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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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KEYSTONE CONSOLIDATED INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 3315 37-0364250
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(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
HAROLD M. CURDY
THREE LINCOLN CENTRE THREE LINCOLN CENTRE
5430 LBJ FREEWAY VICE PRESIDENT -- FINANCE
SUITE 1740 5430 LBJ FREEWAY
DALLAS, TEXAS 75240-2697 SUITE 1740
(972) 458-0028 DALLAS, TEXAS 75240-2697
(Address, including zip code, and telephone (972) 458-0028
number, (Name, address, including zip code, and
including area code, of registrant's principal telephone number,
executive offices) including area code, of agent for service)
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Copy to:
ALAN C. LEET, ESQ.
ROGERS & HARDIN LLP
2700 INTERNATIONAL TOWER
229 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30303
(404) 522-4700
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
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9 5/8% Senior Secured Notes............ $100,000,000 100% $100,000,000 $30,303
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as
amended.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 19, 1997
PRELIMINARY PROSPECTUS
OFFER TO EXCHANGE
9 5/8% SENIOR SECURED NOTES DUE 2007 FOR OUTSTANDING
9 5/8% SENIOR SECURED NOTES DUE 2007
OF
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 PM
NEW YORK CITY TIME ON , 1997, UNLESS EXTENDED.
---------------------
Keystone Consolidated Industries, Inc., a Delaware corporation (the
"Company"), hereby offers to exchange (the "Exchange Offer") $100,000,000 in
aggregate principal amount of its 9 5/8% Senior Secured Notes Due 2007 (the
"Exchange Notes") for $100,000,000 in aggregate principal amount of its
outstanding 9 5/8% Senior Secured Notes due 2007 that were issued and sold in a
transaction exempt from registration under the Securities Act of 1933, as
amended (the "Senior Notes" and, together with the Exchange Notes, the "Notes").
The terms of the Exchange Notes are substantially similar (including
principal amount, interest rate, maturity and ranking) to the terms of the
Senior Notes for which they may be exchanged pursuant to the Exchange Offer,
except that the Exchange Notes (i) are freely transferable by holders thereof
(except as provided below) and (ii) are issued without any covenant regarding
their registration. The Exchange Notes will be, and the Senior Notes are,
secured by a second priority lien on substantially all of the existing, and,
subject to the terms of the Indenture (as defined), future assets of the Company
and its Subsidiaries (as defined), including equipment acquired and improvements
made pursuant to the Company's capital improvements plan. The lien on the fixed
assets of the Company and its Subsidiaries will become a first priority lien
upon the termination of the first priority lien in favor of the Master Trust (as
defined) securing the Company's contingent pension contribution obligations of
approximately $4.5 million, which decline in annual increments to $0 by January
1, 2001. The Senior Notes are, and the Exchange Notes will be, senior secured
obligations of the Company ranking pari passu in right of payment to all
existing and future senior indebtedness of the Company and senior in right of
payment to any future subordinated indebtedness of the Company. As of June 30,
1997, after giving pro forma effect to the offering of the Senior Notes and the
application of the proceeds thereof, the Company would have had approximately
$101.5 million of total indebtedness. Subject to certain restrictions, the
Indenture permits the Company and its Subsidiaries to incur additional debt,
including debt that may be secured. See "Description of Notes -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock." There
will be no cash proceeds to the Company from the Exchange Offer.
The Exchange Notes will bear interest from and including their respective
dates of issuance. Holders whose Senior Notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance of
the Exchange Notes, such interest to be payable with the first interest payment
on the Exchange Notes, but will not receive any payment in respect of interest
on the Senior Notes accrued after the issuance of the Exchange Notes.
The Senior Notes were originally issued and sold on August 7, 1997 in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption provided in Section 4(2) of
the Securities Act and Rule 144A and Regulation S of the Securities Act (the
"Offering"). Accordingly, the Senior Notes may not be reoffered, resold or
otherwise pledged, hypothecated or transferred in the United States unless so
registered or unless an applicable exemption from the registration requirements
of the Securities Act is available. Based upon its view of interpretations
provided to third parties by the Staff (the "Staff") of the Securities and
Exchange Commission (the "Commission"), the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in exchange for the Senior Notes may
be offered for resale, resold and otherwise transferred by holders thereof
(other than any holder which is (i) an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act (an "Affiliate"), (ii) a
broker-dealer who acquired Senior Notes directly from the Company or (iii) a
broker-dealer who acquired Senior Notes as a result of market making or other
trading activities) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such Exchange Notes are
acquired in
<PAGE> 3
the ordinary course of business of such holders, and such holders are not
engaged in, and do not intend to engage in, a distribution of such Exchange
Notes. Each broker-dealer who acquired Senior Notes directly from the Company
and is participating in the Exchange Offer must comply with the registration and
prospectus delivery provisions of the Securities Act. Broker-dealers who
acquired Senior Notes as a result of market making or other trading activities
may use this Prospectus, as supplemented or amended, in connection with resales
of the Exchange Notes. The Company has agreed that, for a period of 120 days
after this Registration Statement is declared effective by the Commission, it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. Each broker-dealer who receives Exchange Notes pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
that is filed as an exhibit to the Registration Statement of which this
Prospectus is a part (the "Letter of Transmittal") states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Any holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
The Senior Notes and the Exchange Notes constitute new issues of securities
with no established public trading market. Any Senior Notes not tendered and
accepted in the Exchange Offer will remain outstanding. To the extent that
Senior Notes are tendered and accepted in the Exchange Offer, a holder's ability
to sell untendered, and tendered but unaccepted, Senior Notes could be adversely
affected. Following consummation of the Exchange Offer, the holders of Senior
Notes will continue to be subject to the existing restrictions on transfer
thereof and the Company will have no further obligation to such holders to
provide for the registration under the Securities Act of the Senior Notes except
under certain limited circumstances. See "Description of Notes -- Registration
Rights." No assurance can be given as to the liquidity of the trading market for
either the Senior Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered or accepted for exchange. The Exchange
Offer will expire at 5:00 p.m., New York City time, on , 1997,
unless extended (the "Expiration Date"). The date of acceptance for exchange of
the Senior Notes (the "Exchange Date") will be the first business day following
the Expiration Date, upon surrender of the Senior Notes. Senior Notes tendered
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date; otherwise such tenders are irrevocable.
---------------------
SEE "RISK FACTORS" ON PAGE 8 HEREOF FOR A DESCRIPTION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is , 1997.
<PAGE> 4
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which represent the Company's
expectations or beliefs concerning future events that involve risks and
uncertainties. All statements other than statements of historical facts included
in this Prospectus, including, without limitation, the statements under
"Prospectus Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere herein are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Such
forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual future results or trends to differ materially from
future results or trends expressed or implied by such forward-looking
statements. The most significant of such risks, uncertainties and other factors
are discussed under the heading "Risk Factors," beginning on page 8 of this
Prospectus, and prospective investors are urged to consider carefully such
factors.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the
rules and regulations promulgated thereunder, covering the Exchange Notes being
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to in the Registration Statement are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Company is subject to the periodic reporting and other informational
requirements of the Exchange Act of 1934. Periodic reports, proxy and
information statements and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at its regional offices located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Company upon request. The Company's common
stock is listed on the New York Stock Exchange. Periodic reports, proxy
statements and other information filed by the Company can be inspected at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005. In addition, such material can also be obtained from the Commission's
Website at http://www.sec.gov.
The Company is required by the terms of the Indenture under which the Notes
were issued to furnish the holders of the Notes with annual reports containing
consolidated financial statements audited by its independent accountants and
with quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS
NOT BEEN ANY
i
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CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated herein by reference: (1) the
Company's Annual Report on Form 10-K for the year ended December 31, 1996; (2)
the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997 and June 30, 1997; and (3) the Company's Current Report on Form 8-K filed
September 4, 1997.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the termination of the Exchange Offer made herein shall be deemed to be
incorporated herein by reference and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
HEREIN) ARE AVAILABLE UPON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, FROM THE
COMPANY. WRITTEN OR TELEPHONE REQUESTS SHOULD BE DIRECTED TO KEYSTONE
CONSOLIDATED INDUSTRIES, INC., THREE LINCOLN CENTRE, 5430 LBJ FREEWAY, SUITE
1740, DALLAS, TEXAS 75240-2697 ATTENTION: SANDRA K. MYERS, CORPORATE SECRETARY
(TELEPHONE 972-458-0028). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUESTS SHOULD BE MADE BY , 1997.
ii
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TABLE OF CONTENTS
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PAGE
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FORWARD LOOKING STATEMENTS.................................. i
AVAILABLE INFORMATION....................................... i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. ii
PROSPECTUS SUMMARY.......................................... 1
The Company............................................... 1
The Exchange Offer........................................ 3
Terms of the Notes........................................ 4
Summary Financial Data.................................... 6
RISK FACTORS................................................ 8
High Level of Indebtedness; Ability to Service
Indebtedness........................................... 8
Restrictive Covenants and Asset Encumbrances.............. 8
Security.................................................. 9
Cyclicality, Competition and Other Market Factors......... 9
Substantial Employee Postretirement Obligations........... 9
Environmental Matters..................................... 10
Risks in Implementing Capital Improvements Plan........... 11
Scrap Steel and Other Material Costs...................... 11
Operating Results and Liquidity........................... 11
Liabilities Associated with DeSoto........................ 12
Plant Utilization and Capacity............................ 12
Labor Relations........................................... 12
Control Person and Potential Conflicts of Interest........ 12
Absence of Public Market.................................. 13
Consequences of Failure To Exchange....................... 13
USE OF PROCEEDS............................................. 13
THE EXCHANGE OFFER.......................................... 14
Purpose of the Exchange Offer............................. 14
Terms of the Exchange..................................... 14
Expiration Date; Extensions; Termination; Amendments...... 15
How to Tender............................................. 16
Terms and Conditions of the Letter of Transmittal......... 17
Withdrawal Rights......................................... 18
Acceptance of Senior Notes for Exchange; Delivery of
Exchange Notes......................................... 18
Conditions to the Exchange Offer.......................... 18
Exchange Agent............................................ 19
Solicitation of Tenders; Expenses......................... 19
Appraisal Rights.......................................... 20
Federal Income Tax Consequences........................... 20
Other..................................................... 20
CAPITALIZATION.............................................. 21
SELECTED CONSOLIDATED FINANCIAL DATA........................ 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND
RESULTS OF OPERATIONS..................................... 24
BUSINESS.................................................... 31
MANAGEMENT.................................................. 41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 46
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iii
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SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS.............................................. 47
DESCRIPTION OF REVOLVING CREDIT FACILITY AND RELATED MATTERS................................................ 49
DESCRIPTION OF THE NOTES.................................................................................... 51
General................................................................................................... 51
Principal, Maturity and Interest.......................................................................... 51
Optional Redemption....................................................................................... 52
Mandatory Redemption...................................................................................... 52
Repurchase at the Option of Holders....................................................................... 52
Security.................................................................................................. 54
Certain Bankruptcy Limitations............................................................................ 57
Certain Covenants......................................................................................... 57
Events of Default and Remedies............................................................................ 62
No Personal Liability of Directors, Officers, Employees and Stockholders.................................. 63
Legal Defeasance and Covenant Defeasance.................................................................. 63
Possession, Use and Release of Collateral................................................................. 64
Use of Trust Moneys....................................................................................... 65
Transfer and Exchange..................................................................................... 65
Amendment, Supplement and Waiver.......................................................................... 65
Concerning the Trustee.................................................................................... 66
Additional Information.................................................................................... 66
Book-Entry, Delivery and Form............................................................................. 66
Registration Rights; Liquidated Damages................................................................... 68
Certain Definitions....................................................................................... 69
PLAN OF DISTRIBUTION........................................................................................ 79
LEGAL MATTERS............................................................................................... 80
EXPERTS..................................................................................................... 80
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................................................. F-1
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iv
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
of Keystone Consolidated Industries, Inc. (together with its subsidiaries,
"Keystone" or the "Company") appearing elsewhere herein. Certain statements
contained in this Prospectus under "Prospectus Summary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," in addition to certain statements contained elsewhere in this
Prospectus, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and are thus prospective. Such
forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual future results or trends to differ materially from
future results or trends expressed or implied by such forward-looking
statements. The most significant of such risks, uncertainties and other factors
are discussed under the heading "Risk Factors," beginning on page 8 of this
Prospectus, and prospective investors are urged to consider carefully such
factors.
THE COMPANY
Keystone is a leading manufacturer of steel fabricated wire products,
industrial wire and carbon steel rod for the agricultural, industrial,
construction, original equipment manufacturer and retail consumer markets. The
Company believes it is the second largest manufacturer of fabricated wire
products and industrial wire in the United States based on tons produced
(381,000 in 1996). The Company is vertically integrated, converting
substantially all of its fabricated wire products and industrial wire from
carbon steel rod produced in its steel mini-mill. During 1996, approximately 71%
of the Company's net sales were generated from sales of fabricated wire products
and industrial wire with the balance generated primarily from sales of rod not
used in the Company's downstream operations. The Company's vertical integration
allows it to benefit from the higher and more stable margins associated with
fabricated wire products as compared to carbon steel rod, as well as from lower
production costs of carbon steel rod as compared to wire fabricators which
purchase rod in the open market. Moreover, management believes that Keystone's
downstream fabricated wire products and industrial wire businesses better
insulate it from the effects of rod imports and increases in domestic rod
production capacity as compared to non-integrated rod producers. For the twelve
months ended June 30, 1997, the Company had net sales of $353.4 million. See
"Summary Financial Data."
The Company's fabricated wire products, which comprised 48% of its 1996 net
sales, include fencing, barbed wire, welded and woven hardware cloth and nails.
These products are sold to agricultural, construction, industrial, consumer
do-it-yourself and other end-user markets. The Company serves these markets
through distributors, merchandisers and consumer do-it-yourself chains such as
Home Depot U.S.A., Inc., Lowe's Companies, Inc. and McCoy's Building Supply
Center. A significant proportion of these products are sold to agricultural,
consumer do-it-yourself and other end-user markets which in management's opinion
are typically less cyclical than many steel consuming end-use markets such as
the automotive, construction, appliance and machinery manufacturing industries.
Management believes the Company's ability to service these customers with a wide
range of fabricated wire products through multiple production and distribution
locations provides it a competitive advantage in accessing important channels to
these rapidly growing and less cyclical markets. Approximately 75% of the
Company's fabricated wire products net sales are generated by sales under the
RED BRAND trademark, a widely recognized brand name in the agricultural and
construction fencing marketplaces for more than 50 years.
The Company also sells industrial wire, an intermediate product used in the
manufacture of fabricated wire products, to third parties who are generally not
in competition with the Company. The Company's industrial wire customers include
manufacturers of nails, coat hangers, barbecue grills, air conditioners, tools,
refrigerators and other appliances. In 1996, net sales of industrial wire
accounted for 23% of Company net sales. The Company also sells into the open
market carbon steel rod which it is not able to consume in its downstream
fabricated wire products and industrial wire operations. In 1996, open market
sales of rod accounted for 28% of Company net sales. Of these rod sales,
approximately 11% were to Engineered Wire Products, Inc. ("EWP"), a fabricated
wire products company with 1996 net sales of $24.5 million. Keystone owns a 20%
equity interest in EWP and has rights under certain circumstances to acquire the
remaining 80%. See "Business -- Products, Markets and Distribution."
1
<PAGE> 9
The Company's operating strategy is to enhance profitability by: (i)
establishing a leading position as a supplier of choice among its fabricated
wire products and industrial wire customers by offering a broad product line and
by satisfying growing customer quality and service requirements; (ii) shifting
its product mix towards higher margin, value-added fabricated wire products;
(iii) achieving manufacturing cost savings and production efficiencies through
capital improvements and investment in new and upgraded wire and steel
production equipment; and (iv) increasing vertical integration through internal
growth and selective acquisitions of fabricated wire products manufacturing
facilities.
The Company has commenced a three year, $75 million capital improvements
plan to upgrade certain of its plant and equipment and eliminate production
capacity bottlenecks in order to reduce costs and improve production efficiency.
The principal components of the Company's capital improvements plan include
reconfiguring its electric arc furnace, replacing the caster and upgrading its
wire and rod mills. The Company has recently hired a new operating management
team with experience in implementing similar capital improvements. Upon the
completion of these capital improvements in 1999, the Company expects to
increase its annual steel casting production capacity to 800,000 tons from
655,000. Based upon expected levels of capacity utilization and current product
mix, the Company currently expects to realize savings of approximately $15
million annually in manufacturing and production costs following completion of
the capital improvements plan in 1999.
Prior to September 1996, Keystone's cash flow available for capital
investment was constrained due to large required annual contributions to the
Company's underfunded defined benefit pension plans. The Company made pension
contributions of $20.1 million, $18.7 million and $9.7 million in 1994, 1995,
and 1996, respectively. Keystone's financial flexibility was further constrained
by the uncertainty of future pension funding requirements. To address the
constraints placed upon the Company by its pension plan obligations, the Company
acquired DeSoto, Inc. ("DeSoto") in September 1996 for $29.3 million (plus the
assumption, through a subsidiary, of DeSoto's liabilities) in a stock-for-stock
merger transaction which included the concurrent merger of the Keystone defined
benefit pension plans with and into the DeSoto defined benefit pension plan.
DeSoto manufactures household cleaning products which generated 1996 pro forma
revenues of $14.1 million; however, its principal asset was a pension plan that
was overfunded for financial reporting purposes by approximately $91.2 million.
As a result of the merger of the pension plans, the Company's resulting pension
plan was overfunded for financial reporting purposes by $46.9 million at
December 31, 1996. Management does not expect Keystone to be required to make
contributions to its pension plan in 1997. Moreover, the Company's pension
expense, which was $8.9 million, $8.7 million and $3.7 million in 1994, 1995,
and 1996, respectively, is expected to become a credit for financial reporting
purposes of approximately $3 million in 1997. See "Risk Factors -- Substantial
Employee Postretirement Obligations" and Note 7 to the Consolidated Financial
Statements (as defined).
The Company is the successor to Keystone Steel & Wire Company, which was
founded in 1889. In 1981, Contran Corporation ("Contran") acquired an interest
in the Company and subsequently acquired a majority of the Company's outstanding
capital stock. Substantially all of the outstanding voting stock of Contran is
held by trusts established for the benefit of the children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is the sole trustee. As a result of the
acquisition of DeSoto, Contran's beneficial ownership of the Company was reduced
to 41%. However, the Company may continue to be deemed to be controlled by
Contran and Mr. Simmons. The Company's principal executive offices are located
at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas 75240-2697,
and its telephone number at that address is (972) 458-0028.
2
<PAGE> 10
THE EXCHANGE OFFER
The Exchange Offer......... The Company is offering to exchange up to
$100,000,000 aggregate principal amount of 9 5/8%
Senior Secured Notes due 2007 (the "Exchange
Notes"), which have been registered under the
Securities Act, for up to $100,000,000 aggregate
principal amount of outstanding 9 5/8% Senior
Secured Notes due 2007 (the "Senior Notes"). Upon
consummation of the Exchange Offer, the terms of
the Exchange Notes will be substantially identical
in all respects (including principal amount,
interest rate, maturity and ranking) to the terms
of the Senior Notes for which they may be exchanged
pursuant to the Exchange Offer, except that (i) the
Exchange Notes will be freely transferable by
holders thereof except as provided herein (see "The
Exchange Offer -- Terms of the Exchange" and
"-- Terms and Conditions of the Letter of
Transmittal") and (ii) the Exchange Notes will be
issued without any covenant regarding registration
under the Securities Act. Exchange Notes issued
pursuant to the Exchange Offer in exchange for the
Senior Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other
than any holder which is (i) an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired
Senior Notes directly from the Company or (iii)
broker-dealers who acquired Senior Notes as a
result of market making or other trading
activities) without compliance with the
registration and prospectus delivery provisions of
the Securities Act provided that such Exchange
Notes are acquired in the ordinary course of such
holders' business and such holders are not engaged
in, and do not intend to engage in, and have no
arrangement or understanding with any person to
participate in, a distribution of such Exchange
Notes.
Minimum Condition.......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Senior Notes
being tendered for exchange.
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1997 unless
extended (the "Expiration Date").
Exchange Date.............. The first date of acceptance for exchange for the
Senior Notes will be the first business day
following the Expiration Date.
Conditions to the Exchange
Offer...................... The obligation of the Company to consummate the
Exchange Offer is subject to certain conditions.
See "The Exchange Offer -- Conditions to the
Exchange Offer." The Company reserves the right to
terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of
any such condition.
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to the
Expiration Date. Any Senior Notes not accepted for
any reason will be returned without expense to the
tendering holders thereof as promptly as
practicable after the expiration or termination of
the Exchange Offer.
Procedures for Tendering
Senior Notes............... See "The Exchange Offer -- How to Tender."
Federal Income Tax
Consequences............. The exchange of Senior Notes for Exchange Notes by
holders will not be a taxable exchange for federal
income tax purposes, and holders should
3
<PAGE> 11
not recognize any taxable gain or loss or any
interest income as a result of such exchange.
Effect on Holders of Senior
Notes.................... As a result of the making of this Exchange Offer,
and upon acceptance for exchange of all validly
tendered Senior Notes pursuant to the terms of this
Exchange Offer, the Company will have fulfilled a
covenant contained in the terms of the Senior Notes
and the Registration Rights Agreements (the
"Registration Rights Agreements") dated as of
August 7, 1997 among the Company and the Initial
Purchasers and, accordingly, the holders of the
Senior Notes will have no further registration or
other rights under the Registration Rights
Agreement, except under certain limited
circumstances. See "Description of
Notes -- Registration Rights." Holders of the
Senior Notes who do not tender their Senior Notes
in the Exchange Offer will continue to hold such
Senior Notes and will be entitled to all the rights
and limitations applicable thereto under the
indenture, dated as of August 7, 1997, among the
Company and The Bank of New York, as Trustee (the
"Trustee"), relating to the Senior Notes and
Exchange Notes (the "Indenture"). All untendered,
and tendered but unaccepted, Senior Notes will
continue to be subject to the restrictions on
transfer provided for in such Senior Notes and the
Indenture. To the extent that Senior Notes are
tendered and accepted in the Exchange Offer, the
trading market, if any, for the Senior Notes could
be adversely affected. See "Risk
Factors -- Consequences of Failure to Exchange."
TERMS OF THE NOTES
Interest Payment Dates..... February 1 and August 1 of each year, commencing
February 1, 1998.
Maturity................... August 1, 2007
Sinking Fund Provisions.... None.
Optional Redemption........ The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or
after August 1, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest, if
any, to the date of redemption. In addition, prior
to August 1, 2000, the Company may redeem up to 25%
of the original aggregate principal amount of the
Notes at a redemption price equal to 109 5/8% of
the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of redemption,
with the net proceeds of one or more public
offerings of Qualified Capital Stock (as defined);
provided that at least $75.0 million in aggregate
principal amount of the Notes remains outstanding
immediately after such redemption. See "Description
of Notes -- Optional Redemption."
Change of Control.......... In the event of a Change of Control (as defined),
holders of the Notes will have the right to require
the Company to purchase their Notes, in whole or in
part, at a price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued
and unpaid interest, if any, to the date of
purchase.
Asset Sale Proceeds........ The Company is obligated in certain instances to
make an offer to repurchase the Notes at a price
equal to 100% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of
repurchase with the net cash proceeds of certain
asset sales.
4
<PAGE> 12
Security................... The Company's obligations are secured by a second
priority lien on substantially all of the existing
and, subject to the terms of the Indenture, future
fixed assets of the Company and its Subsidiaries,
including equipment acquired and improvements made
pursuant to the Company's capital improvements
plan. The lien on the fixed assets of the Company
and its Subsidiaries will become a first priority
lien upon the termination of the first priority
lien in favor of the Master Trust, for the benefit
of the Company's defined benefit pension plan (the
"Plan"), securing the Company's contingent pension
contribution obligations of approximately $4.5
million, which decline in annual increments to $0
by January 1, 2001.
Ranking.................... The Notes are senior secured obligations of the
Company ranking pari passu in right of payment to
all existing and future senior indebtedness of the
Company and senior in right of payment to any
future subordinated indebtedness of the Company. As
of June 30, 1997, after giving pro forma effect to
the Offering and the application of the proceeds
thereof, the Company would have had approximately
$101.5 million of total indebtedness. See
"Capitalization" and "Description of Notes."
Certain Covenants.......... The Indenture contains covenants that, among other
things, limit the ability of the Company and its
Subsidiaries to: (i) incur additional indebtedness;
(ii) pay dividends or make certain other restricted
payments; (iii) enter into transactions with
affiliates; (iv) create certain liens; (v) engage
in certain sale and leaseback transactions; (vi)
make certain asset dispositions; (vii) impair
security interests; and (viii) merge or consolidate
with, or transfer all or substantially all of their
assets to, another person. See "Description of
Notes -- Certain Covenants."
For a discussion of certain factors that should be considered in connection
with the Exchange Offer, see "Risk Factors" beginning on page 8.
5
<PAGE> 13
SUMMARY FINANCIAL DATA
The consolidated statement of operations data for each of the years in the
five year period ended December 31, 1996 and the balance sheet data as of
December 31 for each of the years in the five year period ended December 31,
1996 have been derived from the audited consolidated financial statements of the
Company and the notes thereto (the "Consolidated Financial Statements"). This
financial data set forth below should be read in conjunction with the
Consolidated Financial Statements, the "Unaudited Pro Forma Consolidated
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated statement of operations
data for the six month periods ended June 30, 1996 and 1997 and the balance
sheet data as of June 30, 1997 have been derived from the Company's unaudited
consolidated financial statements covering such periods. Results for the interim
periods are not necessarily indicative of results for a full year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PER TON AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $316,251 $345,186 $364,435 $345,657 $331,175 $170,118 $192,381
Gross profit............................. 37,443 32,521 36,982 32,748 34,026 12,443 21,789
Operating income......................... 16,049 13,077 12,908 11,298 10,730 2,573 11,982
Interest expense (credit)(1)............. 3,036 6,575 (1,165) 3,385 3,741 1,869 2,736
Income (loss) before income taxes........ 8,340 1,130 12,389 8,078 4,240 (542) 9,255
Net income (loss)........................ (64,803) 749 7,561 4,887 2,584 (327) 5,971
OTHER FINANCIAL DATA:
Cash contributions to defined benefit
pension plans.......................... $ 19,933 $ 14,955 $ 20,069 $ 18,702 $ 9,664 $ 7,664 $ --
Capital expenditures..................... 7,459 7,349 12,742 18,208 18,992 7,400 9,616
Depreciation and amortization............ 10,525 11,084 11,585 11,961 12,425 7,095 6,536
Ratio of earnings to fixed charges(2).... 3.7x 1.2x -- 3.0x 1.9x -- 4.0x
Pro forma ratio of earnings to fixed
charges(2)............................. -- -- 2.3x
OTHER OPERATING DATA:
Product shipments (in tons):
Fabricated wire products............... 262 257 267 242 222 116 125
Industrial wire........................ 121 149 168 164 159 79 89
Carbon steel rod....................... 302 337 316 287 307 157 166
-------- -------- -------- -------- -------- -------- --------
Total.............................. 685 743 751 693 688 352 380
======== ======== ======== ======== ======== ======== ========
Average selling prices per ton:
Fabricated wire products............... $ 681 $ 685 $ 690 $ 707 $ 716 $ 731 $ 716
Industrial wire........................ 456 455 479 492 478 478 473
Carbon steel rod....................... 272 296 313 322 298 296 309
Average total production cost per ton.... 406 420 437 452 428 447 430
Average scrap purchase cost per ton...... 85 110 125 128 125 129 122
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(4).............................. $(14,229) $ 67,998
Property, plant and equipment, net........................ 94,653 94,653
Total assets.............................................. 310,458 357,233
Total debt................................................ 54,510 101,460
Stockholders' equity...................................... 37,610 37,503
</TABLE>
- ---------------
(1) During 1993, the Company accrued approximately $4.0 million for the
estimated cost of interest as a result of an unfavorable U.S. Supreme Court
decision related to the Company's 1983 and 1984 contributions of certain
real property to its pension plans. In 1994, pursuant to the terms of an
agreement with the Internal Revenue Service, the interest due was reduced to
approximately $100,000 and, as such, the Company recorded a reduction of
approximately $3.9 million in the previously accrued interest.
(2) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes plus fixed
charges (excluding capitalized interest) and adjustments for undistributed
equity in earnings. Fixed charges
6
<PAGE> 14
consist of interest expense and capitalized interest. The Company's fixed
charges in 1994 amounted to a net credit of $1.0 million. The Company's
earnings were insufficient to cover total fixed charges in the six months
ended June 30, 1996. The coverage deficiency was $.8 million. On a pro forma
basis, the Company's earnings were insufficient to cover total fixed charges
in 1996 and the six months ended June 30, 1996. The pro forma coverage
deficiency in 1996 and the six months ended June 30, 1996, was $2.3 million
and $3.7 million, respectively.
(3) The Balance Sheet Data, as adjusted, reflects adjustments to give effect to
the Offering and the application of the net proceeds therefrom, as if it had
occurred on June 30, 1997.
(4) Working capital (deficit) represents current assets minus current
liabilities.
7
<PAGE> 15
RISK FACTORS
Holders of the Senior Notes should carefully consider the risk factors set
forth below, as well as the other information set forth in this Prospectus, in
evaluating whether to tender their Senior Notes for the Exchange Notes offered
hereby.
HIGH LEVEL OF INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS. The Company is
highly leveraged. At June 30, 1997, on a pro forma basis, after giving effect to
the Offering and the application of the net proceeds therefrom, the aggregate
total outstanding indebtedness of the Company would have been approximately
$101.5 million. See "Capitalization." In addition, the Revolving Credit Facility
(as defined) provides, among other things, for the incurrence by Keystone of
secured debt of up to $55 million, provided that such borrowings are subject to
certain limitations set forth in the Indenture. See "Description of Revolving
Credit Facility and Related Matters." The Company's ability to make scheduled
payments of interest on, or to refinance, or pay when due the principal on the
Notes and the Revolving Credit Facility depends on its future operating
performance, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control.
The obligations of the Company under the Revolving Credit Facility are
collateralized by all of the assets of the Company and its Subsidiaries with the
exception of their respective fixed assets. In the event of default under the
Revolving Credit Facility, the lender thereunder would be entitled to exercise
the remedies available to a secured lender under applicable law. Therefore, the
lender under the Revolving Credit Facility will have prior claim on such assets
of the Company and its Subsidiaries over other creditors, including the holders
of the Notes. If the lender under the Revolving Credit Facility accelerates the
maturity thereunder there can be no assurance that the Company and its
Subsidiaries will have sufficient assets to satisfy its obligations under the
Notes.
The degree to which the Company is indebted could have significant
consequences to the holders of the Notes, including: (i) the Company's increased
vulnerability to adverse general economic and industry conditions; (ii) the
Company's ability to obtain additional financing for future working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes
may be limited; (iii) the dedication of a substantial portion of the Company's
cash flow from operations to the payment of interest on the Notes and principal
of and interest on the borrowings under the Revolving Credit Facility, if any,
and other Company indebtedness, thereby reducing the funds available for
operations and future business opportunities; (iv) the Company's increased
vulnerability to higher interest rates as a result of the fact that any
borrowings under the Revolving Credit Facility will be at variable rates of
interest; and (v) the Company may be at a competitive disadvantage because some
of the Company's competitors are less leveraged, resulting in greater
operational and financial flexibility. In addition, any indebtedness incurred in
connection with the Revolving Credit Facility, which expires in December 1999
absent future renewals, will mature prior to the maturity of the Notes. See
"Description of Revolving Credit Facility and Related Matters."
RESTRICTIVE COVENANTS AND ASSET ENCUMBRANCES. The Revolving Credit Facility
contains certain financial and other covenants, including covenants requiring
the Company to maintain certain financial ratios and restricting the ability of
the Company and its subsidiaries from incurring additional indebtedness or from
creating or suffering to exist certain liens. The ability of the Company to
comply with such provisions may be affected by events beyond its control. Should
the Company be unable to comply with the financial or other restrictive
covenants under the Revolving Credit Facility at any time in the future, there
can be no assurance that the lender would agree to any necessary amendments or
waivers. In such a case, the failure to obtain amendments or waivers could have
a material adverse effect upon the Company and its ability to meet its
obligations, including obligations with respect to the Notes. A failure to make
any required payment under the Revolving Credit Facility or any other Company
indebtedness or to comply with any of the financial and operating covenants
included therein could result in an event of default thereunder, permitting the
lender to accelerate the maturity of the indebtedness under the Revolving Credit
Facility and to foreclose upon the lender's collateral, and, depending upon the
action taken by such lender, delaying or precluding payment of principal of,
premium, if any, or interest on the Notes. See "Description of Revolving Credit
Facility and Related Matters." The Indenture also has certain covenants which,
if not complied with, would result in an
8
<PAGE> 16
event of default thereunder, permitting the acceleration of the Notes. Any such
event of default or acceleration of the Notes could also result in an event of
default or acceleration of the Revolving Credit Facility or other indebtedness
of the Company. See "Description of Notes -- Certain Covenants."
SECURITY. The Company's obligations under the Notes are secured by a second
priority lien on substantially all of the existing and, subject to the terms of
the Indenture, future fixed assets of the Company and its Subsidiaries,
including equipment acquired and improvements made pursuant to the Company's
capital improvements plan. The lien on the fixed assets of the Company and its
Subsidiaries will become a first priority lien upon the termination of the first
priority lien in favor of the Master Trust, for the benefit of the Plan,
securing the Company's contingent pension contribution obligations of
approximately $4.5 million, which contingent liability will decline in annual
increments to $0 by January 1, 2001. If and to the extent that the contingent
liabilities secured by such prior lien become due, or if the Master Trust
becomes entitled to exercise its lien, the Master Trust would have a prior claim
upon the Collateral (as defined). See "-- Substantial Employee Postretirement
Obligations."
The net book value of the Collateral on June 30, 1997 was approximately
$89.8 million. In addition, over the next three years, the Company expects to
expend approximately $75 million on capital improvements. See
"Business -- Capital Improvements." No appraisals of any of the Collateral have
been prepared in connection with the Offering. There can be no assurance that
the proceeds of the sale of any Collateral pursuant to the Indenture and the
related Security Documents (as defined) following a declaration of acceleration
of the Notes will be sufficient to satisfy payment of the then outstanding
Notes. In addition, the ability of the holders of the Notes to realize upon the
Collateral may be subject to certain bankruptcy law limitations in the event of
a bankruptcy of the Company. See "Description of Notes -- Certain Bankruptcy
Limitations."
The Indenture permits the release of Collateral without substitution of
collateral of equal value under certain circumstances. See "Description of
Notes -- Possession, Use and Release of Collateral."
CYCLICALITY, COMPETITION AND OTHER MARKET FACTORS. The steel and wire
business and the markets served by the Company are highly cyclical and
competitive and include both domestic and foreign competitors. The economic
recession during the early 1990s significantly reduced industry profitability.
Most domestic integrated steel producers suffered substantial losses as a result
of the economic recession, high levels of steel imports, worldwide production
overcapacity, a strong U.S. dollar and increased domestic and international
competition. Worldwide overcapacity in the steel industry continues to exist and
since the expiration of certain voluntary restraint agreements with certain
foreign governments in 1992, imports of rod and certain wire products have
increased. The Company believes that certain competitors may increase their rod
production capacity in the next few years, which could adversely affect rod
pricing generally and increase competition among rod manufacturers.
