurs significant ongoing costs for plant and equipment and
substantial employee pension and medical benefits for current and retired
employees which leave the Company vulnerable to business downturns and increases
in costs. In order to meet its financial obligations, the Company has reduced
controllable costs, modified product mix, acquired and disposed of businesses,
refinanced certain indebtedness,
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and raised 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.
For 1994, management has budgeted profitable results of operations with
sufficient cash flows from operations and financing activities to meet its
anticipated operating needs. This budget 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 the Company's revolving credit
facility. However, potential liabilities under environmental laws and
regulations with respect to the clean-up and disposal of wastes beyond present
accruals, any significant increases in the required minimum fundings to the
Company's pension funds or 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, any significant decline in the Company's markets or market share,
any inability to maintain satisfactory billet and rod production levels, or any
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
Note 14 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
The Company's continuing operations are the manufacture and sale of carbon
steel rod, wire and wire products for agricultural, industrial, construction,
commercial, OEM and retail consumer markets.
During 1993, the Peoria steel and rod mills increased production of billets
by approximately 2% (644,000 tons compared to 632,000 tons) and steel rod by
approximately 9% (715,000 tons compared to 655,000 tons) over the production for
1992. From time to time the Company purchases billets from other suppliers
resulting in increased utilization of the rod mill. The Company purchased 72,000
tons, 41,000 tons and 106,000 tons of billets in 1991, 1992 and 1993,
respectively.
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,
-------------------------
1991 1992 1993
----- ----- -----
Net sales........................................................... 100.0% 100.0 % 100.0%
Cost of goods sold.................................................. 87.6 88.2 90.6
----- ----- -----
Gross profit...................................................... 12.4 11.8 9.4
Selling, general and administrative expenses........................ 6.3 8.3 7.4
Other income........................................................ .2 -- .2
----- ----- -----
Income before interest expense and income taxes................... 6.3 3.5 2.2
Interest expense.................................................... 1.4 .9 1.9
----- ----- -----
Income before income taxes........................................ 4.9 2.6 .3
Provision for income taxes.......................................... 1.7 1.0 .1
----- ----- -----
Income from continuing operations................................. 3.2 1.6 .2
Extraordinary items................................................. 1.2 -- --
Cumulative effect of changes in accounting principles............... -- (22.1) --
----- ----- -----
Net income (loss)......................................... 4.4% (20.5)% .2%
----- ----- -----
----- ----- -----
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YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
NET SALES
Net sales were $302.1 million in 1991, $316.3 million in 1992 and $345.2
million in 1993. During 1993, tons of rod sold increased 12% (337,000 tons
compared to 302,000 tons), while tons of wire and wire products sold increased
8% (414,000 tons compared to 383,000 tons). Of the 8% increase in wire and wire
product tonnage, wire tonnage increased 26% and wire products tonnage decreased
2%. Wire is generally sold at a lower selling price per ton than wire products.
In 1993, selling prices of wire and wire products increased approximately 2% and
selling prices of rod increased approximately 9% compared to 1992 prices.
During 1992, tons of rod sold were comparable to 1991 (302,000 tons
compared to 301,000 tons), while tons of wire and wire products sold increased
7% (383,000 tons compared to 359,000 tons) compared to 1991. Of the 7% increase
in wire and wire product tonnage, wire tonnage increased 16% and wire products
tonnage increased 2%. Sales attributable to the KeyWest Wire division (acquired
in May 1991) during the first four months of 1992 were $5.9 million and 6,000
tons of wire and wire products. The Company sold for export 26,000 tons and
4,000 tons of rod during 1991 and 1992, respectively. In 1992, selling prices of
wire and wire products decreased approximately 1% and selling prices of rod
decreased approximately 3% compared to 1991 prices.
GROSS PROFIT
Gross profit was $37.5 million in 1991, $37.4 million in 1992 and $32.5
million in 1993. Gross profit in 1993, as a percentage of net sales, declined
2.4% from 1992 due primarily to significantly higher scrap steel costs. The
purchase of scrap steel is highly competitive and its price volatility is
influenced by periodic shortages, freight costs, weather, speculation by scrap
brokers and other conditions largely beyond the control of the Company. The cost
of scrap can vary significantly and product selling prices cannot always be
adjusted, especially in the short-term, to recover the costs of large increases
in scrap prices. Scrap prices rose by approximately 50% during 1993 and, despite
increasing certain product selling prices five times during 1993, these
significant cost increases could not be immediately recovered which adversely
affected the Company's 1993 gross profit margins. While gross profit in 1993 was
aided by higher product selling prices, increased tons of product sold and lower
rod conversion costs, it was also negatively impacted by approximately $2.3
million of additional environmental costs related to the inadvertent processing
of some contaminated scrap steel. See Note 14 to the Consolidated Financial
Statements.
Gross profit in 1992, as a percentage of net sales, declined slightly from
1991 due to lower selling prices and higher health care costs, including
increased costs due to the adoption of SFAS 106, partially offset by lower
pension costs, an increase in the tons of wire and wire products sold and lower
raw material and rod conversion costs. Gross profit in 1992 was also negatively
impacted by $1 million related to the inadvertent processing of some
contaminated scrap steel.
Although the Company's primary energy source is purchased coal-generated
electricity, gross profit can also be adversely affected by the volatility in
the price of oil and natural gas resulting in increased energy, transportation,
freight, scrap and supply costs. The Company cannot predict if it would be able
to recover any such cost increases through higher product selling prices or
improved production efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $18.9 million in 1991,
$26.1 million in 1992 and $25.3 million in 1993. The 1993 decrease in selling,
general and administrative expenses resulted primarily from a decrease of
approximately $3.7 million in expenses related to environmental issues offset by
increased expenses of $3.2 million related to excise taxes due to the adverse
May 1993 U.S. Supreme Court decision. See Note 14 to the Consolidated Financial
Statements.
Almost 70% of the $7.2 million increase in 1992 related to environmental
issues, including a $3.5 million fourth quarter revision of previous estimates
of the costs for closure of certain inactive waste disposal units at
9
11
Peoria. Higher medical and insurance costs, along with a full year of operating
expense of the KeyWest Wire division acquired in May 1991, also contributed to
the increase in 1992.
OTHER INCOME
Other income in 1993 primarily represents rental income and gain on sale of
fixed assets. Other income in 1991 included interest on an installment note,
which was paid in full during 1992, from one of the Company's largest customers.
INTEREST EXPENSE
Interest expense increased by $3.5 million in 1993 and includes $3.9
million related to the adverse May 1993 U.S. Supreme Court decision. See Note 14
to the Consolidated Financial Statements.
Interest expense declined in 1992 due principally to lower interest rates
and lower average borrowing levels.
INCOME TAXES
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 net current taxes
payable result primarily from the alternative minimum tax. The Company's
deferred tax position at December 31, 1993 is explained in Note 5 to the
Consolidated Financial Statements and in "Liquidity and Capital Resources"
above.
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
See Notes 5 and 10, respectively, to the Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is contained in a separate section
of this report. See Index of Financial Statements and Financial Statement
Schedules 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.
10
12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
disclosure provided under the caption "Security Ownership" in the Keystone Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
disclosure provided under the caption "Certain Business Relationships and
Related Transactions" in the Keystone Proxy Statement. See also Note 11 to the
Consolidated Financial Statements.
11
13
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
Schedules 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
----------- -------
3.1 -- Certificate of Incorporation, as amended and filed with the Secretary
of State of Delaware -- incorporated by reference to Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1990.