Certain of the Company's competitors have significantly greater financial
and other resources than the Company, which could affect the Company's ability
to compete effectively. In addition, changes in currency exchange rates may
result in increased competition from foreign manufacturers. Accordingly, any
significant economic downturn in the domestic or worldwide economy, increase in
steel imports, increase in production, increase in the strength of the U.S.
dollar or increase in domestic or international competition would likely have an
adverse effect on the results of operations and financial condition of the
Company. See "Business -- Competition."
SUBSTANTIAL EMPLOYEE POSTRETIREMENT OBLIGATIONS. The Company has
substantial financial obligations related to its employee postretirement medical
and life insurance benefits plans. Most employees of the Company and certain
retired employees of currently owned, sold or discontinued businesses are
currently entitled to certain postretirement medical and life insurance
benefits. Statement of Financial Accounting Standards No. 106, "Accounting for
Postretirement Benefits Other than Pensions" ("SFAS 106") requires accrual of
estimated future retiree medical and life insurance benefits rather than
recognition of costs as claims are paid. In accordance with SFAS 106, a
liability has been established for the present value of the estimated future
medical and life insurance benefit obligations based on various assumptions,
such as the discount rate and the rate of increase of future health care costs.
Changes in such assumptions or termination of the employee postretirement plans
for medical and life insurance benefits could result in a material change
9
<PAGE> 17
in the Company's postretirement medical and life insurance benefit obligation
and the associated expense ("OPEB expense"). As of June 30, 1997, the Company
had an accumulated postretirement health care and life insurance benefit
liability of $109.7 million. The OPEB expense for financial reporting purposes
and cash payments for actual postretirement health care and life insurance
claims were approximately $7.8 million and $7.5 million, respectively, during
1996. During the first six months of 1997, OPEB expense and cash payments
amounted to $4.0 million and $3.6 million respectively. As medical costs rise,
the Company expects its employee postretirement cash payments to increase.
The Company also maintains the Plan pursuant to which current and former
employees of the Company and certain of the Company's predecessors are entitled
to pension benefits. The Company's acquisition of DeSoto in September 1996
included the concurrent merger of the Company's three underfunded defined
benefit pension plans with and into DeSoto's single overfunded defined benefit
pension plan resulting in a plan that was overfunded for financial reporting
purposes by $46.9 million at December 31, 1996. The Company will continue to be
subject to the minimum funding requirements of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). As the actuarial assumptions under
ERISA differ from those utilized by the Company for financial reporting
purposes, the Company may be obligated in the future under ERISA to make further
contributions to the Plan even though there is an overfunding for financial
reporting purposes. Although the Company does not expect to be obligated to make
any payments to the Plan in 1997, future Plan funding obligations will be
contingent upon various factors, including the performance of the Plan's
investments and changes in the Company's actuarial assumptions, including the
Plan participants' mortality rates, length of service and salary amount prior to
retirement.
At June 30, 1997, approximately 92% of the Plan assets were invested in a
collective investment trust (the "Collective Trust") formed by Valhi, Inc.
("Valhi"), a majority owned subsidiary of Contran, to permit the collective
investment by trusts which implement employee benefit plans maintained by
Contran, Valhi and related companies, including the Company. The remainder of
the Plan and the Collective Trust's assets at June 30, 1997 were invested in
United States Treasury Notes, corporate bonds and notes, investment
partnerships, time deposits, commercial paper, foreign currency, certain real
estate leased by the Company, various mutual funds invested in bonds, equity and
real estate, mortgages and other short-term investments. Harold C. Simmons is
the sole trustee and the sole member of the Trust Investment Committee for the
Collective Trust. See Note 7 to the Consolidated Financial Statements.
ENVIRONMENTAL MATTERS. The Company generates hazardous materials,
wastewater and air emissions in the ordinary course of its business. The Company
is subject to federal, state and local environmental laws and regulations
governing, among other things, wastewater, air emissions, toxic use reduction
and hazardous materials disposal. The Company is currently involved in a six
phase closure of several inactive hazardous waste surface impoundments at its
Peoria facility. The Company is also subject to federal and state "Superfund"
and other legislation that impose cleanup and remediation liability upon present
and former owners and operators of, and persons that generated hazardous waste
deposited in, sites determined by federal and state regulators to contain
hazardous waste. The Company has been notified by the United States
Environmental Protection Agency ("EPA") that it is a potentially responsible
party under the federal Superfund statute for the alleged release or threat of
release of hazardous waste into the environment in several instances. Most of
these instances involve the cleanup of landfills and disposal facilities which
allegedly received hazardous waste generated by the Company, DeSoto or their
respective predecessors. The Company incurred expenses associated with
environmental matters of $6.1 million, $3.6 million and $6.7 million in 1994,
1995 and 1996, respectively and $1.2 million during the first six months of
1997. At June 30, 1997, the Company's financial statements reflected total
accrued liabilities of $17.6 million to cover estimated remediation costs
arising from environmental issues relating to these matters. Although the
Company has established an accrual for estimated future required environmental
remediation, there is no assurance as to the ultimate cost of remedial measures
that might eventually be required by environmental authorities or that
additional environmental hazards, requiring additional remedial expenditures,
might not be asserted by such authorities or private parties. Accordingly, the
costs of remedial measures may exceed the amounts accrued.
Environmental legislation and regulations and related administrative
policies have changed rapidly and significantly in recent years. It is likely
that the Company will be subject to increasingly stringent
10
<PAGE> 18
environmental standards in the future (including those under the Clean Air Act
Amendments of 1990, the Clean Water Act Amendments of 1990, stormwater permit
programs and toxic use reduction programs) and will be required to make
additional expenditures, which could be significant, relating to environmental
matters on an ongoing basis. Accordingly, the Company's actual future
expenditures for installation of, and improvements to, environmental control
facilities and other similar matters cannot be conclusively determined.
The Company is subject to (and may in the future be subject to) legal
proceedings brought by private parties or governmental agencies with respect to
environmental matters. There is no assurance that expenditures or proceedings of
the nature described above, or other expenditures or liabilities resulting from
hazardous substances located on the Company's property or used or generated in
the conduct of its business, or resulting from circumstances, actions,
proceedings or claims relating to environmental matters, will not have a
material adverse effect on the Company. See "Business -- Environmental Matters."
RISKS IN IMPLEMENTING CAPITAL IMPROVEMENTS PLAN. A key element of the
Company's business strategy is to achieve cost savings and production
efficiencies through major capital improvements. Timely completion of the
several components of the capital improvements plan are subject to a number of
uncertainties, including the need to complete the engineering, design and
construction of the improvements and the task of bringing the new production
facilities up to production capacity while minimizing production interruptions.
There is no assurance that the Company will not experience delays and
difficulties with respect to such efforts, which may include construction
delays, production interruptions and the diversion of resources from the
Company's other operations. Furthermore, there can be no assurance that the
capital improvements plan will be completed within the time frames or for the
amounts budgeted therefor. The failure to complete, or a substantial disruption
or delay in completing, these projects, or a substantial increase in the cost of
such projects, could have a material adverse effect on the Company. In addition,
the ability of the Company to achieve, within budgeted time frames, the
anticipated cost savings, operating efficiencies, yield improvements and other
benefits from the capital improvements plan is subject to significant
uncertainties, certain of which are beyond the control of the Company. There is
no assurance that such anticipated cost savings or yield improvements or other
benefits will be realized within budgeted time frames or that sufficient demand
will exist for the products that can be produced by the Company as a result of
such improvements, any of which could have a material adverse effect on the
Company. See "Business -- Business Strategy."
SCRAP STEEL AND OTHER MATERIAL COSTS. The principal raw material used by
the Company and other mini-mill producers in steel rod production is scrap
steel. The purchase of scrap steel is highly competitive and its price
volatility is influenced by periodic shortages, freight costs, weather and other
conditions beyond the control of the Company. The cost of scrap steel has
fluctuated significantly in the past, and may fluctuate significantly in the
future, and the Company cannot predict accurately the future price of scrap and
is not always able to pass on higher scrap costs by increasing the selling
prices of its products. In addition to scrap steel, the Company's production is
dependent upon the availability of certain other materials and adequate energy
supplies. The Company's manufacturing processes consume large amounts of energy
in the form of electricity and natural gas. The Company purchases electrical
energy from a regulated utility under an interruptible service contract which
provides for more economical electricity rates but allows the utility to refuse
or interrupt power to the Company's manufacturing facilities during periods of
peak demand. Such interruptions in energy supply have adversely affected the
Company's rod production in the past. A significant increase in the cost, or
interruption in the supply, of scrap steel, other raw materials or energy
supplies could adversely affect the Company's liquidity, financial condition and
results of operations.
OPERATING RESULTS AND LIQUIDITY. Although the Company has reported net
income in recent years, in order to meet its financial obligations during such
years the Company has relied to a significant extent upon borrowed funds. In
1996, the Company increased its net borrowings by $22 million in part to fund
$11 million of payments associated with completing the DeSoto acquisition, to
fund capital expenditures and to finance operating activities, including pension
contributions. The Company incurs significant ongoing costs for plant and
equipment, environmental matters and employee welfare benefits for current and
retired employees, which leave the Company vulnerable to business downturns. Any
significant decline in the Company's sales, inability to maintain satisfactory
production levels, additional liabilities under environmental laws and
11
<PAGE> 19
regulations with respect to conducting its operations or the disposal and
cleanup of wastes beyond those amounts already accrued, significant increases in
pension and welfare benefits expense or funding requirements, significant
increases in interest rates, other factors mentioned herein, or other
unanticipated costs, if significant, could materially and adversely affect the
Company's results of operations and liquidity. See "-- High Level of
Indebtedness; Ability to Service Indebtedness" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
LIABILITIES ASSOCIATED WITH DESOTO. DeSoto, a wholly owned subsidiary of
Keystone, is subject to certain contingent liabilities, including contingent
liabilities associated with environmental matters discussed above and tax
liability adjustments proposed by the Internal Revenue Service based upon its
audit of DeSoto's 1990 through 1993 federal income tax returns. The Company
believes DeSoto has established appropriate accruals for these contingencies.
However, the Company acquired DeSoto in September 1996 and, accordingly, has
been managing the resolution of these contingencies for only a limited time.
There is no assurance that the ultimate cost of these contingencies will not
exceed the current accruals.
PLANT UTILIZATION AND CAPACITY. In order to operate profitably, the Company
must effectively utilize its production capacity and successfully market its
products in highly competitive markets. Due to significant costs associated with
idling a steel mill, it is critical that the Company fully utilize its steel
manufacturing capacity. As a part of its capital improvements plan, the Company
intends to expand its billet producing capacity by approximately 22%. There is
no assurance, however, that the Company will be able to utilize fully its
expanded billet capacity. Furthermore, an economic downturn, the Company's
failure to compete effectively in its major markets, a failure of plant or
equipment requiring significant capital expenditures or time to repair, or the
other factors mentioned herein could result in operating the steel and rod mills
and its industrial wire and wire products facilities at lower, less than
optimal, capacity levels.
LABOR RELATIONS. A majority of the Company's workforce is represented by
various labor organizations, including the Independent Steel Workers Alliance,
the International Association of Machinists and Aerospace Workers (Local 2082),
the United Paperworkers International Union, AFL-CIO and its Local 903 and the
District No. 55 of the International Association of Machinists, and Aerospace
Workers, AFL-CIO (collectively, the "Unions"). The Company currently has
collective bargaining agreements with all of the Unions, which expire at various
times between March 1998 and March 2000. There can be no assurance, however, as
to the results of negotiations of future collective bargaining agreements,
whether future collective bargaining agreements will be negotiated without
production interruptions or the possible impact of future collective bargaining
agreements, or the negotiation thereof, on the Company's financial condition and
results of operations.
CONTROL PERSON AND POTENTIAL CONFLICTS OF INTEREST. Contran beneficially
owns, directly and indirectly, approximately 41% of the outstanding Keystone
common stock, and thereby may be deemed to control the Company. The election of
directors and taking of other corporate actions, including mergers, requiring
the approval of the Company's stockholders, may be controlled by Contran.
Therefore, Contran could participate in a transaction which could precipitate a
Change of Control which could require the Company to repurchase the Notes at
101% of the principal amount then outstanding plus accrued and unpaid interest,
if any. There can be no assurance that the Company will be able to complete such
a repurchase. Substantially all of the outstanding voting stock of Contran is
held by trusts established for the benefit of the children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is the sole trustee. Accordingly, each
of Contran and the Company may be deemed to be controlled by Harold C. Simmons.
Certain of the officers and directors of the Company are also officers and
directors of Contran or of entities that may be deemed to be controlled by or
affiliated with Contran and/or Harold C. Simmons. In addition, from time to
time, corporations that may be deemed to be controlled by or affiliated with
Harold C. Simmons, including the Company, engage in (i) intercorporate
transactions with related companies, including guarantees, management and
expense sharing arrangements, shared fee arrangements, joint ventures,
partnerships, loans, options, advances of funds on open account, sales, leases
and exchanges of assets, including securities issued by both related and
unrelated parties, and (ii) common acquisition strategies, business
combinations, reorganizations, recapitalizations, securities repurchases,
purchases and sales (and
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other acquisitions and dispositions) of subsidiaries, divisions or other
business units, which transactions may involve both related and unrelated
parties and may include transactions which result in the acquisition by one
related party of a publicly-held minority equity interest in another related
party. Depending upon the business, tax and other objectives then relevant, it
is possible that the Company might be a party to one or more such transactions
in the future. The foregoing relationships, transactions and agreements may
create potential conflicts of interest. It is, however, 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. See "Certain Relationships and Related Transactions."
ABSENCE OF A PUBLIC MARKET. There is no existing market for the Exchange
Notes and there can be no assurance as to the liquidity of any markets that may
develop for the Exchange Notes, the ability of holders of the Exchange Notes to
sell such securities or the price at which holders would be able to sell such
securities. If such a market were to exist, the Exchange Notes could trade at
prices that may be higher or lower than their principal amount or purchase
price, depending on many factors, including prevailing interest rates, the
market for similar notes, and the financial performance of the Company and its
Subsidiaries. The Company has been advised by Wasserstein Perella Securities,
Inc. and PaineWebber Incorporated that they presently intend to make a market in
the Exchange Notes. However, they are not obligated to do so, and any
market-making activity with respect to the Exchange Notes may be discontinued at
any time without notice. In addition, such market-making activity will be
subject to the limits imposed by the Exchange Act. The Company does not intend
to apply for listing of the Exchange Notes on any securities exchange.
CONSEQUENCES OF FAILURE TO EXCHANGE. Holders of Senior Notes who do not
exchange their Senior Notes for Exchange Notes pursuant to the Exchange Offer
will continue to be subject to the restrictions on transfer of such Senior Notes
as set forth in the legend thereon as a consequence of the issuance of the
Senior Notes pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Senior Notes may not be offered or sold, unless registered
under the Securities Act and applicable state securities laws, or pursuant to an
exemption therefrom. Except under certain limited circumstances, the Company
does not intend to register the Senior Notes under the Securities Act. In
addition, any holder of Senior Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes may be deemed
to have received restricted securities and, if so, will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. To the extent Senior Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for the
Senior Notes not tendered could be adversely affected. See "The Exchange Offer"
and "Description of Notes -- Registration Rights."
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange pursuant to the
Exchange Offer. The net proceeds to the Company from the issuance of the Senior
Notes were approximately $96.5 million. The Company used $52.4 million of the
net proceeds from the issuance of the Senior Notes to repay borrowings under the
Company's Revolving Credit Facility and to retire amounts outstanding under the
Company's term loan (the "Term Loan"). The Company intends to use the balance of
the net proceeds for general corporate purposes, primarily financing capital
expenditures. See "Business -- Capital Improvements." Until used, the net
proceeds of the Offering will be invested in short-term investment grade
securities or money market funds.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Senior Notes were originally issued and sold on August 7, 1997 in a
transaction not registered under the Securities Act in reliance upon the
exemptions provided by Section 4(2), Rule 144A and Regulation S of the
Securities Act. In connection with the sale of the Senior Notes, the Company
agreed to use its best efforts to file with the Commission a registration
statement relating to an exchange offer (the "Exchange Offer Registration
Statement") pursuant to which another series of notes of the Company, the
Exchange Notes, covered by such registration statement and containing
substantially the same terms as the Senior Notes, except as set forth in this
Prospectus, would be offered in exchange for Senior Notes tendered at the option
of the holders thereof. In the event that either (i) the Company fails to file
any of the registration statements required by the Registration Rights Agreement
on or before the date specified for such filing, (ii) any of such registration
statements are not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), (iii) the
Company fails to consummate the Exchange Offer within 150 days of the Issue
Date, or (iv) the Shelf Registration Statement (as herein defined) or the
Exchange Offer Registration Statement is declared effective but thereafter,
subject to certain exceptions, ceases to be effective or usable in connection
with resales of Notes during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (i) through (iv), a
"Registration Default"), then the Company will pay liquidated damages to each
Holder of Notes, with respect to the first 90-day period immediately following
the occurrence of such Registration Default in an amount equal to $.05 per week
per $1,000 principal amount of Notes held by such Holder ("Liquidated Damages").
For any portion of a week that the Registration Default continues, such
Liquidated Damages shall be calculated on a pro-rata basis. The amount of the
Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $.25 per week per $1,000 principal amount of Notes. All accrued
Liquidated Damages will be paid by the Company on each interest payment date to
the Global Note Holder, as herein defined, by wire transfer of same day funds
and to Holders of Certificated Securities, as herein defined, by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Company with respect to the Registration Rights Agreements.
TERMS OF THE EXCHANGE
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Prospectus (the "Letter of Transmittal"), $1,000 in principal amount of 9 5/8%
Exchange Notes for each $1,000 in principal amount of 9 5/8% Senior Notes. The
terms of the Exchange Notes are identical in all respects to the terms of the
Senior Notes for which they may be exchanged pursuant to this Exchange Offer,
except that the Exchange Notes will generally be freely transferable by holders
thereof, and the holders of the Exchange Notes (as well as remaining holders of
any Senior Notes) will not be entitled to registration rights under the
Registration Rights Agreement. See "Description of Notes -- Registration
Rights." The Exchange Notes will evidence the same debt as the Senior Notes and
will be entitled to the benefits of the Indenture pursuant to which such Notes
were issued. See "Description of Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered for exchange.
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Senior Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Senior Notes directly from the
Company or (iii) broker-dealers who acquired Senior Notes as a
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<PAGE> 22
result of market making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business, and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Senior Notes, where such Senior Notes
were acquired by such broker-dealer as a result of market-making activities,
must acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Notes. See "Plan of Distribution." The Letter of Transmittal
states that by so acknowledging, and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Senior Notes where such Senior Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, for a period not to
exceed 120 days after the Expiration Date, they will make this Prospectus
available to any broker-dealer for use in connection with any such resale. Any
holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Tendering holders of Senior Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Senior Notes
pursuant to the Exchange Offer.
The Exchange Notes will bear interest from and including their respective
dates of issuance. Holders whose Senior Notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance of
the Exchange Notes, such interest to be payable with the first interest payment
on the Exchange Notes, but will not receive any payment in respect of interest
on the Senior Notes accrued after the issuance of the Exchange Notes.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on , unless the
Company in its sole discretion extends the period during which the Exchange
Offer is open, in which event the term "Expiration Date" means the latest time
and date on which the Exchange Offer, as so extended by the Company, expires.
The Company reserves the right to extend the Exchange Offer at any time and from
time to time prior to the Expiration Date by giving written notice to The Bank
of New York (the "Exchange Agent") and by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Senior Notes previously tendered pursuant to the Exchange
Offer will remain subject to the Exchange Offer.
The initial Exchange Date will be the first business day following the
Expiration Date. The Company expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Senior Notes for any reason,
including if any of the events set forth below under "-- Conditions to the
Exchange Offer" shall have occurred and shall not have been waived by the
Company and (ii) amend the terms of the Exchange Offer in any manner, whether
before or after any tender of the Senior Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent in writing and will
either issue a press release or give written notice to the holders of the Senior
Notes as promptly as practicable. Unless the Company terminates the Exchange
Offer prior to 5:00 p.m., New York City time, on the Expiration Date, the
Company will exchange the Exchange Notes for the Senior Notes on the Exchange
Date.
If the Company waives any material condition to the Exchange Offer, or
amends the Exchange Offer in any other material respect, and if at the time that
notice of such waiver or amendment is first published, sent or given to holders
of Senior Notes in the manner specified above, the Exchange Offer is scheduled
to expire at any time earlier than the expiration of a period ending on the
fifth business day from, and including, the date that such notice is first so
published, sent or given, then the Exchange Offer will be extended until the
expiration of such period of five business days.
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This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Company to record holders of Senior Notes and
will be furnished to brokers, banks and similar persons whose names, or the
names of whose nominees, appear on the lists of holders for subsequent
transmittal to beneficial owners of Senior Notes.
HOW TO TENDER
The tender of the Senior Notes to the Company by a holder thereof pursuant
to one of the procedures set forth below will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
General Procedures. A holder of a Senior Note may tender the same by (i)
properly completing and signing the Letter of Transmittal or a facsimile thereof
(all references in this Prospectus to the Letter of Transmittal shall be deemed
to include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the Senior Notes being tendered and any
required signature guarantees (or a timely confirmation of a book-entry transfer
(a "Book-Entry Confirmation") pursuant to the procedure described below), to the
Exchange Agent at its address set forth on the back cover of this Prospectus on
or prior to the Expiration Date or (ii) complying with the guaranteed delivery
procedures described below.
If tendered Senior Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Senior Notes are to be reissued) in the
name of the registered holder, the signature of such signer need not be
guaranteed. In any other case, the tendered Senior Notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Company and duly executed by the registered holder and the signature on the
endorsement or instrument of transfer must be guaranteed by a firm (an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program (an "Eligible Program") within the meaning of Rule 17Ad-15 under the
Exchange Act. If the Exchange Notes and/or Senior Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note register for the Senior Notes, the signature on the Letter of
Transmittal must be guaranteed by an Eligible Institution.
Any beneficial owner whose Senior Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Senior Notes should contact such holder promptly and instruct such
holder to tender Senior Notes on such beneficial owner's behalf. If such
beneficial owner wishes to tender such Senior Notes himself, such beneficial
owner must, prior to completing and executing the Letter of Transmittal and
delivering such Senior Notes, either make appropriate arrangements to register
ownership of the Senior Notes in such beneficial owner's name or follow the
procedures described in the immediately preceding paragraph. The transfer of
record ownership may take considerable time.
Book-Entry Transfer. The Exchange Agent will establish the Exchange Offer
with The Depository Trust Company (the "Book Entry Transfer Facility") as
eligible for the Book Entry Transfer Facility's Automated Tender Offer Program
("ATOP") within two business days after receipt of this Prospectus, and any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Senior Notes in accordance
with the Book-Entry Transfer Facility's procedures for such transfer under ATOP.
If delivery of the Senior Notes is effected through book-entry transfer, Book
Entry Confirmation and an Agent's Message is necessary to tender validly such
Senior Notes. The term "Agent's Message" means a message transmitted by the
Book-Entry Transfer Facility and forming a part of the Book-Entry Confirmation
that states that the Book-Entry Transfer Facility has received an express
acknowledgment from the participant in the Book-Entry Transfer Facility
described in such Agent's Message, stating the aggregate principal amount of the
Senior Notes that have been tendered by such participant pursuant to the
Exchange Offer and that such participant has received this Prospectus and the
Letter of Transmittal and agrees to be bound by their terms and that the Company
may enforce such agreement against such participant.
THE METHOD OF DELIVERY OF SENIOR NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
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EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the Exchange Agent will
be required to withhold, and will withhold, 31% of the gross proceeds otherwise
payable to a holder pursuant to the Exchange Offer if the holder does not
provide its taxpayer identification number (social security number or employer
identification number) and certify that such number is correct. Each tendering
holder should complete and sign the main signature form and the Substitute Form
W-9 included as part of the Letter of Transmittal, so as to provide the
information and certification necessary to avoid backup withholding, unless an
applicable exemption exists and is proved in a manner satisfactory to the
Company and the Exchange Agent.
Guaranteed Delivery Procedures. If a holder desires to accept the Exchange
Offer and time will not permit a Letter of Transmittal or Senior Notes to reach
the Exchange Agent before the Expiration Date, a tender may be effected if the
Exchange Agent has received at the address specified on the back cover hereof on
or prior to the Expiration Date a letter or facsimile transmission from an
Eligible Institution setting forth the name and address of the tendering holder,
the names in which the Senior Notes are registered and, if possible, the
certificate numbers of the Senior Notes to be tendered, and stating that the
tender is being made thereby and guaranteeing that within three New York Stock
Exchange trading days after the date of execution of such letter or facsimile
transmission by the Eligible Institution, the Senior Notes, in proper form for
transfer, will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Senior Notes being tendered by the above-described
method (or a timely Book-Entry Confirmation) are deposited with the Exchange
Agent within the time period set forth above (accompanied or preceded by a
properly completed Letter of Transmittal and any other required documents), the
Company may, at its option, reject the tender. Copies of a Notice of Guaranteed
Delivery which may be used by Eligible Institutions for the purposes described
in this paragraph are being delivered with this Prospectus and the related
Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Senior Notes (or a timely Book-Entry Confirmation) is
received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Senior Notes tendered pursuant to a Notice of Guaranteed Delivery or letter or
facsimile transmission to similar effect (as provided above) by an Eligible
Institution will be made only against deposit of the Letter of Transmittal (and
any other required documents) and the tendered Senior Notes (or a timely
Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Senior Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for exchange of which may, in the opinion of counsel to
the Company, be unlawful. The Company also reserves the absolute right to waive
any of the conditions of the Exchange Offer or any defect or irregularities in
tenders of any particular holder whether or not similar defects or
irregularities are waived in the case of other holders. None of the Company, the
Exchange Agent or any other person will be under any duty to give notification
of any defects or irregularities in tenders or shall incur any liability for
failure to give any such notification. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the Letter of Transmittal and
the instructions thereto) will be final and binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Senior Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Senior Notes to the Company and irrevocably
constitutes and appoints the Exchange Agent as the Transferor's agent and
attorney-in-fact to cause the Senior Notes to be assigned, transferred and
exchanged. The Transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Senior Notes, and that,
when the same are accepted for exchange, the Company will acquire good
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<PAGE> 25
and unencumbered title to the tendered Senior Notes, free and clear of all
liens, restrictions, charges and encumbrances and not subject to any adverse
claim. The Transferor also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Senior
Notes. All authority conferred by the Transferor will survive the death or
incapacity of the Transferor and every obligation of the Transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
By tendering Senior Notes, the Transferor certifies that it is not an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act, that it is not a broker-dealer that owns Senior Notes acquired directly
from the Company or an affiliate of the Company, that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes.
WITHDRAWAL RIGHTS
Senior Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the back cover of this Prospectus. Any such notice of
withdrawal must specify the person named in the Letter of Transmittal as having
tendered Senior Notes to be withdrawn, the certificate numbers of Senior Notes
to be withdrawn, the principal amount of Senior Notes to be withdrawn (which
must be an authorized denomination), that such holder is withdrawing his
election to have such Senior Notes exchanged, and the name of the registered
holder of such Senior Notes. Additionally, the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution (except in the case of
Senior Notes tendered for the account of an Eligible Institution). The Exchange
Agent will return the properly withdrawn Senior Notes promptly following receipt
of notice of withdrawal. All questions as to the validity of notices of
withdrawals, including time of receipt, will be determined by the Company, and
such determination will be final and binding on all parties.
ACCEPTANCE OF SENIOR NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Senior Notes validly tendered and not withdrawn and
the issuance of the Exchange Notes will be made on the Exchange Date. For the
purposes of the Exchange Offer, the Company shall be deemed to have accepted for
exchange validly tendered Senior Notes when, as and if the Company has given
written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Senior
Notes for the purposes of receiving Exchange Notes from the Company and causing
the Senior Notes to be assigned, transferred and exchanged. Upon the terms and
subject to the conditions of the Exchange Offer, delivery of Exchange Notes to
be issued in exchange for accepted Senior Notes will be made by the Exchange
Agent promptly after acceptance of the tendered Senior Notes. Senior Notes not
accepted for exchange by the Company will be returned without expense to the
tendering holders (or in the case of Senior Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the procedures of the Book-Entry transfer facility promptly
following the Expiration Date or, if the Company terminates the Exchange Offer
prior to the Expiration Date, promptly after the Exchange Offer is so
terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue Exchange Notes
in respect of any properly tendered Senior Notes not previously accepted and may
terminate the Exchange Offer (by oral or written notice to the Exchange Agent
and by timely public announcement communicated, unless otherwise required by
applicable law or regulation, by making a release to the Dow Jones News Service)
or, at its option, modify or otherwise amend the
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Exchange Offer, if (a) there shall be threatened, instituted or pending any
action or proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental regulatory or
administrative agency or commission, (i) seeking to restrain or prohibit the
making or consummation of the Exchange Offer or any other transaction
contemplated by the Exchange Offer, (ii) assessing or seeking any damages as a
result thereof, or (iii) resulting in a material delay in the ability of the
Company to accept for exchange or exchange some or all of the Senior Notes
pursuant to the Exchange Offer; (b) any statute, rule, regulation, order or
injunction shall be sought, proposed, introduced, enacted, promulgated or deemed
applicable to the Exchange Offer or any of the transactions contemplated by the
Exchange Offer by any government or governmental authority, domestic or foreign,
or any action shall have been taken, proposed or threatened, by any government,
governmental authority, agency or court, domestic or foreign, that in the sole
judgment of the Company might directly or indirectly result in any of the
consequences referred to in clauses (a)(i) or (ii) above or, in the sole
judgment of the Company, might result in the holders of Exchange Notes having
obligations with respect to resales and transfers of Exchange Notes which are
greater than those described in the interpretations of the Commission referred
to on the cover page of this Prospectus, or would otherwise make it inadvisable
to proceed with the Exchange Offer; or (c) a material adverse change shall have
occurred in the business, condition (financial or otherwise), operations, or
prospects of the Company.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Company) giving rise to such condition or may be waived by the Company in whole
or in part at any time or from time to time in its sole discretion. The failure
by the Company at any time to exercise any of the foregoing rights will not be
deemed a waiver of any such right, and each right will be deemed an ongoing
right which may be asserted at any time or from time to time. In addition, the
Company has reserved the right, notwithstanding the satisfaction of each of the
foregoing conditions, to terminate or amend the Exchange Offer.
Any determination by the Company concerning the fulfillment or
non-fulfillment of any conditions will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Senior Notes
tendered and no Exchange Notes will be issued in exchange for any such Senior
Notes, if at such time any stop order shall be threatened or in effect with
respect to (i) the Registration Statement of which this Prospectus constitutes a
part or (ii) qualification under the Trust Indenture Act of 1939 (the "Trust
Indenture Act") of the Indenture pursuant to which such Senior Notes were
issued.
EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. The Letter of Transmittal must be addressed to the Exchange
Agent at the address specified on the back cover page of this Prospectus.
Delivery to an address other than as set forth herein, or transmissions of
instructions via a facsimile number other than the ones set forth herein, will
not constitute a valid delivery.
SOLICITATIONS OF TENDERS; EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Company
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. The expenses to be
incurred in connection with the Exchange Offer, including the fees and expenses
of the Exchange Agent and printing, accounting and legal fees, will be paid by
the Company and are estimated at approximately $100,000.
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No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Senior Notes in any jurisdiction in
which the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Senior
Notes in such jurisdiction. In any jurisdiction the securities laws or blue sky
laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
APPRAISAL RIGHTS
HOLDERS OF SENIOR NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL
RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Senior Notes for Exchange Notes by holders will not be a
taxable exchange for Federal income tax purposes, and holders should not
recognize any taxable gain or loss or any interest income as a result of such
exchange.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Senior Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Senior Notes pursuant to the terms of this Exchange Offer, the
Company will have fulfilled a covenant contained in the terms of the Senior
Notes and the Registration Rights Agreements. Holders of the Senior Notes who do
not tender their certificates in the Exchange Offer will continue to hold such
certificates and will be entitled to all the rights, and limitations applicable
thereto, under the Indenture pursuant to which such Senior Notes were issued,
except for any such rights under the Registration Rights Agreement, which by its
term terminates or ceases to have further effect as a result of the making of
this Exchange Offer. See "Description of the Notes." All untendered Senior Notes
will continue to be subject to the restriction on transfer set forth in the
Indenture. To the extent that Senior Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for the Senior Notes could be
adversely affected. See "Risk Factors -- Consequences of Failure to Exchange."
The Company may in the future seek to acquire untendered Senior Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plan to acquire any Senior Notes
which are not tendered in the Exchange Offer.
20
<PAGE> 28
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 30, 1997 (i) on an actual basis; and (ii) as adjusted to give
effect to the Offering and the application of the net proceeds therefrom. This
table should be read in conjunction with "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and "Unaudited Pro Forma
Consolidated Financial Information" included elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Notes payable and current maturities of long term debt:
Revolving Credit Facility(1).............................. $ 35,551 $ --
Term Loan................................................. 3,333 --
Other..................................................... 320 320
-------- --------
Total notes payable and current maturities of long
term debt....................................... 39,204 320
-------- --------
Long-Term debt:
Term Loan................................................. 14,166 --
9 5/8% Senior Secured Notes due 2007...................... -- 100,000
Other..................................................... 1,140 1,140
-------- --------
Total long term debt.............................. 15,306 101,140
-------- --------
Redeemable preferred stock, no par value; 500,000 shares
authorized;
435,456 shares issued..................................... 3,500 3,500
-------- --------
Stockholders' equity:
Common stock, $1.00 par value; 12,000,000 shares
authorized;
9,263,898 shares issued at stated value(2)............. 9,994 9,994
Additional paid-in capital................................ 46,882 46,882
Accumulated deficit....................................... (19,254) (19,361)
Treasury stock -- 1,134 shares, at cost................... (12) (12)
-------- --------
Total stockholders' equity........................ 37,610 37,503
-------- --------
Total capitalization.............................. $ 95,620 $142,463
======== ========
</TABLE>
- ---------------
(1) Under the Revolving Credit Facility, the Company had $19.1 million available
for borrowing at June 30, 1997 ($54.6 million, as adjusted for the Offering
and the application of the net proceeds therefrom, but subject to
restrictions pursuant to the terms of the Notes). See "Description of
Notes -- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock" and "Description of Revolving Credit Facility and Related
Matters."
(2) Excludes 472,696 shares of common stock issuable upon the exercise of
currently outstanding options and on additional shares of common stock
reserved for issuance pursuant to Keystone stock plans. See
"Management -- Executive Compensation."