3.2 -- Bylaws of the Company, as amended and restated May 15,
1990 -- incorporated by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K dated for the year ended December 31,
1990.
4.1 -- Accounts Receivable Financing Agreement and Security Agreement dated
December 19, 1986, as amended between the Company and Congress
Financial Corporation (Central) -- incorporated by reference to
Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990.
4.2 -- Amendment No. 6, dated November 1, 1991 to Accounts Receivable
Financing Agreement and Rider No. 1 between the Company and Congress
Financial Corporation (Central) dated December 19,
1986 -- incorporated by reference to Exhibit 4.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991.
4.3 -- Amendment No. 7, dated January 15, 1993 to Accounts Receivable
Financing Agreement and Rider No. 1 between the Company and Congress
Financial Corporation (Central) dated December 19, 1986.
4.4 -- Amendment No. 8, dated December 30, 1993 to Accounts Receivable
Financing Agreement and Rider No. 1 between the Company and Congress
Financial Corporation (Central) dated December 19, 1986.
4.5 -- Term Loan and Security Agreement between the Company and Congress
Financial Corporation (Central) dated December 30, 1993.
10.1 -- Intercorporate Services Agreement with Contran Corporation dated as
of January 1, 1993.
21 -- Subsidiaries of the Company.
23 -- Consent of Coopers & Lybrand.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1993.
12
14
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 15, 1994, thereunto duly
authorized.
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
(Registrant)
/s/ GLENN R. SIMMONS
Glenn R. Simmons
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below and dated as of March 15, 1994, 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 and Director
Chief Executive Officer
/s/ J. WALTER TUCKER, JR. /s/ RICHARD N. ULLMAN
J. Walter Tucker, Jr. Richard N. Ullman
Vice Chairman of the Board Director
/s/ THOMAS E. BARRY /s/ HAROLD M. CURDY
Thomas E. Barry Harold M. Curdy
Director Vice President -- Finance,
Treasurer and Principal
Financial Officer
/s/ PAUL M. BASS, JR. /s/ BERT E. DOWNING, JR.
Paul M. Bass, Jr. Bert E. Downing, Jr.
Director Controller and Principal
Accounting Officer
/s/ DONALD A. SOMMER
Donald A. Sommer
Director
13
15
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 SCHEDULES
PAGE
--------
FINANCIAL STATEMENTS
Report of Independent Accountants................................................ F-2
Consolidated Balance Sheets -- December 31, 1992 and 1993........................ F-3
Consolidated Statements of Operations -- Years ended December 31, 1991, 1992 and
1993.......................................................................... F-4
Consolidated Statements of Cash Flows -- Years ended December 31, 1991, 1992 and
1993.......................................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) -- Years ended December
31, 1991, 1992 and 1993....................................................... F-6
Notes to Consolidated Financial Statements....................................... F-7/F-19
FINANCIAL STATEMENT SCHEDULES
Schedule V -- Property, Plant and Equipment...................................... S-1
Schedule VI -- Accumulated Depreciation of Property, Plant and Equipment......... S-2
Schedule VIII -- Valuation and Qualifying Accounts............................... S-3
Schedule X -- Supplementary Income Statement Information......................... S-3
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
F-1
16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Keystone Consolidated Industries, Inc.
We have audited the consolidated financial statements and the financial
statement schedules of Keystone Consolidated Industries, Inc. and Subsidiaries
as listed in the Index of Consolidated Financial Statements and Financial
Statement Schedules on page F-1 of this Annual Report on Form 10-K. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Keystone Consolidated Industries, Inc. and Subsidiaries as of December 31, 1993
and 1992, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1993 in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
As discussed in Note 10 to the Consolidated Financial Statements, in 1992
the Company changed its methods of accounting for postretirement benefits other
than pensions and for income taxes in accordance with Statements of Financial
Accounting Standards Nos. 106 and 109, respectively.
COOPERS & LYBRAND
Dallas, Texas
March 11, 1994
F-2
17
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1992 AND 1993
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
1992 1993
-------- --------
Current assets:
Notes and accounts receivable, net of allowances of $464 and $435.... $ 35,749 $ 38,513
Inventories.......................................................... 36,444 35,544
Deferred income taxes................................................ 4,190 5,437
Prepaid expenses and other........................................... 1,710 1,257
-------- --------
Total current assets......................................... 78,093 80,751
-------- --------
Property, plant and equipment.......................................... 216,930 222,601
Less accumulated depreciation.......................................... 132,108 141,832
-------- --------
Net property, plant and equipment............................ 84,822 80,769
-------- --------
Other assets:
Unrecognized net pension obligation.................................. 13,887 12,067
Deferred income taxes................................................ 20,667 28,056
Notes receivable..................................................... 2,551 1,917
Other................................................................ 2,089 3,094
-------- --------
Total other assets........................................... 39,194 45,134
-------- --------
$202,109 $206,654
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable and current maturities of long-term debt............... $ 23,741 $ 8,148
Accounts payable..................................................... 20,733 24,189
Accounts payable to affiliates....................................... 38 111
Accrued pension cost................................................. 7,259 9,556
Accrued OPEB cost.................................................... 7,657 7,243
Other accrued liabilities............................................ 17,888 25,119
-------- --------
Total current liabilities.................................... 77,316 74,366
-------- --------
Noncurrent liabilities:
Long-term debt....................................................... 10,744 19,042
Accrued pension cost................................................. 51,638 60,102
Accrued OPEB cost.................................................... 93,727 96,336
Other................................................................ 7,720 7,716
-------- --------
Total noncurrent liabilities................................. 163,829 183,196
-------- --------
Stockholders' equity (deficit):
Preferred stock, no par value; 500,000 shares authorized............. -- --
Common stock, $1 par value, 9,000,000 shares authorized; 5,514,685
shares issued at stated value..................................... 6,244 6,244
Additional paid-in capital........................................... 18,803 18,803
Excess of pension cost over unrecognized net pension obligation...... (23,156) (35,317)
Accumulated deficit.................................................. (40,796) (40,047)
Treasury stock -- 10,550 and 56,550 shares, at cost.................. (131) (591)
-------- --------
Total stockholders' deficit.................................. (39,036) (50,908)
-------- --------
$202,109 $206,654
-------- --------
-------- --------
Commitments and contingencies (Note 14).
See accompanying notes to consolidated financial statements.
F-3
18
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1991 1992 1993
-------- -------- --------
Revenues and other income:
Net sales................................................ $302,132 $316,251 $345,186
Interest and other, net.................................. 587 46 525
-------- -------- --------
302,719 316,297 345,711
-------- -------- --------
Costs and expenses:
Cost of goods sold....................................... 264,678 278,808 312,665
Selling.................................................. 4,825 4,833 5,032
General and administrative............................... 14,074 21,280 20,309
Interest................................................. 4,322 3,036 6,575
-------- -------- --------
287,899 307,957 344,581
-------- -------- --------
Income before income taxes....................... 14,820 8,340 1,130
Provision for income taxes................................. 5,051 3,194 381
-------- -------- --------
Income before extraordinary item and cumulative
effect of changes in accounting principles..... 9,769 5,146 749
Extraordinary item......................................... 3,502 -- --
Cumulative effect of changes in accounting principles...... -- (69,949) --
-------- -------- --------
Net income (loss)................................ $ 13,271 $(64,803) $ 749
-------- -------- --------
-------- -------- --------
Income (loss) per common and common equivalent share:
Before extraordinary item............................. $ 1.75 $ .92 $ .14
Extraordinary item.................................... .62 -- --
Cumulative effect of changes in accounting
principles.......................................... -- (12.53) --
-------- -------- --------
Net income (loss)................................ $ 2.37 $ (11.61) $ .14
-------- -------- --------
-------- -------- --------
Weighted average common and common equivalent shares
outstanding.............................................. 5,591 5,572 5,495
-------- -------- --------
-------- -------- --------
F-4
19
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS)
1991 1992 1993
------- -------- --------
Cash flows from operating activities:
Net income (loss)......................................... $13,271 $(64,803) $ 749
------- -------- --------
Adjustments:
Depreciation........................................... 9,996 10,525 11,084
Noncash OPEB cost...................................... -- 3,207 2,195
Cumulative effect of changes in accounting
principles........................................... -- 69,949 --
Other, net............................................. 14 239 (1,078)
Change in assets and liabilities:
Accounts and notes receivable........................ 208 (4,055) (2,735)
Inventories.......................................... (7,602) 3,437 900
Accounts payable..................................... 2,769 (397) 3,529
Accrued pension cost, net of adjustments to
stockholders'
equity and the unrecognized net pension
obligation........................................ (2,041) (11,312) (7,354)
Other, net........................................... 143 3,283 7,309
------- -------- --------
Total adjustments...................................... 3,487 74,876 13,850
------- -------- --------
Net cash provided by operating activities......... 16,758 10,073 14,599
------- -------- --------
Cash flows from investing activities:
Capital expenditures...................................... (9,271) (7,459) (7,349)
Proceeds from disposition of property and equipment....... 123 191 505
------- -------- --------
Net cash used by investing activities............. (9,148) (7,268) (6,844)
------- -------- --------
Cash flows from financing activities:
Revolving credit facility, net............................ (2,460) 638 (16,451)
Other notes payable and long-term debt:
Additions.............................................. 34 90 20,091
Principal payments..................................... (5,206) (3,533) (10,935)
Issuance (purchase) of common stock....................... 22 -- (460)
------- -------- --------
Net cash used by financing activities............. (7,610) (2,805) (7,755)
------- -------- --------
Net change in cash and cash equivalents..................... -- -- --
Cash and cash equivalents, beginning of year................ -- -- --
------- -------- --------
Cash and cash equivalents, end of year...................... $ -- $ -- $ --
------- -------- --------
------- -------- --------
Supplemental disclosures -- cash paid for:
Interest, net of amount capitalized....................... $ 4,486 $ 3,104 $ 2,797
Income taxes.............................................. 1,731 3,909 70
See accompanying notes to consolidated financial statements.
F-5
20
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED
---------------- PAID-IN PENSION EARNINGS TREASURY
SHARES AMOUNT CAPITAL LIABILITIES (DEFICIT) STOCK
------ ------ ---------- ----------- ----------- --------
Balance -- December 31, 1990......... 5,507 $6,236 $ 18,789 $ (24,670) $ 10,736 $ (144)
Net income........................... -- -- -- -- 13,271 --
Pension adjustments.................. -- -- -- 2,909 -- --
Exercise of employee stock options... 8 8 14 -- -- --
------ ------ ---------- ----------- ----------- --------
Balance -- December 31, 1991......... 5,515 6,244 18,803 (21,761) 24,007 (144)
Net loss............................. -- -- -- -- (64,803) --
Pension adjustments.................. -- -- -- (1,395) -- --
Issuance of treasury stock........... -- -- -- -- -- 13
------ ------ ---------- ----------- ----------- --------
Balance -- December 31, 1992......... 5,515 6,244 18,803 (23,156) (40,796) (131)
Net income........................... -- -- -- -- 749 --
Pension adjustments.................. -- -- -- (12,161) -- --
Purchase of treasury stock........... -- -- -- -- -- (460)
------ ------ ---------- ----------- ----------- --------
Balance -- December 31, 1993......... 5,515 $6,244 $ 18,803 $ (35,317) $ (40,047) $ (591)
------ ------ ---------- ----------- ----------- --------
------ ------ ---------- ----------- ----------- --------
See accompanying notes to consolidated financial statements.
F-6
21
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 a
majority-owned subsidiary of Contran Corporation ("Contran"). At December 31,
1993, Contran held, directly or indirectly, approximately 62% of the Company's
outstanding common stock. All of Contran's outstanding common stock is held by
trusts established for the benefit of the children and grandchildren of Harold
C. Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons may be deemed to
control Contran and the Company.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
balances have been eliminated.
Fiscal year
The Company's fiscal year is 52 or 53 weeks and ends on the last Sunday in
December. Each of fiscal 1991, 1992 and 1993 were 52-week years.
Property, plant, equipment and depreciation
Property, plant and equipment are stated at cost. Repairs, maintenance and
minor renewals are expensed as incurred. Improvements which substantially
increase an asset's capacity or alter its capabilities are capitalized.
Depreciation is computed using principally the straight-line method over
the estimated useful lives of 10 to approximately 30 years for buildings and
improvements and three to 12 years for machinery and equipment.
Retirement plans and postretirement benefits other than pensions
Accounting and funding policies for retirement plans and postretirement
benefits other than pensions ("OPEB") are described in Notes 7 and 9,
respectively.
Environmental liabilities
The Company records liabilities related to environmental issues at such
time as information becomes available and is sufficient to support a reasonable
estimate of range of loss. If the Company is unable to determine that a single
amount in an estimated range is more likely, the minimum amount of the range is
recorded.
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.
Income (loss) per share
Income (loss) per share is based on the weighted average number of common
and common equivalent shares outstanding during each year. Outstanding stock
options and other common stock equivalents are excluded from the computations
when the effect of their assumed exercise is antidilutive.
F-7
22
NOTE 2 -- 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 68% and
71% of the inventories held at December 31, 1992 and 1993, respectively, and the
first-in, first-out or average cost methods are used to determine the cost of
all other inventories.
DECEMBER 31,
---------------------
1992 1993
-------- --------
(IN THOUSANDS)
Raw materials.................................................. $ 9,331 $ 9,944
Work in process................................................ 7,974 9,963
Finished products.............................................. 13,643 14,250
Supplies....................................................... 14,119 14,115
-------- --------
45,067 48,272
Less LIFO reserve.............................................. 8,623 12,728
-------- --------
$ 36,444 $ 35,544
-------- --------
-------- --------
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
---------------------
1992 1993
-------- --------
(IN THOUSANDS)
Land, buildings and improvements............................... $ 41,912 $ 42,461
Machinery and equipment........................................ 169,596 175,734
Leasehold improvements......................................... 1,204 1,204
Construction in progress....................................... 4,218 3,202
-------- --------
$216,930 $222,601
-------- --------
-------- --------
NOTE 4 -- NOTES PAYABLE AND LONG-TERM DEBT
DECEMBER 31,
---------------------
1992 1993
-------- --------
(IN THOUSANDS)
Keystone:
Commercial credit agreements:
Revolving credit facility................................. $ 20,362 $ 3,911
Term loans................................................ 9,107 19,439
Series 1976 Pollution Control Revenue Bonds, interest at 8%;
due in equal annual installments through 1996............. 2,000 1,500
Urban and Community Development Assistance Grants, interest
at 8%, due in semi-annual installments through 2003....... 2,300 2,082
Other, interest at 3% to 13.75%, due in installments through
1996...................................................... 716 258
-------- --------
34,485 27,190
Less current maturities................................. 23,741 8,148
-------- --------
$ 10,744 $ 19,042
-------- --------
-------- --------
The Company maintains a $35 million commercial revolving credit facility
which matures December 31, 1996, is collateralized primarily by the Company's
trade receivables and inventories and bears interest at 1.5% over the prime rate
(an effective rate of 7.5% at December 31, 1993). 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 $.4
million at December 31, 1993). At December 31, 1993, the available
F-8
23
borrowings under this credit facility were $30.7 million. This credit facility
requires that the Company's daily cash receipts be used to reduce the
outstanding borrowings, which results in the Company maintaining zero cash
balances.