21
<PAGE> 29
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for each of the years in the
five year period ended December 31, 1996 and the balance sheet data as of
December 31 for each of the years in the five year period ended December 31,
1996 have been derived from the Consolidated Financial Statements. The financial
data set forth below should be read in conjunction with the Consolidated
Financial Statements, the "Unaudited Pro Forma Consolidated Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The consolidated statement of operations data for
the six month periods ended June 30, 1996 and 1997 and the balance sheet data as
of June 30, 1997 have been derived from the Company's unaudited consolidated
financial statements covering such periods. Results for the interim periods are
not necessarily indicative of results for a full year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PER TON AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $316,251 $345,186 $364,435 $345,657 $331,175 $170,118 $192,381
Cost of goods sold................ 278,808 312,665 327,453 312,909 297,149 157,675 170,592
-------- -------- -------- -------- -------- -------- --------
Gross profit...................... 37,443 32,521 36,982 32,748 34,026 12,443 21,789
Selling expenses.................. 4,833 5,032 5,101 4,367 3,855 2,006 2,460
General and administrative
expenses........................ 21,280 20,309 20,675 17,185 22,779 9,296 7,780
Operating income.................. 16,049 13,077 12,908 11,298 10,730 2,573 11,982
Interest expense
(credit)(1)..................... 3,036 6,575 (1,165) 3,385 3,741 1,869 2,736
Income (loss) before income
taxes........................... $ 8,340 $ 1,130 $ 12,389 $ 8,078 $ 4,240 $ (542) $ 9,255
Provision (benefit) for income
taxes........................... 3,194 381 4,828 3,191 1,656 (215) 3,284
-------- -------- -------- -------- -------- -------- --------
Income (loss) before changes in
accounting principles........... 5,146 749 7,561 4,887 2,584 (327) 5,971
Cumulative effect of changes in
accounting
principles(2)................... (69,949) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).......... $(64,803) $ 749 $ 7,561 $ 4,887 $ 2,584 $ (327) $ 5,971
======== ======== ======== ======== ======== ======== ========
Net income (loss) available for
common shares(3)................ $(64,803) $ 749 $ 7,561 $ 4,887 $ 2,514 $ (327) $ 5,831
======== ======== ======== ======== ======== ======== ========
Primary net income (loss) before
changes in accounting principles
available for common shares per
share........................... $ .92 $ .14 $ 1.35 $ .86 $ .38 $ (.06) $ .63
======== ======== ======== ======== ======== ======== ========
Fully diluted net income (loss)
before changes in accounting
principles available for common
shares per share................ $ .92 $ .14 $ 1.35 $ .86 $ .38 $ (.06) $ .62
======== ======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding:
Primary......................... 5,572 5,495 5,601 5,654 6,560 5,678 9,279
======== ======== ======== ======== ======== ======== ========
Fully diluted................... 5,572 3,495 5,601 5,654 6,560 5,678 9,335
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Cash contributions to defined
benefit pension plans........... $ 19,933 $ 14,955 $ 20,069 $ 18,702 $ 9,664 $ 7,664 $ --
Capital expenditures.............. 7,459 7,349 12,742 18,208 18,992 7,400 9,616
Depreciation and amortization..... 10,525 11,084 11,585 11,961 12,425 7,095 6,536
Ratio of earnings to fixed
charges(4)...................... 3.7x 1.2x -- 3.0x 1.9x -- 4.0x
Pro forma ratio of earnings to
fixed charges(4)................ -- -- 2.3x
</TABLE>
22
<PAGE> 30
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PER TON AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Product shipments (in tons):
Fabricated wire products........ 262 257 267 242 222 116 125
Industrial wire................. 121 149 168 164 159 79 89
Carbon Steel Rod................ 302 337 316 287 307 157 166
-------- -------- -------- -------- -------- -------- --------
Total...................... 685 743 751 693 688 352 380
======== ======== ======== ======== ======== ======== ========
Average selling prices per ton:
Fabricated wire products........ $ 681 $ 685 $ 690 $ 707 $ 716 $ 731 $ 716
Industrial wire................. 456 455 479 492 478 478 473
Carbon Steel Rod................ 272 296 313 322 298 296 309
Average total production cost per
ton............................. 406 420 437 452 428 447 430
Average scrap purchase cost per
ton............................. 85 110 125 128 125 129 122
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1997
---------------------------------------------------- ----------------------
AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(5)
-------- -------- -------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(6)..... $ 777 $ 6,385 $ 2,529 $ (6,861) $(15,907) $(14,229) $ 67,998
Property, plant and equipment,
net............................ 84,822 80,769 81,147 86,436 92,608 94,653 94,653
Total assets..................... 202,109 206,654 205,601 198,822 302,368 310,458 357,233
Total debt....................... 34,485 27,190 26,054 29,945 51,780 54,510 101,460
Stockholders' equity (deficit)... (39,036) (50,908) (40,579) (37,493) 31,170 37,610 37,503
</TABLE>
- ---------------
(1) During 1993, the Company accrued approximately $4.0 million for the
estimated cost of interest as a result of an unfavorable U.S. Supreme Court
decision related to the Company's 1983 and 1984 contributions of certain
real property to its pension plans. In 1994, pursuant to the terms of an
agreement with the Internal Revenue Service, the interest due was reduced to
approximately $100,000 and, as such, the Company recorded a reduction of
approximately $3.9 million in the previously accrued interest.
(2) Relates to adoption of Statement of Financial Accounting Standards ("SFAS"),
No. 106 -- "Postretirement Benefits Other Than Pensions" ("OPEB") and SFAS
No. 109 -- "Employers' Accounting for Income Taxes."
(3) Includes dividends on preferred stock of $70,000 in the year ended December
31, 1996 and $140,000 in the six months ended June 30, 1997.
(4) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes plus fixed
charges (excluding capitalized interest) and adjustments for undistributed
equity in earnings. Fixed charges consist of interest expense and
capitalized interest. The Company's fixed charges in 1994 amounted to a net
credit of $1.0 million. The Company's earnings were insufficient to cover
total fixed charges in the six months ended June 30, 1996. The coverage
deficiency was $.8 million. On a pro forma basis, the Company's earnings
were insufficient to cover total fixed charges in 1996 and the six months
ended June 30, 1996. The pro forma coverage deficiency in 1996 and the six
months ended June 30, 1996 was $2.3 million and $3.7 million, respectively.
(5) The Balance Sheet Data, as adjusted, reflects adjustments to give effect to
the Offering and the application of the net proceeds therefrom, as if it had
occurred on June 30, 1997.
(6) Working capital (deficit) represents current assets minus current
liabilities.
23
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Keystone is a leading manufacturer of fabricated wire products, industrial
wire and carbon steel rod for the agricultural, industrial, construction,
original equipment manufacturer and retail consumer markets. The Company
believes it is the second largest manufacturer of fabricated wire products and
industrial wire in the United States based on tons produced (381,000 in 1996).
The Company's operations benefit from vertical integration as the Company's
mini-mill supplies carbon steel rod produced from scrap steel to its downstream
fabricated wire products and industrial wire operations. These downstream
fabrication operations accounted for 71% of 1996 net sales. The Company's
fabricated wire products typically yield higher and less volatile gross margins
compared to rod. Management believes that Keystone's fabricated wire businesses
insulate it better than other rod producers from the effects of rod imports and
new domestic rod production capacity. Moreover, the Company's rod production
costs have historically been below the market price for rod providing a
significant cost advantage over wire producers who purchase rod as a raw
material.
The Company's estimated current fabricated wire products and industrial
wire production capacity is 521,000 tons. Utilization of the Company's annual
fabricated wire products and industrial wire production capacity aggregated 83%
in 1994, 77% in 1995 and 78% in 1996. Recent modifications to the Company's
steel making operations increased annual billet production capacity from
approximately 655,000 tons to 700,000 tons, while the current estimated annual
production capacity of the Company's rod mill is approximately 750,000 tons. In
1995 and 1996, the Company's steel making operations operated at near capacity
and, together with billet purchases of 61,000 tons and 46,000 tons in 1995 and
1996, respectively, provided 706,000 tons and 700,000 tons of billets in 1995
and 1996, respectively. Despite comparable billet volumes, rod production
increased 5% from 662,000 tons (88% of estimated capacity) in 1995 to 694,000
tons (93% of estimated capacity) in 1996 due primarily to decreases in
year-to-year billet inventory levels and 12,000 tons of billets that were
converted to rod in 1996 for another manufacturer. Rod production in 1995 was
also adversely impacted by power curtailments and outages under the Company's
interruptible power supply agreement, and the related impact on manufacturing
efficiency.
In November 1994, the Company entered into a Joint Venture Agreement and
formed EWP. The Company has a 20% equity interest in EWP together with an option
to acquire the remaining 80%. In 1995, the Company contributed to EWP, among
other things, certain equipment as part of its capital contribution. As a
result, the Company no longer sells most of the fabricated wire products
previously manufactured on the equipment contributed to EWP. During 1996, the
Company manufactured 4,000 tons of these fabricated wire products as compared to
13,000 tons in 1995. As part of the joint venture agreement, the Company
supplies EWP with all of its rod requirements. EWP then converts the rod to
fabricated wire products which are primarily used in the concrete pipe business.
During 1996, the Company shipped 33,000 tons of rod to EWP as compared to 28,000
tons in 1995.
The Company's profitability is dependent in large part on its ability to
utilize effectively its production capacity, which is affected by the
availability of raw material, plant efficiency and other production factors and
to control its manufacturing costs, which are comprised primarily of raw
materials, energy and labor costs. The Company's primary raw material is scrap
steel. The price of scrap steel is highly volatile and scrap steel prices are
affected by periodic shortages, freight costs, weather and other conditions
largely beyond the control of the Company. Although the average per ton price
paid for scrap by the Company was relatively constant between 1994, 1995 and
1996 ($125, $128, and $125, respectively), prices can vary widely from
period-to-period and the Company's product selling prices cannot always be
adjusted, especially in the short-term, to recover the costs of large increases
in scrap prices.
The Company consumes a significant amount of energy in its manufacturing
operations and, accordingly, its profitability can also be adversely affected by
the volatility in the price of coal, oil and natural gas resulting in increased
energy, transportation, freight, scrap and supply costs. The Company purchases
electrical energy for its Peoria, Illinois facility from a regulated utility
under an interruptible service contract which provides for
24
<PAGE> 32
more economical electricity rates but allows the utility to refuse or interrupt
power to the Company's manufacturing facilities during periods of peak demand.
The utility has in the past refused or interrupted service to the Company
resulting in decreased production and higher costs associated with the related
downtime.
The majority of the Company's 1,950 employees are represented by two labor
unions, the Independent Steel Workers Alliance ("ISWA"), representing
approximately 1,130 employees, and the International Association of Machinists
and Aerospace Workers (Local 2082) ("IAMAW"), representing approximately 180
employees. The three year collective bargaining agreements with the ISWA and
IAMAW expire in May 1999 and February 2000, respectively, reflect annual
compensation levels that are commensurate with those of prior contracts and
permit the Company to estimate effectively its labor costs during the terms of
these contracts. The Company believes its labor relations with these unions are
good.
As a result of the acquisition of DeSoto in September 1996, the Company is
also engaged in the manufacture and packaging of household cleaning products. As
the operations of DeSoto were insignificant when compared to the consolidated
operations of the Company in 1996 and are expected to continue to be
insignificant in the future, DeSoto's results of operations are not separately
addressed in the discussion that follows.
INDUSTRY
The fabricated wire products, industrial wire and carbon steel rod
industries in the United States are highly competitive and are comprised
primarily of several large mini-mill rod producers, but also include many small
independent wire companies and a few large diversified rod and wire producers,
such as the Company. Foreign steel and industrial wire producers also compete
with the Company and other domestic producers. Competition in the fabricated
wire product and wire markets is based primarily on price, delivery performance,
product quality, service, and brand name preference. Since carbon steel rod is a
commodity product, price is the primary competitive factor. While overall demand
for the Company's fabricated wire products and industrial wire is influenced
generally by cyclical changes in the United States economy, the diversity of end
use markets and customers served by the Company somewhat mitigates the
unfavorable effects of a downturn in any specific market.
The domestic carbon steel rod industry experienced a consolidation over the
past decade, as large integrated steel producers disposed of or discontinued
their carbon steel rod and wire operations. Some of this capacity was replaced
by the capacity of domestic mini-mills and certain foreign producers. Worldwide
overcapacity in the steel industry continues to exist and since the expiration
of certain voluntary restraint agreements with certain foreign governments in
March 1992, imports of wire rod and certain wire products have increased
significantly. The Company understands that certain competitors may increase
their rod production capacity in the next few years, which could adversely
affect rod pricing generally and increase competition among rod manufacturers.
The Company competes with many small independent wire companies who
purchase rod from domestic and foreign sources. The Company believes that its
internal supply of steel rod and integration of fabricated wire products
operations gives it a competitive advantage over non-integrated rod producers
and wire companies.
25
<PAGE> 33
RESULTS OF OPERATIONS
The following table sets forth selected operating data of the Company as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------
1994 1995 1996 1996 1997
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................. 89.9 90.5 89.7 92.7 88.7
Gross profit................................... 10.1 9.5 10.3 7.3 11.3
Selling expenses............................... 1.4 1.3 1.2 1.2 1.3
General and administrative expense............. 5.7 5.0 6.9 5.5 4.8
Overfunded defined benefit pension credit...... -- -- -- -- (.8)
Income (loss) before income taxes.............. 3.4% 2.3% 1.3% (.3)% 4.8%
Provision for income taxes (benefit)........... 1.3 .9 .5 (.1) 1.7
----- ----- ----- ----- -----
Net income (loss) from continuing operations... 2.1% 1.4% .8% (.2)% 3.1%
===== ===== ===== ===== =====
</TABLE>
Six months ended June 30, 1997 compared to six months ended June 30, 1996
During the first six months of 1997, the Company produced 339,000 tons of
billets as compared to 309,000 tons in the first six months of 1996. The
Company's rod production during the first six months of 1997 increased to
381,000 tons as compared to 337,000 tons during the first six months of 1996.
This increase was due primarily to the 30,000 ton increase in billet production
combined with a 17,000 ton increase in purchased billets.
Net sales increased to $192.4 million in the first six months of 1997 from
$170.1 million in the first six months of 1996. Of these sales, fabricated wire
products represented $89.2 million (46%) in 1997 and $85.1 million (50%) in
1996; industrial wire represented $42.3 million (22%) in 1997 and $38.0 million
(22%) in 1996; and carbon steel rod represented $51.1 million (27%) in 1997 and
$46.4 million (27%) in 1996.
Fabricated wire products prices decreased 2% while shipments increased 7%
to 125,000 tons in 1997 from 116,000 tons in 1996. Industrial wire prices also
decreased 1% while shipments increased 13% to 89,000 tons in 1997 from 79,000
tons in 1996. Carbon steel rod prices increased 4% and shipments increased 6% to
166,000 tons in 1997 from 157,000 tons in 1996.
On April 11, 1997, the International Trade Commission preliminarily ruled
that the U.S. wire rod industry was materially injured or threatened with
material injury by the alleged dumping of subsidized imports of wire rod by
certain countries. Since that ruling, imports of wire rod have decreased and
imported tons have carried higher prices. During the second quarter of 1997, the
Company implemented an average $7 per ton price increase for industrial wire,
carbon steel rod and certain fabricated wire products.
Gross profit increased approximately 76% to $21.8 million in the first half
of 1997 from $12.4 million in the first half of 1996. Gross profit increased to
11.3% in 1997 from 7.3% in 1996, primarily as a result of lower scrap costs and
pension expense as well as slightly lower rod conversion costs. During the first
six months of 1997, the Company purchased 360,000 tons of scrap at an average
price of $122 per ton as compared to 1996 purchases of 309,000 tons at an
average price of $129 per ton. The acquisition of DeSoto in September 1996
included the concurrent merger of the Company's and DeSoto's defined benefit
pension plans resulting in a single overfunded defined benefit pension plan.
Pension expense charged to cost of goods sold was $3.8 million in the first half
of 1996. As a result of the overfunded status of the Company's defined benefit
pension plan, Keystone recorded a pension credit of $1.5 million in the first
half of 1997. The Company currently estimates, for financial reporting purposes,
that it will recognize a non-cash pension credit of approximately $3.0 million
in 1997 and, does not anticipate cash contributions for defined benefit pension
plan fundings will be required in 1997. However, future variances from
actuarially assumed rates, including the rate of return on pension plan assets,
may result in increases or decreases in pension expense or credit and future
funding requirements. See Note 7 to the Consolidated Financial Statements.
26
<PAGE> 34
Selling expenses increased to $2.5 million in the first half of 1997 from
$2.0 million in the first half of 1996, but remained relatively constant as a
percentage of net sales.
General and administrative expenses remained constant at $9.3 million
during the first half of 1997 as compared to the first half of 1996. This was
primarily due to higher employee related expenses offset by $.9 million in
amortization of negative goodwill resulting from the DeSoto acquisition. At June
30, 1997 the Company's financial statements reflected accrued liabilities of
$17.6 million for estimated remediation costs arising from environmental issues.
There is no assurance regarding the ultimate cost of remedial measures that
might eventually be required by environmental authorities or that additional
environmental hazards, requiring further remedial expenditures, might not be
asserted by such authorities or private parties. Accordingly, the ultimate costs
of remedial measures may exceed the amounts currently accrued.
Interest expense in the first half of 1997 was higher than the first half
of 1996 due principally to higher borrowing levels. Average borrowings by the
Company under its revolving credit facility and term loan approximated $56.2
million in the first half of 1997 as compared to $39.2 million in the first half
of 1996. During the first half of 1997, the average interest rate paid by the
Company was 9.4% per annum as compared to 9.3% per annum in the first half of
1996.
As a result of the sale of Senior Secured Notes, interest expense in the
future is expected to be greater than the historic levels in the second half of
1996 or the first half of 1997.
The principal reasons for the difference between the U.S. federal statutory
income tax rate and the Company's effective income tax rates are explained in
Note 5 to the Consolidated Financial Statements. The Company's deferred tax
position at December 31, 1996 is also explained in Note 5 to the Consolidated
Financial Statements and in "-- Liquidity and Capital Resources."
As a result of the items discussed above, net income during the second
quarter of 1997 increased to $4.3 million from $.8 million in the second quarter
of 1996, and net income during the first half of 1997 increased to $5.8 million
from a loss of $.3 million in the first half of 1996.
Year ended December 31, 1996 compared to year ended December 31, 1995
Net sales decreased 4% to $331.2 million in 1996 from $345.7 million in
1995. Of these sales, fabricated wire products represented $159.2 million (48%)
in 1996 and $171.4 million (50%) in 1995; industrial wire represented $75.8
million (23%) in 1996 and $80.7 million (23%) in 1995; and carbon steel rod
represented $91.8 million (28%) in 1996 and $92.4 million (27%) in 1995.
Fabricated wire product prices increased approximately 1% while shipments
decreased 8% to 222,000 tons in 1996 from 242,000 tons in 1995. This decrease in
shipments was primarily due to the closing of the Company's West Coast
distribution facility and the contribution of certain equipment to the EWP joint
venture in 1995, as previously discussed. Shipments of fabricated wire products
by Keystone's remaining facilities increased slightly in 1996, but were more
than offset by the 12,000 tons of fabricated wire products shipped by the West
Coast distribution facility in 1995. Industrial wire prices decreased
approximately 3% in 1996 while shipments also decreased 3% (159,000 tons in 1996
from 164,000 tons in 1995). Carbon steel rod prices decreased 7% as shipments
increased 7% from 1995 to 1996 (307,000 tons in 1996 from 287,000 tons in 1995).
This increase in rod shipments was due in part to increased purchases by EWP.
Gross profit increased approximately 4% to $34.0 million in 1996 from $32.7
million in 1995. Gross margin increased to 10.3% in 1996 from 9.5% in 1995, as
lower overall product selling prices were more than offset by a more favorable
product sales mix of fabricated wire products, lower scrap and purchased billet
costs and lower pension expense. During 1996, the Company purchased 654,000 tons
of scrap at an average price of $125 per ton as compared to 1995 purchases of
644,000 tons at an average price of $128 per ton. The Company purchased 46,000
tons of billets in 1996 at an average price of $227 per ton as compared to
61,000 tons at $257 per ton in 1995. As a result of the DeSoto acquisition,
pension expense decreased 58% in 1996, as compared to 1995. During 1996 and 1995
the Company charged pension expense of approximately $3.7 million and $8.7
million, respectively, to cost of goods sold.
27
<PAGE> 35
Selling expenses decreased 11% to $3.9 million in 1996 from $4.4 million in
1995 but remained relatively constant as a percentage of net sales.
General and administrative expenses increased 32.6%, or $5.6 million, in
1996. This increase was primarily a result of higher expenses related to the
Company's environmental remediation project at its Peoria, Illinois facility
($6.7 million in 1996 as compared to $3.6 million in 1995), increased insurance
costs due to abnormally low levels in 1995 and costs incurred in connection with
a possible joint venture that, upon termination of discussions with the
potential joint venture partner, were charged to expense in 1996.
Interest expense increased 11% or $.4 million in 1996. The increase was due
principally to higher average borrowing levels primarily due to decreased
profitability in 1996 as well as payments made in connection with the DeSoto
acquisition. Average borrowings by the Company under its Revolving Credit
Facility and Term Loan approximated $40.2 million in 1996 as compared to $31.8
million in 1995. During 1996, the average interest rate paid by the Company was
9.3% per annum as compared to 10.3% per annum in 1995. The Company expects
higher average borrowing levels and interest rates in 1997 will result in
increased interest expense as compared to the 1996 level.
The effective income tax rates were comparable between 1996 and 1995.
As a result of the items discussed above, net income during 1996 decreased
to $2.6 million from $4.9 million in 1995, or approximately 47%, and decreased
as a percentage of sales to 0.8% from 1.4%.
Year ended December 31, 1995 compared to year ended December 31, 1994
Net sales decreased 5% to $345.7 million in 1995 from $364.4 million in
1994. Of these sales, fabricated wire products represented $171.4 million (50%)
in 1995 and $183.8 million (50%) in 1994; industrial wire represented $80.7
million (23%) in 1995 and $80.3 million (22%) in 1994; and carbon steel rod
represented $92.4 million (27%) in 1995 and $99.0 million (27%) in 1994. In
1995, fabricated wire product prices increased approximately 3% over 1994
levels, but shipments decreased 9% (242,000 tons in 1995 from 267,000 tons in
1994). The 25,000 ton decrease in sales of fabricated wire products in 1995 as
compared to 1994 was due primarily to a 7,000 ton decrease in shipments from the
West Coast distribution facility (that was eventually closed in late 1995) and
an 8,000 ton decrease in the products manufactured on the equipment that was
contributed to EWP in 1995. Industrial wire prices increased 3% in 1995 as
shipments decreased 2% (164,000 tons in 1995 from 167,000 in 1994). Carbon steel
rod prices also increased approximately 3% in 1995 as shipments decreased 9%
(287,000 tons in 1995 as compared to 316,000 in 1994).
Gross profit decreased approximately 12% to $32.7 million in 1995 from
$37.0 million in 1994. Gross margin fell to 9.5% in 1995 from 10.1% in 1994, due
to increased scrap costs, increased rod conversion costs and increased costs
resulting from production delays due to power refusals and interruptions and
unplanned equipment repairs. During 1995, the Company purchased 644,000 tons of
scrap at an average price of $128 per ton as compared to 661,000 tons at an
average price of $125 per ton in 1994. Rod conversion costs in 1995 increased
3.5% to $88 per ton as compared to 1994 costs of $85 per ton. During 1995 and
1994, the Company charged pension expense of approximately $8.7 million and $8.9
million, respectively, to cost of goods sold.
Selling expenses decreased to $4.4 million in 1995 from $5.1 million in
1994 but remained relatively constant as a percentage of net sales.
General and administrative expenses declined 16.9%, or $3.5 million, from
1994 to 1995. This decline was primarily a result of lower expenses related to
the Company's information systems project, environmental remediation and
disposal of contaminated electric arc furnace dust. During 1995, expenses
related to the Company's environmental remediation efforts and disposal of
contaminated electric arc furnace dust amounted to $3.6 million as compared to
1994 expenses of $6.1 million.
Interest expense related to the Company's various credit facilities in 1995
was higher than 1994 due principally to higher average interest rates and
borrowing levels. During 1995, the average interest rate paid by the Company was
10.3% per annum as compared to 8.0% per annum in 1994. Average borrowings by the
Company under its Revolving Credit Facility and Term Loan approximated $31.8
million in 1995 as compared
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<PAGE> 36
to $28.3 million in 1994. During 1993, the Company accrued approximately $4.0
million for the estimated interest cost as a result of an unfavorable U.S.
Supreme Court decision related to the Company's 1983 and 1984 contributions of
certain real property to its pension plans. In 1994, pursuant to the terms of an
agreement with the Internal Revenue Service, the interest due was reduced to
approximately $.1 million and, as such, the Company recorded a reduction of
approximately $3.9 million in the previously accrued interest.
The effective income tax rates were comparable between 1995 and 1994.
As a result of the items discussed above, net income during 1995 decreased
to $4.9 million from $7.6 million in 1994, or 35%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows from operating activities are affected by the
seasonality of its business as sales of certain products used in the
agricultural and construction industries are typically highest during the second
quarter and lowest during the fourth quarter of each year. These seasonal
fluctuations, as well as the annual shutdown for scheduled maintenance and
repairs at the Company's Peoria, Illinois facility, impact the timing of
production, sales and purchases and typically result in a use of cash from
operations and increases in the outstanding balance under the Company's
Revolving Credit Facility during the first quarter of each year.
At June 30, 1997, the Company had a working capital deficit of $14.2
million, including $39.2 million of notes payable and current maturities of
long-term debt. The outstanding borrowings under the Company's $55 million
Revolving Credit Facility were $35.6 million at June 30, 1997. The amount of
available borrowings under the Company's Revolving Credit Facility is based on
formula-determined amounts of trade receivables and inventories, less the amount
of outstanding letters of credit. Additional available borrowings under the
Revolving Credit Facility, which expires December 31, 1999, were $19.2 million
at June 30, 1997. The Company's Revolving Credit Facility requires daily cash
receipts to be used to reduce outstanding borrowings, which results in the
Company maintaining zero cash balances.
The Company had net deferred tax assets of $17.5 million at June 30, 1997,
all of which are classified as current assets. The majority of the deferred tax
asset relates to expenses accrued for financial reporting purposes but not yet
paid or deductible for income tax purposes, and alternative minimum tax credit
and net operating loss carryforwards. The Company continually monitors and
evaluates the need for, and the amount of, a deferred tax valuation allowance
and will in the future, after considering all factors believed to be relevant,
make appropriate adjustments, if any, to such allowance. See Note 5 to the
Consolidated Financial Statements.
During the first half of 1997, the Company's operating activities provided
approximately $6.9 million of cash compared to $.9 million in the first half of
1996. In addition to higher earnings in the first half of 1997, cash flow from
operations was impacted by changes in relative levels of assets and liabilities,
including levels of pension fundings. Defined benefit pension plan contributions
were $7.7 million in the first half of 1996. The acquisition of DeSoto included
the concurrent merger of Keystone's previously underfunded defined benefit
pension plans with and into DeSoto's overfunded defined benefit pension plan,
resulting in a single overfunded plan for financial reporting purposes. The
Company did not make any contribution to its pension plan during the first half
of 1997 and does not expect to be required to make contributions to the pension
plan during the remainder of 1997. Future variances from actuarially assumed
rates, including the rate of return on pension plan assets, may result in
increases or decreases to pension expense or credit and funding requirements in
future periods. See Note 7 to the Consolidated Financial Statements. Immediately
following the DeSoto acquisition, Keystone was obligated to, and did, cause
DeSoto to pay certain of DeSoto's trade creditors (the "Trade Credit Group") 80%
of the balance of the trade payables then due to the Trade Credit Group. The
remaining 20% of the balance ($1.4 million) due to the Trade Credit Group, plus
interest at 8%, was paid by DeSoto in February 1997.
During 1996, the Company's operating activities used approximately $0.4
million of cash, compared to $12.5 million of cash provided by operating
activities in 1995. In addition to lower earnings in 1996, as compared to 1995,
cash flow from operations was impacted by changes in relative levels of assets
and
29
<PAGE> 37
liabilities, including levels of pension fundings in excess of pension expense.
Defined benefit pension plan contributions ($9.7 million) exceeded pension
expense ($3.7 million) by approximately $6.0 million in 1996 as compared to an
excess of $10.0 million in 1995. Immediately following the acquisition of
DeSoto, Keystone was obligated to cause DeSoto to pay approximately $5.9 million
to the Trade Credit Group and $1.6 million of accumulated, unpaid dividends to
the former holders of DeSoto's preferred stock.
Prior to its acquisition by Keystone, DeSoto received a Report of Tax
Examination Changes from the Internal Revenue Service ("IRS") that proposed
adjustments resulting in additional taxes, penalties, and interest for the years
1990 through 1993. DeSoto filed a formal appeal of the proposed adjustments, and
in prior years, accrued an estimate of its liability related to this matter. On
August 5, 1997, DeSoto entered into a tentative agreement with the IRS to settle
the matter within previously accrued amounts.
During 1996, the Company made capital expenditures of approximately $19.0
million primarily related to upgrades of production equipment and an information
systems project at its facility in Peoria, Illinois. During the first half of
1997, the Company made capital expenditures of approximately $9.6 million
primarily related to upgrades of production equipment and an information systems
project at its facility in Peoria, Illinois. Capital expenditures for 1997 are
currently estimated to be approximately $22 million and are related primarily to
upgrades of production equipment. See "Use of Proceeds" and "Business -- Capital
Improvements."
The Company incurs significant ongoing costs for plant and equipment and
substantial employee medical benefits for both current and retired employees. As
such, the Company is vulnerable to business downturns and increases in costs,
and accordingly, routinely compares its liquidity requirements and capital needs
against its estimated future operating cash flows. As a result of this process,
the Company has in the past, and may in the future, reduce controllable costs,
modify product mix, acquire and dispose of businesses, restructure certain
indebtedness, and raise additional equity capital. The Company will continue to
evaluate the need for similar actions or other measures in the future in order
to meet its obligations. The Company also routinely evaluates acquisitions of
interests in, or combinations with, companies related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities or increasing the indebtedness of the Company. Upon completion
of the Offering, the Company's ability to incur new debt in the future will be
limited by the terms of the Indenture.
The Company repaid the outstanding borrowings under the Revolving Credit
Facility and Term Loan ($35.6 million and $17.5 million, respectively, at June
30, 1997) with a portion of the net proceeds of the Offering. In addition, the
Company anticipates applying the remaining net proceeds to fund a portion of its
capital improvements plan and for general corporate purposes. Until used, the
net proceeds of the Offering will be invested in short-term investment grade
securities or money market funds.
Management believes the cash flows from operations together with the funds
available under the Revolving Credit Facility will be sufficient to fund the
anticipated needs of its operations and capital improvements plan. This belief
is based upon management's assessment of various financial and operational
factors, including, but not limited to, assumptions relating to product
shipments, product mix and selling prices, production schedules, productivity
rates, raw materials, electricity, labor, employee benefits and other fixed and
variable costs, working capital requirements, interest rates, repayments of
long-term debt, capital expenditures, and available borrowings under the
Revolving Credit Facility. However, liabilities under environmental laws and
regulations with respect to the clean-up and disposal of wastes, any significant
increases in the cost of providing medical coverage to active and retired
employees could have a material adverse effect on the future liquidity,
financial condition and results of operations of the Company. Additionally,
significant declines in the Company's end-user markets or market share, the
inability to maintain satisfactory billet and rod production levels, or other
unanticipated costs, if significant, could result in a need for funds greater
than the Company currently has available. There can be no assurance the Company
would be able to obtain an adequate amount of additional financing. See
"Business -- Environmental" and Notes 15 and 17 to the Consolidated Financial
Statements.
30
<PAGE> 38
BUSINESS
GENERAL
Keystone is a leading manufacturer of steel fabricated wire products,
industrial wire and carbon steel rod for the agricultural, industrial,
construction, original equipment manufacturer and retail consumer markets. The
Company believes it is the second largest manufacturer of fabricated wire
products and industrial wire in the United States based on tons produced
(381,000 in 1996). The Company is vertically integrated, converting
substantially all of its fabricated wire products and industrial wire from
carbon steel rod produced in its steel mini-mill. During 1996, approximately 71%
of the Company's net sales were generated from sales of fabricated wire products
and industrial wire with the balance generated primarily from sales of rod not
used in the Company's downstream operations. The Company's vertical integration
allows it to benefit from the higher and more stable margins associated with
fabricated wire products as compared to carbon steel rod, as well as from lower
carbon steel rod production costs as compared to wire fabricators which purchase
rod in the open market. Moreover, management believes that Keystone's downstream
fabricated wire products and industrial wire businesses better insulate it from
the effects of rod imports and increases in domestic rod production capacity as
compared to non-integrated rod producers.
BUSINESS STRATEGY
The Company seeks to enhance profitability through the implementation of
its operating strategy, which is comprised of the following principal
components.
Becoming the Supplier of Choice. The Company seeks to be the supplier of
choice to its fabricated wire products customers by offering a broad range of
branded products that management believes are highly regarded in many end-user
markets and by meeting the increasingly demanding service and delivery
requirements of its fabricated wire products customers. The Company's fabricated
wire products include a broad line of agricultural and construction products
offered under its recognized RED BRAND(R) label which are sold through a number
of national and regional retail distributors. Approximately 75% of fabricated
wire product sales are marketed under the RED BRAND(R) label, a recognized brand
of the Company for more than 50 years. The Company believes that by emphasizing
sales of branded products through national and regional distributors as well as
through consumer do-it-yourself chains, it can further enhance its image as a
producer of consistently high quality fabricated wire products. The Company
continually seeks to strengthen its position as a supplier of choice to the
profitable and growing retail distributor market by providing a broad product
mix, responsive delivery capability and assistance to retailers in maximizing
customer revenue per square foot through merchandise packaging, product support
literature, point of purchase displays and recommendations for efficient use of
sales floor and shelf space.
Optimizing Product Mix. Since fabricated wire products generally yield
higher profit margins than does carbon steel rod, the Company seeks to utilize a
significant percentage of its carbon steel rod output in its fabricated wire
products. During the last three years, the Company converted approximately 56%
of rod tonnage it produced into fabricated wire products and industrial wire.
The Company's integrated manufacturing operations enable it to produce a variety
of fabricated wire products for a wide range of applications. As such, the
Company selectively adjusts its fabricated wire product manufacturing schedules
and product mix towards more profitable products. In this manner, the Company
has been able to increase the average price of fabricated wire products by 5%
over the past five years from $681 per ton in 1992 to $716 per ton in 1996.
Achieving Cost Savings and Production Efficiencies. One of Keystone's
primary objectives is to become the lowest cost domestic producer of fabricated
wire products and industrial wire. The Company's existing operations have been
capacity constrained by bottlenecks in the manufacturing process. As a
consequence, the Company has been forced to purchase steel billets in the open
market in order to operate its rod mill at capacity. This has made the Company
more susceptible to fluctuations in market prices for steel billets.
Additionally, the Company's rod capacity has been limited by inefficient
production equipment which has resulted in higher than average production of
"seconds" or lower quality rod which have been sold into the market at
substantial discounts. In order to improve the cost and production efficiency
and increase the
31
<PAGE> 39
capacity of its wire and rod manufacturing facilities, the Company has commenced
a three year, $75 million capital improvements plan intended to upgrade certain
plant and equipment and remove production capacity bottlenecks. Upon the
successful implementation of this plan, expected to be completed by year end
1999, and based upon expected levels of capacity utilization and current product
mix, the Company currently expects to realize savings of approximately $15
million annually in manufacturing and production costs commencing in the year
2000. See "-- Capital Improvements."
Adding Fabricated Wire Products Capacity. The Company's five existing
fabricated wire products/plants located throughout the Midwest and Southwest
enable the Company to convert rod into higher-margin fabricated wire products.
To further its vertical integration strategy, the Company continually seeks
acquisitions that would either expand its fabricated wire product offerings,
increase the manufacturing capacity of its fabricated wire products or permit it
to better compete in certain geographic markets.