On December 30, 1993, the Company entered into a new $20 million term loan
with the financial institution that provides the Company's revolving credit
facility. The new term loan bears interest at the prime rate plus 1% and is due
in 35 monthly installments of $.3 million plus accrued interest and one final
installment of the remaining principal and interest on December 31, 1996. The
new term loan requires compliance with the restrictive covenants, security
agreement and certain other terms of the revolving credit facility and is
further collateralized by the Company's property, plant and equipment. In
addition, the new term loan becomes due and payable if the Company terminates
its revolving credit facility. The proceeds of the new term loan were used to
prepay the Company's prior term loan ($6.8 million) and the balance was applied
to reduce the revolving borrowings. Upon closing the new term loan, the Company
immediately made a prepayment of principal in the amount of $.6 million.
The Company's commercial credit agreements contain restrictive covenants,
including a prohibition against the payment of dividends without lender consent,
and certain minimum working capital and net worth requirements. Substantially
all of the Company's notes payable and long-term debt reprice with changes in
interest rates, and the book value of such indebtedness is deemed to approximate
market value.
Average short-term borrowings under revolving credit agreements were $19.8
million in 1991, $18.4 million in 1992 and $19.2 million in 1993, at average
interest rates of 11.4%, 8.8% and 8.2%, respectively. The maximum short-term
borrowings outstanding at any month end during these years were $31.3 million in
1991, $28.6 million in 1992 and $27.3 million in 1993.
At December 31, 1992 and 1993, total collateralized obligations, including
deferred pension contributions (see Note 7), amounted to $50.3 million and $40.5
million, respectively.
The aggregate maturities of notes payable and long-term debt are shown in
the table below.
AMOUNT
--------------
YEAR ENDING (IN THOUSANDS)
DECEMBER 31,
- ------------
1994........................................................ $ 8,148
1995........................................................ 4,155
1996........................................................ 13,570
1997........................................................ 243
1998........................................................ 207
1999 and thereafter......................................... 867
--------------
$ 27,190
--------------
--------------
F-9
24
NOTE 5 -- INCOME TAXES
Summarized below are (i) the difference between the provision for income
taxes and the amounts that would be expected using the U. S. federal statutory
income tax rate of 34% in 1991 and 1992 and 35% in 1993 and (ii) the components
of the comprehensive provision for income taxes.
YEARS ENDED DECEMBER 31,
-------------------------------
1991 1992 1993
------- ------- -------
(IN THOUSANDS)
Expected tax expense, at statutory rates...................... $ 5,039 $ 2,836 $ 396
U.S. state income taxes, net.................................. 13 380 207
Nondeductible excise taxes.................................... -- -- 1,110
Rate change adjustment of deferred taxes...................... -- -- (1,320)
Other, net.................................................... (1) (22) (12)
------- ------- -------
5,051 3,194 381
Extraordinary item............................................ (3,502) -- --
------- ------- -------
Provision for income taxes charged to results of
operations............................................. 1,549 3,194 381
Stockholders' equity -- pension component..................... -- (856) (7,774)
------- ------- -------
Comprehensive provision (benefit) for income
taxes............................................. $ 1,549 $ 2,338 $(7,393)
------- ------- -------
------- ------- -------
Comprehensive provision (benefit) for income taxes:
Currently payable:
U.S. federal............................................. $ 5,032 $ 4,751 $ 439
U.S. state............................................... 19 664 171
Benefit of loss carryforwards............................ (5,032) (5,211) (767)
Alternative minimum tax liability........................ 1,530 2,983 1,406
------- ------- -------
Net currently payable.................................. 1,549 3,187 1,249
Deferred income taxes, net.................................. -- (849) (8,642)
------- ------- -------
$ 1,549 $ 2,338 $(7,393)
------- ------- -------
------- ------- -------
The components of the net deferred tax asset are summarized below.
DECEMBER 31,
-----------------------------------------------
1992 1993
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- -------- -------- --------
(IN THOUSANDS)
Tax effect of temporary differences relating to:
Inventories................................... $ 1,490 $ -- $ 1,623 $ --
Property and equipment........................ -- (12,216) -- (11,845)
Accrued pension cost.......................... 13,461 -- 18,206 --
Accrued OPEB cost............................. 38,526 -- 40,396 --
Accrued liabilities and other deductible
differences................................ 6,733 -- 6,978 --
Other taxable differences..................... -- (615) -- (583)
Net operating loss carryforwards.............. 2,169 -- 2,376 --
Alternative minimum tax credit
carryforwards.............................. 5,309 -- 6,342 --
Valuation allowance............................. (30,000) -- (30,000) --
-------- -------- -------- --------
Gross deferred tax assets (liabilities).... 37,688 (12,831) 45,921 (12,428)
Reclassification, principally netting by tax
jurisdiction.................................. (12,831) 12,831 (12,428) 12,428
-------- -------- -------- --------
Net deferred tax asset..................... 24,857 -- 33,493 --
Less current deferred tax asset, net of
valuation
allowances of $5,057 and $4,870 in 1992
and 1993, respectively........................ 4,190 -- 5,437 --
-------- -------- -------- --------
Noncurrent deferred tax asset................. $ 20,667 $ -- $ 28,056 $ --
-------- -------- -------- --------
-------- -------- -------- --------
F-10
25
While the Company currently expects that its long-term profitability should
ultimately be sufficient to enable it to realize full benefit of its future tax
deductions, considering all factors believed to be relevant, including the
Company's recent profitability, its expected future near-term levels of
profitability, and the fact that accrued OPEB and pension expenses will become
deductible over an extended period of time and require the Company to generate
significant future taxable income, the Company believes that a portion of the
gross deferred tax assets may not currently meet a "more likely than not"
realizability test. There was no change in the valuation allowance during 1992
or 1993.
The net operating loss carryforwards of approximately $6.1 million and $4.9
million for federal and state income tax purposes, respectively, expire from
2003 through 2005. The Company utilized its remaining alternative minimum tax
loss carryforward during 1991; accordingly, the full 20% alternative minimum tax
is payable by the Company for 1992 and 1993.
For financial reporting purposes, the utilization of net operating loss
carryforwards to offset the provision for income taxes in 1991 has been reported
as an extraordinary item, as then required. Subsequent to the adoption of SFAS
No. 109 in 1992, such benefits are not classified as extraordinary items.
NOTE 6 -- STOCK OPTIONS AND STOCK APPRECIATION RIGHTS PLAN
The Company's Incentive Stock Option -- Stock Appreciation Rights Plan (the
"1982 Option Plan") permits the granting of incentive stock options ("ISOs") and
stock appreciation rights ("SARs") to purchase up to 337,500 shares of the
Company's common stock, subject to adjustment in certain instances. ISOs are 20%
vested and exercisable one year from the date of grant, increasing to 40% at two
years after the date of grant, 60% at three years after the date of grant, and
100% at four years after the date of grant. ISOs expire five years from the date
of grant. There have been no SARs awarded to date. The 1982 Option Plan was
replaced in May 1992 upon adoption of the Keystone Consolidated Industries, Inc.
1992 Incentive Compensation Plan (the "1992 Option Plan").
The 1992 Option Plan permits the granting of stock options, SARs and
restricted stock to key employees of the Company or its parent or subsidiaries
for up to 100,000 shares of the Company's common stock, subject to adjustments
in certain instances. The 1992 Option Plan provides for the grant of options
that qualify as incentive stock options and for options which are not so
qualified. Incentive stock options are granted at a price not less than 100% of
the fair market value of such stock on the date of grant. The exercise price of
all options and SARs, the length of period during which the options or SARs may
be exercised, and the length of the restriction period for restricted stock
awards are determined by the Incentive Compensation Committee of the Board of
Directors.
The Keystone Consolidated Industries, Inc. 1992 Non-Employee Director Stock
Option Plan (the "Director Plan") was adopted in May 1992. The Director Plan
provides that each non-employee director of the Company will automatically be
granted annually an option to purchase 1,000 shares of the Company's common
stock. Options are granted at a price equal to the fair market value of such
stock on the date of the grant, vest one year from the date of the grant and
expire five years from the date of the grant. Up to 50,000 shares of the
Company's common stock may be issued pursuant to the Director Plan.
F-11
26
Changes in outstanding options, including options outstanding under a prior
plan pursuant to which no further grants can be made are summarized in the table
below.
PRICE PER AMOUNT PAYABLE
OPTIONS SHARE UPON EXERCISE
------- ------------ --------------
Outstanding at December 31, 1990....................... 144,000 $ 2.93-17.79 $1,687,480
Granted.............................................. 10,000 15.81 158,100
Exercised............................................ (7,500) 2.93 (22,000)
------- ------------ --------------
Outstanding at December 31, 1991....................... 146,500 8.53-17.79 1,823,580
Granted.............................................. 20,000 10.75-12.86 246,650
Canceled............................................. (37,500) 10.41-17.79 (556,301)
------- ------------ --------------
Outstanding at December 31, 1992....................... 129,000 8.53-15.81 1,513,929
Granted.............................................. 55,000 8.75-10.50 490,000
Canceled............................................. (4,500) 9.99-15.77 (53,625)
------- ------------ --------------
Outstanding at December 31, 1993....................... 179,500 $ 8.53-15.81 $1,950,304
------- ------------ --------------
------- ------------ --------------
At December 31, 1993, options to purchase 142,700 shares were exercisable
(110,000 shares exercisable at prices lower than the December 31, 1993 quoted
market price of $10.25 per share) and options to purchase an additional 23,800
will become exercisable in 1994. At December 31, 1993, an aggregate of 90,000
shares were available for future grants under the 1992 Option Plan and the
Director Plan.
In January 1994, the Company awarded 19,200 shares of restricted stock
under the terms of the 1992 Option Plan as partial consideration for
compensation that had been accrued at December 31, 1993. The restricted stock
vests 40% six months after the award date, increasing to 70% 18 months after the
award date and 100% two years after the award date.
NOTE 7 -- EMPLOYEE BENEFIT PLANS
The Company maintains several noncontributory defined benefit pension plans
covering most of its employees. Benefits are based on a combination of stated
percentages of an employee's wages. Pension plan assets are primarily invested
in a collective investment trust (the "Collective Trust") formed by Valhi, Inc.,
a majority-owned subsidiary of Contran, to permit the collective investment by
trusts which implement employee benefit plans maintained by Contran, Valhi and
related companies, including the Company. Harold C. Simmons is the sole trustee
and the sole member of the Trust Investment Committee for such trust.
The Company's funding policy is to contribute amounts equal to, or
exceeding, minimum funding requirements of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The Company received permission from
the Internal Revenue Service ("IRS") to defer the annual pension plan
contributions for plan years ended June 30, 1980, 1984 and 1985, which, in the
aggregate, amounted to $31.7 million. The deferred amounts, with interest, are
payable to the plans over fifteen years. At December 31, 1993, the remaining
balance of such deferred contributions was approximately $13.3 million. Payment
of these deferred contributions, due through 2000, is collateralized by a lien
on all of the Company's assets.
The components of net periodic pension cost are presented in the table
below.
YEARS ENDED DECEMBER 31,
---------------------------------
1991 1990 1993
-------- -------- -------
(IN THOUSANDS)
Service cost........................................ $ 1,357 $ 2,005 $ 1,931
Interest cost on projected benefit obligation....... 14,715 14,593 14,509
Actual return on plan assets........................ (11,050) (6,559) (18,200)
Net amortization and deferral....................... 4,704 (1,418) 9,363
-------- -------- -------
Net periodic pension cost......................... $ 9,726 $ 8,621 $ 7,603
-------- -------- -------
-------- -------- -------
F-12
27
Effective December 31, 1993, due primarily to the continued general decline
in interest rates, the Company changed the discount rates used in determining
the actuarial present values of the projected pension plan benefit obligations
from 9.5% to 7.5% and also reduced its assumed long-term rate of return on plan
assets from 12% to 10%. These changes resulted in, among other things, an
increase in noncurrent pension cost liability of $28 million, and a $17 million
charge to stockholders' deficit. Variances from actuarially assumed rates,
including the rate of return on pension plan assets, will result in additional
increases or decreases in these accounts, as well as deferred taxes, pension
expense and funding requirements in future periods.
The following table sets forth the actuarially estimated obligations and
funded status of the Company's various defined benefit pension plans and the
Company's accrued pension cost.
DECEMBER 31,
---------------------
1992 1993
-------- --------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligation............................................ $149,269 $173,924
-------- --------
-------- --------
Accumulated benefit obligation....................................... $153,828 $180,426
-------- --------
-------- --------
Projected benefit obligation......................................... $159,072 $187,776
Plan assets at fair value.............................................. 94,940 110,767
-------- --------
Projected benefit obligation in excess of plan assets.................. 64,132 77,009
Unrecognized net loss from experience different from actuarial
assumptions.......................................................... (29,202) (51,304)
Unrecognized net obligation being amortized over 15-19 years........... (13,887) (12,067)
Adjustment required to recognize minimum liability..................... 37,854 56,020
-------- --------
Total accrued pension cost...................................... 58,897 69,658
Less current portion................................................... 7,259 9,556
-------- --------
Noncurrent accrued pension cost................................. $ 51,638 $ 60,102
-------- --------
-------- --------
The assumed rates of increase in future compensation levels were 3%. The
assumed long-term rates of return on assets were 12% and 10% at December 31,
1992 and 1993, respectively. The vested benefit obligation includes the
actuarial present value of the vested benefits to which an active employee is
entitled if employment was terminated immediately.
The Company maintains several defined contribution plans covering most of
its employees. The Company contributes the lesser of an amount equal to the
participants' contributions or a profit sharing formula established by the Board
of Directors. Expense related to these plans was $2.1 million in 1991, $2.3
million in 1992 and $2.4 million in 1993.