The Company believes the fabricated wire products and industrial wire
industry is undergoing a period of consolidation and that a number of smaller
and less integrated wire manufacturers may be seeking to dispose of some or all
of their operations. Although the Company continually seeks suitable acquisition
candidates and, from time to time, engages in exploratory discussions regarding
such acquisitions, it currently has no plans, understandings or arrangements
with respect to any specific acquisition prospect, and no assurance may be given
that it will be successful in its acquisition efforts.
CAPITAL IMPROVEMENTS
The Company has commenced a three year, $75 million capital improvements
plan to upgrade certain of its plant and equipment and eliminate production
capacity bottlenecks in order to reduce costs and improve production efficiency.
The principal components of the Company's capital improvements plan include
reconfiguring its electric arc furnace, replacing the caster and upgrading its
wire and rod mills. The Company has recently hired a new operating management
team with experience in implementing similar capital improvements. Upon the
completion of these capital improvements in 1999, the Company expects to
increase its annual steel casting production capacity to 800,000 tons from
655,000 tons. Based upon expected levels of capacity utilization and current
product mix, the Company currently expects to realize savings of approximately
$15 million annually in manufacturing and production costs following completion
of the capital improvements plan in 1999.
The principal components of the Company's capital improvements plan, which
are expected to be substantially completed by the end of 1999, are summarized
below:
- Reconfiguration of the Electric Arc Furnaces. The Company's existing
steelmaking operations consist of two electric arc furnaces which
alternately provide molten steel to the continuous caster. Keystone is
upgrading one of the two furnaces to increase its melting capacity and is
replacing the second furnace with a ladle refining furnace. This project
is designed to reduce the Company's maintenance, refractory, raw
materials and energy costs, improve its production yield and enable the
Company to produce alloy and boron steel to required chemistries and
temperature specifications at lower costs. Keystone expects to complete
the arc shop reconfiguration and related projects during the third
quarter of 1997 for a total cost of $6.8 million. As of June 30, 1997,
the Company had spent $3.4 million on this project.
- Replacement of the Caster. Keystone currently has a six strand continuous
billet caster which was built in 1968. The caster is inefficient because
it can only cast one heat of liquid steel at a time, requiring
approximately 30 minutes of downtime between each "batch." The Company
intends to replace its existing caster with a new, curved mold six strand
billet caster with ladle sequence casting capability and a bottom tapping
design. The new caster will reduce manning levels, improve quality and
safety and lower refractory costs. In addition, the new caster is
expected to increase the Company's steel billet producing capacity by 22%
to 800,000 tons per year thereby eliminating the Company's need to
purchase billets produced by other steel companies to operate its rod
mill at full capacity. The Company expects to complete the replacement of
the caster in 1998 for an aggregate capital investment of approximately
$37.3 million.
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<PAGE> 40
- Upgrading the Wire Mill. The Company intends to improve the cost
efficiency of its Peoria wire mill by replacing 40% of its older wire
drawing machines with new, high-speed drawing machines and by adding
mechanical descaling capabilities and upgrading its galvanizing
operations. The improvements will result in improved productivity through
logistical enhancements and headcount reductions. The Company expects to
complete these upgrades by year end 1999 for an aggregate capital
investment of approximately $18 million.
PRODUCTS, MARKETS AND DISTRIBUTION
The following table sets forth certain information with respect to the
Company's steel and wire product mix in each of the last three years and the six
months ended June 30, 1996 and 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------- -------------------
1994 1995 1996 1996
------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF TONS OF OF TONS OF OF TONS OF OF TONS OF
PRODUCT SHIPPED SALES SHIPPED SALES SHIPPED SALES SHIPPED SALES
------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fabricated wire
products................ 35.5% 50.6% 35.0% 49.8% 32.3% 48.7% 33.0% 50.2%
Industrial wire........... 22.3 22.1 23.6 23.4 23.1 23.2 22.5 22.4
Carbon steel rod.......... 42.2 27.3 41.4 26.8 44.6 28.1 44.5 27.4
----- ----- ----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== ===== =====
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997
-------------------
PERCENT PERCENT
OF TONS OF
PRODUCT SHIPPED SALES
------- -------- --------
<S> <C> <C>
Fabricated wire
products................ 32.8% 48.8%
Industrial wire........... 23.6 23.2
Carbon steel rod.......... 43.6 28.0
----- -----
100.0% 100.0%
===== =====
</TABLE>
- Fabricated Wire Products. The Company is one of the leading suppliers in
the United States of agricultural fencing, barbed wire, stockade panels
and a variety of welded and woven wire mesh, fabric and netting for
agricultural, construction and industrial applications. The Company
produces these products at its Peoria, Illinois, Sherman, Texas and
Caldwell, Texas facilities. These products are distributed by the Company
through farm supply distributors, hardlines merchandisers, building and
industrial materials distributors and consumer do-it-yourself chains such
as Home Depot U.S.A., Inc., Lowe's Companies, Inc. and McCoy's Building
Supply Center. Many of the Company's fencing and related wire products
are marketed under the Company's RED BRAND(R) label, a recognized brand
of the Company for more than 50 years. As part of its marketing strategy,
the Company designs merchandise packaging, supportive product literature
and point-of-purchase displays for marketing many of these products to
the retail consumer market. The Company also manufactures products for
residential and commercial construction, including bulk, package and
collated nails, rebar ty wire, stucco netting and reinforcing building
fabric at its Peoria, Illinois, Sherman, Texas, Caldwell, Texas,
Springdale, Arkansas and Hortonville, Wisconsin facilities. The primary
customers for these products are construction contractors and building
materials distributors. The Company sells approximately 35% of its nails
through PrimeSource, Inc., one of the largest nail distributors in the
United States, under PrimeSource's GripRite(R) label.
The Company believes that its fabricated wire products are less
susceptible than industrial wire or rod to the cyclical nature of the
steel business because the commodity-priced raw materials used in such
products, such as scrap steel, represent a lower percentage of the total
cost of such value-added products when compared to rod or other less
value-added products.
The Company continuously evaluates opportunities to expand its downstream
fabricated wire products operations. During 1994, the Company purchased a
20% stake in EWP, a joint venture with a manufacturer and distributor of
wire mesh for use in highway and road construction. During 1996, 11% of
Keystone's rod sales were to EWP. Keystone has the right, under certain
circumstances to purchase the remaining 80% interest in EWP at fair
market value during the five year period ending November 1999. Management
believes EWP broadens its fabricated wire product line and in the future
may provide an opportunity to shift additional rod production to a higher
margin, value-added fabricated wire product.
- Industrial Wire. The Company is one of the largest manufacturers of
industrial wire in the United States. At its Peoria, Illinois,
Hortonville, Wisconsin, Sherman, Texas and Caldwell, Texas facilities,
the Company produces custom-drawn industrial wire in a variety of gauges,
finishes and packages for
33
<PAGE> 41
further consumption by the Company's fabricated wire products operations
and for sale to industrial fabrication and original equipment
manufacturer customers. The Company's drawn wire is used by customers in
the production of a broad range of finished goods, including nails, coat
hangers, barbecue grills, air conditioners, tools, refrigerators and
other appliances. Management believes that with a few exceptions, its
industrial wire customers do not generally compete with the Company.
- Carbon Steel Rod. The Company produces low carbon steel rod at its rod
mill located in Peoria, Illinois. Low carbon steel rod, with carbon
content of up to 0.38%, is more easily shaped and formed than higher
carbon rod and is suitable for a variety of applications where ease of
forming is a consideration. In 1996, approximately 56% of the rod
manufactured by the Company was used internally to produce wire and
fabricated wire products at the Company's five wire fabrication
facilities. The remainder of the Company's rod production was sold
directly to producers of construction products, fabricated wire products
and industrial wire, including products similar to those manufactured by
the Company.
CUSTOMERS
The Company sells its products to customers in the agricultural,
industrial, construction, commercial, original equipment manufacturer and retail
markets primarily in the Midwestern and Southwestern regions of the United
States. Customers vary considerably by product and management believes the
Company's ability to offer a broad range of product represents a competitive
advantage in servicing the diverse needs of its customers.
A listing of end-user markets by products follows:
<TABLE>
<CAPTION>
PRODUCT PRINCIPAL MARKETS SERVED
------- ------------------------
<S> <C>
Fencing products Agricultural, construction, do-it-yourself
Wire mesh products Agricultural, construction
Nails Construction, do-it-yourself
Industrial wire Producers of fabricated wire products
Carbon steel rod Producers of industrial wire and fabricated wire products
</TABLE>
Customers of the Company's industrial wire include manufacturers and
producers of nails, coat hangers, barbecue grills, air conditioners, tools,
refrigerators and other appliances. With few exceptions, these customers are
generally not in competition with the Company. Customers of the Company's carbon
steel rod include other downstream industrial wire and fabricated wire products
companies, including manufacturers of products similar to those manufactured by
the Company.
The Company's ten largest customers represented approximately 29%, 30% and
33% of the Company's net sales in 1994, 1995 and 1996, respectively, and no
single customer accounted for more than 7% of the Company's net sales during
1994, 1995 or 1996. The Company's fabricated wire products, industrial wire and
rod business is not dependent upon a single customer or a few customers, the
loss of any one, or a few, of which would have a material adverse effect on its
business.
FACILITIES
The Company's fabricated wire products, industrial wire and carbon steel
rod production facilities utilize approximately 2.6 million square feet for
manufacturing and office space, approximately 80% of which is located at the
Company's Peoria, Illinois facility.
34
<PAGE> 42
The following table sets forth the location, size and general product types
produced for each of the Company's steel and wire facilities, all of which are
owned by the Company.
<TABLE>
<CAPTION>
SIZE
FACILITY NAME LOCATION (SQUARE FEET) PRODUCTS PRODUCED
------------- -------- ------------- -----------------
<S> <C> <C> <C>
Keystone Steel & Wire......... Peoria, IL 2,100,000 Fabricated wire products, industrial
wire, carbon steel rod
Sherman Wire.................. Sherman, TX 294,000 Fabricated wire products and industrial
wire
Keystone Fasteners............ Springdale, AR 76,000 Fabricated wire products
Sherman Wire of Caldwell...... Caldwell, TX 75,000 Fabricated wire products and industrial
wire
Fox Valley Steel & Wire....... Hortonville, WI 74,000 Fabricated wire products and industrial
wire
</TABLE>
The Company believes that all of its facilities are well maintained and
satisfactory for their intended purposes.
MANUFACTURING
The Company's manufacturing operations consist of an electric arc furnace
steel mill, referred to as a mini-mill, a rod mill and five wire and wire
product fabrication facilities. The manufacturing process commences in the
Peoria, Illinois arc shop with scrap steel being loaded into one of two electric
arc furnaces and converted into molten steel. The molten steel is then
transferred by ladle into a six-strand continuous casting machine from which it
emerges in five-inch square strands that are cut to predetermined lengths,
referred to as billets. These billets, along with any billets purchased from
outside suppliers, are then transferred to the adjoining rod mill.
Upon entering the rod mill, the billets pass through a computer-controlled,
multi-zone recuperative reheat furnace. The heated billets are fed into the
rolling line, where they pass through various finishing stands during the rod
production process. After rolling, the rod is coiled and cooled. After cooling,
the coiled rod passes through inspection stations for metallurgical, surface and
diameter checks. Finished coils are compacted and banded, and either transferred
to the Company's other facilities for processing into wire, nails and other
fabricated wire products or shipped to rod customers.
While the Company does not maintain a significant "shelf" inventory of
finished rod, it generally has on hand approximately a one-month supply of
fabricated wire and wire products inventory which enables it to fill customer
orders and respond to shifts in product demand.
RAW MATERIALS AND ENERGY
The principal raw material used in the Company's operations is scrap steel.
The Company's steel mill is located close to numerous sources of high density
automobile, industrial and railroad scrap, all of which is currently available.
The purchase of scrap steel is highly competitive and its price volatility is
influenced by periodic shortages, freight costs, weather, and other conditions
beyond the control of the Company. The cost of scrap can vary significantly and
product selling prices cannot always be adjusted, especially in the short-term,
to recover the costs of large increases in scrap prices. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's manufacturing processes consume large amounts of energy in
the form of electricity and natural gas. The Company purchases electrical energy
for its Peoria facility from a regulated utility under an interruptible service
contract which provides for more economical electricity rates but allows the
utility to refuse or interrupt power to the Company's manufacturing facilities
during periods of peak demand. The utility has in the past refused or
interrupted service to the Company resulting in decreased production and
increased costs associated with the related downtime.
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<PAGE> 43
COMPETITION
The fabricated wire products, industrial wire and carbon steel rod
businesses in the United States are highly competitive and are comprised
primarily of several large mini-mill rod producers, many small independent wire
companies and a few large diversified rod and wire producers, such as the
Company. Among Keystone's principal competitors in the fabricated wire products
and industrial wire markets are Insteel Industries, Inc., Northwestern Steel &
Wire Co., Davis Wire Corporation and Gilbert & Bennett. Competition in the
fabricated wire and wire product markets is based on a variety of factors,
including channels of distribution, price, delivery performance, product
quality, service, and brand name preference. Since carbon steel rod is a
commodity steel product, management believes the domestic rod market is more
competitive than the wire and wire products markets, and price is the primary
competitive factor. Among Keystone's principal domestic carbon steel rod
competitors are North Star Steel, GS Technologies, Rariton River and Co-Steel.
Foreign steel and industrial wire producers also compete with the Company and
other domestic producers.
The Company also competes with many small independent wire companies who
purchase rod from domestic and foreign sources. Due to the breadth of its
fabricated wire products and industrial wire offerings, its ability to service
diverse geographic and product markets, and the low relative cost of its
internal supply of steel rod, the Company believes that it is well positioned to
compete effectively with non-diversified rod producers and wire companies.
The domestic steel rod industry has experienced a consolidation over the
past decade, as large integrated steel producers disposed of or, to a
significant degree, discontinued their carbon steel rod and wire operations.
Some of this capacity was replaced by domestic mini-mills and foreign producers.
Worldwide overcapacity in the steel industry continues to exist and since the
expiration of certain voluntary restraint agreements with certain foreign
governments in March 1992, imports of wire rod and certain wire products have
increased significantly. The Company believes that certain competitors may
increase their rod production capacity in the next few years, which could
adversely affect rod pricing generally and increase competition among rod
manufacturers.
The Company believes its facilities are well located to serve markets
throughout the continental United States, with principal markets located in the
Midwestern and Southwestern regions. Close proximity to its customer base
provides the Company with certain advantages over foreign and certain domestic
competition, including reduced shipping costs, improved customer service and
shortened delivery times. The Company believes higher transportation costs and
the lack of local distribution centers tends to limit foreign producers'
penetration of the Company's principal fabricated wire products, industrial wire
and rod markets, but there can be no assurance this will continue to be the
case.
The Company is implementing the initial phases of a direct order/inventory
control system that is designed to enhance its ability to serve high volume,
retail customers. The Company believes this system, when fully implemented, will
provide the Company with a competitive advantage in the service of its major
retail customers.
TRADEMARKS
The Company has registered the trademark RED BRAND for field fence and
related products. Adopted by the Company in 1924, the RED BRAND trademark has
been widely advertised and enjoys high levels of market recognition. The Company
also maintains other trademarks for various products which have been promoted in
their respective markets.
EMPLOYMENT
The Company currently employs approximately 1,950 people, of whom
approximately 1,130 are represented by the Independent Steel Workers Alliance
("ISWA") at its Peoria, Illinois facilities and approximately 180 are
represented by the International Association of Machinists and Aerospace Workers
(Local 2082) ("IAMAW") at its Sherman, Texas facilities. The current collective
bargaining agreement with
36
<PAGE> 44
the ISWA expires in May 1999. In March 1997, the Company entered into a new
three year contract with the IAMAW. The Company believes its relationship with
its employees are good. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
BACKLOG
The Company's backlog of unfilled cancelable fabricated wire products,
industrial wire and rod purchase orders, for delivery generally within three
months, approximated $30 million at December 31, 1995 and $23 million at
December 31, 1996, and $41 million at June 30, 1997. The Company does not
believe that backlog is a significant factor in its business.
HOUSEHOLD CLEANING PRODUCTS (DESOTO)
DeSoto, Inc., a wholly owned subsidiary of the Company, manufactures
household cleaning products (primarily powdered and liquid laundry detergents)
at its DeSoto facility located in Joliet, Illinois. For the nine month period
from the date of the DeSoto acquisition through June 30, 1997, DeSoto had net
sales of $10.9 million. DeSoto manufactures most products on a make and ship
basis, and, as such, overall levels of raw materials and finished goods
inventories maintained by DeSoto are relatively nominal. Approximately 80% of
DeSoto's household cleaning products sales from the date of the acquisition by
Keystone through March 31, 1997, were to a single customer, Sears Roebuck & Co.
("Sears"). Although the loss of Sears as a customer would have a material
adverse effect on DeSoto's household cleaning products business, such loss would
not have a material adverse effect on the consolidated operations of the
Company.
ENVIRONMENTAL MATTERS
Generally. The Company's production facilities are affected by a variety of
environmental laws and regulations, including laws governing the discharge of
water pollutants and air contaminants, the generation, transportation, storage,
treatment and disposal of solid wastes and hazardous substances and the handling
of toxic substances, including certain substances used in, or generated by, the
Company's manufacturing operations. Many of these laws and regulations require
permits to operate the facilities to which they pertain. Denial, revocation,
suspension or expiration of such permits could impair the ability of the
affected facility to continue operations.
The Company records liabilities related to environmental issues at such
time as information becomes available and is sufficient to support a reasonable
estimate of a range of loss. If the Company is unable to determine that a single
amount in an estimated range is more likely, the minimum amount of the range is
recorded. Costs of future expenditures for environmental remediation obligations
are not discounted to their present value. Recoveries of environmental
remediation costs from other parties are recorded as assets when their receipt
is deemed probable. See Note 15 to the Consolidated Financial Statements.
The Company believes its current operating facilities are in material
compliance with all presently applicable federal, state and local laws
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment. Environmental legislation and
regulations have changed rapidly in recent years and the Company may be subject
to increasingly stringent environmental standards in the future.
Peoria facility. The Company is currently involved in the closure of
inactive hazardous waste surface impoundments at its Peoria facility pursuant to
a closure plan approved by the Illinois Environmental Protection Agency ("IEPA")
in September 1992. The original closure plan provides for the in-place treatment
of seven hazardous waste surface impoundments and two waste piles to be disposed
of as special wastes. The Company recorded an estimated liability for
remediation of the impoundments and waste piles based on a six phase remediation
plan. The Company adjusts the recorded liability for each phase as actual
remediation costs become known. During the remediation of Phase I, which was
completed in 1994, the Company discovered additional contaminated soils and
recorded a charge of $3.1 million for the treatment and disposal costs related
to the additional soils. During 1995, the Company began remediation of Phases II
and III and completed these phases, as well as Phase IV during 1996. In
addition, the Company began
37
<PAGE> 45
remediation of Phase V during 1996. During 1995, additional contaminated soils
were discovered and the Company recorded a charge of $2.4 million for the
remediation costs for Phases II and III. During 1996, the Company's actual
remediation costs for Phase IV were greater than the recorded accrual and as
such, the Company recorded an additional charge of $2.8 million. In addition,
based on new cost estimates developed in 1996, the Company recorded an
additional charge of $3.6 million (approximately $2.0 million in the fourth
quarter) representing the estimated costs remaining to be incurred relating to
the uncompleted phases. At June 30, 1997, the Company has a $9.2 million accrual
representing the estimated costs remaining to be incurred relating to the
remediation efforts, exclusive of capital improvements. The remediation is
currently expected to be complete in 1998. Pursuant to agreements with the IEPA
and Illinois Attorney General's office, the Company is depositing $3 million
into a trust fund over a six-year period ending July 1999. The Company cannot
withdraw funds from the trust fund until the fund balance exceeds the sum of the
estimated remaining remediation costs plus $2 million. At December 31, 1995 and
1996 and June 30, 1997 the trust fund had balances of $2.4 million, $2.8 million
and $2.9 million, respectively, which amounts are included in other noncurrent
assets because the Company does not expect to have access to any of these funds
until after 1998.
Superfund sites -- Keystone. The Company is subject to federal and state
"Superfund" legislation that imposes cleanup and remediation responsibility upon
present and former owners and operators of, and persons that generated hazardous
substances deposited upon, sites determined by state or federal regulators to
contain hazardous substances. The Company has been notified by the 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 various sites. These situations involve cleanup of
landfills and disposal facilities which allegedly received hazardous substances
generated by discontinued operations of the Company. At both December 31, 1995
and 1996, the Company had accrued a total liability related to these sites of
$1.1 million and at June 30, 1997, the Company had an accrual related to these
sites of $0.4 million. The Company believes its comprehensive general liability
insurance policies provide indemnification for certain costs the Company may
incur at the three Superfund sites discussed below, and has recorded receivables
for the estimated insurance recoveries.
In July 1991, the United States filed an action against a former division
of the Company and four other PRP's in the United States District Court for the
Northern District of Illinois seeking to recover investigation and remediation
costs incurred by the EPA at the Byron Salvage Yard, located in Byron, Illinois.
In April 1992, the Company 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. The EPA has possession of the site and is
conducting the remedial investigation. In July 1993, the EPA made available for
inspection records documenting approximately $10 million in investigation and
remediation costs incurred at the site and produced copies of the laboratory
results on groundwater samples taken as a part of the ongoing remedial
investigation. During 1994, the EPA released its remedial investigation study
showing ground water contamination, however the EPA has not completed a
feasibility study or risk assessment for the site. Until the EPA releases its
Final Record of Decision, the Company will not know whether the EPA will require
any further groundwater remediation measures. In December 1996, the Company, the
EPA and the Department of Justice entered into the Fifth Partial Consent Decree
to settle the Company's liability for EPA response costs incurred at the site
through April 1994 for a payment of $690,000. Under the agreement the Company is
precluded from recovering any portion of the $690,000 settlement payment from
other parties to the lawsuit. In January 1997, the Company paid the $690,000
settlement. The Company will remain potentially liable for EPA response costs
incurred after April 30, 1994, and natural resource damage claims, if any, that
may be asserted in the future. Keystone recovered a portion of the $690,000
payment from its insurer.
In September 1991, the Company along with 53 other PRP's executed a consent
decree to undertake the immediate removal of hazardous wastes and initiate a
Remedial Investigation/Feasibility Study ("RI/FS") of the Interstate Pollution
Control site located in Rockford, Illinois. The Company's percentage allocation
within the group of PRP's agreeing to fund this project is currently 2.14%.
However, the Company's ultimate allocation, and the ultimate costs of the RI/FS
and any remedial action, are subject to change depending, for
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<PAGE> 46
example, upon: the number and financial condition of the other participating
PRPs, field conditions and sampling results, results of the risk assessment and
feasibility study, additional regulatory requirements, and the success of a
contribution action seeking to compel additional parties to contribute to the
costs of the RI/FS and any remedial action. The project manager for the
engineering firm conducting the RI/FS at the site has concluded the least
expensive remedial option would be to cap the site and install and operate a
soil vapor extraction system, at an estimated cost of approximately $2.6
million. The remedial investigation and feasibility study is expected to be
completed during 1997. The Company's current allocated share of the estimated
least expensive remedial option is $56,000.
In August 1987, the Company was notified by the EPA that it is a PRP with
respect to the alleged hazardous substance contamination of a site previously
owned by the Company in Cortland, New York. There are four other PRPs
participating in the RI/FS and a contribution action is pending against eleven
additional viable entities which allegedly contributed wastes to the site. An
estimate made by the principal engineering firm responsible for the management
of the RI/FS indicated the cost of the least expensive remedial option is
approximately $3 million. This option would involve the construction of a site
cap and ground water monitoring. The likelihood that the EPA will select this
option will depend on, among other things, the results of the EPA's evaluation
of the feasibility study. The Company's estimated share of the least expensive
remedial option is $375,000.
Superfund sites -- DeSoto. The Company's wholly owned subsidiary, DeSoto,
is also subject to federal and state Superfund legislation and has been notified
by the EPA that it is a PRP under the federal Superfund legislation for the
alleged release or threat of release of hazardous substances into the
environment at several sites. DeSoto is also involved in remediation efforts at
other non Superfund sites. All of these situations involve cleanup of landfills
and other facilities which allegedly received hazardous substances generated by
discontinued operations of DeSoto. The Company has a total of $7.1 million
accrued at June 30, 1997 relative to these sites. Such accruals were recorded by
DeSoto prior to the DeSoto acquisition. Although some insurance coverage is
available to DeSoto relative to these sites, the Company has not recorded
receivables for expected insurance proceeds at June 30, 1997.
The EPA has notified DeSoto it is a PRP responsible for the alleged
hazardous substance contamination of the American Chemical Site ("ACS"), a
chemical recycling facility located in Griffith, Indiana. The EPA alleges that
DeSoto's discontinued operations sent its wastes directly to ACS during the
1950's through the 1980's and has assigned an allocation level of approximately
5.7% to DeSoto. Cleanup costs have previously been estimated to range from $40
million to $85 million. In prior years DeSoto has paid approximately $207,000
towards the cleanup of this site. DeSoto expects to vigorously defend any
additional proceedings against it.
Prior to the Desoto acquisition, DeSoto was notified by the EPA that it is
one of 50 PRPs at the Chemical Recyclers, Inc. site in Wylie, Texas. Under a
consent order from the EPA, the PRP group has performed a removal action and an
investigation of soil and groundwater contamination. Such investigation revealed
certain environmental contamination. Certain PRPs that allegedly did not produce
chlorinated solvents may argue they should not be responsible for groundwater
cleanup or that responsibility should not be based on pure volume, but toxicity
should be taken into account in allocating responsibility. It is not presently
known whether DeSoto sent any chlorinated solvents to the site. It is
anticipated the EPA will order further remedial action, the exact extent of
which is not currently known. DeSoto has been allocated on a non-binding interim
basis, approximately 10% of the costs for this site.
In 1984, the EPA filed suit against DeSoto by amending a complaint against
Midwest Solvent Recovery, Inc. et al ("Midco"). DeSoto was a defendant based
upon alleged shipments to an industrial waste recycling storage and disposal
operation site located in Gary, Indiana. The amended complaint sought relief
under the federal Superfund statute to force the defendants to clean up the
site, pay noncompliance penalties and reimburse the government for past clean up
costs. In June 1992, DeSoto settled its portion of the case by entering into a
partial consent decree, and all but one of the eight remaining primary
defendants and 93 third party defendants entered into a main consent decree.
Under the terms of the partial consent decree, DeSoto agreed to pay its pro rata
share (13.47%) of all costs under the main consent decree. At June 30, 1997
current
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<PAGE> 47
estimates of total remaining remediation costs related to this site are
approximately $20 million. In addition to certain amounts (totaling
approximately $1.1 million at June 30, 1997) included in the trust fund
discussed below, DeSoto also has certain credits (totaling $1.2 million at June
30, 1997) due to it under the partial consent decree. These credits can be used
by DeSoto (with certain limitations) to fund its future liabilities under the
partial consent decree.
In 1995, DeSoto was notified by the Texas Natural Resource Conservation
Commission ("TNRCC") that there were certain deficiencies in prior DeSoto
reports to TNRCC relative to one of DeSoto's non-operating facilities located in
Gainesville, Texas. In response to the TNRCC letter, DeSoto engaged an
environmental consulting firm to report on additional potential remediation
costs. Additional remediation costs are presently estimated to be between $1
million to $5 million.
In December 1994, DeSoto was named in a complaint filed in the United
States District Court for the Northern District of Indiana. The complaint
alleges DeSoto and numerous other parties are jointly and severally responsible
under the federal Superfund statute for the cleanup and future cleanup, plus
costs and legal fees, at the Ninth Avenue site in Gary, Indiana. The complaint
also alleges DeSoto is responsible for its allocable share of such expenses and
costs. DeSoto entered into a settlement agreement which resolved its liability
at this site for a payment of $490,000 which was paid in March 1997.
In December 1991, DeSoto and approximately 600 other PRPs were named in a
complaint alleging DeSoto and the other PRPs generated wastes that were disposed
of at a Pennsauken, New Jersey municipal landfill. The plaintiffs in the
complaint were ordered by the court to show in what manner the defendants were
connected to the site. The plaintiffs provided an alleged nexus indicating
garbage and construction materials from DeSoto's former Pennsauken facility were
disposed of at the site and such waste contained hazardous material. In December
1992, the plaintiffs responded claiming enough information had been provided, to
which DeSoto objected. The claim was dismissed without prejudice in August 1993.
In 1996, DeSoto received an amended complaint containing the same allegations.
This matter is in discovery stage at June 30, 1997. DeSoto has denied any
liability with regard to this matter and expects to vigorously defend the
action.
In addition to the sites discussed above, DeSoto is allegedly involved at
26 other sites at which the Company does not expect significant liability.
Under the terms of a 1990 asset purchase agreement relating to the purchase
of one of DeSoto's former businesses by Sherwin-Williams, $6.0 million of the
sale's proceeds were used to establish a trust fund to fund potential clean-up
liabilities. The trust agreement expires on October 26, 2000, or when the trust
is depleted, whichever occurs first. A portion of the trust has been set aside
with respect to the Midco site, as discussed above; the agreement governing that
portion of the trust expires on October 26, 2008. DeSoto has access to the trust
fund, subject to Sherwin-Williams' approval, for any expenses or liabilities
incurred by DeSoto regarding environmental claims relating to the sites
identified in the trust agreement. Sherwin-Williams has access to the trust
fund, subject to DeSoto's approval, for any expenses or liabilities incurred as
a result of DeSoto's failure to meet its obligations relating to the sites
identified in the agreement. DeSoto was reimbursed approximately $131,000 during
the period from the date of the merger with Keystone through December 31, 1996
and $490,000 during the interim period ended June 30, 1997, from the trust to
cover waste site payments. The balance in the trust fund, primarily invested in
United States Treasury securities and classified as a restricted investment on
the balance sheet, as of June 30, 1997 was approximately $4.1 million.
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<PAGE> 48
MANAGEMENT
OFFICERS AND DIRECTORS
The current executive officers and directors of the Company are listed
below:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Glenn R. Simmons.................. 69 Chairman of the Board
J. Walter Tucker, Jr. ............ 72 Vice Chairman of the Board
Robert W. Singer.................. 60 President and Chief Executive
Officer
Harold M. Curdy................... 50 Vice President -- Finance and
Treasurer
Bert E. Downing, Jr. ............. 41 Corporate Controller
Ralph P. End...................... 59 Vice President and General Counsel
Thomas J. Glaister................ 48 President, Keystone Wire & Steel
Division
Bill J. Johnson................... 60 President, Sherman Wire Division
Sandra K. Myers................... 54 Corporate Secretary
Thomas E. Barry................... 54 Director
Paul M. Bass, Jr. ................ 62 Director
David E. Connor................... 71 Director
William P. Lyons.................. 56 Director
Donald A. Sommer.................. 69 Director
William Spier..................... 62 Director
Richard N. Ullman................. 63 Director
</TABLE>
Glenn R. Simmons has served as Chairman of the Board of Directors of the
Company since prior to 1992. Mr. Simmons served as Chief Executive Officer of
the Company from prior to 1992 to February 1997. Mr. Simmons has served as Vice
Chairman of the Board of Directors of Contran since prior to 1992. Mr. Simmons
has been a director of Contran and an executive officer and/or director of
various companies related to Contran since prior to 1992. He is Vice Chairman of
the Board of Valhi and Valcor, Inc. and a director of NL Industries, Inc. ("NL")
and Tremont Corporation ("Tremont"), all of which companies may be deemed to be
affiliates of the Company. Mr. Simmons is also the brother of Harold C. Simmons.
J. Walter Tucker, Jr. has served as Vice Chairman of the Board of Directors
of the Company since prior to 1992. Mr. Tucker has served as a director,
President and Treasurer of Tucker & Branham, Inc., a privately owned real
estate, mortgage banking and insurance firm since prior to 1992. Mr. Tucker is
also a director of Columbian Mutual Life Insurance Company and Valhi. He has
also been an executive officer and/or director of various companies related to
Valhi and Contran since prior to 1992. Mr. Tucker's spouse is a first cousin of
Donald A. Sommer.
Robert W. Singer is President and Chief Executive Officer of the Company.
Mr. Singer has served as Chief Executive Officer since February 1997. Mr. Singer
served as President and Chief Operating Officer of the Company since prior to
1992. He has served as Vice President of Valhi and Contran since prior to 1992.
Harold M. Curdy is Vice President -- Finance and Treasurer of the Company
and has served in such capacities since prior to 1992.
Bert E. Downing, Jr. is Corporate Controller of the Company and has served
in such capacity since December 1993. From prior to 1992 to December 1993, Mr.
Downing served as Senior Manager in the Dallas office of Ernst & Young, a public
accounting firm.
Ralph P. End has served as Vice President and General Counsel of the
Company since prior to 1992.
Thomas J. Glaister has served as President, Keystone Steel & Wire Division,
a division of the Company, since January 1997. Mr. Glaister served as General
Manager, Logistics of Lukens, Inc. ("Lukens") prior to
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<PAGE> 49
joining Keystone Steel & Wire. He held various management positions with Lukens
from prior to 1992 to January 1997.
Bill J. Johnson has served as President of Sherman Wire, a division of the
Company, since February 1995. Mr. Johnson served as Vice President & General
Manager of Sherman Wire since prior to 1992.
Sandra K. Myers is Corporate Secretary of the Company and Executive
Secretary of Contran and has served in both capacities since prior to 1992.
Thomas E. Barry has been a director of the Company since prior to 1992 and
is Vice President for Executive Affairs at Southern Methodist University and has
been a Professor of Marketing in the Edwin L. Cox School of Business at Southern
Methodist University since prior to 1992.
Paul M. Bass, Jr. has been a director of the Company since prior to 1992
and is Vice Chairman of First Southwest Company, a privately owned investment
banking firm, and has served as a director since prior to 1992. Mr. Bass is also
Chairman of Richman Gordman Half Price Stores, Inc., Chairman of MorAmerica
Private Equities Company, and director and Chairman of the Audit Committee of
California Federal Bank and director and member of the Executive Committee of
Source Services, Inc. Mr. Bass is currently serving as a member of the Executive
Committee of Zale-Lipshy University Hospital and as Chairman of the Board of
Trustees of Southwestern Medical Foundation.
David E. Connor has been a director of the Company since prior to 1992 and
is President of David E. Connor and Associates, advisers to commerce and
industry, in Peoria, Illinois and has served in such capacity since prior to
1992. He is Chairman of the Board of First Midwest Bankshares, Quincy, Illinois.
He is also director of Heartland Community Health Clinic, Peoria, Illinois,
Museum Trustees of America, Washington, D.C., and a trustee of Bradley
University, Peoria, Illinois.
William P. Lyons has been a director of the Company since September 1996
and is Chairman of the board of Holmes Protection Group, Inc., an electronic
security systems and monitoring company, and has served in such capacity since
1995. Mr. Lyons was a director of DeSoto from prior to 1992 until September
1996. He is also Chairman of JVL Corp., now an investment firm, but formerly a
generic pharmaceutical manufacturer, since 1992. Mr. Lyons is also President of
William P. Lyons & Co., Inc. since prior to 1992, and Managing Director of
Madison Partners, LLC, both investment firms. He is also a director of Lydall,
Inc. and Video Lottery Technologies, Inc.
Donald A. Sommer has been a director of the Company since 1962 and served
as a Vice President of the Company prior to his retirement in 1982. Mr. Sommer
is a first cousin to the spouse of J. Walter Tucker, Jr.