F-13
28
NOTE 8 -- OTHER ACCRUED LIABILITIES
DECEMBER 31,
--------------------
1992 1993
-------- --------
(IN THOUSANDS)
Current:
Salary, wages, vacations and other employee expense.................... $ 10,096 $ 9,388
Excise tax and related accrued interest................................ -- 7,120
Environmental.......................................................... 2,200 3,525
Other.................................................................. 5,592 5,086
-------- --------
$ 17,888 $ 25,119
-------- --------
-------- --------
Noncurrent:
Environmental.......................................................... $ 6,222 $ 6,056
Other.................................................................. 1,498 1,660
-------- --------
$ 7,720 $ 7,716
-------- --------
-------- --------
NOTE 9 -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company currently provides, in addition to pension benefits, medical
and life insurance benefits for certain retired employees of currently owned
businesses as well as for certain retirees of businesses which have been sold or
discontinued. Certain retirees are required to contribute to the cost of their
benefits. Under plans currently in effect, certain active employees would be
entitled to receive OPEB upon retirement. OPEB expense under the pay-as-you-go
method was $6.5 million in 1991. OPEB expense under the accrual method pursuant
to SFAS No. 106 for the years ended December 31, 1992 and 1993 was composed of
the following:
DECEMBER 31,
--------------------
1992 1993
-------- --------
(IN THOUSANDS)
Service cost............................................................. $ 1,046 $ 1,109
Interest cost on projected benefit obligation............................ 9,002 9,132
Amortization of prior service cost....................................... -- (171)
-------- --------
Total OPEB expense............................................. $ 10,048 $ 10,070
-------- --------
-------- --------
The following table sets forth the actuarial present value of the estimated
accumulated OPEB obligations, none of which have been funded.
DECEMBER 31,
---------------------
1992 1993
-------- --------
(IN THOUSANDS)
Actuarial present value of accumulated OPEB obligations:
Current retirees..................................................... $ 76,888 $ 74,369
Fully eligible active plan participants.............................. 1,130 1,071
Other active plan participants....................................... 23,366 27,511
-------- --------
101,384 102,951
Unrecognized net loss from experience different from actuarial
assumptions.......................................................... -- (4,952)
Unrecognized prior service credit...................................... -- 5,580
-------- --------
Total accrued OPEB cost................................................ 101,384 103,579
Less current portion................................................... 7,657 7,243
-------- --------
Noncurrent accrued OPEB cost.................................... $ 93,727 $ 96,336
-------- --------
-------- --------
The rates used in determining the actuarial present value of the
accumulated OPEB obligations were (i) discount rate -- 9.5% and 7.5% at December
31, 1992 and 1993, respectively, and (ii) rate of increase in
F-14
29
future health care costs -- 11% in 1993 and 10% in 1994, gradually declining to
5.5% in 2015 and thereafter. If the health care cost trend rate was increased by
one percentage point for each year, OPEB expense would have increased $1.2
million in each of 1992 and 1993, and the actuarial present value of accumulated
OPEB obligations at December 31, 1992 and 1993 would have increased $10.3
million and $10.4 million, respectively.
NOTE 10 -- CHANGE IN ACCOUNTING PRINCIPLES
The Company (i) elected early compliance with both SFAS No. 106 (OPEB) and
SFAS No. 109 (income taxes) as of January 1, 1992; (ii) elected to apply SFAS
No. 109 prospectively and not restate prior years; and (iii) elected immediate
recognition of the OPEB transition obligation. The cumulative effect of changes
in accounting principles is shown in the table below.
AMOUNT
------
(IN THOUSANDS)
Increase (decrease) in net assets at January 1, 1992:
Accrued OPEB cost.................................................... $(93,957)
Deferred income taxes, net........................................... 24,008
--------
Loss from cumulative effect of changes in accounting principles... $(69,949)
========
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Company may be deemed to be controlled by Harold C. Simmons (see Note
1). Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in various transactions with related parties, including
the Company. Such transactions may include, among other things, management and
expense sharing arrangements, advances of funds on open account, and sales,
leases and exchanges of assets. It is the policy of the Company to engage in
transactions with related parties on terms, in the opinion of the Company, no
less favorable to the Company than could be obtained from unrelated parties.
Depending upon the business, tax and other objectives then relevant, the Company
may be a party to one or more such transactions in the future.
J. Walter Tucker, Jr., Vice Chairman of the Company, is a principal
stockholder of Tucker & Branham, Inc., Orlando, Florida. The Company has
contracted with Tucker & Branham, Inc. for the services of Mr. Tucker. Fees paid
Tucker & Branham, Inc. were $41,000 in 1991, $50,000 in 1992 and $62,000 in
1993.
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 paid
pursuant to this agreement were $484,000 in 1991, $508,000 in 1992 and $580,000
in 1993. In addition, the Company purchased certain aircraft services from Valhi
in the amount of $178,000 in each of 1991 and 1992 and $158,000 in 1993.
Certain of Keystone's property, liability and casualty insurance risks were
partially reinsured by a captive insurance subsidiary of Valhi prior to 1993.
The premiums and claims paid in connection therewith were approximately $234,000
in 1991, $18,000 in 1992 and $139,000 in 1993. In 1991, $770,000 of unrelated
third party property premiums were financed over a nine-month period by this
subsidiary.
F-15
30
NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31, 1993:
Net sales........................................ $ 81,130 $95,822 $ 86,361 $81,873
Gross profit..................................... 7,155 9,190 9,012 7,164
Net income (loss)........................ $ 592 $(3,590) $ 3,191 $ 556
-------- ------- ------------ -----------
-------- ------- ------------ -----------
Income (loss) per common share................... $ .11 $ (.65) $ .58 $ .10
-------- ------- ------------ -----------
-------- ------- ------------ -----------
Year ended December 31, 1992:
Net sales........................................ $ 82,656 $92,459 $ 76,978 $64,158
Gross profit..................................... 9,807 12,854 9,497 5,285
Income (loss) before cumulative effect of changes
in accounting principles...................... $ 2,156 $ 4,049 $ 2,133 $(3,192)
Cumulative effect of changes in accounting
principles.................................... (69,949) -- -- --
-------- ------- ------------ -----------
Net income (loss)........................ $(67,793) $ 4,049 $ 2,133 $(3,192)
-------- ------- ------------ -----------
-------- ------- ------------ -----------
Income (loss) per common share:
Income (loss) before cumulative effect of
changes in accounting principles............ $ .38 $ .73 $ .38 $ (.57)
Cumulative effect of changes in accounting
principles.................................. (12.53) -- -- --
-------- ------- ------------ -----------
Net income (loss)........................ $ (12.15) $ .73 $ .38 $ (.57)
-------- ------- ------------ -----------
-------- ------- ------------ -----------
NOTE 13 -- INDUSTRY SEGMENT INFORMATION
The Company's continuing operations are comprised of one segment, the
manufacture and sale of carbon steel rod, wire and wire products for
agricultural, industrial, construction, commercial, original equipment
manufacturers and retail consumer markets.
YEARS ENDED DECEMBER 31,
----------------------------------
1991 1992 1993
-------- -------- --------
(IN THOUSANDS)
Net sales.................................................. $302,132 $316,251 $345,186
-------- -------- --------
-------- -------- --------
Operating income........................................... $ 19,248 $ 12,826 $ 12,361
General corporate expense, net............................. (106) (1,450) (4,656)
Interest expense........................................... (4,322) (3,036) (6,575)
-------- -------- --------
Income before income taxes....................... $ 14,820 $ 8,340 $ 1,130
-------- -------- --------
-------- -------- --------
Export sales were $7.5 million in 1991, $2.8 million in 1992 and $1.5
million in 1993. General corporate expenses in 1993 included $3.2 million of
nondeductible excise taxes, and interest expense included $3.9 million of
related interest. See Note 14.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
Environmental matters -- Peoria facility
The Company is currently involved in the closure of inactive waste disposal
units at its Peoria, Illinois facility pursuant to a closure plan approved by
the Illinois Environmental Protection Agency ("IEPA") in September 1992 which
provides for the treatment of seven hazardous waste surface impoundments and two
waste piles. The closure plan proposes, among other things, the in-place
treatment of certain sediments in the surface impoundments, which treatment is
designed to convert certain hazardous wastes to special wastes that
F-16
31
qualify for "delisting" and can be removed and disposed of at a lesser cost than
"listed" hazardous wastes. One of the seven surface impoundments, containing
approximately 30% of the total sediments to be treated, was treated as a full
scale test during 1993 to meet established criteria and a delisting petition was
filed with the Illinois Pollution Control Board ("IPCB") documenting the results
of that treatment. Based on these results, the IPCB approved the Company's
delisting petition on February 17, 1994. At December 31, 1993, the Company has a
$7.3 million accrual representing the estimated costs remaining to be incurred
relating to the remediation efforts, exclusive of capital improvements. The
remediation is expected to be performed over the next five to six years. The
Company also reached agreements with the IEPA and the Illinois Attorney
General's office concerning financial assurance, liability insurance, delisting
procedure and certain ground water contamination issues which, along with the
closure plan, were incorporated in a Consent Order in July 1993. Pursuant to the
agreement, the Company will deposit $3 million into a trust fund over a six-year
period. The Company cannot withdraw funds from the trust fund until the fund
balance exceeds the sum of the estimated remaining remediation costs plus $2
million. At December 31, 1992 and 1993 the trust fund had balances of $501,000
and $863,000, 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 1997.
In the normal course of operations at the Company's Peoria facility an
unknown amount of a radioactive element was contained in some scrap being melted
in an electric arc furnace resulting in the pollution control system and the
accumulated furnace dust becoming contaminated. As a result, it was necessary
for the Company to clean the pollution control system and remove, contain and
store the contaminated dust. The Company has incurred $2.1 million of costs
related to this incident, net of $1.2 million in insurance reimbursements. The
insurers are disputing coverage for the remaining $1.1 million in excess of the
Company's $1 million insurance deductible. Preliminary cost estimates to
stabilize and dispose of the contaminated dust offsite range from $7 million to
$9 million. However, the Company is investigating alternatives to stabilization
and offsite disposal of the contaminated dust including storing the dust on site
indefinitely. The preliminary cost estimate for long term on-site storage is
approximately $1.2 million, which amount has been accrued at December 31, 1993.
The Company believes its comprehensive general liability insurance policies
provide indemnification for costs incurred resulting from this incident.
However, because of the dispute with the insurers, the Company has not recorded
an insurance receivable related to this matter.
Environmental matters -- "Superfund" sites
The Company is also 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 several sites. These situations involve cleanup of landfills and
disposal facilities which allegedly received hazardous substances generated by
discontinued operations of the Company. 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 subsidiary
of the Company and four other PRP's in the United States District Court for the
Northern District of Illinois (Civil Action No. 91C4482) seeking to recover
investigation and remediation costs incurred by U.S. EPA at the Byron Salvage
Yard, located in Byron, Illinois. In April 1992, Keystone filed a third-party
complaint in this civil action against 15 additional parties seeking
contribution in the event the Company is held liable for any response costs at
the Byron site. Neither the Company nor the other designated PRPs are performing
any investigation of the nature and extent of the contamination. U.S. EPA has
possession of the site, is conducting the remedial investigation, and has not
made available sufficient data, tests results or other facts that would enable
the PRPs to speculate as to an appropriate remedy or remedies. In July 1993, the
U.S. EPA made available for inspection records documenting approximately $10
million in investigation and remediation costs incurred at the site and produced
copies of the laboratory results on groundwater samples taken as a part of the
ongoing
F-17
32
remedial investigation. U.S. EPA has not released any hydrogeological analysis
or risk assessment of those test results, nor has it disclosed any of its
remedial investigation findings. Until U.S. EPA releases its remedial
investigation/feasibility study ("RI/FS"), the Company has no basis to predict
whether U.S. EPA will require any further groundwater remediation measures. The
Company accrued its $500,000 estimated share of the documented investigation and
remediation costs during 1993.
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 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 2.14%. However, the Company's ultimate allocation, and
the ultimate costs of the RI/FS and the removal action, are subject to change
depending, for example, upon: the number and financial condition of the other
participating PRPs, field conditions and sampling results, additional regulatory
requirements, and the success of a planned contribution action seeking to compel
additional parties to contribute to the costs of the RI/FS and removal action.
The project manager for the engineering firm conducting the RI/FS at the site
has concluded the least expensive remedial option would be to cap the site and
install and operate a soil vapor extraction system, at an estimated cost of
approximately $2.6 million. The remedial investigation is still in process and
the feasibility study is not due to be completed until 1995. The Company's share
of the estimated least expensive remedial option is approximately $56,000, which
was accrued in the fourth quarter of 1993.
In August 1987, the Company was notified by the U.S. EPA that it is a PRP
responsible for the alleged hazardous substance contamination of a site
previously owned by the Company in Cortland, New York. There are four other PRPs
and a contribution action is pending against eleven additional viable companies
which contributed wastes to the site. A recent estimate made by the principal
engineering firm responsible for the management of the RI/FS indicated the
estimated cost of the least expensive remedial option is $6 million to $8.5
million. This option would involve pumping and treating contaminated groundwater
extracted from wells on the site, as well as the construction of a site cap. The
likelihood that U.S. EPA will select this option will depend on, among other
things, the results of the supplemental field investigations initiated in
November 1993 and the findings of the site risk assessment and feasibility
study. The Company's estimated share of the least expensive remedial option is
approximately $375,000, which was accrued in the fourth quarter of 1993.
Current litigation
In 1983 and 1984, the Company satisfied a portion of its funding
obligations to the Keystone Master Pension Trust ("KMPT") through the
contribution of certain real property. The IRS contended these contributions
were prohibited sales between the Company and the KMPT and in 1988, issued a
Notice of Deficiency proposing the imposition of excise taxes plus accrued
interest against the Company under the "prohibited transaction" provisions of
the Internal Revenue Code (the "Code"). On May 24, 1993, the U.S. Supreme Court
reversed lower court decisions favorable to the Company and remanded the case to
the tax court to determine the amount due. The Company believed the
contributions were not prohibited transactions and had no accrual with respect
to this matter prior to the U.S. Supreme Court's reversal of the favorable lower
courts' decisions. The Company has estimated the costs of the 5% nondeductible
excise taxes to be approximately $3.2 million and the related interest accrued
through December 31, 1993 to be approximately $3.9 million, resulting in a net
after-tax charge of approximately $5.6 million in 1993. In addition, to avoid a
second tier $9.6 million excise tax, the Company made a "correction" payment of
$2.3 million to its pension plans in June 1993. The IRS contended this
additional payment should have been approximately $3.5 million higher. The
Company is currently negotiating a settlement of this matter with the IRS.
In February 1989, the Company sold substantially all of the operating
assets of two former divisions. As part of the purchase price, the Company
received two promissory notes from the purchaser collateralized by the assets
sold. In 1991, the purchaser restructured its business and borrowing
obligations, including its notes payable to the Company, sold product lines,
spun off operations and sold unused machinery and equipment. In consideration of
the Company's consent to that restructuring, the Company obtained certain
replacement security interests including a secured note receivable, proceeds,
from a noncompetition agreement and security interests in two of the purchasers
limited partnership interests. In October 1991, an involuntary bankruptcy
petition was filed against the purchaser by certain unsecured creditors. As a
result, a liquidation effort
F-18
33
commenced under the supervision of the U.S. Bankruptcy Court. The Company
accounts for the notes by the cost recovery method and the net carrying value
was $3.0 million and $2.4 million at December 31, 1992 and 1993, respectively.