William Spier has been a director of the Company since September 1996 and
is President and Chairman of Sutton Holding Corp., a private investment company,
and has served in such capacity since prior to 1992. Mr. Spier was Chairman of
DeSoto from prior to 1992 to September 1996, Chief Executive Officer of DeSoto
from prior to 1992 to January 1994 and from September 1995 to September 1996. He
is also a director of Geotek Communications, Inc., EA Industries, Inc.,
Integrated Technology USA, Inc. and Video Lottery Technologies, Inc.
Richard N. Ullman has been a director of the Company since 1992 and is
President of Federal Companies, a privately held commercial warehouse and
transportation company in Peoria, Illinois, and has served in such capacity
since prior to 1992. He is a director of First of America Bank -- Illinois, N.A.
and Cilcorp, Inc. and is also serving as director of Children's Hospital of
Illinois at St. Francis, director of St. Francis Medical Center, and a trustee
of Bradley University, all located in Peoria.
All of the executive officers of the Company serve at the pleasure of the
Company's Board of Directors.
42
<PAGE> 50
CERTAIN LITIGATION
Harold C. Simmons, Glenn R. Simmons and certain companies related to
Keystone are parties to the litigation described below.
In November 1991, a purported derivative complaint was filed in the Court
of Chancery of the State of Delaware, New Castle County, (Alan Russell Kahn v.
Tremont Corporation, et al., No. 12339), in connection with Tremont's purchase
of 7,800,000 shares of common stock of NL from Valhi (the "NL Stock Purchase").
In addition to Valhi, the complaint named as defendants Tremont and the members
of Tremont's Board of Directors, including Glenn R. Simmons and Harold C.
Simmons. The complaint alleged, among other things, that the NL Stock Purchase
constituted a waste of Tremont's assets and that Tremont's Board of Directors
had breached its fiduciary duties to Tremont's public stockholders. A trial on
this matter was held in June 1995 and in March 1996 the court issued its opinion
ruling in favor of the defendants and concluded that the NL Stock Purchase did
not constitute an overreaching by Valhi, that Tremont's purchase price in the NL
Stock Purchase was fair and that in all other respects the NL Stock Purchase was
fair to Tremont. In June 1996, the plaintiffs filed an appeal with the Delaware
Supreme Court. In June 1997, the Delaware Supreme Court reversed and remanded
the trial court ruling for further proceedings. An oral hearing before the trial
court to determine the nature of these proceedings is scheduled for October
1997.
In September 1996, a complaint was filed in the Superior Court of New
Jersey, Bergen County, Chancery Division (Seinfeld v. Simmons, et al., No.
C-336-96) against Valhi, NL and certain current and former members of NL's board
of directors. The complaint, a derivative action on behalf of NL, alleges, among
other things, that NL's August 1991 "Dutch Auction" tender offer was an unfair
and wasteful expenditure of NL's funds. The complaint seeks, among other things,
to rescind NL's purchase of approximately 10.9 million shares of its common
stock from Valhi pursuant to the Dutch Auction, and the plaintiff has stated
that damages sought are $149 million. The defendants have answered the complaint
and have denied all allegations of wrongdoing. Trial is scheduled to begin in
November 1997.
DIRECTORS' COMPENSATION
Directors of the Company who are not salaried employees of the Company
receive an annual retainer of $12,000. Such directors also receive a fee of $450
per day for each Board of Directors meeting and/or committee meeting. Directors
are also reimbursed for reasonable expenses incurred in attending the Company's
Board of Directors and/or committee meetings. On May 5, 1992, the Company's
stockholders approved the Keystone Consolidated Industries, Inc. 1992
Non-Employee Director Stock Option Plan ("Keystone Director Plan"), which
provides that each non-employee director will be granted an option to purchase
1,000 shares of Keystone common stock on the third business day after the
Company issues its press release summarizing the Company's annual financial
results for the prior fiscal year. The exercise price of the options will be
equal to the last reported sale price of Keystone common stock on the NYSE
Composite Tape on the date of grant. Options granted pursuant to the Keystone
Director Plan become exercisable one year after the date of grant and expire on
the fifth anniversary following the date of grant. Mr. Glenn Simmons' services
are made available to the Company pursuant to the Intercorporate Services
Agreement between the Company and Contran (the "Intercorporate Services
Agreement"). In addition to director services, Mr. Tucker provides certain
consulting services to the Company for which the Company pays a company related
to Mr. Tucker. See "Certain Relationships and Related Transactions."
43
<PAGE> 51
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to each of the Company's four most highly compensated
executive officers other than the chief executive officer (collectively, the
"Keystone Named Executive Officers") for services rendered in all capacities to
the Company for the years ended December 31, 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
AWARDS
ANNUAL COMPENSATION --------------------- ALL OTHER
NAME AND --------------------- SECURITIES UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
------------------ ---- --------- -------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
Glenn R. Simmons(2) 1996 126,923 250,000 125,000 --
Chief Executive Officer 1995 123,077 -- -- --
1994 175,000 -- -- --
Harold M. Curdy 1996 140,000 175,000 25,000 7,260
Vice President -- Finance 1995 132,000 60,000 -- 7,425
& Treasurer 1994 132,000 125,000 -- 6,690
Bert E. Downing, Jr. 1996 80,000 37,000 15,000 4,840
Corporate Controller 1995 76,000 20,000 -- 4,655
1994 72,000 18,000 -- --
Ralph P. End 1996 95,000 47,000 15,000 6,195
Vice President and 1995 93,000 30,000 -- 6,559
General Counsel 1994 93,000 35,000 -- 5,762
Robert W. Singer(3) 1996 170,000 200,000 -- 7,260
President 1995 225,000 62,500 -- 7,425
1994 225,000 150,000 -- 6,690
</TABLE>
- ---------------
(1) Amounts contributed by the Company to the Company's 401(k) Plan for the
benefit of such executive officer.
(2) Glenn R. Simmons, Chairman of the Board of the Company, was formerly Chief
Executive Officer of the Company prior to his resignation from such position
effective as of February 10, 1997. Mr. Simmons is not a salaried employee of
the Company. The reported salary represents an allocation of his time
devoted to Keystone business under the Intercorporate Services Agreement.
See "Certain Relationships and Related Transactions." Keystone, however,
paid Mr. Simmons a bonus in 1996.
(3) Robert W. Singer was formerly President and Chief Operating Officer prior to
accepting the position of President and Chief Executive Officer effective as
of February 10, 1997. The amounts shown in the table as compensation for Mr.
Singer for 1996 represent the full amount paid by the Company for services
rendered to the Company during 1996, less the portion of such compensation
that is either credited or reimbursed to the Company for services Mr. Singer
rendered to Valhi pursuant to the Intercorporate Services Agreement. Mr.
Singer's Keystone compensation excludes $55,000 as salary for services
rendered by Mr. Singer to Valhi during 1996 for which Keystone received
credit under the Intercorporate Services Agreement.
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<PAGE> 52
The following table sets forth certain information at December 31, 1996 and
for the fiscal year then ended with respect to stock options granted to the
Keystone Named Executive Officers. No stock appreciation rights were granted and
no options have been granted at an option price below fair market value on the
date of the grant.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER % OF TOTAL VALUE AT ASSUMED
OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM($)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(1) YEAR ($/SHARE) DATE 5% 10%
---- ---------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Glenn R. Simmons.............. 125,000 69% 8.125 10/02/06 638,721 1,618,645
Harold M. Curdy............... 25,000 14 8.125 10/02/06 127,744 323,729
Bert E. Downing, Jr........... 15,000 8 8.125 10/02/06 76,746 194,237
Ralph P. End.................. 15,000 8 8.125 10/02/06 76,746 194,237
Robert W. Singer.............. -- -- -- -- -- --
</TABLE>
- ---------------
(1) Options were granted on October 2, 1996 and vest 33 1/3%, 66 2/3%, and 100%
on the first, second, and third anniversary of the date of grant,
respectively.
The following table provides information, with respect to the Keystone
Named Executive Officers, concerning the value of unexercised stock options held
as of December 31, 1996. In 1996, no Keystone Named Executive Officer exercised
any stock options or stock appreciation rights.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
DECEMBER 31, 1996(#) AT DECEMBER 31, 1996($)(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Glenn R. Simmons....................... 22,500 130,000 n/a 15,625
Harold M. Curdy........................ 3,000 27,000 n/a 3,125
Bert E. Downing, Jr.................... 800 16,200 n/a 1,875
Ralph P. End........................... 900..... 15,600 n/a 1,875
Robert W. Singer....................... 6,000 4,000 n/a n/a
</TABLE>
- ---------------
(1) The values shown in the table are based on the $8.25 per share closing price
of the common stock on December 31, 1996 as reported by the NYSE Composite
Tape, less the exercise price of the options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except for Mr. Sommer who retired as Vice President of the Company in 1982,
no member of the Company's Compensation Committee is or has been an officer or
employee of the Company or any of its subsidiaries. In 1996, no executive
officer of the Company served on the compensation committee or as a director of
another entity, one of whose executive officers served on the Company's
Compensation Committee or Board of Directors.
PENSION PLAN
The Company maintains a qualified, noncontributory defined benefit pension
plan which provides defined retirement benefits to various groups of eligible
employees, including executive officers. Normal retirement age under the
Company's pension plan is age 65. Under the plan, the defined benefit for
salaried employees, including officers, is based on a straight life annuity. An
individual's monthly benefit is the sum of the following: (a) for credited
service prior to January 1, 1981, the amount determined by his or her average
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<PAGE> 53
monthly cash compensation for the five years of his or her highest earnings
prior to January 1, 1981, multiplied by 1.1% multiplied by the years of credited
service, plus (b) for each year of service between 1980 and 1989, the amount
determined by the sum of 1.2% multiplied by his or her average monthly cash
compensation that year up to the social security wage base and 1.75% multiplied
by his or her average monthly cash compensation that year in excess of the
social security wage base, plus (c) for each year subsequent to 1989, the amount
determined by 1.2% multiplied by his or her average monthly cash compensation
that year, but not less than $14.00 per month.
The estimated annual benefits payable upon retirement at normal retirement
age for each of the salaried Keystone Named Executive Officers, assuming
continued employment with the Company until normal retirement age at current
salary levels are: Harold M. Curdy, $46,908; Bert E. Downing, Jr., $26,992;
Ralph P. End, $28,333 and Robert W. Singer, $24,475. Glenn R. Simmons does not
participate in the Company's defined benefit pension plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As set forth below under the caption "Security Ownership of Management and
Certain Beneficial Owners," Harold C. Simmons, through Contran and other
entities, may be deemed to beneficially own approximately 44% of the Company's
outstanding common stock and, therefore, may be deemed to control the Company.
The Company and other entities that may be deemed to be controlled by or
affiliated with Mr. Simmons sometimes engage in (a) intercorporate transactions
such as guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties, and (b) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions that resulted in the acquisition by one related party
of a publicly held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates and understands that
Contran and related entities consider, review and evaluate transactions of the
type described above. Depending on the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more of
such transactions in the future. In connection with these activities, the
Company may consider issuing additional equity securities or incurring
additional indebtedness. The Company's acquisition activities have in the past
and may in the future include participation in the acquisition or restructuring
activities conducted by other companies that may be deemed to be controlled by
Harold C. Simmons. It is the policy of the Company to engage in transactions
with related parties on terms, in the opinion of the Company's management, no
less favorable to the Company than could be obtained from unrelated parties.
The Indenture limits the ability of the Company and its Subsidiaries to
enter into transactions with affiliates. See "Description of Notes -- Certain
Covenants -- Transactions with Affiliates." Except as will be required under the
terms of the Indenture, no specific procedures are in place that govern the
treatment of transactions among the Company and its related entities, although
such entities may implement specific procedures as appropriate for particular
transactions. In addition, under applicable principles of law, in the absence of
stockholder ratification or approval by directors who may be deemed
disinterested, transactions involving contracts among companies under common
control must be fair to all companies involved. Furthermore, directors and
officers owe fiduciary duties of good faith and fair dealing to all stockholders
of the companies for which they serve.
Glenn R. Simmons, J. Walter Tucker, Jr., and Sandra K. Myers are not
salaried employees of the Company. The Company has contracted with Contran, on a
fee basis payable in quarterly installments, to provide certain administrative
and other services to the Company in addition to the services of Mr. Simmons and
Ms. Myers, including consulting services of Contran executive officers pursuant
to the Intercorporate Services Agreement. The aggregate fees incurred by the
Company pursuant to this agreement were $640,000 in 1994, $500,000 in 1995 and
$465,000 in 1996. The Company compensates Tucker & Branham, Inc. for
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<PAGE> 54
certain consulting services of Mr. Tucker on an hourly basis as his services are
requested. The fees paid Tucker & Branham, Inc. were $66,000 in 1994, $50,000 in
1995 and $79,000 in 1996.
Certain of Keystone's property, liability and casualty insurance risks are
partially insured or reinsured by a captive insurance subsidiary of Valhi. The
premiums and claims paid in connection therewith were approximately $98,000 in
1994, $39,000 in 1995 and $689,000 in 1996.
The Company also purchased aircraft services from Valhi in the amount of
$128,000 in 1994, $150,000 in 1995 and $172,000 in 1996.
In the opinion of management and the Board of Directors, the terms of the
transactions described above were no less favorable to the Company than those
that could have been obtained from an unrelated entity.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
As of June 30, 1997, the Company's directors, the Keystone Named Executive
Officers, the beneficial owners of more than 5% of the Company's common stock
and preferred stock outstanding, and the Company's directors and executive
officers as a group, beneficially owned, as defined by the rules of the
Commission, the shares of the Company's common stock and preferred stock shown
in the following table.
<TABLE>
<CAPTION>
COMBINED
OWNERSHIP OF
COMMON AND
PREFERRED STOCK
COMMON PERCENT OF PREFERRED PERCENT OF PERCENT OF
NAME OF BENEFICIAL OWNER STOCK CLASS(1) STOCK CLASS(2) CLASS(2)
------------------------ --------- ---------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Thomas E. Barry(3)..................... 4,200 -- 0 -- --
Paul M. Bass, Jr.(3)(4)................ 11,500 -- 0 -- --
David E. Connor(3)..................... 5,500 -- 0 -- --
Harold M. Curdy(5)..................... 18,831 -- 0 -- --
Bert E. Downing, Jr.(5)................ 1,794 -- 0 -- --
Ralph P. End(5)........................ 4,764 -- 0 -- --
William P. Lyons(6).................... 36,127 -- 0 -- --
Glenn R. Simmons(5)(7)................. 68,600 -- 0 -- --
Robert W. Singer(5).................... 43,250 -- 0 -- --
Donald A. Sommer(3).................... 32,964 -- 0 -- --
William Spier(6)(8).................... 226,412 2.4 193,537 44.4 4.3
J. Walter Tucker, Jr................... 153,450 1.7 0 -- 1.6
Richard N. Ullman(3)................... 4,500 -- 0 -- --
Harold C. Simmons(7)(9)(10)............ 4,094,609 44.2 0 -- 42.2
Dimensional Fund Advisors Inc.(11)..... 553,100 5.7 0 -- 5.7
Coatings Group, Inc.(12)............... 184,017 -- 193,537 44.4 3.9
Vahal Corp.(13)........................ -- -- 145,152 33.3 1.6
Parkway M&A Capital Corporation(14).... 98,174 1.1 96,769 22.2 2.0
All directors and executive officers as
a group (16
persons)(3)(4)(5)(6)(8)(15).......... 628,828 6.7 193,537 44.4 8.4
</TABLE>
- ---------------
(1) All beneficial ownership is sole and direct except as otherwise set forth
herein. Information as to the beneficial ownership of common stock and
preferred stock has either been furnished to the Company by or on behalf of
the indicated persons or is taken from reports on file with the Commission.
(2) Percentage omitted if less than 1%.
(3) Includes shares that such person or group could acquire upon the exercise
of options exercisable within the next 60 days by Messrs. Barry, Bass,
Connor, Sommer and Ullman for the purchase of 4,000 shares each pursuant to
the Keystone Director Plan.
(4) Includes 2,500 shares of common stock held in discretionary accounts by
First Southwest Company, a licensed broker-dealer, on behalf of certain of
its clients, as to which Mr. Bass has voting and dispositive authority. Mr.
Bass serves as Vice Chairman of First Southwest Company. As a result of the
foregoing, Mr. Bass may be deemed to be the beneficial owner of such
shares. However, Mr. Bass disclaims all such beneficial ownership.
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<PAGE> 55
(5) Includes shares that such person or group could acquire upon the exercise
of options exercisable within the next 60 days by Messrs. Curdy, Downing,
End, Simmons and Singer, for the purchase of 5,000, 1,200, 1,500, 27,500
and 10,000 shares, respectively, pursuant to the Company's stock option
plan.
(6) Includes shares that such person or group could acquire upon the exercise
of options exercisable within the next 60 days by Messrs. Lyons and Spier,
for the purchase of 3,732 and 22,395 shares, respectively, pursuant to the
Company's stock option plan. These options represent options granted under
the DeSoto, Inc. 1992 Stock Option Plan which were exchanged for Keystone
options at the time of the Company's acquisition of DeSoto on September 27,
1996.
(7) Glenn R. Simmons is the brother of Harold C. Simmons.
(8) Includes 184,017 shares of the Company's common stock and 193,537 shares of
preferred stock owned by Coatings Group, a private corporation controlled
by Mr. Spier.
(9) The shares of the Company's common stock shown as beneficially owned by
Harold C. Simmons includes 3,478,059, 326,050, 250,000, and 30,000 shares
held by Contran, NL, The Harold Simmons Foundation, Inc. (the
"Foundation"), and The Combined Master Retirement Trust (the "Combined
Trust"), respectively. Mr. Simmons' business address is 5430 LBJ Freeway,
Suite 1700, Dallas, Texas 75240.
Contran and NL directly hold approximately 37.5% and 3.5%, respectively, of
the Company's outstanding common stock. Valhi and Tremont are the holders
of approximately 55.6% and 17.7%, respectively, of the outstanding common
stock of NL. Contran holds, directly or indirectly through related
entities, approximately 92.0% and 42.0% of the outstanding common stock of
Valhi and Tremont, respectively. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of Harold C.
Simmons' children and grandchildren (together, the "Trusts"), of which Mr.
Simmons is the sole trustee. As sole trustee of each of the Trusts, Mr.
Simmons has the power to vote and direct the disposition of the shares of
Contran stock held by each of the Trusts; however, Mr. Simmons disclaims
beneficial ownership thereof.
Although the Company is not a party to the action, the Company is aware
that a lawsuit captioned In re: The Harold C. Simmons Family Trust No. 1
and Family Trust No. 2 U/A January 1, 1964 (No. 96-306-P) is pending in the
Probate Court Number One of Dallas County, Texas. Pleadings filed in the
action contain allegations by two of Harold C. Simmons' four daughters (who
are among the beneficiaries of the Trusts) that Mr. Simmons has breached
his fiduciary duties as trustee of the Trusts. The breaches of fiduciary
duty claimed include, among others, allegedly unfair self dealing,
allegedly improper charitable contributions and alleged violations of the
federal election laws. Pleadings by Mr. Simmons in the action assert that
all actions taken by him as trustee were specifically permitted by the
terms of the Trusts and greatly benefitted the Trusts and the
beneficiaries. The relief sought by the plaintiffs includes money damages
and the removal of Mr. Simmons as trustee of the Trusts. Mr. Simmons' other
two daughters have filed pleadings in the action opposing the relief sought
by the plaintiffs. Mr. Simmons has advised the Company that the action has
no merit; that he denies all allegations of wrongdoing made by the
plaintiffs; and that he intends to defend the actions vigorously.
Harold C. Simmons is Chairman of the Board, President and Chief Executive
Officer of Valhi and Contran and Chairman of the Board and Chief Executive
Officer of certain related entities through which Contran may be deemed to
control Valhi. Additionally, he is Chairman of the Board of NL and is a
director of Tremont.
The Combined Trust holds approximately 0.3% of the outstanding shares of
the Company's common stock. The Combined Trust is a trust formed by Valhi
to permit the collective investment by trusts that maintain the assets of
certain employee benefit plans adopted by Valhi and related companies,
including Keystone. Harold C. Simmons is sole trustee of the Combined Trust
and sole member of the Trust Investment Committee for the Combined Trust.
The trustee and members of the Trust Investment Committee for the Combined
Trust are selected by Valhi's board of directors. Harold C. Simmons and
Glenn R. Simmons are members of Valhi's board of directors and are both
participants in one or more of the employee benefit plans that invest
through the Combined Trust; however, both such persons disclaim beneficial
ownership of the shares of Company common stock held by the Combined Trust,
except to the extent of their respective vested beneficial interests
therein.
The Foundation holds approximately 2.7% of the outstanding shares of the
Company's common stock. The Foundation is a tax-exempt foundation organized
and existing exclusively for charitable purposes. Harold C. Simmons is
Chairman of the Board and Chief Executive Officer of the Foundation.
By virtue of the holding of the offices, the stock ownership and his
service as trustee, all as described above, Harold C. Simmons may be deemed
to control such entities and Mr. Simmons and certain of such entities may
be deemed to possess indirect beneficial ownership of certain shares of
Company common stock directly held by certain of such other entities.
However, Mr. Simmons disclaims beneficial ownership of the shares of the
Company's common stock beneficially owned, directly or indirectly, by any
of such entities.
The information contained in this footnote is based on information provided
to the Company by Valhi, Contran and certain of their affiliates as of June
30, 1997.
(10) The shares of the Company's common stock shown as beneficially owned by
Harold C. Simmons also includes 10,500 shares held by Mr. Simmons' wife,
with respect to all of which Mr. Simmons disclaims beneficial ownership.
(11) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 553,100 shares of the
Company's common stock as of December 31, 1996, all of which shares are
held in portfolios of DFA
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<PAGE> 56
Investment Dimensions Group Inc., a registered open-end investment company,
or in series of The DFA Investment Trust Company, a Delaware business
trust, or the DFA Group Trust and the DFA Participating Group Trust,
investment vehicles for qualified employee benefit plans, all of which
Dimensional Fund Advisors Inc. serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares. The business address of
Dimensional Fund Advisors Inc. is 1299 Ocean Avenue, Suite 650, Santa
Monica, California 90401.
(12) Coatings Group, Inc. is a private corporation controlled by William Spier.
The business address of Coatings Group, Inc. is 444 Madison Avenue, 38th
Floor, New York, New York 10022.
(13) The business address of Vahal Corp. is 555 Fifth Avenue, 17th Floor, New
York, New York 10033.
(14) The business address of Parkway M&A Capital Corporation is 444 Madison
Avenue, 38th Floor, New York, New York 10022.
(15) In addition to the foregoing, the shares of the Company's common stock
shown as beneficially owned by the Company's directors and executive
officers as a group include 5,760 shares that the remaining executive
officers of the Company have the right to acquire upon the exercise within
the next 60 days of stock options granted pursuant to the Company's stock
option plan.
DESCRIPTION OF REVOLVING CREDIT FACILITY AND RELATED MATTERS
The Company and its wholly owned subsidiary, DeSoto, have entered into
revolving loan and security agreements (the "Loan Agreements") with Congress
Financial Corporation (Central) (the "Bank") that provide for a working capital
facility (the "Revolving Credit Facility") of up to an aggregate amount of $55
million to be used for working capital requirements and other general corporate
purposes. The Revolving Credit Facility is comprised of a separate facility
available to each of the Company and DeSoto. The maximum amount of the $10
million facility available to DeSoto under the Revolving Credit Facility is
based on the sum of a certain percentage of eligible accounts receivable and
eligible inventory of DeSoto less certain reductions made by the Bank. The
maximum amount of the $55 million facility available to the Company under the
Revolving Credit Facility, which is reduced to the extent of amounts outstanding
under the DeSoto Facility, is based on the sum of certain percentages of
eligible accounts receivable and eligible inventory of the Company, Sherman Wire
of Caldwell, Inc., a subsidiary of the Company ("Caldwell"), and Fox Valley
Steel and Wire Company, a subsidiary of the Company ("Fox Valley"), less an
inventory cap and certain other adjustments. The Revolving Credit Facility
includes a provision for the issuance of letters of credit in a maximum
aggregate amount of $5 million. The Revolving Credit Facility expires on
December 31, 1999.
INTEREST PAYMENTS
Interest on borrowings under the Revolving Credit Facility is payable at a
rate of 1% per annum in excess of the prime rate, except that the Company shall
pay to the Bank interest at the rate of 3% per annum in excess of the prime rate
if there is an event of default under the Loan Agreements or the amount of loans
pursuant to the Revolving Credit Facility is in excess of the maximum provided
in the Loan Agreements. Interest is payable monthly, in arrears, and is computed
on the basis of a 360-day year.
COLLECTION FACILITY
The Revolving Credit Facility requires that the Company use its daily cash
receipts to reduce the outstanding borrowings thereunder. The Company maintains
certain blocked accounts which are the property of the Bank and into which the
Company or its account debtors remit all payments on open accounts and all
payments constituting proceeds of inventory or other collateral.
SECURITY INTERESTS
As security for the Revolving Credit Facility, the Bank holds a first
priority lien on substantially all of the assets of the Company and its
Subsidiaries with the exception of their respective fixed assets. The Bank has
entered into an intercreditor agreement with the Trustee acknowledging their
respective rights in their respective collateral (the "Intercreditor
Agreement").
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<PAGE> 57
GUARANTEES
Caldwell, DeSoto and Fox Valley have guaranteed all payments and
performance obligations of the Company with respect to the Revolving Credit
Facility, and the Company has guaranteed all payment and performance obligations
of DeSoto under the Revolving Credit Facility.
COVENANTS
Pursuant to the Loan Agreements, the Company, DeSoto, Caldwell and Fox
Valley have each agreed that they will not (i) recapitalize, merge or
consolidate with another entity, or sell, assign, lease or transfer or dispose
of any stock or indebtedness or any of their assets, or form or acquire any
subsidiaries; (ii) create, incur, assume or suffer to exist any security
interest, mortgage, pledge, lien, charge or other encumbrance on any of its
assets or properties except for certain liens securing the payment of taxes,
certain liens arising in the ordinary course of business, or nonmaterial
restrictions affecting the use of real property and other specifically permitted
liens, including the liens and security interests securing the Notes and
purchase money liens and security interests incurred in connection with the
capital improvements program described under the caption "Business -- Capital
Improvements"; (iii) incur any additional indebtedness except for trade
obligations and accruals in the ordinary course of business, indebtedness
evidenced by the Notes and purchase money indebtedness, or amend, modify, alter
or change the terms of, or redeem, such indebtedness, except for mandatory
redemption of the Notes; (iv) make any investments except (a) endorsement of
instruments for collection or deposit in the ordinary course of business, (b)
loans or investments resulting from the conversion of past due accounts
receivable into notes or stock, which are delivered and pledged to the Bank, and
(c) investments specifically enumerated therein, consisting of certain low risk
investments and specified intercompany loans; (v) enter into any transaction for
the purchase, sale or exchange of property or the rendering of any services to
or by any affiliate except for certain specifically permitted transactions; and
(vi) make loans to, or pay any bonuses, management or other fees to any
officers, directors, employees or stockholders of the Company or any affiliate
except for certain specifically permitted payments.
The Company and DeSoto have agreed not to declare or pay any dividends or
set aside or deposit or invest sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of stock for consideration
other than common stock or make any other distribution in respect of any such
shares, except for scheduled dividends on the Company's Series A Senior
Preferred Stock and redemption of such stock in an amount not to exceed
$3,500,000. In addition, the Company has agreed to maintain working capital (as
defined in the Loan Agreements) of not less than $15,000,000 and tangible net
worth (as defined in the Loan Agreements) of not less than $10,000,000.
EVENTS OF DEFAULT
The Loan Agreements contain certain events of default, including, without
limitation, the following: (i) the failure of the Company or DeSoto to pay when
due any obligations or the failure to perform any of the terms, covenants,
conditions or provisions in the Loan Agreements or related documents; (ii) any
representation, warranty or statement of fact made by the Company or DeSoto to
the Bank in the Loan Agreements or related documents proving to be false or
misleading in any material respect; (iii) the revocation, termination or failure
to perform any terms, covenants, conditions or provisions of any guaranty,
endorsement or other agreement by any obligor in favor of the Bank; (iv) the
rendering of any judgment for the payment of money against the Company, DeSoto
or any obligor in excess of $100,000 in any one case or in excess of $500,000 in
the aggregate, if such amount remains undischarged or unvacated for a period in
excess of 30 days or the rendering of any injunction, attachment, garnishment or
execution against the Company, DeSoto or any obligor on any of their assets; (v)
the death of any obligor or the dissolution, suspension or discontinuance of
doing business of the Company, DeSoto or any obligor; (vi) the insolvency of the
Company, DeSoto or any obligor, an assignment for the benefit of creditors, the
making or sending of a notice of a bulk transfer, or the calling of a meeting of
their creditors; (vii) certain other events of bankruptcy or insolvency of the
Company, DeSoto or any obligor; (viii) the default by the Company, DeSoto or any
obligor under certain agreements with any person other than the Bank; (ix) any
change in the controlling ownership of the Company or DeSoto; (x) the indictment
or threatened indictment of the Company, DeSoto or any obligor under certain
criminal
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statutes where the remedy available includes forfeiture of any property of the
Company, DeSoto or any obligor; (xi) a material adverse change in the business,
assets or prospects of the Company, DeSoto or any obligor after the date of the
Loan Agreements; (xii) any event of default under any of the other financing
agreements or under the security agreement executed by Company in favor of
Keystone Master Pension Trust; (xiii) the termination of the subordination
agreement executed by the trustee of the Keystone Master Pension Trust in favor
of the Bank; or (xiv) a default by the Company under the agreement with the
Pension Benefit Guaranty Corporation.
FEES
The Company pays a monthly service fee not to exceed $5,000 to the Bank and
a letter of credit fee at a rate equal to one quarter of one percent (.25%) per
month on the outstanding balance of the letter of credit accommodations.
COLLATERAL INTEREST OF PENSION BENEFIT GUARANTY CORPORATION AND MASTER TRUST
The Company has granted the Pension Benefit Guaranty Corporation and the
Keystone Master Retirement Trust, each acting on behalf of itself and the Plan
(collectively, the "Master Trust"), a lien on all of the Company's assets to
secure a maximum of $4.5 million of certain contingent future pension funding
obligations through January 1, 2001. See Note 7 to the Consolidated Financial
Statements. This lien is subordinate to the lien securing borrowings under the
Revolving Credit Facility, but is senior to the lien to be granted in the
Collateral to secure the Notes.
DESCRIPTION OF NOTES
GENERAL
The Senior Notes were issued pursuant to an Indenture (the "Indenture")
between the Company and The Bank of New York, as trustee (the "Trustee"), in a
private transaction that was not subject to the registration requirements of the
Securities Act. The Exchange Notes will be issued pursuant to the Indenture.
Upon issuance of the Exchange Notes or the effectiveness of the Registration
Statement of which this prospectus is part, the Indenture will be subject to and
governed by the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Notes are subject to all such terms, and Holders of Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of certain provisions of the Indenture and the
Registration Rights Agreement does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Notes, the Indenture and the Registration Rights Agreement, including the
definitions therein of certain terms used below. A copy of the Indenture and
Registration Rights Agreement is available as set forth below under
"-- Available Information." The definitions of certain terms used in the
following summary are set forth below under "-- Certain Definitions."
The Notes are senior secured obligations of the Company ranking pari passu
in right of payment to all existing and future senior indebtedness of the
Company and senior in right of payment to any future subordinated indebtedness
of the Company. As of June 30, 1997, after giving pro forma effect to the
Offering and the application of the proceeds thereof, the Company would have had
approximately $101.5 million of total indebtedness outstanding. Subject to
certain restrictions, the Indenture permits the Company and its Subsidiaries to
incur additional debt, including debt which may be secured, provided certain
financial and other conditions described under "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock," and
"-- Certain Covenants -- Liens" are met.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100.0 million and
mature on August 1, 2007. The Notes bear interest at the stated rate of 9 5/8%
per annum, payable semi-annually in arrears on February 1 and August 1,
commencing on February 1, 1998, to Holders of record at the close of business on
the
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January 15 and July 15 immediately preceding such interest payment date.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the date of original
issuance. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. References in this "Description of Notes" to interest
shall be deemed to include Liquidated Damages, if any, unless the context
otherwise requires. Principal, redemption price and purchase price of, and
interest on the Notes will be payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register of
Holders of Notes; provided that all payments with respect to Notes the Holders
of which have given wire transfer instructions to the Company will be required
to be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York is the office of the Trustee maintained
for such purpose. The Notes will be issued in denominations of $1,000 and
integral multiples thereof.
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to August 1,
2002. On such date and thereafter, the Notes will be subject to redemption at
the option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below, plus accrued and unpaid interest, if any,
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on August 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002....................................................... 104.813%
2003....................................................... 103.208%
2004....................................................... 101.604%
2005 and thereafter........................................ 100.000%
</TABLE>
Notwithstanding the foregoing, prior to August 1, 2000, the Company may at
its option redeem up to an aggregate of 25% of the original principal amount of
the Notes at a redemption price of 109.625% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the redemption date, with the net
proceeds of one or more Public Equity Offerings of Qualified Capital Stock of
the Company; provided that at least $75.0 million in aggregate principal amount
of Notes remain outstanding immediately after such redemption; and provided,
further, that such redemption shall occur within 90 days after the date of the
closing of such Public Equity Offering of Qualified Capital Stock of the
Company.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee by lot, pro rata or by such
other method as the Trustee shall deem fair and appropriate; provided that no
Notes of $1,000 or less shall be redeemed in part.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control. Upon the occurrence of a Change of Control, each Holder
of Notes will have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at a
purchase price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, thereon to the Purchase Date. Immediately
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of Control
and offering to repurchase Notes pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
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<PAGE> 60
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the related Purchase Date, which is at least 30 but no more than 60 days
from the date on which the Company mails notice of the Change of Control, the
Company will, to the extent permitted under applicable law, (1) accept for
payment all Notes or portions thereof properly tendered pursuant to the Change
of Control Offer, (2) deposit with the Paying Agent an amount equal to the
purchase price, together with accrued and unpaid interest thereon to the
Purchase Date in respect of all Notes or portions thereof so tendered and
accepted for repurchase and (3) deliver or cause to be delivered to the Trustee
the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so
repurchased the amount due in connection with such Notes, and the Company will
promptly issue a new Note, and the Trustee, upon written request from the
Company will authenticate and mail or deliver (or cause to be transferred by
book entry) to each relevant Holder a new Note equal in principal amount to any
unpurchased portion of the Notes surrendered, if any; provided that each such
new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Company will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Purchase Date.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Asset Sales. The Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, engage in an Asset
Sale unless (i) immediately before and after giving effect to such transaction,
no Default or Event of Default exists, (ii) the Company (or the Subsidiary, as
the case may be) receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the assets or Equity Interests issued or sold
or otherwise disposed of, (iii) if such Asset Sale involves Collateral it shall
be in compliance with the provisions described under "-- Possession, Use and
Release of Collateral," and (iv) at least 75% of the consideration therefor
received by the Company or such Subsidiary is in the form of cash or Cash
Equivalents; provided that the amount of (x) any liabilities (as shown on the
Company's or such Subsidiary's most recent balance sheet) of the Company or any
Subsidiary (other than contingent liabilities and liabilities that are by their
terms subordinated to the Notes) that are assumed by the transferee of any such
assets pursuant to an agreement that releases the Company or such Subsidiary
from further liability and (y) any securities received by the Company or any
such Subsidiary from such transferee that are immediately converted by the
Company or such Subsidiary into cash or Cash Equivalents (to the extent of the
cash or Cash Equivalents received), shall be deemed to be cash or Cash
Equivalents for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or the applicable Subsidiary shall apply such Net Proceeds as
follows:
(a) first, to the extent such Net Proceeds are received from an Asset
Sale not involving the sale, transfer or disposition of Collateral
("Non-Collateral Proceeds"), to repay any Indebtedness secured by the
assets involved in such Asset Sale or otherwise required to be repaid with
the proceeds thereof, and
(b) second, with respect to any Non-Collateral Proceeds remaining
after application pursuant to the preceding paragraph (a) and any Net
Proceeds received from an Asset Sale to the extent such assets constitute
Collateral ("Collateral Proceeds" and, together with such remaining
Non-Collateral Proceeds, the "Available Amount"), the Company shall make an
offer to purchase (the "Asset Sale Offer") from all Holders of Notes, up to
a maximum principal amount (expressed as a multiple of $1,000) of Notes
equal to the Available Amount (the "Offer Amount") at a purchase price
equal to 100% of the principal
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<PAGE> 61
amount thereof plus accrued and unpaid interest thereon, if any, to the
Purchase Date; provided, however, that the Company will not be required to
apply pursuant to this paragraph (b) Net Proceeds received from any Asset
Sale if, and only to the extent that, such Net Proceeds are applied to a
Related Business Investment within 360 days of such Asset Sale and, if the
Net Proceeds so invested were Collateral Proceeds, the property and assets
constituting such Related Business Investment and any other non-cash
consideration received as a result of such Asset Sale are made subject to
the Lien of the Indenture and the applicable Security Documents; provided,
further, that if at any time any non-cash consideration received by the
Company or any Subsidiary, as the case may be, in connection with any Asset
Sale is converted into or sold or otherwise disposed of for cash, then such
conversion or disposition shall be deemed to constitute an Asset Sale under
the Indenture and the Net Proceeds thereof shall be applied in accordance
with this "Repurchase at the Option of Holders -- Asset Sale" covenant; and
provided, further, that the Company may defer the Asset Sale Offer until 30
days after there is an aggregate unutilized Available Amount equal to or in
excess of $10 million resulting from one or more Asset Sales (at which
time, the entire unutilized Available Amount, and not just the amount in
excess of $10 million, shall be applied as required by this paragraph).
All Collateral Proceeds shall constitute Trust Moneys and shall be
delivered by the Company (or the applicable Subsidiary) to the Trustee and shall
be deposited in the Collateral Account in accordance with the Indenture.
Collateral Proceeds so deposited may be withdrawn from the Collateral Account
pursuant to the Indenture.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of an Asset Sale.
On the related Purchase Date, which is at least 30 but no more than 60 days
from the date on which the Company mails notice of an Asset Sale Offer, the
Company will, to the extent permitted under applicable law, (i) accept for
payment all Notes or portions thereof properly tendered pursuant to the Asset
Sale Offer in an aggregate principal amount not in excess of the Offer Amount,
(ii) deposit or direct the Trustee to deposit with the Paying Agent an amount
equal to the purchase price, together with accrued and unpaid interest thereon
to the Purchase Date, in respect of all Notes or portions thereof so tendered
and accepted for repurchase and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being repurchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the amount due in connection with such Notes, and the Company will promptly
issue a new Note, and the Trustee, upon written request from the Company will
authenticate and mail or deliver (or cause to be transferred by book entry) to
each relevant Holder a new Note, equal in principal amount to any unpurchased
portion of the Notes surrendered, if any; provided, that each such new Note will
be in a principal amount of $1,000 or an integral multiple thereof. The Company
will publicly announce the results of the Asset Sale Offer on or as soon as
practicable after the Purchase Date.
To the extent that the aggregate amount of Notes tendered pursuant to an
Asset Sale Offer is less than the Available Amount, the Company or the
applicable Subsidiary may use any remaining Available Amount for any purpose not
prohibited by the Indenture, and the Company may obtain a release of the
unutilized portion of the Available Amount from the Lien of the Security
Documents. If the aggregate principal amount of Notes surrendered by Holders
thereof exceeds the Offer Amount, the Trustee shall select the Notes to be
purchased on a pro rata basis. Upon completion of an Asset Sale Offer, the
Available Amount shall be reset at zero.
SECURITY
Pursuant to the Security Documents, the Company and a Subsidiary has
assigned and pledged as collateral to the Trustee for the benefit of the Trustee
and the Holders of the Notes a security interest in certain of their existing
real and personal property summarized below, whether now owned or, in the case
of certain personal property located on real property constituting Collateral,
hereafter acquired, together with the
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<PAGE> 62
proceeds therefrom. The Collateral for the Notes initially represents (i)
substantially all of the fixed assets of the Company and its Subsidiaries,
including equipment acquired and improvements made pursuant to the Company's
capital improvements plan, subject to assets permitted to be excluded by the
Indenture (collectively, the "Fixed Assets"), and (ii) proceeds of the foregoing
collateral. The security interest in the Fixed Assets will be a second priority
lien, such lien ranking junior only to the existing lien on such Collateral in
favor of the Master Trust, for the benefit of the Plan, granted pursuant to the
PBGC Documents; provided that upon the extinguishment of the lien evidenced by
the PBGC Documents, which, although there can be no assurance, the Company
expects to occur on January 1, 2001, the security interest in the Fixed Assets
for the benefit of the Holders of the Notes shall become a first priority lien.
See "Risk Factors -- Security" and "Risk Factors -- Substantial Employee
Postretirement Obligations."
The net book value of the Collateral pledged by the Company and its
Subsidiaries as of June 30, 1997 was approximately $89.8 million. In addition,
commencing in 1997 and over the next three years, the Company expects to expend
approximately $75 million on capital improvements. See "Business -- Capital
Improvements." No appraisals of any of the Collateral have been prepared in
connection with this Offering. There can be no assurance that the proceeds of
any sale of the Collateral in whole or in part pursuant to the Indenture and the
related Security Documents following an Event of Default would be sufficient to
satisfy payments due on the Notes. See "Risk Factors -- Security." In addition,
the ability of the Holders of Notes to realize upon the Collateral may be
subject to certain bankruptcy law limitations in the event of a bankruptcy. See
"-- Certain Bankruptcy Limitations" below.
The Company and any Wholly Owned Subsidiary are permitted to transfer all
or a portion of the Collateral to one or more of the Company's Wholly Owned
Subsidiaries; provided that any such Wholly Owned Subsidiary executes a senior
guarantee (secured by the Collateral transferred) of the Company's obligations
under the Notes and the Indenture. See "-- Certain Covenants -- Future
Guarantees."
The collateral release provisions of the Indenture permit the release of
Collateral without substitution of collateral of equal value under certain
circumstances. See "-- Possession, Use and Release of Collateral." As described
under "Repurchase at the Option of Holders -- Asset Sales," the Net Proceeds of
such Asset Sales may be required to be utilized to make an offer to purchase
Notes. To the extent an offer to purchase Notes is not subscribed to by Holders
thereof on the basis described under "Repurchase at the Option of Holders --
Asset Sales," the unutilized Net Proceeds may be retained by the Company, free
of the Lien of the Indenture and the Security Documents.
Pursuant to the Security Documents and subject to the terms of the
Indenture, the Company and a Subsidiary has granted a security interest to the
Trustee, for its benefit and the benefit of the Holders of the Notes, each of
the following assets:
(a) the Company's interest in substantially all of the real property
owned by the Company on the Issue Date, together with all additions,
accessions, improvements, alterations and repairs thereto;
(b) DeSoto's interest in substantially all of the real property owned
by DeSoto on the Issue Date, together with all additions, accessions,
improvements, alterations and repairs thereto;
(c) all machinery and equipment located at the real property referred
to in clauses (a) and (b) above, whether owned on the Issue Date or
thereafter acquired (including, in the case of (a) and (b) above and this
clause (c), without limitation, all improvements and equipment constructed
or acquired, as applicable, after the Issue Date, as contemplated in the
Company's capital improvements plan as described under the caption
"Business -- Capital Improvements"), together with all additions,
accessions, improvements, alterations, replacements and repairs thereto;
and
(d) all proceeds and products of any and all of the foregoing.
The following sets forth certain summary information with respect to the
facilities included in the Collateral:
Peoria Facilities. A fabricated wire products, industrial wire and carbon
steel rod production facility, owned by the Company and located in Peoria,
Illinois, of approximately 2,100,000 square feet in the
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<PAGE> 63
aggregate. This facility is located on approximately 1,295 acres. At June 30,
1997, the net book value of the facility's land, land improvements and building
improvements was approximately $13.5 million and the net book value of the other
Fixed Assets located thereon was approximately $64.4 million.
Sherman Facility. A fabricated wire products and industrial wire production
facility, owned by DeSoto and located in Sherman, Texas, of approximately
294,000 square feet in the aggregate. This facility is located on approximately
34 acres. At June 30, 1997, the net book value of the facility's land, land
improvements and building improvements was approximately $2.2 million and the
net book value of the other Fixed Assets located thereon was approximately $6.6
million.
Springdale Facility. A fabricated wire products facility, owned by the
Company and located in Springdale, Arkansas, of approximately 76,000 square feet
in the aggregate. This facility is located on approximately 6 acres. At June 30,
1997, the net book value of the facility's land, land improvements and building
improvements was approximately $1.4 million and the net book value of the other
Fixed Assets located thereon was approximately $1.7 million.
The personal property Collateral has been pledged by the Company and DeSoto
to the Trustee for its benefit and the benefit of the holders of the Notes
pursuant to security agreements (collectively, the "Security Agreements"). The
Company and DeSoto have pledged the real property Collateral to the Trustee for
its benefit and the benefit of the holders of the Notes pursuant to mortgages,
deeds of trust or deeds to secure debt (collectively, the "Mortgages"). In
general, the liens on the Collateral granted to the Trustee, for its benefit and
the benefit of the holders of the Notes, are subject to (i) in the case of real
property Collateral, certain easements, rights-of-way, zoning restrictions and
other similar charges or encumbrances which do not, in any case, materially
detract from the value of the real property affected thereby or do not interfere
in any material respect with the ordinary conduct of the business of the Company
or its Subsidiaries at such real property, (ii) in the case of personal property
Collateral, certain existing or future purchase money liens, (iii) in the case
of the Fixed Assets generally, (a) the first priority lien granted to the Master
Trust for the benefit of the Plan, pursuant to the PBGC Documents, and other
Liens which may be permitted pursuant to the terms of the Indenture and (b)
certain tax liens and landlords', warehousemens' and materialmens' liens which
may, as a matter of law, have priority over the lien and security interest
granted to the Trustee; and (iv) the terms of the Intercreditor Agreement.
If an Event of Default occurs under the Indenture and a declaration of
acceleration of the Notes occurs as a result thereof, the Trustee, on behalf of
the Holders of the Notes, in addition to any rights or remedies available to it
under the Indenture, may take such action as it deems advisable to protect and
enforce its rights in the Collateral, including the institution of foreclosure
proceedings. The proceeds received by the Trustee from any foreclosure will be
applied by the Trustee first to pay the expenses of such foreclosure and fees
and other amounts then payable to (i) the Trustee under the Indenture and (ii)
the Master Trust, if at such time it has a prior lien and any amounts are due to
it pursuant to the PBGC Documents, and thereafter to pay the principal, premium,
if any, and interest on the Notes.
Real property pledged as security to a lender may be subject to known and
unforeseen environmental risks. Under the federal Superfund statute, a secured
lender may be held liable, in certain limited circumstances, for the costs of
remediating or preventing releases or threatened releases of hazardous
substances at or from a mortgaged property. There may be similar risks under
various state laws and common law theories. Lender liability may be imposed
where the lender actually participates in the management or operational affairs
of the mortgaged property with certain exceptions.
Under the Indenture, the Trustee may, prior to taking certain actions,
request that Holders of Notes provide an indemnification against its costs,
expenses and liabilities. It is possible that federal Superfund (or analogous)
cleanup costs could become a liability of the Trustee and cause a loss to any
Holders of Notes that provided an indemnification. In addition, such Holders may
act directly rather than through the Trustee, in specified circumstances, in
order to pursue a remedy under the Indenture. If Holders of Notes exercise that
right, they could, under certain circumstances, be subject to the risks of
environmental liability discussed above.
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CERTAIN BANKRUPTCY LIMITATIONS
The right of the Trustee to repossess and dispose of the Collateral upon
the occurrence of an Event of Default is likely to be significantly impaired by
applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or
against the Company or any Subsidiary prior to the Trustee having repossessed
and disposed of the Collateral. Under Bankruptcy Law, a secured creditor such as
the Trustee is prohibited from repossessing its security from a debtor in a
bankruptcy case, or from disposing of security repossessed from such debtor,
without bankruptcy court approval. Moreover, Bankruptcy Law permits the debtor
to continue to retain and to use collateral even though the debtor is in default
under the applicable debt instruments, provided that the secured creditor is
given "adequate protection." The meaning of the term "adequate protection" may
vary according to circumstances, but it is intended in general to protect the
value of the secured creditor's interest in the collateral and may include cash
payments or the granting of additional security, if and at such times as the
court in its discretion determines, for any diminution in the value of the
collateral as a result of the stay of repossession or disposition or any use of
the collateral by the debtor during the pendency of the bankruptcy case. In view
of the lack of a precise definition of the term "adequate protection" and the
broad discretionary powers of a bankruptcy court, it is impossible to predict
how long payments under the Notes could be delayed following commencement of a
bankruptcy case, whether or when the Trustee could repossess or dispose of the
Collateral or whether or to what extent Holders of the Notes would be
compensated for any delay in payment or loss of value of the Collateral through
the requirement of "adequate protection."
CERTAIN COVENANTS
Restricted Payments. The Indenture provides that the Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly: (i) declare
or pay any dividend or make any other payment or distribution in respect of
Equity Interests in the Company or any of its Subsidiaries (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company) or to the direct or indirect holders of Equity Interests in the
Company or any of its Subsidiaries in their capacity as such (other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of the Company or dividends or distributions payable to the Company or
any Wholly Owned Subsidiary of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value any Equity Interests of the Company or any direct or
indirect parent of the Company or other Affiliate of the Company (other than a
Wholly Owned Subsidiary of the Company); (iii) make any principal payment on, or
purchase, redeem, defease (including in-substance or legal defeasance) or
otherwise acquire or retire for value (including pursuant to mandatory
repurchase covenants), prior to any scheduled maturity, scheduled repayment or
scheduled sinking fund payment, any Indebtedness that is subordinated to the
Notes; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) immediately before and after giving effect to such transaction, no
Default or Event of Default exists; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Consolidated Cash Flow Ratio test set forth in the first paragraph of
the covenant described below under the caption " -- Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the date
of the Indenture (excluding Restricted Payments permitted by clauses (ii)
and (iii) of the next succeeding paragraph), is less than the sum of (i)
$2.5 million plus (ii) 50% of the cumulative Consolidated Net Income of the
Company for the period (taken as one accounting period) from the beginning
of the fiscal quarter in which the initial issuance of the Notes occurs to
the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for
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such period is a deficit, less 100% of such deficit), plus (iii) 100% of
the aggregate net cash proceeds received by the Company from the issue or
sale since the date of the Indenture and prior to the date of such
Restricted Payment of Equity Interests of the Company or of debt securities
of the Company that have been converted into or exchanged for such Equity
Interests (other than Equity Interests (or convertible debt securities)
sold to a Subsidiary of the Company and other than Disqualified Stock or
debt securities that have been converted into Disqualified Stock), and from
the exercise of options, warrants or other rights to purchase such Equity
Interests (other than Disqualified Stock), less any such proceeds used to
redeem Notes in accordance with the second paragraph of "-- Optional
Redemption," plus (iv) the aggregate amount of all Restricted Payments that
are returned, repaid or distributed, without restriction, to the Company or
any Wholly Owned Subsidiary if and to the extent that such amounts are not
included in Consolidated Net Income.
Notwithstanding clauses (b) and (c) above, the Company and its Subsidiaries
may take the following actions:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company or any of its Subsidiaries in exchange
for, or out of the proceeds of, the substantially concurrent sale (other
than to a Subsidiary of the Company) of other Equity Interests of the
Company (other than any Disqualified Stock); provided that the amount of
any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition shall be excluded from the
calculation of Restricted Payments in clause (c)(iii) of the preceding
paragraph and shall not constitute a Restricted Payment;
(iii) the defeasance, redemption, repurchase or payment of principal
of Indebtedness that is subordinated to the Notes with the net cash
proceeds from an incurrence of Permitted Refinancing Debt or the
substantially concurrent sale (other than to a Subsidiary of the Company)
of Equity Interests of the Company (other than Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement or other acquisition shall
be excluded from the calculation of Restricted Payments in clause (c)(iii)
of the preceding paragraph and shall not constitute a Restricted Payment;
(iv) the payment of mandatory dividends on, and the mandatory
redemption of, the Series A Preferred Stock; and
(v) the making of Permitted Investments.
If any Person in which an Investment is made, which Investment constitutes
a Restricted Payment when made, thereafter becomes a Wholly Owned Subsidiary,
all such Investments previously made in such Person shall no longer be counted
as Restricted Payments for purposes of calculating the aggregate amount of
Restricted Payments pursuant to clause (c) above, in each case to the extent
such Investments would otherwise be so counted.
If the Company or a Subsidiary transfers, conveys, sells, leases or
otherwise disposes of an Investment in accordance with the "-- Repurchase at the
Option of Holders -- Asset Sales" covenant, which Investment was originally
included in the aggregate amount expended or declared for all Restricted
Payments pursuant to clause (c) of the definition of "Restricted Payments," the
aggregate amount expended or declared for all Restricted Payments shall be
reduced by the lesser of (i) the Net Proceeds from the transfer, conveyance,
sale, lease or other disposition of such Investment or (ii) the amount of the
original Investment, in each case, to the extent originally included in the
aggregate amount expended or declared for all Restricted Payments pursuant to
clause (c) above.
The amount of all Restricted Payments (other than cash) shall be the Fair
Market Value on the date of the Restricted Payment of the asset(s) proposed to
be transferred by the Company or such Subsidiary, as the case may be, pursuant
to the Restricted Payment. Not later than the date of making any Restricted
Payment,
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the Company shall deliver to the Trustee an Officers' Certificate stating that
such Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
Incurrence of Indebtedness and Issuance of Preferred Stock. The Indenture
provides that the Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create, incur, issue, assume, suffer to exist,
guaranty or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of Disqualified
Stock or preferred stock (other than to the Company or a Wholly Owned Subsidiary
of the Company), in each case, except for Permitted Indebtedness, provided that
no Default or Event of Default exists immediately before and after giving effect
to such transaction; provided, however, that the Company (but not any of its
Subsidiaries) may incur Indebtedness (including Acquired Debt) and the Company
(but not any of its Subsidiaries) may issue shares of Disqualified Stock, if (i)
immediately before and after giving effect to such transaction, no Default or
Event of Default exists and (ii) the Company's Consolidated Cash Flow Ratio for
its most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been
greater than 2.5 to 1.0, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period.
Liens. The Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien of any kind, except Permitted Liens, on or with
respect to any property or asset now owned or hereafter acquired, or any
interest therein, or any income or profits therefrom or assign or convey any
right to receive income therefrom.
Issuance and Sale of Capital Stock of Subsidiaries. The Company (i) will
not, and will not permit any of its Subsidiaries to, issue, transfer, convey,
lease or otherwise dispose of any shares of Capital Stock of a Subsidiary or
securities convertible or exchangeable into, or options, warrants, rights or any
other interest with respect to, Capital Stock of a Subsidiary, to any Person
other than the Company or a Wholly Owned Subsidiary except in a transaction
consisting of a sale of all of the Capital Stock of any such Subsidiary and that
complies with the provisions described under the caption "-- Repurchase at the
Option of Holders -- Asset Sales" above to the extent such provisions apply or
(ii) will not permit any Person, other than the Company or a Wholly Owned
Subsidiary, to own any Capital Stock of any Subsidiary, other than to the extent
such Person owns such Capital Stock on the date on which the Indenture was
entered into, and other than directors' qualifying shares and immaterial shares
to be owned by a Person in order to qualify such Subsidiary as a corporation
under the laws of the jurisdiction in which such Subsidiary is chartered or
incorporated.
Dividend and Other Payment Restrictions Affecting Subsidiaries. The
Indenture provides that the Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary to (i)(a) pay dividends or make any other distributions to the
Company or any of its Subsidiaries (1) on its Capital Stock or (2) with respect
to any other interest or participation in, or measured by, its profits, or (b)
pay any Indebtedness owed to the Company or any of its Subsidiaries, (ii) make
loans or advances to the Company or any of its Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of (a)
Existing Indebtedness as in effect on the date of the Indenture; (b) the Amended
Credit Facility or the Amended DeSoto Credit Facility, (c) the Indenture and the
Notes, (d) applicable law, (e) any instrument governing Acquired Debt of the
Company or any of its Subsidiaries or Capital Stock of a Person acquired by the
Company or any of its Subsidiaries as in effect at the time of such acquisition
(except to the extent such Acquired Debt was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided that
in the case of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred and provided, further, that the Consolidated Cash
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Flow of such Person is not taken into account in determining whether such
Indebtedness is permitted, (f) by reason of customary non-assignment provisions
in leases entered into in the ordinary course of business and consistent with
past practices, (g) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (iii) above on the property so acquired, or (h) Permitted Refinancing
Debt, provided that the restrictions contained in the agreements governing such
Permitted Refinancing Debt are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
Sale/Leaseback Transactions. The Indenture provides that the Company will
not, and will not permit any of its Subsidiaries to, enter into any
Sale/leaseback; unless (i) such Sale/leaseback involves only the sale or
transfer of assets acquired after the Issue Date and not constituting
Collateral, (ii) the Company or such Subsidiary could have incurred Indebtedness
in an amount equal to the Attributable Debt relating to such Sale/leaseback
pursuant to the Consolidated Cash Flow Ratio test set forth in the first
paragraph of the covenant described above under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock," (iii) the sale price in such
Sale/leaseback is at least equal to the Fair Market Value of the property that
is the subject of such Sale/leaseback, and (iv) the transfer of assets in such
Sale/leaseback is permitted by, and the Company applies the Net Proceeds of such
transaction in compliance with, the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales."
Transactions with Affiliates. The Indenture provides that the Company will
not, and will not permit any of its Subsidiaries to, directly or indirectly,
conduct any business with or enter into or suffer to exist any transaction or
series of transactions, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or render any service
to, or purchase any property or assets from, or enter into or make or amend any
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Subsidiary than those that could have been
reasonably obtained in a comparable transaction by the Company or such
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $10.0 million, an opinion as to the
fairness to the Company of such Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking firm of national
standing; provided that (w) the indemnification of officers and directors of the
Company or its Subsidiaries in accordance with the charters and by-laws of the
Company and its Subsidiaries or pursuant to director indemnification agreements,
(x) any employment agreement entered into by the Company or any of its
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Subsidiary, (y) transactions between or among
the Company and/or its Wholly Owned Subsidiaries and (z) Restricted Payments and
Permitted Investments that are permitted by the provisions of the Indenture
described above under the caption "Certain Covenants -- Restricted Payments," in
each case, shall not be deemed Affiliate Transactions.
Impairment of Security Interest. The Company shall not, and shall not
permit any of its Subsidiaries to, take or omit to take any action which action
or omission might or would have the result of affecting or impairing the
security interest in favor of the Trustee, on behalf of itself and the Holders
of the Notes, with respect to the Collateral, and the Company shall not grant to
any Person (other than the Trustee on behalf of itself and the Holders of the
Notes) any interest whatsoever in the Collateral other than Liens permitted by
the Indenture and the Security Documents.
Future Guarantees. The Company or any of its Wholly Owned Subsidiaries may
transfer, in one transaction or a series of related transactions, any Collateral
to any Wholly Owned Subsidiary of the Company, if such transferee Wholly Owned
Subsidiary shall (i) execute and deliver to the Trustee a supplemental indenture
in form reasonably satisfactory to the Trustee pursuant to which such Wholly
Owned Subsidiary shall unconditionally guarantee on a senior secured basis
(secured by the Collateral so transferred)
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all of the Company obligations under the Notes and the Indenture, (ii) take all
necessary action to cause the Lien on such Collateral in favor of the Trustee to
remain in full force and effect at all times, (iii) deliver to the Trustee an
opinion of counsel that such supplemental indenture and any other documents
required to comply with clause (ii) above have been duly authorized, executed
and delivered by such Wholly Owned Subsidiary and the supplemental indenture and
each such other document constitutes a legal, valid, binding and enforceable
obligation of such Wholly Owned Subsidiary and (iv) take such further action and
execute and deliver such other documents specific in the Indenture or otherwise
reasonably requested by the Trustee to effectuate the foregoing.
Merger, Consolidation, or Sale of Assets. The Indenture provides that the
Company may not consolidate or merge with or into (whether or not the Company is
the surviving corporation), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in one
or more related transactions, to another corporation, Person or entity unless
(i) the Company is the surviving corporation or the entity or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (the "Surviving Entity") is a corporation organized or
existing under the laws of the United States, any state thereof or the District
of Columbia; (ii) the Surviving Entity, if any, assumes all the obligations of
the Company under the Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) immediately
before and after giving effect to such transaction, no Default or Event of
Default exists; (iv) the Company or the Surviving Entity, as the case may be,
(A) will have Consolidated Net Worth immediately after the transaction equal to
or greater than the Consolidated Net Worth of the Company immediately preceding
the transaction and (B) will, at the time of such transaction and after giving
pro forma effect thereto as if such transaction had occurred at the beginning of
the applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Consolidated Cash Flow Ratio test set
forth in the first paragraph of the covenant described above under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock;" and (v) in the case of a transfer of assets, the Surviving Entity has
acquired all or substantially all of the assets of the Company as an entirety.
Payments for Consent. The Indenture provides that neither the Company nor
any of its Subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
of any Notes for or as an inducement to any consent, waiver or amendment of any
of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all Holders of the Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
Reports. The Indenture provides that, whether or not required by the rules
and regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all information that would be required to be
filed with the Commission on Form 8-K if the Company were required to file such
reports. In addition, whether or not required by the rules and regulations of
the Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. In addition, the Company has agreed
that, for so long as any Notes remain outstanding, it will furnish to the
Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default for 30 days in the payment when due of interest on the
Notes;
(ii) default in payment when due, whether at maturity, upon
acceleration, optional redemption, required purchase, or otherwise, of the
principal, redemption price or purchase price of the Notes;
(iii) failure by the Company to comply with the provisions described
under the captions "-- Repurchase at the Option of Holders," "-- Certain
Covenants -- Restricted Payment," "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," "-- Certain
Covenants -- Liens," "-- Certain Covenants -- Sale/Leaseback Transactions,"
and "-- Certain Covenants -- Merger, Consolidation, or Sale of Assets;"
(iv) failure by the Company for 30 days after notice from the Trustee
or Holders of not less than 25% of the aggregate principal amount of the
Notes outstanding to comply with any of the covenants and agreements in the
Indenture or the Notes (other than the obligations specified in (i), (ii)
or (iii) above);
(v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries
(or the payment of which is Guaranteed by the Company or any of its
Subsidiaries) whether such Indebtedness or Guarantee now exists, or is
created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity; and, in any such case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default, or the maturity
of which has been so accelerated, aggregates in excess of $10 million;
(vi) failure by the Company, or any of its Subsidiaries to pay final
judgments aggregating in excess of $10 million (excluding judgments to the
extent covered by insurance in respect of which coverage has not been
disclaimed or denied), which judgments are not paid, discharged or stayed,
by operation of appeal or otherwise, for a period of 60 days;
(vii) any of the Security Documents ceases to be in full force and
effect or any of the Security Documents ceases to give the Trustee the
Liens, rights, powers and privileges purported to be created thereby in any
material respect; and
(viii) certain events of bankruptcy or insolvency with respect to the
Company or any Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Upon such acceleration,
the entire principal amount of, and accrued and unpaid interest on the Notes
shall become immediately due and payable, unless all Events of Default specified
in such acceleration notice (other than any Event of Default in respect of
non-payment of principal, premium or interest, if any, which has become due
solely by reason of such declaration of acceleration) shall have been cured.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company or any
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal, redemption price, purchase price or interest) if it determines in
good faith that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the
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Company would have had to pay if the Company then had elected to redeem the
Notes pursuant to the optional redemption provisions of the Indenture, an
equivalent premium shall also become and be immediately due and payable to the
extent permitted by law upon the acceleration of the Notes. If an Event of
Default occurs prior to the first date on which the Company may redeem Notes at
its option as described in the first paragraph under "Optional Redemption" by
reason of any willful action (or inaction) taken (or not taken) by or on behalf
of the Company with the intention of avoiding the prohibition on redemption of
the Notes prior to such first date, then the premium specified in the Indenture
for an optional redemption on such first date shall also become immediately due
and payable to the extent permitted by law upon the acceleration of the Notes.
The Holders of the required percentage of the aggregate principal amount of
the Notes then outstanding as described under "-- Amendment, Supplement and
Waiver", by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and, in certain
circumstances may rescind any acceleration with respect to the Notes and its
consequences.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture, or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver of liabilities under the federal securities laws
is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of the
Obligations of the Company discharged with respect to the outstanding Notes
("Legal Defeasance") except for (i) the rights of Holders of outstanding Notes
to receive payments in respect of the principal, redemption price of, and
interest on such Notes when such payments are due from the trust referred to
below, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
Obligations of the Company released with respect to certain covenants (including
those described under "-- Repurchase at the Option of Holders") that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "-- Events of Default"
will no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable government
securities, or a combination thereof, in such amounts as will be sufficient
(without reinvestment), in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal or redemption price of, and
interest on the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular redemption date; (ii) in
the case of Legal Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue
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Service a ruling or (B) since the date of the Indenture, there has been a change
in the applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit (it being understood that such condition shall not be deemed to be
satisfied until such 91st day); (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that, after the 91st day after the deposits,
the trust funds will not be subject to the effect of an avoidance or other order
under any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (vii) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance, as the case may be, have been complied
with.
POSSESSION, USE AND RELEASE OF COLLATERAL
Unless an Event of Default shall have occurred and be continuing, the
Company and its Subsidiaries will have the right to remain in possession and
retain exclusive control of the Collateral securing the Notes (other than any
cash, securities, obligations or Cash Equivalents constituting a part of the
Collateral and deposited with the Trustee in the Collateral Account and other
than as set forth in the Security Documents), or freely operate the Collateral
and to collect, invest and dispose of any income therefrom.
Release of Collateral. Upon compliance by the Company with the conditions
set forth below in respect of any Asset Sale release, and upon delivery by the
Company to the Trustee of an opinion of counsel to the effect that such
conditions have been met, the Trustee will release the Released Interests (as
hereinafter defined) from the Lien of the Security Documents and reconvey the
Released Interests to the Company.
Asset Sale Release. The Company will have the right to obtain a release of
items of Collateral (the "Released Interests") subject to an Asset Sale upon
compliance with the condition that the Company deliver to the Trustee the
following:
(a) A notice from the Company requesting the release of Released
Interests, (i) describing the proposed Released Interests, (ii) specifying
the value of such Released Interests on a date within 60 days of such
notice (the "Valuation Date"), (iii) stating that the purchase price
received is at least equal to the Fair Market Value of the Released
Interests, (iv) stating that the release of such Released Interest will not
interfere with the Trustee's ability to realize the value of the remaining
Collateral and will not impair the maintenance and operation of the
remaining Collateral and (v) certifying that such Asset Sale complies with
the terms and conditions of the Indenture with respect thereto;
(b) An Officers' Certificate of the Company stating that (i) such
Assets Sale covers only the Released Interests and complies with the terms
and conditions of the Indenture with respect to Asset Sales, (ii) all Net
Proceeds from the sale of any of the Released Interests will be applied
pursuant to the
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provisions of the Indenture in respect of Asset Sales, (iii) there is no
Default or Event of Default in effect or continuing on the date thereof,
the Valuation Date or the date of such Assets Sale, (iv) the release of the
Collateral will not result in a Default or Event of Default under the
Indenture, and (v) all conditions precedent in the Indenture relating to
the release in question have been complied with;
(c) The Net Proceeds and other non-cash consideration from the Asset
Sale required to be delivered to the Trustee pursuant to the Indenture; and
(d) All documentation required by the Trust Indenture Act prior to the
release of Collateral by the Trustee.
Disposition of Collateral Without Release. So long as no Event of Default
shall have occurred and be continuing, the Company may, without any release or
consent by the Trustee, sell or otherwise dispose of any machinery, equipment,
furniture, apparatus, tools or implements or other similar property subject to
the Lien of the Security Documents, which may have become worn out or obsolete,
not exceeding individually, in Fair Market Value, $250,000.
USE OF TRUST MONEYS
All Trust Moneys (including, without limitation, all Collateral Proceeds)
shall be held by the Trustee as a part of the Collateral securing the Notes and,
so long as no Event of Default shall have occurred and be continuing, may either
(i) be released in accordance with "-- Possession, Use and Release of
Collateral" and "-- Repurchase at the Option of Holders -- Asset Sales" above if
such Trust Moneys represent Collateral Proceeds in respect of any Assets Sale or
(ii) at the direction of the Company be applied by the Trustee from time to time
to the payment of the principal of, premium, if any, and interest on any Notes
at maturity or upon redemption or to the purchase of Notes upon tender or in the
open market or at private sale or upon any exchange or in any one or more of
such ways, in each case in compliance with the Indenture. The Company may also
withdraw Trust Moneys constituting the proceeds of insurance upon any part of
the Collateral or an award for any Collateral, subject to certain conditions.
The Trustee shall be entitled to apply any Trust Moneys to the cure of any
Default or Event of Default under the Indenture. Trust Moneys deposited with the
Trustee shall be invested in Cash Equivalents pursuant to the direction of the
Company and, so long as no Event of Default shall have occurred and be
continuing, the Company shall be entitled to any interest or dividends accrued,
earned or paid on such Cash Equivalents.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed. The
registered Holder of a Note will be treated as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided below, the Indenture, the Security Documents or the
Notes may be amended or supplemented with the consent of the Holders of at least
a majority in principal amount of the Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of, tender offer or
exchange offer for, Notes), and any existing default or compliance with any
provision of the Indenture, the Security Documents or the Notes may be waived
with the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal, redemption price or purchase price
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of or change the fixed maturity of any Note or alter the provisions with respect
to the redemption of the Notes, (iii) reduce the rate of or change the time for
payment of interest on or with respect to any Note, (iv) waive a Default or
Event of Default in the payment of principal, redemption price or purchase price
of, or interest on the Notes (except a rescission of acceleration of the Notes
by the Holders of at least a majority in aggregate principal amount of the Notes
and a waiver of the payment default that resulted from such acceleration), (v)
make any Note payable in money other than that stated in the Notes, (vi) make
any change in the provisions of the Indenture or the Security Documents relating
to waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal, redemption price or purchase price of, or interest on the
Notes, (vii) waive a redemption or repurchase payment with respect to any Note,
or (viii) make any change in the foregoing amendment and waiver provisions.
In addition to the foregoing, except as provided under the caption
"-- Possession, Use and Release of Collateral," no portion of the Collateral may
be released without the consent of the Holders of at least 66 2/3% in aggregate
principal amount of the then outstanding Notes.
Senior Notes that remain outstanding after the consummation of the Exchange
Offer and Exchange Notes issued in connection with the Exchange Offer will be
entitled to vote or consent on all matters as a single class of securities under
the Indenture.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes (if any), to provide for
the assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to the Trustee against any loss,
liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Keystone Consolidated
Industries, Inc., Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas,
Texas 75240. Attention: Corporate Secretary.