In November 1993, the bankruptcy Trustee commenced an adversary proceeding
against the Company seeking to subordinate certain claims filed by the Company
during the bankruptcy proceeding and to recover certain payments received by the
Company, aggregating $1.6 million at December 31, 1993, pursuant to the note
receivable and noncompetition agreement referred to above. The Company believes
the adversary proceeding is without merit and intends to vigorously defend its
interests.
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.
Concentration of credit risk
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 customer's financial condition and,
generally, requires no collateral from its customers. The Company's ten largest
customers accounted for approximately 31% of sales in 1991, 33% in 1992 and 30%
in 1993 and approximately 39% and 33% of notes and accounts receivable at
December 31, 1992 and 1993, respectively.
F-19
34
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
BALANCE AT BALANCE
BEGINNING AT END
CLASSIFICATION OF PERIOD ADDITIONS RETIREMENTS OTHER OF PERIOD
- ------------------------------------------- ---------- --------- ----------- ----- ---------
Year ended December 31, 1991:
Land..................................... $ 1,427 $ -- $ -- $ -- $ 1,427
Buildings and improvements............... 36,586 1,843 -- -- 38,429
Machinery and equipment.................. 159,456 5,950 847 -- 164,559
Leasehold improvements................... 1,204 -- -- -- 1,204
Construction in progress................. 3,427 1,478 28 -- 4,877
---------- --------- ----------- ----- ---------
$ 202,100 $ 9,271 $ 875 $ -- $ 210,496
---------- --------- ----------- ----- ---------
---------- --------- ----------- ----- ---------
Year ended December 31, 1992:
Land..................................... $ 1,427 $ -- $ -- $ -- $ 1,427
Buildings and improvements............... 38,429 2,119 16 (47) 40,485
Machinery and equipment.................. 164,559 5,919 929 47 169,596
Leasehold improvements................... 1,204 -- -- -- 1,204
Construction in progress................. 4,877 (579) 80 -- 4,218
---------- --------- ----------- ----- ---------
$ 210,496 $ 7,459 $ 1,025 $ -- $ 216,930
---------- --------- ----------- ----- ---------
---------- --------- ----------- ----- ---------
Year ended December 31, 1993:
Land..................................... $ 1,427 $ 94 $ -- $ -- $ 1,521
Buildings and improvements............... 40,485 586 131 -- 40,940
Machinery and equipment.................. 169,596 7,754 1,547 (69) 175,734
Leasehold improvements................... 1,204 -- -- -- 1,204
Construction in progress................. 4,218 (1,085) -- 69 3,202
---------- --------- ----------- ----- ---------
$ 216,930 $ 7,349 $ 1,678 $ -- $ 222,601
---------- --------- ----------- ----- ---------
---------- --------- ----------- ----- ---------
S-1
35
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE VI -- ACCUMULATED DEPRECIATION
OF PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
BALANCE AT BALANCE
BEGINNING AT END
CLASSIFICATION OF PERIOD ADDITIONS RETIREMENTS OTHER OF PERIOD
- ------------------------------------------- ---------- --------- ----------- ----- ---------
Year ended December 31, 1991:
Buildings and improvements............... $ 19,487 $ 1,052 $ -- $ 1 $ 20,540
Machinery and equipment.................. 92,408 8,917 747 -- 100,578
Leasehold improvements................... 1,187 27 -- -- 1,214
---------- --------- ----------- ----- ---------
$ 113,082 $ 9,996 $ 747 $ 1 $ 122,332
---------- --------- ----------- ----- ---------
---------- --------- ----------- ----- ---------
Year ended December 31, 1992:
Buildings and improvements............... $ 20,540 $ 1,166 $ 14 $ 104 $ 21,796
Machinery and equipment.................. 100,578 9,277 735 6 109,126
Leasehold improvements................... 1,214 82 -- (110) 1,186
---------- --------- ----------- ----- ---------
$ 122,332 $10,525 $ 749 $ -- $ 132,108
---------- --------- ----------- ----- ---------
---------- --------- ----------- ----- ---------
Year ended December 31, 1993:
Buildings and improvements $ 21,796 $ 1,227 $ 28 $ -- $ 22,995
Machinery and equipment.................. 109,126 9,855 1,332 -- 117,649
Leasehold improvements................... 1,186 2 -- -- 1,188
---------- --------- ----------- ----- ---------
$ 132,108 $11,084 $ 1,360 $ -- $ 141,832
---------- --------- ----------- ----- ---------
---------- --------- ----------- ----- ---------
S-2
36
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
-------------------------
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND (NET OF END OF
DESCRIPTION OF PERIOD EXPENSES RECOVERIES) PERIOD
- -------------------------------------------------- ---------- ---------- ----------- ----------
Year ended December 31, 1991:
Allowance for doubtful accounts and notes
receivable................................... $1,209 $133 $ 1,025 $ 317
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Reserve for supplies inventory.................. $ 768 $298 $ -- $1,066
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Allowance for doubtful notes and interest
receivable................................... $1,100 $ -- $ 1,100 $ --
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Year ended December 31, 1992:
Allowance for doubtful accounts and notes
receivable................................... $ 317 $ 45 $ (102) $ 464
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Reserve for supplies inventory.................. $1,066 $180 $ -- $1,246
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Year ended December 31, 1993:
Allowance for doubtful accounts and notes
receivable................................... $ 464 $ (6) $ (23) $ 435
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Reserve for supplies inventory.................. $1,246 $247 $ -- $1,493
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
* * * * *
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
(IN THOUSANDS)
CHARGED TO COSTS AND EXPENSES
YEARS ENDED DECEMBER 31,
--------------------------------
1991 1992 1993
-------- -------- --------
Maintenance................................................... $ 34,676 $ 36,830 $ 34,116
-------- -------- --------
-------- -------- --------
- ---------------
Note: Other items are omitted as the amounts did not exceed one percent of total
sales or are reported in the related statements of operations and
statements of cash flows.
S-3
37
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
EXHIBIT INDEX
Page Numbers:
manually
Exhibit No. signed copy
- ----------- -------------
3.1 Certificate of Incorporation, as amended and filed with the Secretary of State of
Delaware -- incorporated by reference to Exhibit 3.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1990.
3.2 Bylaws of the Company, as amended and restated May 15, 1990 -- incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990.
4.1 Accounts Receivable Financing Agreement and Security Agreement dated December 19,
1986, as amended between the Company and Congress Financial Corporation (Central) --
incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990.
4.2 Amendment No. 6, dated November 1, 1991 to Accounts Receivable Financing Agreement
and Rider No. 1 between the Company and Congress Financial Corporation (Central)
dated December 19, 1986 -- incorporated by reference to Exhibit 4.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991.
4.3 Amendment No. 7, dated January 15, 1993 to Accounts Receivable Financing Agreement
and Rider No. 1 between the Company and Congress Financial Corporation (Central)
dated December 19, 1986.
4.4 Amendment No. 8, dated December 30, 1993 to Accounts Receivable Financing Agreement
and Rider No. 1 between the Company and Congress Financial Corporation (Central)
dated December 19, 1986.
4.5 Term Loan and Security Agreement between the Company and Congress Financial
Corporation (Central) dated December 30, 1993.
10.1 Intercorporate Services Agreement with Contran Corporation dated as of January 1, 1993.
21 Subsidiaries of the Company.
23 Consent of Coopers & Lybrand.
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1993.