BOOK-ENTRY, DELIVERY AND FORM
The Exchange Notes will be issued in fully registered form, without
coupons, in denominations of $1,000 principal amount and integral multiples
thereof.
Global Notes; Book-Entry Form. Except as set forth under "-- Certificated
Securities" below, the Exchange Notes will be evidenced by one or more global
Notes (collectively, the "Global Notes") which will
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be deposited with the Trustee as custodian for The Depository Trust Company, New
York, New York ("DTC") and registered in the name of Cede & Co. ("Cede") as
DTC's nominee.
Exchange Notes that are issued as discussed below under "-- Certificated
Securities" will be issued in registered form (the "Certificated Securities").
Upon transfer of Certificated Securities, such Certificated Securities may,
unless the Global Notes have previously been exchanged for Certificated
Securities, be exchanged for an interest in a Global Note representing the
principal amount of Notes being transferred.
Payment of principal, redemption price and purchase price of, and interest
on the Global Notes will be made to Cede, the nominee for DTC, as the registered
owner of the Global Notes by wire transfer of immediately available funds. None
of the Company, the Trustee or any paying agent will have any responsibility or
liability for any aspect of the records relating to, or payments made on account
of, beneficial ownership interests in the Global Notes or for maintaining,
supervising, or reviewing any records relating to such beneficial ownership
interests.
The Company has been informed by DTC that, with respect to any payment of
principal, redemption price and purchase price of, and interest on the Global
Notes, DTC's practice is to credit Participants' accounts on the payment date
therefor with payments in amounts proportionate to their respective beneficial
interests in the Notes represented by the Global Notes, as shown on the records
of DTC, unless DTC has reason to believe that it will not receive payment on
such payment date. Payments by Participants to owners of beneficial interests in
Notes represented by the Global Notes held through such Participants will be the
responsibility of such Participants, as is now the case with securities held for
the accounts of customers registered in "street name."
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in Notes represented by the Global Notes to pledge
such interest to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of such interest, may be affected by the
lack of a physical certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar or paying agent under
the Indenture) will have any responsibility for the performance by DTC or its
Participants or Indirect Participants of their respective obligations under the
rules and procedures governing their operations. DTC has advised the Company
that it will take any action permitted to be taken by a Holder of Notes only at
the direction of one or more Participants to whose account with DTC interests in
the Global Notes are credited and only in respect of the principal amount of the
Notes represented by the Global Notes as to which such Participant or
Participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
Company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entry
changes to the accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and may include
certain other organizations such as the Initial Purchasers. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with, a Participant, either directly or indirectly.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
in order to facilitate transfers of interests in the Global Notes among
Participants of DTC, Euroclear and Cedel, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. If DTC is at any time unwilling or unable to continue
as depositary and a successor depositary is not appointed by the Company within
90 days, the Company will cause Notes to be issued in definitive form in
exchange for the Global Notes. None of the Company, the Trustee or any of their
respective agents will have
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any responsibility for the performance by DTC, Euroclear and Cedel, their
Participants or Indirect Participants of their respective obligations under the
rules and procedures governing their operations, including maintaining,
supervising or reviewing the records relating to, or payments made on account
of, beneficial ownership interests in Global Notes.
Certificated Securities. An investor may request that their Exchange Note
be issued in certificated form, and may request at any time that their interest
in a Global Note be exchanged for an Exchange Note in certificated form.
Finally, certificated Exchange Notes may be issued in exchange for Senior Notes
represented by the Global Notes if no successor depositary is appointed by the
Company or in certain other circumstances set forth in the Indenture.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company entered into the Registration Rights Agreement with the Initial
Purchasers dated August 7, 1997 pursuant to which the Company agreed to file
this the Registration Statement of which this Prospectus is a part with respect
to an offer to exchange the Senior Notes for the Exchange Notes.
The Registration Rights Agreement also provides that the Company will use
its best efforts to cause the Exchange Offer Registration Statement to be
declared effective under the Securities Act within 120 days after the Issue
Date, and (ii) use its best efforts to consummate the Exchange Offer within 150
days of the Issue Date. Upon the Exchange Offer Registration Statement being
declared effective, the Company will offer the Exchange Notes in exchange for
surrender of the Senior Notes. The Company will keep the Exchange Offer open for
not less than 30 days (or longer if required by applicable law) after the date
notice of the Exchange Offer is mailed to the Holders of the Notes. See "The
Exchange Offer."
In the event that (i) the Company determines in reasonably good faith that
any changes in the law or the applicable interpretations of the Staff of the
Commission do not permit the Company to effect the Exchange Offer, or that the
Exchange Notes would not be tradable upon receipt by the Holders that
participate in the Exchange Offer without restriction under state and federal
securities laws (other than due solely to the status of a Holder as an Affiliate
of the Company), (ii) the Exchange Offer is not consummated within 150 days of
the Issue Date, (iii) in certain circumstances, certain holders of unregistered
Senior Notes so request within 120 days after the consummation of the Exchange
Offer, or (iv) in the case of any Holder that participates in the Exchange
Offer, such Holder does not receive Exchange Notes on the date of the exchange
that may be sold without restriction under state and federal securities laws
(other than due solely to the status of such Holder as an Affiliate of the
Company) and so notifies the Company within 60 days after such Holder first
becomes aware of such restriction and provides the Company with a reasonable
basis for its conclusion, in the case of each of clauses (i)-(iv) of this
sentence, then the Company will promptly deliver to the Holders and the Trustee
written notice thereof and, at its cost, (a) within 30 days after such
obligation arises, file a shelf registration statement covering resales of the
Notes (the "Shelf Registration Statement"), provided, however, that if the
Company has not consummated the Exchange Offer within 150 days of the Issue
Date, the Company will file the Shelf Registration Statement with the Commission
on or prior to the 151st day after the Issue Date, (b) use its best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act by the 60th day after such obligation arises and (c) use its best
efforts to keep the Shelf Registration Statement effective until two years after
its effective date, or such shorter period ending when (i) all Notes covered by
the Shelf Registration Statement have been sold in the manner set forth and as
contemplated therein or (ii) a subsequent Shelf Registration Statement covering
all unregistered Notes has been declared effective under the Securities Act. The
Company will, in the event of the filing of a Shelf Registration Statement,
provide to each Holder of the Notes copies of the prospectus which is a part of
the Shelf Registration Statement, notify each such Holder when the Shelf
Registration Statement for the Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes. A Holder of
Notes that sells such Notes pursuant to the Shelf Registration Statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such a Holder (including certain
indemnification obligations). In addition, each Holder of the Notes will be
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required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights Agreement
in order to have its Notes included in the Shelf Registration Statement and to
benefit from the provisions regarding liquidated damages set forth in the
following paragraph.
In the event that either (i) the Company fails to file any of the
registration statements required by the Registration Rights Agreement on or
before the date specified for such filing, (ii) any of such registration
statements are not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), (iii) the
Company fails to consummate the Exchange Offer within 30 days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (iv) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter, subject to certain
exceptions, ceases to be effective or usable in connection with resales of Notes
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (i) through (iv), a "Registration Default"), then
the Company will pay liquidated damages to each Holder of Notes, with respect to
the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount of Notes held by such Holder ("Liquidated Damages"). For any portion of a
week that the Registration Default continues, such Liquidated Damages shall be
calculated on a pro-rata basis. The amount of the Liquidated Damages will
increase by an additional $.05 per week per $1,000 principal amount of Notes
with respect to each subsequent 90-day period until all Registration Defaults
have been cured, up to a maximum amount of Liquidated Damages of $.25 per week
per $1,000 principal amount of Notes. All accrued Liquidated Damages will be
paid by the Company on each interest payment date to the Global Note Holder by
wire transfer of same day funds and to Holders of Certificated Securities by
wire transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified. Following the cure
of all Registration Defaults, the accrual of Liquidated Damages will cease.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such Person merges with or
into or consolidates with or becomes a Subsidiary of such specified Person and
(ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that (a)
beneficial ownership of 10% or more of the voting securities of a Person shall
be presumed to be control, which presumption may be rebutted by evidence to the
contrary and (b) each Permitted Holder shall be deemed to be an Affiliate of the
Company and its Subsidiaries.
"Amended Credit Facility" means the Amended and Restated Revolving Loan and
Security Agreement, dated as of December 29, 1995, by and between Congress
Financial Corporation (Central) and the Company, as amended by the First
Amendment thereto, dated as of September 27, 1996 and the Second Amendment
thereto, dated as of August 4, 1997, including any related collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced or refinanced from time to time
(provided that such amendment, modification, renewal, refunding, replacement or
refinancing (a) does not result in an increase in the $55 million (less any
borrowings outstanding under the Amended DeSoto Credit Facility) in maximum
borrowings available under the Amended Credit Facility as in
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effect on the Issue Date and (b) contains no encumbrance or restrictions any
more restrictive than any encumbrance or restriction contained in the Amended
Credit Facility as in effect on the Issue Date).
"Amended DeSoto Credit Facility" means the Revolving Loan and Security
Agreement, dated as of September 27, 1996, by and between Congress Financial
Corporation (Central) and DeSoto (f/k/a DSO Acquisition Corporation), as amended
by the First Amendment thereto, dated as of August 4, 1997, including any
related collateral documents, instruments and agreements executed in connection
therewith, and in each case as amended, modified, renewed, refunded, replaced or
refinanced from time to time (provided that such amendment, modification,
renewal, refunding, replacement or refinancing (a) does not result in an
increase in the $10 million (less any borrowings in excess of $45 million
outstanding under the Amended Credit Facility) in maximum borrowings available
under the Amended DeSoto Credit Facility as in effect on the Issue Date and (b)
contains no encumbrance or restrictions any more restrictive than any
encumbrance or restriction contained in the Amended DeSoto Credit Facility as in
effect on the Issue Date).
"Asset Sale" means (A) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a Sale/leaseback) other
than in the ordinary course of business consistent with past practices (provided
that the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Company and its Subsidiaries taken as a whole will be
governed by the provisions of the Indenture described above under the caption
"-- Repurchase at the Option of Holders -- Change of Control" and/or the
provisions described above under the caption "-- Certain Covenants -- Merger,
Consolidation or Sale of Assets" and not by the provisions of the "-- Repurchase
at the Option of Holders -- Asset Sale" covenant), or (B) the issue or sale by
the Company or any of its Subsidiaries of Equity Interests of any of the
Company's Subsidiaries, in the case of either clause (A) or (B), whether in a
single transaction or a series of related transactions (a) that have a Fair
Market Value in excess of $500,000 or (b) for net proceeds in excess of
$500,000. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Wholly Owned Subsidiary or by a Subsidiary to the Company or to a Wholly
Owned Subsidiary, (ii) an issuance of Equity Interests by a Subsidiary to the
Company or to a Wholly Owned Subsidiary, (iii) a Restricted Payment that is
permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments", (iv) a disposition of inventory in the
ordinary course of business, (v) a disposition of obsolete or worn out property
that is no longer useful in the conduct of the business of the Company and its
Subsidiaries, in the ordinary course of business, in each case, will not be
deemed to be Asset Sales.
"Attributable Debt" in respect of a Sale/leaseback means, at the time of
determination, the present value (discounted at the rate of interest implicit in
such transaction, determined in accordance with GAAP) of the obligation of the
lessee for net rental payments during the remaining term of the lease included
in such Sale/leaseback (including any period for which such lease has been
extended).
"Bankruptcy Law" means Title 11 of the U.S. Code or any similar Federal,
state or foreign law for the relief of debtors.
"Capital Expenditures" shall mean payments for any assets, or improvements,
replacements, substitutions or additions thereto, that have a useful life of
more than one year and which, in accordance with GAAP consistently applied, are
required to be capitalized (as opposed to expensed in the period in which the
payment occurred).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or other business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) in
the equity of such association or entity, (iii) in the case of a partnership,
partnership interests (whether general or limited) and (iv) any other interest
or participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof having maturities of not more than six months
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from the date of acquisition, (ii) demand and time deposits, certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any lender party to the
Amended Credit Facility or the Amended DeSoto Credit Facility or with any
domestic commercial bank having capital and surplus in excess of $500.0 million
and a Thomson Bank Watch Rating of "B" or better, (iii) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (i) and (ii) above entered into with any financial
institution meeting the qualifications specified in clause (ii) above and (iv)
commercial paper rated at least P-1 by Moody's Investors Service, Inc. or at
least A-1 by Standard & Poor's Rating Group and in each case maturing within six
months after the date of acquisition.
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), other than one or more of the Permitted Holders, is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Stock of the
Company; or (b) the Company consolidates with, or merges with or into, another
Person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets (determined on a consolidated basis) to
any Person, or any Person consolidates with, or merges with or into, the
Company, in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is converted into or exchanged for cash, securities
or other property, other than (A) any such transaction where (i) the outstanding
Voting Stock of the Company is converted into or exchanged for (1) Voting Stock
(other than Disqualified Stock) of the surviving or transferee corporation
and/or (2) cash, securities and other property in an amount which could be paid
by the Company as a Restricted Payment under the Indenture and (ii) the
"beneficial owners" of the Voting Stock of the Company immediately prior to such
transaction own, directly or indirectly, not less than a majority of the Voting
Stock of the surviving or transferee corporation immediately after such
transaction or (B) any such transaction as a result of which any Person or group
beneficially owns in the aggregate a greater percentage than the Permitted
Holders of the Voting Stock of the surviving or transferee corporation
immediately after such transaction; or (c) during any consecutive two-year
period, individuals who at the beginning of such period constituted the Board of
the Company (together with any new directors whose election by the Board of the
Company or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of the Company then in office (other than by action of the
Permitted Holders pursuant to the Company's by-laws as in effect on the Issue
Date, or otherwise); provided that, to the extent that one or more regulatory
approvals are required for one or more of the events or circumstances described
above to become effective under applicable law, such events or circumstances
shall be deemed to have occurred at the time such approvals have been obtained
and become effective under applicable law.
"Collateral Account" means the collateral account to be established
pursuant to the Indenture.
"Collateral" means, collectively, all of the property and assets
(including, without limitation, Trust Moneys) that are from time to time subject
to the Security Documents.
"Consolidated Cash Flow" means, without duplication, with respect to any
Person for any period, the Consolidated Net Income of such Person for such
period plus, to the extent deducted in computing Consolidated Net Income: (i)
provision for taxes based on income or profits of such Person and its
Subsidiaries for such period, plus (ii) Consolidated Interest Expense of such
Person and its Subsidiaries for such period, plus (iii) depreciation, depletion,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other non-cash charges (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Subsidiaries for such period, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision of taxes on the income or profits of, and
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the depreciation, depletion and amortization and other non-cash charges of, a
Subsidiary of the referent Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent (and in same proportion) that
the net income of such Subsidiary was included in calculating the Consolidated
Net Income of such Person and only if a corresponding amount would be permitted
at the date of determination to be paid as a dividend to the Company by such
Subsidiary without prior governmental approval (that has not been obtained), and
without direct or indirect restriction pursuant to, the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Cash Flow Ratio" of any Person means for any twelve-month
period the ratio of Consolidated Cash Flow of such Person for such period to the
sum of (a) Consolidated Interest Expense of such Person for such period, plus
(b) the annual interest expense (including the amortization of debt discount)
with respect to any Indebtedness proposed to be incurred by such Person or its
Subsidiaries, minus (c) Consolidated Interest Expense of such Person to the
extent included in clause (a) with respect to any Indebtedness that will no
longer be outstanding as a result of the incurrence of the Indebtedness proposed
to be incurred, plus (d) the interest expense (including the amortization of
debt discount) with respect to any other Indebtedness incurred by such Person or
its Subsidiaries since the end of such period to the extent not included in
clause (a) minus (e) Consolidated Interest Expense of such Person to the extent
included in clause (a) with respect to any Indebtedness that no longer is
outstanding as a result of the incurrence of Indebtedness referred to in clause
(d); provided, however, that in making such computation, the Consolidated
Interest Expense of such Person attributable to interest on any proposed
Indebtedness bearing a floating interest rate shall be computed on a pro forma
basis as if the rate in effect on the date of computation had been the
applicable rate for the entire period; and provided, further that, in the event
such Person or any of its Subsidiaries has made Asset Sales or acquisitions of
assets not in the ordinary course of business (including acquisitions of other
Persons by merger, consolidation or purchase of Capital Stock) during or after
such period, such computation shall be made on a pro forma basis as if the Asset
Sales or acquisitions had taken place on the first day of such period.
"Consolidated Interest Expense" for any Person and its Subsidiaries for any
period the consolidated interest expense calculated on a consolidated basis and
determined in accordance with GAAP, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations but excluding fees and expenses related to letters of
credit).
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the net income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that there shall be excluded therefrom, without duplication: (i) all items
classified as extraordinary, unusual or nonrecurring gains (or losses); (ii) any
net loss or net income of any other Person (other than a Subsidiary of such
Person), except to the extent of the amount of dividends or other distributions
actually paid to such Person or its Subsidiaries by such other Person during
such period; (iii) the net income of any Person acquired by such Person or a
Subsidiary thereof in a pooling-of-interests transaction for any period prior to
the date of such acquisition; (iv) gains (but not losses) in respect of Asset
Sales by such Person or its Subsidiaries; (v) the net income (but not net loss)
of any Subsidiary of such Person to the extent that the declaration or payment
of dividends or distributions to such Person is restricted by the terms of its
constituent documents or any agreement, instrument, contract, judgment, order,
decree, statute, rule, governmental regulation or otherwise, except for any
dividends or distributions actually paid by such Subsidiary to such Person or
another Subsidiary of such Person; (vi) with regard to a Subsidiary of such
Person (other than a Wholly Owned Subsidiary of such Person), any aggregate net
income (or loss) in excess of such Person's pro rata share of such Subsidiary's
net income (or loss); and (vii) the cumulative effect of any change in
accounting principles.
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"Consolidated Net Worth" means, with respect to any Person as of any date,
the consolidated stockholders' equity of such Person and its consolidated
Subsidiaries, as determined in accordance with GAAP, less, to the extent
included therein, all amounts, if any, attributable to Disqualified Stock.
"Default" means any event, occurrence or condition that is or with the
passage of time or the giving of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event or with the passage of time,
matures or is redeemable, pursuant to a sinking fund obligation or otherwise
(excluding any redemption at the option of the issuer of such Capital Stock on a
date that is at least 91 days after the date on which the Notes mature), or
redeemable at the option of the Holder thereof, in whole or in part, on or prior
to the date that is 91 days after the date on which the Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means all Indebtedness of the Company and its
Subsidiaries in existence on the Issue Date.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of whom is under undue pressure or
compulsion to complete the transaction. Fair Market Value of any asset of the
Company and its Subsidiaries shall be determined by (i) an executive officer of
the Company, acting in good faith, with respect to any Asset Sale which involves
$1 million or less, and shall be evidenced by an officer's certificate of said
officer delivered to the Trustee or (ii) the Board of Directors of the Company,
acting in good faith, with respect to any Asset Sale which involves in excess of
$1 million, and shall be evidenced by a Board resolution thereof delivered to
the Trustee; provided that with respect to any Asset Sale which involves in
excess of $10 million the Fair Market Value of any such asset or assets shall be
determined by an Independent Financial Advisor.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time; provided, however, that for
purposes of determining the Consolidated Net Income of the Company, "GAAP" shall
mean such generally accepted accounting principles as are in effect on the date
on which the Notes are originally issued.
"Guarantee" means, as applied to any Indebtedness of another Person, (i) a
guarantee (other than by endorsement of negotiable instruments for collection in
the ordinary course of business), direct or indirect, in any manner, of all or
any part of such Indebtedness, (ii) any direct or indirect obligation,
contingent or otherwise, of a Person guaranteeing or having the effect of
guaranteeing the Indebtedness of any other Person in any manner and (iii) an
agreement of a Person, direct or indirect, contingent or otherwise, the
practical effect of which is to assure in any way the payment or performance (or
payment of damages in the event of non-performance) of all or any part of such
Indebtedness of another Person.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Incur" or "incur" means, with respect to any Indebtedness or other
obligation of any Person, to create, issue (by conversion, exchange or
otherwise), assume, Guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the unconsolidated
balance sheet of such Person (and "incurrence," "incurred," "incurrable" and
"incurring" shall have meanings correlative to the foregoing), provided,
however,
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that a change in GAAP that results in an obligation of such Person that exists
at such time becoming Indebtedness shall not be deemed an incurrence of such
Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (i) any liability of such Person (a) for borrowed money, or
under any reimbursement obligation relating to a letter of credit, bankers'
acceptance or note purchase facility; (b) evidenced by a bond, note, debenture
or similar instrument; (c) for the balance deferred and unpaid of the purchase
price for any property or service or any obligation upon which interest charges
are customarily paid (except for accrued expenses or trade payables arising in
the ordinary course of business); (d) for the payment of money relating to a
lease that is required to be classified as a Capitalized Lease Obligation in
accordance with GAAP; (e) for the maximum fixed repurchase price of any
Disqualified Stock of such Person plus accrued and unpaid dividends thereon; (f)
secured by a lien, including pursuant to the PBGC Documents, (ii) any obligation
of others secured by a Lien on any asset of such Person, whether or not any
obligation secured thereby has been assumed, by such Person; (iii) any
obligations of such Person under any Hedging Obligation; and (iv) any Guarantee
of such Person or any obligation of such Person which in economic effect is a
guarantee with respect to any Indebtedness of another Person.
For purposes of this definition, "maximum fixed repurchase price" of any
Disqualified Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were purchased on any date on which Indebtedness shall be
required to be determined pursuant to the Indenture, and if such price is based
upon, or measured by, the Fair Market Value of such Disqualified Stock.
"Independent Financial Advisor" means an accounting, appraisal or
investment banking firm of nationally recognized standing that is, in the
reasonable and good faith judgment of the Board of Directors of the Company,
qualified to perform the task for which such firm has been engaged and
disinterested and independent with respect to the Company and its Affiliates.
"Investment" by any Person means any direct or indirect loan, advance (or
other extension of credit) or capital contribution (by means of any transfer of
cash or other property) to another Person or any other payments for property or
services for the account or use of another Person, including without limitation
the following: (i) the purchase or acquisition of any Capital Stock or other
evidence of beneficial ownership in another Person; (ii) the purchase,
acquisition or Guarantee of the Indebtedness of another Person or the issuance
of a "keep well" with respect thereto; and (iii) the purchase or acquisition of
the business or assets of another Person; but shall exclude: (a) accounts
receivable and other extensions of trade credit on commercially reasonable terms
in accordance with normal trade practices; (b) the acquisition of property and
assets from equipment suppliers and other vendors in the ordinary course of
business, provided that such property and assets do not represent all or
substantially all of the production capacity of the supplier or other vendor;
and (c) the acquisition of assets, Capital Stock or other securities by the
Company for consideration consisting solely of the Capital Stock of the Company
other than Disqualified Stock.
If the Company or any Subsidiary of the Company sells or otherwise disposes
of any Equity Interests of any direct or indirect Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such Person is no
longer a Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the Fair Market
Value of the Equity Interests of such Subsidiary not sold or disposed of.
"Issue Date" means August 7, 1997.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
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"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received in connection with the sale or other disposition
of any non-cash consideration received in any Asset Sale), net of (i) the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, (ii) taxes paid or payable as
a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements) and (iii) any reserves established
in accordance with GAAP for adjustment in respect of the sale price of such
asset or assets or for any liabilities associated with such Asset Sale; provided
that any reversal of any such reserve shall be added back in the determination
of Net Proceeds.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PBGC Documents" means, collectively, (a) the Agreement, dated as of August
19, 1996, between the Company, the Keystone Master Retirement Trust and the
Pension Benefit Guaranty Corporation, acting on behalf of itself and various
pension plans of the Company; (b) the Amended and Restated Security Agreement,
dated as of January 8, 1987, between the Company and the Master Trust, as
amended on October 28, 1988 and August 19, 1996; and (c) the Amended and
Restated Subordination Agreement, dated as of June 30, 1987, between the Company
and the Master Trust, as amended on August 19, 1996.
"Permitted Holders" means (i) Harold C. Simmons, (ii) the trustees of the
Harold C. Simmons Family Trust No. 1 dated January 1, 1964, the Harold C.
Simmons Family Trust No. 2 dated January 1, 1964 and any trust or trusts,
established after the Issue Date for the benefit of Harold C. Simmons and/or his
spouse or his descendants whether natural or adopted (such trusts collectively,
the "Trusts" and such individuals collectively, the "Beneficiaries"), (iii) each
of the Trusts, (iv) each of the Beneficiaries, (v) any Person controlled,
directly or indirectly, by one or more of the Persons described in clauses (i)
through (iv) above, (vi) any employee benefit plan or pension fund of the
Company or any Subsidiary, (vii) any Person holding Voting Stock for or pursuant
to the terms of any such plan or fund, and (viii) any group made up of Persons
described in clauses (i) through (vii) above.
"Permitted Indebtedness" means the Indebtedness set forth in the following
clauses (each of which shall be given independent effect):
(i) any Permitted Secured Debt of the Company under the Amended Credit
Facility in an aggregate principal amount at any time outstanding (being
deemed to have a principal amount equal to the maximum potential liability
of the Company thereunder) not to exceed an amount equal to $25 million
under the Amended Credit Facility; provided that at no time shall the sum
of the aggregate principal amount outstanding under the Amended Credit
Facility pursuant to this clause (i) and the amount outstanding under
clause (ii) below exceed $25 million in the aggregate;
(ii) any Permitted Secured Debt of DeSoto under the Amended DeSoto
Credit Facility in an aggregate principal amount at any time outstanding
(being deemed to have a principal amount equal to the maximum potential
liability of DeSoto thereunder) not to exceed an amount equal to $10
million under the Amended DeSoto Credit Facility; provided that at no time
shall the sum of the aggregate principal amount outstanding under the
Amended DeSoto Credit Facility pursuant to this clause (ii) and the amount
outstanding under clause (i) above exceed $25 million in the aggregate;
(iii) the Permitted Secured Debt of the Company represented by the
PBGC Documents;
(iv) the Notes;
(v) the Existing Indebtedness of the Company and its Subsidiaries
(except to the extent such Indebtedness is proposed to be repaid by
application of the proceeds of the Notes);
(vi) the incurrence by the Company or any of its Wholly Owned
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Wholly Owned Subsidiaries; provided, however, that (A) any
subsequent issuance, transfer or other disposition of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or a Wholly Owned Subsidiary
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and (B) any sale, transfer or other disposition of any such Indebtedness to
a Person that is not either the Company or a Wholly Owned Subsidiary shall
be deemed, in each case, to constitute a new incurrence of such
Indebtedness;
(vii) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Debt to the extent in exchange for, or to the extent
the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund, Indebtedness that was permitted by the Indenture to be
incurred;
(viii) the incurrence of Indebtedness or the issuance of Disqualified
Stock or preferred stock by any Person prior to the time (A) such Person
became a Subsidiary of the Company, (B) such Person merges into or
consolidates with a Subsidiary of the Company or (C) another Subsidiary of
the Company merges into or consolidates with such Person (in a transaction
in which such Person becomes a Subsidiary of the Company), provided,
however, that immediately following the transaction which caused such
Person to become a Subsidiary, the Company could incur $1.00 of additional
Indebtedness pursuant to the first sentence above under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock";
(ix) the incurrence by the Company or any of its Subsidiaries of
additional Indebtedness represented by Capital Lease Obligations, mortgage
financings, Purchase Money Obligations, in each case, incurred for the
purpose of financing or refinancing all or any part of the purchase price
or cost of construction or improvement of property, plant or equipment used
in the business of the Company or such Subsidiary, in an aggregate
principal amount not to exceed $5 million at any time outstanding,
provided, however, that in the case of Purchase Money Obligations, such
Indebtedness shall not constitute more than 100% of the cost to the Company
or such Subsidiary of the property purchased or leased with the proceeds
thereof;
(x) the incurrence in the ordinary course of business by the Company
of Indebtedness representing reimbursement obligations under commercial
letters of credit;
(xi) the incurrence by the Company of Hedging Obligations that are
incurred for the purpose of fixing or hedging interest rate risk with
respect to any floating rate Indebtedness that is permitted by the terms of
this Indenture to be outstanding;
(xii) the incurrence by the Company of Indebtedness in respect of bid,
performance or advance payment bonds, and appeal and surety bonds; and
(xiii) the incurrence of Indebtedness by the Company (other than that
referred to in clauses (i) through (xii) above) notwithstanding the
limitations in the preceding clauses (i) through (xii) not to exceed $5
million outstanding at any given time.
For purposes of this definition, (i) in the event that an item of Indebtedness
meets the criteria of more than one of the types of Permitted Indebtedness
permitted by the clauses (i) through (xiii) of this definition, the Company in
its sole discretion will classify such item of Permitted Indebtedness and will
only be required to include the amount of such Indebtedness once in determining
compliance with amount limits set forth in this definition; (ii) the amount of
Indebtedness issued at a price which is less than the principal amount thereof
shall be equal to the amount of liability in respect thereof determined in
accordance with GAAP; and (iii) the amount of Indebtedness represented by a
Guarantee of a primary obligation of another Person shall be deemed to be the
lower of (x) an amount equal to the maximum amount of the primary obligation
(including without limitation all principal, premiums, if any, interest, fees
and all other amounts in respect thereof) in respect of which such Guarantee is
made and (y) the maximum amount for which such guaranteeing Person may be liable
pursuant to the terms of the applicable Guarantee, which, in any case in which
such Guarantee consists solely of the granting of a Lien on any asset of such
guaranteeing Person, shall be limited to the Fair Market Value of such asset.
"Permitted Investments" means (a) any Investment in the Company or in a
Subsidiary; (b) any Investment in Cash Equivalents; (c) any Investment by the
Company or any Subsidiary in a Person, if as a result of such Investment (i)
such Person becomes a Subsidiary or (ii) such Person is merged, consolidated or
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amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Subsidiary; (d) any
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "-- Repurchase at the Option of
Holders -- Asset Sales"; (e) any obligations or shares of Capital Stock received
in connection with or as a result of a bankruptcy, workout or reorganization of
the issuer of such obligations or shares of Capital Stock; (f) any Investment
received involuntarily; and (g) any Investment existing on the date of the
Indenture.
"Permitted Liens" means (i) Liens on assets of the Company or its
Subsidiaries to secure the Amended Credit Facility, the Amended DeSoto Credit
Facility, the PBGC Documents, the Notes and other Permitted Secured Debt that
was permitted by the terms of the Indenture and the Security Documents to be
incurred; (ii) Liens existing on the date of the Indenture; (iii) Liens to
secure any Permitted Refinancing Debt, in whole or in part, of any Indebtedness
secured by Liens referred to in the foregoing clause (i) or (ii); (iv) Liens in
favor of the Company or any of its Subsidiaries; (v) Liens on property of a
Person existing at the time such Person is merged into or consolidated with the
Company or any Subsidiary of the Company; provided that such Liens were in
existence prior to such merger or consolidation and were not incurred in
contemplation thereof and do not extend to any assets other than those of the
Person merged into or consolidated with the Company or any Subsidiary; (vi)
Liens on property existing at the time of acquisition thereof by the Company or
any Subsidiary of the Company, provided that such Liens were in existence prior
to such acquisition and were not incurred in contemplation thereof and do not
extend to any assets other than those so acquired by the Company or any
Subsidiary; (vii) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business (or to secure reimbursement
obligations in respect of letters of credit issued in connection with any of the
foregoing obligations); (viii) Liens to secure Indebtedness (including Purchase
Money Obligations and Capital Lease Obligations) permitted by clause (ix) of the
definition of Permitted Indebtedness covering only the assets acquired with such
Indebtedness; (ix) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently pursued, provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (x) covenants, easements,
rights-of-way, restrictions, encroachments or other similar encumbrances not
materially impairing the marketability of the property encumbered thereby and
not interfering in any material respect with the use of such property or with
the ordinary conduct of the business of the Company or any Subsidiary; (xi)
Liens with respect to judgments which have been stayed or for which a bond
having a value equal to the judgment amount has been posted, but only for so
long as such judgment has been stayed or such bond remains posted and
outstanding; (xii) Liens incurred in the ordinary course of business of the
Company or any Subsidiary of the Company with respect to obligations that do not
exceed $1.0 million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Subsidiary; and (xiii) Liens on assets or property (including any real property
upon which such assets or property are or will be located) securing Indebtedness
incurred to purchase or construct such assets or property, which Indebtedness is
permitted to be incurred under the Indenture.
"Permitted Refinancing Debt" means any Indebtedness of the Company or any
of its Subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund other Indebtedness
of the Company or such Subsidiary; provided that (i) the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Debt does not
exceed the principal amount (or accreted value, if applicable) of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith); (ii)
such Permitted Refinancing Debt has a final maturity date no earlier than the
final maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Debt has a final maturity date no earlier than the final maturity date of, and
is subordinated in
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right of payment to, the Notes on terms at least as favorable to the Holders of
Notes as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness may not be incurred by any Subsidiary if the Company is the
original obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Permitted Secured Debt" means any Indebtedness of the Company or any
Subsidiary (plus interest, premium, fees and other obligations associated
therewith), and any refinancing, refunding, replacement, renewal or extension
thereof, (a) under the Amended Credit Facility, (b) under the Amended DeSoto
Credit Facility, (c) under the PBGC Documents, (d) under the Notes, (e)
constituting Purchase Money Obligations, (f) constituting Capital Lease
Obligations, or (g) secured by Permitted Liens.
"Public Equity Offering" means any underwritten public offering of Capital
Stock of the Company or a Successor Entity pursuant to an effective registration
statement (other than a registration statement on Form S-4 or Form S-8 or any
successor or similar form) under the Securities Act.
"Purchase Date" means each date on which the Company is obligated to
repurchase Notes pursuant to the terms of the Indenture.
"Purchase Money Obligations" means, with respect to any specified Person,
means Indebtedness of such Person incurred for the purpose of financing all or
any part of the purchase price or the cost of construction or improvement of
equipment or property, but only if such equipment or property is or should be
included in "addition to property, plant or equipment" in accordance with
generally accepted accounting principles and only if such equipment or property
is not being purchased as part of an acquisition of any business.
"Qualified Capital Stock" in any Person means a class of Capital Stock
other than Disqualified Capital Stock.
"Redemption Date" means each date on which the Company is obligated to
redeem Notes pursuant to the terms of the Indenture.
"Related Business Investment" means any Investment, Capital Expenditure or
other expenditure by the Company or any Subsidiary of the Company which is
related to the business of the Company and its Subsidiaries as it is conducted
on the Issue Date.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Sale/leaseback" means any lease, whether an operating lease or a capital
lease, whereby the Company or any of its Subsidiaries, directly or indirectly,
becomes or remains liable as lessee or as guarantor or other surety, of any
property (whether real or personal or mixed) whether now owned or hereafter
acquired, (i) that the Company or its Subsidiaries, as the case may be, has sold
or transferred or is to sell or transfer to any other Person (other than the
Company), or (ii) that the Company or any of its Subsidiaries, as the case may
be, intends to use for substantially the same purpose as any other property that
has been or is to be sold or transferred by the Company or any such Subsidiaries
to any Person (other than the Company) in connection with such lease.
"Security Documents" means the Security Agreements, the Mortgages and the
Intercreditor Agreement referred to under "-- Security" above and the
documentation relating to the Collateral Account.
"Series A Preferred Stock" means the Company's Series A Senior Preferred
Stock, no par value, designated pursuant to a Certificate of Designation filed
with the Secretary of State of the State of Delaware on September 23, 1996, as
in effect on the Issue Date, subject to mandatory redemption on July 1, 2000, or
earlier, upon the occurrence of a change of control (as defined in the
Certificate of Designation) or the occurrence of certain other events.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
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general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Trust Moneys" means all cash or Cash Equivalents received by the Trustee
in accordance with the terms of the Indenture and the Security Documents: (i)
upon the release of property from the Lien of the Security Documents, including,
without limitation, all moneys received in respect of the principal of all
purchase money, governmental or other obligations; or (ii) as Net Proceeds upon
the destruction of all or any part of the Collateral (other than any liability
insurance proceeds payable to the Trustee for any loss, liability or expense
incurred by it); or (iii) as a net award or net awards upon the taking of all or
any part of the Collateral; or (iv) as proceeds of any other sale or other
disposition of all or any part of the Collateral by or on behalf of the Trustee
or any collection, recovery, receipt, appropriation or other realization of or
from all or any part of the Collateral pursuant to the Security Documents or
otherwise; or (v) pursuant to the Mortgages; or (vi) for application as provided
under the Indenture or the Security Documents, or whose disposition is not
otherwise specifically provided for in the Indenture or the Security Documents.
"Voting Stock" means, with respect to any Person, the Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors
or other members of the governing body of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Senior Notes where such Senior Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 120 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until , 1997 (90
days after the date of this Prospectus), all dealers effecting transactions in
the Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer for the purchasers of any such Exchange Notes. Any broker-dealer
that resells Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
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For a period of 120 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the reasonable expenses of one counsel
for the Holders of the Notes) other than commissions or concessions of any
brokers or dealers and will indemnify the Holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Rogers & Hardin LLP, Atlanta, Georgia.
EXPERTS
The consolidated balance sheets as of December 31, 1996 and 1995 and the
consolidated statements of operations, redeemable preferred stock and common
stockholders' equity (deficit), and cash flows and financial statement schedule
for each of the three years in the period ended December 31, 1996, incorporated
by reference and included except for the financial statement schedule in this
prospectus, have been included and incorporated herein in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The consolidated statements of operations of DeSoto for each of the three
years in the period ended December 31, 1995 included in this Prospectus have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto. Reference is made to said report
which includes an explanatory paragraph that describes matters impacting
DeSoto's ability to continue as a going concern.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF KEYSTONE CONSOLIDATED
INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996 and June 30, 1997
(unaudited)............................................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996 and the Six Month
Periods Ended June 30, 1996 and 1997 (unaudited)....... F-4
Consolidated Statements of Redeemable Preferred Stock and
Common Stockholders' Equity (Deficit) for the Years
Ended December 31, 1994, 1995 and 1996 and the Six
Month Period Ended June 30, 1997 (unaudited)........... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996 and the Six Month
Periods Ended June 30, 1996 and 1997 (unaudited)....... F-6
Notes to Consolidated Financial Statements................ F-8
CONSOLIDATED FINANCIAL STATEMENTS OF DESOTO, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................. F-30
Consolidated Statements of Operations for the Years Ended
December 31, 1993, 1994
and 1995............................................... F-31
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1993, 1994, and 1995.......... F-32
Consolidated Balance Sheets as of December 31, 1994 and
1995................................................... F-33
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995....................... F-34
Notes to Consolidated Financial Statements................ F-35
Quarterly Revenues and Earnings data (1994 versus 1995)... F-49
Consolidated Condensed Statements of Operations for the
Nine Months Ended September 30, 1995 and September 27,
1996 and the Six Months Ended
June 30, 1996 (unaudited).............................. F-50
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and September 27,
1996 and the Six Months Ended
June 30, 1996 (unaudited).............................. F-51
Notes to Consolidated Condensed Financial Statements...... F-52
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of June 30, 1997.................................... P-2
Notes to Unaudited Pro Forma Condensed Consolidated
Balance Sheet.......................................... P-3
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 1996........ P-4
Notes to Unaudited Pro Forma Condensed Consolidated
Statement of Operations -- Year Ended December 31,
1996................................................... P-5
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Six Months Ended June 30, 1997...... P-7
Notes to Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the Six Months Ended June
30, 1997............................................... P-8
</TABLE>
F-1
<PAGE> 89
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Keystone Consolidated Industries, Inc.
We have audited the accompanying consolidated balance sheets of Keystone
Consolidated Industries, Inc. and Subsidiaries as of December 31, 1996 and 1995
and the related consolidated statements of operations, redeemable preferred
stock and common stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Keystone Consolidated Industries, Inc. and Subsidiaries as of December 31, 1996
and 1995, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
February 28, 1997
Dallas, Texas
F-2
<PAGE> 90
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Notes and accounts receivable, net of allowances of $537,
$469 and $648........................................... $ 31,363 $ 35,974 $ 43,798
Inventories............................................... 35,631 36,533 35,834
Deferred income taxes..................................... 3,685 16,381 17,488
Prepaid expenses.......................................... 2,026 1,542 626
-------- -------- --------
Total current assets................................ 72,705 90,430 97,746
-------- -------- --------
Property, plant and equipment:
Land, buildings and improvements.......................... 45,715 47,309 47,360
Machinery and equipment................................... 187,577 198,488 198,108
Leasehold improvements.................................... 1,204 1,221 1,297
Construction in progress.................................. 11,263 15,423 24,568
-------- -------- --------
245,759 262,441 271,333
Less accumulated depreciation............................... 159,323 169,833 176,680
-------- -------- --------
Net property, plant and equipment................... 86,436 92,608 94,653
-------- -------- --------
Other assets:
Restricted investments.................................... 2,410 7,691 7,442
Unrecognized net pension obligation....................... 8,427 -- --
Prepaid pension cost...................................... -- 104,726 106,226
Deferred income taxes..................................... 24,485 2,181 --
Other..................................................... 4,359 4,732 4,391
-------- -------- --------
Total other assets.................................. 39,681 119,330 118,059
-------- -------- --------
$198,822 $302,368 $310,458
======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities of long-term debt.... $ 18,750 $ 34,760 $ 39,204
Accounts payable.......................................... 26,534 34,419 31,485
Accounts payable to affiliates............................ 39 159 167
Accrued pension cost...................................... 7,170 -- --
Accrued OPEB cost......................................... 7,776 8,368 8,397
Other accrued liabilities................................. 19,297 28,631 32,722
-------- -------- --------
Total current liabilities........................... 79,566 106,337 111,975
-------- -------- --------
Noncurrent liabilities:
Long-term debt............................................ 11,195 17,020 15,306
Accrued pension cost...................................... 39,222 -- --
Accrued OPEB cost......................................... 97,868 100,818 101,271
Negative goodwill......................................... -- 27,057 26,099
Other..................................................... 8,464 16,466 14,697
-------- -------- --------
Total noncurrent liabilities........................ 156,749 161,361 157,373
-------- -------- --------
Redeemable preferred stock, no par value; 500,000 shares
authorized;
435,456 shares issued..................................... -- 3,500 3,500
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $1 par value, 12,000,000 shares authorized;
5,637,641, 9,190,139 and 9,263,898 shares issued at
stated value............................................ 6,362 9,920 9,994
Additional paid-in capital................................ 20,013 46,347 46,882
Net pension liabilities adjustment........................ (36,257) -- --
Accumulated deficit....................................... (27,599) (25,085) (19,254)
Treasury stock -- 1,134 shares, at cost................... (12) (12) (12)
-------- -------- --------
Total stockholders' equity (deficit)................ (37,493) 31,170 37,610
-------- -------- --------
$198,822 $302,368 $310,458
======== ======== ========
Commitments and contingencies (Notes 15, 16 and 17).
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 91
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues and other income:
Net sales............................. $364,435 $345,657 $331,175 $170,118 $192,381
Other, net............................ 18 267 589 186 442
-------- -------- -------- -------- --------
364,453 345,924 331,764 170,304 192,823
-------- -------- -------- -------- --------
Costs and expenses:
Cost of goods sold.................... 327,453 312,909 297,149 157,675 170,592
Selling............................... 5,101 4,367 3,855 2,006 2,460
General and administrative............ 20,675 17,185 22,779 9,296 9,280
Overfunded defined benefit pension
credit............................. -- -- -- -- (1,500)
Interest -- notes payable & long-term
debt............................... 2,688 3,385 3,741 1,869 2,736
Interest credit related to excise
tax................................ (3,853) -- -- -- --
-------- -------- -------- -------- --------
352,064 337,846 327,524 170,846 183,568
-------- -------- -------- -------- --------
Income (loss) before income
taxes............................ 12,389 8,078 4,240 (542) 9,255
Provision for income taxes (benefit).... 4,828 3,191 1,656 (215) 3,284
-------- -------- -------- -------- --------
Net income (loss).................. 7,561 4,887 2,584 (327) 5,971
Dividends on preferred stock............ -- -- 70 -- 140
-------- -------- -------- -------- --------
Net income (loss) available for common
shares............................. $ 7,561 $ 4,887 $ 2,514 $ (327) $ 5,831
======== ======== ======== ======== ========
Primary net income (loss) available for
common shares per common and common
equivalent share...................... $ 1.35 $ .86 $ .38 $ (.06) $ .63
======== ======== ======== ======== ========
Fully diluted net income (loss)
available for common shares per common
and common equivalent share........... $ 1.35 $ .86 $ .38 $ (.06) $ .62
======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding:
Primary............................... 5,601 5,654 6,560 5,678 9,279
======== ======== ======== ======== ========
Fully diluted......................... 5,601 5,654 6,560 5,678 9,335
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 92
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------------------------------
TOTAL
COMMON
REDEEMABLE COMMON STOCK ADDITIONAL NET PENSION STOCKHOLDERS'
PREFERRED --------------- PAID-IN LIABILITIES ACCUMULATED TREASURY EQUITY
STOCK SHARES AMOUNT CAPITAL ADJUSTMENT (DEFICIT) STOCK (DEFICIT)
---------- ------ ------ ---------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31,
1993..................... $ -- 5,515 $6,244 $18,803 $(35,317) $(40,047) $(591) $(50,908)
Net income................. -- -- -- -- -- 7,561 -- 7,561
Pension adjustments........ -- -- -- -- 1,530 -- -- 1,530
Purchase of treasury
stock.................... -- -- -- -- -- -- (43) (43)
Issuance of stock.......... -- 79 69 590 -- -- 622 1,281
------- ----- ------ ------- -------- -------- ----- --------
Balance -- December 31,
1994..................... -- 5,594 6,313 19,393 (33,787) (32,486) (12) (40,579)
Net income................. -- -- -- -- -- 4,887 -- 4,887
Pension adjustments........ -- -- -- -- (2,470) -- -- (2,470)
Issuance of stock.......... -- 44 49 620 -- -- -- 669
------- ----- ------ ------- -------- -------- ----- --------
Balance -- December 31,
1995..................... -- 5,638 6,362 20,013 (36,257) (27,599) (12) (37,493)
Net income................. -- -- -- -- -- 2,584 -- 2,584
Pension adjustments........ -- -- -- -- 3,554 -- -- 3,554
Issuance of stock --
Acquisition.............. 5,100 3,500 3,500 25,813 -- -- -- 29,313
Issuance of
stock -- other........... -- 52 58 521 -- -- -- 579
Preferred dividends
declared................. 70 -- -- -- -- (70) -- (70)
Preferred dividends paid... (1,670) -- -- -- -- -- -- --
Merger of pension plans,
net...................... -- -- -- -- 32,703 -- -- 32,703
------- ----- ------ ------- -------- -------- ----- --------
Balance -- December 31,
1996..................... 3,500 9,190 9,920 46,347 -- (25,085) (12) 31,170
Unaudited:
Net Income............... -- -- -- -- -- 5,971 -- 5,971
Issuance of stock........ -- 74 74 535 -- -- -- 609
Preferred dividends
declared............... 140 -- -- -- -- (140) -- (140)
Preferred dividends
paid................... (140) -- -- -- -- -- -- --
------- ----- ------ ------- -------- -------- ----- --------
Balance -- June 30,
1997................... $ 3,500 9,264 $9,994 $46,882 $ -- $(19,254) $ (12) $ 37,610
======= ===== ====== ======= ======== ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 93
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $ 7,561 $ 4,887 $ 2,584 $ (327) $ 5,971
Depreciation and amortization......... 11,585 11,961 12,425 7,095 6,536
Deferred income taxes................. 4,175 1,750 (1,249) (2,009) 1,074
Other, net............................ 1,877 945 730 518 753
-------- -------- -------- -------- --------
25,198 19,543 14,490 5,277 14,334
Change in assets and liabilities:
Notes and accounts receivable...... (3,555) 10,379 (2,209) (8,977) (8,025)
Inventories........................ (317) 103 (102) 8,829 699
Accounts payable................... 4,309 (2,036) (3,873) (3,220) (2,926)
Pensions........................... (11,125) (10,042) (5,991) (3,900) (1,500)
Accrued excise tax and related
interest......................... (5,054) (1,033) (1,033) -- --
Other, net......................... 3,234 (4,416) (1,667) 2,938 4,334
-------- -------- -------- -------- --------
Net cash provided (used) by
operating activities........ 12,690 12,498 (385) 947 6,916
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures.................. (12,742) (18,208) (18,992) (7,400) (9,616)
Acquisition costs..................... -- -- (1,008) -- --
Collection of notes receivable........ 555 1,711 168 100 108
Proceeds from disposition of property
and equipment...................... 17 106 29 4 2
-------- -------- -------- -------- --------
Net cash used by investing
activities.................. (12,170) (16,391) (19,803) (7,296) (9,506)
-------- -------- -------- -------- --------
</TABLE>
F-6
<PAGE> 94
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Revolving credit facility, net............ $ 2,620 $ 8,030 $ 16,534 $ 8,179 $ 4,456
Other notes payable and long-term debt:
Additions.............................. 208 81 9,495 11 247
Principal payments..................... (3,964) (4,220) (4,194) (1,841) (1,973)
Preferred stock dividend payments...... -- -- (1,670) -- (140)
Common stock issued, net.................. 616 2 23 -- --
------- ------- -------- ------- -------
Net cash provided (used) by
financing activities............ (520) 3,893 20,188 6,349 2,590
------- ------- -------- ------- -------
Net change in cash and cash equivalents..... -- -- -- -- --
Cash and cash equivalents, beginning of
year...................................... -- -- -- -- --
------- ------- -------- ------- -------
Cash and cash equivalents, end of year...... $ -- $ -- $ -- $ -- $ --
======= ======= ======== ======= =======
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized.... $ 2,831 $ 3,673 $ 4,058 $ 2,060 $ 2,980
Income taxes........................... 1,721 1,560 2,210 278 928
Business combination:
Net assets consolidated:
Noncash assets......................... $ -- $ -- $ 99,663 $ -- $ --
Liabilities............................ -- -- (37,109) -- --
Negative goodwill...................... -- -- (27,133) -- --
------- ------- -------- ------- -------
-- -- 35,421
Redeemable preferred stock issued,
including accumulated dividends........ -- -- (5,100) -- --
Common stock issued....................... -- -- (29,313) -- --
------- ------- -------- ------- -------
Cash paid................................. $ -- $ -- $ 1,008 $ -- $ --
======= ======= ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 95
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Prior to September 27, 1996, Keystone Consolidated Industries, Inc.
("Keystone" or the "Company") was a majority-owned subsidiary of Contran
Corporation ("Contran"). Substantially all of Contran's outstanding voting stock
is held by trusts established for the benefit of the children and grandchildren
of Harold C. Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons may be
deemed to control Contran. On September 27, 1996, the Company acquired DeSoto,
Inc. ("DeSoto") and DeSoto became a wholly-owned subsidiary of Keystone. As a
result of the Company issuing approximately 3.5 million shares of common stock
in connection with the DeSoto acquisition, Contran's direct and indirect
ownership of the Company declined to approximately 41% at June 30, 1997. Contran
may be deemed to control the Company.
Principles of consolidation and management's estimates. The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany accounts and balances have been
eliminated. Certain 1994 and 1995 amounts have been reclassified to conform with
the 1996 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Ultimate actual results may, in some instances, differ from
previously estimated amounts.
Information included in the consolidated financial statements as of June
30, 1997 and for the interim periods ended June 30, 1996 and 1997 is unaudited.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the information for the
interim periods have been made. The results of operations for the interim
periods are not necessarily indicative of the operating results for a full year
or of future operations.
Fiscal year. The Company's fiscal year is 52 or 53 weeks and ends on the
last Sunday in December. Each of fiscal 1994 and 1996 were 52-week years and
1995 was a 53-week year.
Net sales. Sales are recorded when products are shipped.
Property, plant, equipment and depreciation. Property, plant and equipment
are stated at cost. Repairs, maintenance and minor renewals are expensed as
incurred. Improvements which substantially increase an asset's capacity or alter
its capabilities are capitalized.
Depreciation is computed using principally the straight-line method over
the estimated useful lives of 10 to approximately 30 years for buildings and
improvements and three to 12 years for machinery and equipment. Depreciation
expense amounted to $11,585,000, $11,961,000 and $12,501,000 during the years
ended December 31, 1994, 1995 and 1996, respectively, and $7,095,000 and
$7,477,000 during the interim periods ended June 30, 1996 and 1997,
respectively.
Investment in joint venture. The Company has a 20% interest in a joint
venture and accounts for the investment by the equity method. Differences
between the cost of the investment and the Company's pro rata share of the joint
venture's separately-reported net assets, if any, are allocated among the assets
and liabilities of the joint venture based upon estimated relative fair values.
Such differences, which were not material at June 30, 1997, are charged or
credited to income as the joint venture depreciates, amortizes or disposes of
the related net assets. The Company's investment in the joint venture is
included in other assets on the accompanying balance sheet. Earnings from the
joint venture, which are not material, are recorded in other income.
F-8
<PAGE> 96
Retirement plans and post-retirement benefits other than pensions.
Accounting and funding policies for retirement plans and post retirement
benefits other than pensions ("OPEB") are described in Notes 7 and 9,
respectively.
Environmental liabilities. The Company records liabilities related to
environmental issues at such time as information becomes available and is
sufficient to support a reasonable estimate of range of loss. If the Company is
unable to determine that a single amount in an estimated range is more likely,
the minimum amount of the range is recorded. Costs of future expenditures for
environmental remediation obligations are not discounted to their present value.
Recoveries of environmental remediation costs from other parties are recorded as
assets when their receipt is deemed probable.
Income taxes. Deferred income tax assets and liabilities are recognized for
the expected future tax effects of temporary differences between the income tax
and financial reporting carrying amounts of assets and liabilities.
Advertising costs. Advertising costs, expensed as incurred, were $1
million, $.9 million and $.6 million in the years ended December 31, 1994, 1995
and 1996, respectively, and $.5 million during each of the interim periods ended
June 30, 1996 and 1997.
Income per share. Income per share is based on the weighted average number
of common and common equivalent shares outstanding during each year. Outstanding
stock options and other common stock equivalents are excluded from the
computations when the effect of their assumed exercise is antidilutive. The
Company will retroactively adopt Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," effective December 31, 1997. Basic
earnings per share pursuant to SFAS No. 128 will not be materially different
from earnings per share presented herein and diluted earnings per share pursuant
to SFAS No. 128 is not expected to be materially different from basic earnings
per share.
Negative goodwill. Negative goodwill, representing the excess of fair value
over cost of individual net assets acquired in the DeSoto acquisition, is
amortized by the straight-line method over 20 years (remaining life of 19.5
years at March 31, 1997 and is stated net of accumulated amortization of
approximately $76,000 and $1,017,000 at December 31, 1996 and June 30, 1997,
respectively. Amortization of negative goodwill amounted to $76,000 and $941,000
in the year ended December 31, 1996 and the interim period ended June 30, 1997,
respectively.
Employee Stock Options. The Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and its various interpretations. Under APBO No. 25,
no compensation cost is generally recognized for fixed stock options in which
the exercise price is not less than the market price on the grant date.
Compensation cost recognized by the Company in accordance with APBO No. 25 has
not been significant in each of the past three years or the interim period ended
March 31, 1997.
NOTE 2 -- ACQUISITION
On September 27, 1996, the stockholders of Keystone and DeSoto approved the
merger of the two companies (the "Acquisition"), in which DeSoto became a
wholly-owned subsidiary of Keystone. DeSoto manufactures household cleaning
products including powdered and liquid laundry detergents and performs contract
manufacturing and packaging of household cleaning products. Keystone issued
approximately 3.5 million shares of its common stock (approximately $29.3
million at the $8.375 per share market price on September 27, 1996) and 435,456
shares of Keystone preferred stock ($3.5 million redemption value beginning on
July 21, 1997) in exchange for all of the outstanding common stock and preferred
stock, respectively, of DeSoto. Each DeSoto common stockholder received .7465 of
a share of Keystone common stock for each share of DeSoto common stock.
In connection with the Acquisition, Keystone assumed certain options to
purchase DeSoto common stock and converted them to options to acquire
approximately 147,000 shares of Keystone common stock at prices of $5.86 to
$13.56 per share. Keystone also assumed certain DeSoto warrants giving holders
the right to acquire the equivalent of 447,900 shares of Keystone common stock
at a price of $9.38 per share.
F-9
<PAGE> 97
The Acquisition included the concurrent merger of Keystone's three
underfunded defined benefit pension plans with and into DeSoto's overfunded
defined benefit pension plan, which resulted in an overfunded plan for financial
reporting purposes. See Note 7.
Pursuant to the Merger Agreement, Keystone was obligated to, and has caused
DeSoto to pay, approximately $5.9 million to certain of DeSoto's trade creditors
who were parties to a trade composition agreement with DeSoto. DeSoto was
required to pay an additional $1.4 million, plus interest at 8%, to such trade
creditors before September 27, 1997, and such amounts were paid by DeSoto in
February 1997. Additionally, Keystone was obligated to immediately pay to the
holders of DeSoto preferred stock approximately $1.6 million in accumulated,
unpaid dividends, which amounts were also paid. See Note 10.
As a result of these and other transactions related to the Acquisition,
Keystone required additional funding from its primary lender. In order to obtain
such additional funds, Keystone received the consent of the Pension Benefit
Guaranty Corporation (the "PBGC") to increase Keystone's allowable borrowings by
$20 million upon consummation of the Acquisition and the merger of the Keystone
defined benefit pension plans with and into the DeSoto defined benefit pension
plan. The PBGC's consent was required due to prior agreements with the PBGC
whereby Keystone agreed to certain borrowing restrictions.
Keystone accounted for the Acquisition by the purchase method of accounting
and, accordingly, DeSoto's results of operations and cash flows are included in
the Company's consolidated financial statements subsequent to the Acquisition.
The purchase price has been allocated to the individual assets acquired and
liabilities assumed of DeSoto based upon preliminary estimated fair values. The
actual allocation of the purchase price may be different from the preliminary
allocation due to adjustments in the purchase price and refinements in estimates
of the fair values of the net assets acquired.
The unaudited pro forma financial information for the years ended December
31, 1995 and 1996 has been prepared assuming the Acquisition and the
simultaneous merger of the defined benefit pension plans occurred as of January
1, 1995. The pro forma financial information for the years ended December 31,
1995 and 1996 also reflects adjustments to assume that (i) the April 1996 sale
of DeSoto's Union City, California business, and (ii) the 1995 sales of DeSoto's
businesses in Thornton and South Holland, Illinois had both occurred on December
31, 1994. The pro forma financial information for the interim period ended June
30, 1996 has been prepared assuming the Acquisition and the simultaneous merger
of the defined benefit pension plans occurred as of January 1, 1996. The pro
forma financial information also reflects adjustments to assume that the April
1996 sale of DeSoto's Union City, California business occurred as of December
31, 1995. The pro forma financial information is not necessarily indicative of
actual results had the transactions occurred at the beginning of the periods,
nor do they purport to represent results of future operations of the merged
companies.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------- SIX MONTHS ENDED
1995 1996 JUNE 30, 1996
------ ------ ------------------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues and other income........................ $364.0 $343.4 $177.7
Net income (loss)................................ $ 9.2 $ 3.3 $ (.9)
Net income (loss) available to common
stockholders................................... $ 8.7 $ 2.9 $ (1.1)
Net income (loss) per Keystone common share...... $ .93 $ .31 $ (.12)
</TABLE>
Pro forma net periodic defined benefit pension expense for 1995 and 1996,
assuming the Acquisition and pension plan merger occurred January 1, 1995,
approximates $5.3 million and $1.7 million, respectively, as compared to
historical pension expense of $8.7 million and $3.7 million for 1995 and 1996,
respectively. Pro forma net periodic defined benefit pension expenses for the
first six months of 1996, assuming the Acquisition and pension plan merger
occurred January 1, 1996, approximates $2.4 million, as compared to historical
pension expense of $3.8 million.
F-10
<PAGE> 98
NOTE 3 -- INVENTORIES
Inventories are stated at the lower of cost or market. The last-in,
first-out ("LIFO") method is used to determine the cost of approximately three
fourths of the inventories held at December 31, 1995 and 1996, and June 30,
1997. The first-in, first-out or average cost methods are used to determine the
cost of all other inventories.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials:
Steel and wire products............................ $12,669 $12,548 $12,108
Household cleaning products........................ -- 526 557
------- ------- -------
12,669 13,074 12,665
------- ------- -------
Work in process --
Steel and wire products............................ 13,825 12,824 12,764
------- ------- -------
Finished products:
Steel and wire products............................ 10,258 9,954 9,320
Household cleaning products........................ -- 96 335
------- ------- -------
10,258 10,050 9,655
------- ------- -------
Supplies --
Steel and wire products............................ 13,552 13,612 13,777
------- ------- -------
50,304 49,560 48,861
------- ------- -------
Less LIFO reserve:
Steel and wire products............................ 14,673 12,996 12,996
Household cleaning products........................ -- 31 31
------- ------- -------
14,673 13,027 13,027
------- ------- -------
$35,631 $36,533 $35,834
======= ======= =======
</TABLE>
NOTE 4 -- NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Commercial credit agreements:
Revolving credit facility.......................... $14,561 $31,095 $35,551
Term loan.......................................... 13,050 19,166 17,499
Urban and Community Development Assistance Grants,
interest at 8%, due in semi-annual installments
through 2003....................................... 1,444 1,267 1,075
Other................................................ 890 252 385
------- ------- -------
29,945 51,780 54,510
Less current maturities............................ 18,750 34,760 39,204
------- ------- -------
$11,195 $17,020 $15,306
======= ======= =======
</TABLE>
In connection with the Acquisition, the Company's $35 million revolving
credit facility was amended and increased to $55 million. See Note 2. The
revolving credit facility, as amended, is collateralized primarily by the
Company's trade receivables and inventories, bears interest at 1% over the prime
rate and matures December 31, 1999. During 1995 and 1994 the facility bore
interest at 1.5% over the prime rate. The effective interest rate was 10.25% at
December 31, 1995, 9.25% at December 31, 1996 and 9.5% at June 30, 1997. The
F-11
<PAGE> 99
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 June 30, 1997). At June 30, 1997, the additional
available borrowings under this credit facility were $19.1 million. This credit
facility requires the Company's daily cash receipts to be used to reduce the
outstanding borrowings, which results in the Company maintaining zero cash
balances.
Also in connection with the Acquisition, the Company's term loan was
increased from $10.5 million to $20 million and the proceeds therefrom were used
to reduce the revolving credit facility. The term loan, as amended, also bears
interest at the prime rate plus 1% and is due in monthly installments of $.3
million plus accrued interest through November 1999 with one final installment
of the remaining principal and interest on December 31, 1999. The term loan is
with the same financial institution that provides the Company's revolving credit
facility and requires compliance with the restrictive covenants, security
agreement and certain other terms of the revolving credit facility and is
further collateralized by the Company's property, plant and equipment. The term
loan becomes due and payable if the Company terminates its revolving credit
facility.
The Company's credit agreements contain restrictive covenants, including
certain minimum working capital and net worth requirements and a prohibition
against the payment of dividends on Keystone common stock without lender
consent. Substantially all of the Company's notes payable and long-term debt
reprice with changes in interest rates, and the book value of such indebtedness
is deemed to approximate market value.
The aggregate maturities of notes payable and long-term debt are shown in
the table below.
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(IN THOUSANDS)
<S> <C>
Year ending December 31,
1997................................................... $34,760
1998................................................... 3,619
1999................................................... 12,757
2000................................................... 242
2001................................................... 262
2002 and thereafter.................................... 140
-------
$51,780
=======
</TABLE>
At June 30, 1997, total collateralized obligations, including deferred
pension contributions (see Note 7), amounted to $59.0 million.
See Note 18 -- Subsequent Event.
F-12
<PAGE> 100
NOTE 5 -- INCOME TAXES
Summarized below are (i) the differences between the provision for income
taxes and the amounts that would be expected using the U. S. federal statutory
income tax rate of 35%, and (ii) the components of the comprehensive provision
for income taxes.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Expected tax expense, at statutory rate..... $ 4,336 $ 2,827 $ 1,484 $ (190) $3,239
U.S. state income taxes, net................ 557 171 11 (31) 361
Amortization of negative goodwill........... -- -- -- -- (329)
Other, net.................................. (65) 193 161 6 13
------- ------- ------- ------ ------
Provision for income taxes charged to
results of operations.................. 4,828 3,191 1,656 (215) 3,284
Stockholders' equity -- pension component... 978 (1,580) 2,272 3,241 --
------- ------- ------- ------ ------
Comprehensive provision for income
taxes.................................. $ 5,806 $ 1,611 $ 3,928 $3,026 $3,284
======= ======= ======= ====== ======
Comprehensive provision for income taxes:
Currently payable:
U.S. federal........................... $ 943 $ 3,095 $ 5,428 $2,612 $3,537
U.S. state............................. 294 254 788 472 696
Benefit of loss carry forwards......... (2,247) (1,271) (23) -- --
Alternative minimum tax liabilities
(credits)......................... 1,663 (637) (3,288) (1,290) (2,023)
------- ------- ------- ------ ------
Net currently payable................ 653 1,441 2,905 1,794 2,210
Deferred income taxes, net................ 5,153 170 1,023 1,232 1,074
------- ------- ------- ------ ------
$ 5,806 $ 1,611 $ 3,928 $3,026 $3,284
======= ======= ======= ====== ======
</TABLE>
Prior to the Acquisition, the Company believed a portion of its gross
deferred tax assets did not meet a "more likely than not" realizability test and
accordingly, provided a $30 million valuation allowance. As a result of the
Acquisition and related transactions, Keystone eliminated the $30 million
deferred tax asset valuation allowance as part of the purchase price allocation
for the Acquisition. The net deferred tax asset valuation allowance amounted to
$30 million at December 31, 1995. There was no change in the valuation allowance
during 1994, 1995 or the interim periods ended June 30, 1996 and 1997.
During 1995 and 1996, the Company was subject to the regular U.S. federal
statutory income tax rate of 35%, but utilized alternative minimum tax credit
carry forwards to reduce its current federal income tax payable to an amount
equal to the alternative minimum tax. At June 30, 1997, the Company had
approximately $1.2 million of alternative minimum tax credit carry forwards
which have no expiration date.
F-13
<PAGE> 101
The components of the net deferred tax asset are summarized below.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------- ----------------------
1995 1996 1997
---------------------- ---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- ----------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Tax effect of temporary
differences relating to:
Inventories................. $ 1,866 $ -- $ 2,202 $ -- $ 2,045 $ --
Property and equipment...... -- (8,189) -- (5,792) -- (4,602)
Accrued pension cost........ 10,603 -- -- -- -- --
Prepaid pension............. -- -- -- (40,843) -- (41,428)
Accrued OPEB cost........... 41,202 -- 42,583 -- 42,770 --
Accrued liabilities and
other deductible
differences.............. 7,325 -- 14,317 -- 14,636 --
Other taxable differences... -- (1,183) -- (6,228) -- (6,928)
Net operating loss carry
forwards................. -- -- 9,109 -- 9,109 --
Alternative minimum tax
credit carryforwards..... 6,546 -- 3,214 -- 1,191 --
Valuation allowance........... (30,000) -- -- -- -- --
-------- ------- -------- -------- -------- --------
Gross deferred tax assets
(liabilities)............ 37,542 (9,372) 71,425 (52,863) 69,751 (52,958)
Reclassification, principally
netting by tax
jurisdiction................ (9,372) 9,372 (52,863) 52,863 (52,958) 52,958
-------- ------- -------- -------- -------- --------
Net deferred tax asset
(liability).............. 28,170 -- 18,562 -- 16,793 --
Less current deferred tax
asset, net of prorata
allocation of valuation
allowance in 1995........... 3,685 -- 16,381 -- 17,488 --
-------- ------- -------- -------- -------- --------
Noncurrent deferred tax
asset (liability)........ $ 24,485 $ -- $ 2,181 $ -- $ (695) $ --
======== ======= ======== ======== ======== ========
</TABLE>
Significant fluctuations in several components of the net deferred tax
asset resulted from the Acquisition and simultaneous merger of the Company's
pension plans, including the pre-acquisition net operating loss carryforwards
generated by DeSoto which are approximately $9.1 million and which expire from
2003 through 2009. These net operating loss carry forwards can be used to reduce
the future taxable income of the Company, subject to certain statutorily-imposed
limitations. A nominal amount of the acquired net operating loss carryforward
was utilized in 1996 subsequent to the Acquisition and in the interim period
ended March 31, 1997.
Prior to the Acquisition, DeSoto received a Report of Tax Examination
Changes from the Internal Revenue Service that proposed adjustments resulting in
additional taxes, penalties and interest for the years 1990 through 1993. DeSoto
filed a formal appeal of the proposed adjustments, and in prior years, accrued
an estimate of its liability related to this matter. On August 5, 1997, DeSoto
entered into a tentative agreement with the IRS to settle the matter within
previously accrued amounts.
NOTE 6 -- STOCK OPTIONS, WARRANTS AND STOCK APPRECIATION RIGHTS PLAN
The Company's 1992 Option Plan permits the granting of stock options, SARs
and restricted stock to key employees of the Company or its parent or
subsidiaries for up to 300,000 shares of the Company's common stock, subject to
certain adjustments. The 1992 Option Plan provides for the grant of options that
qualify as incentive stock options and for options which are not so qualified.
Incentive stock options are granted at a price
F-14
<PAGE> 102
not less than 100% of the fair market value of such stock on the date of grant.
The exercise price of all options and SARs, the length of period during which
the options or SARs may be exercised, and the length of the restriction period
for restricted stock awards are determined by the Incentive Compensation
Committee of the Board of Directors.
The Keystone Consolidated Industries, Inc. 1992 Non-Employee Director Stock
Option Plan (the "Director Plan") provides that each non-employee director of
the Company will annually be automatically granted an option to purchase 1,000
shares of the Company's common stock. Options are granted at a price equal to
the fair market value of such stock on the date of the grant, vest one year from
the date of the grant and expire five years from the date of the grant. Up to
50,000 shares of the Company's common stock may be issued pursuant to the
Director Plan.
Prior to the Acquisition, DeSoto granted stock options to certain
employees, consultants, and non-employee directors under a DeSoto stock plan
adopted in 1992 (the "DeSoto Options"). The options granted to employees and
consultants were qualified stock options (the "ISO Options") and the options
granted to non-employee directors were non-qualified options. The ISO Options
vest equally over the three years subsequent to the first anniversary of the
grant date and are exercisable for a period of 10 years from the grant date. The
non-qualified options are exercisable immediately upon grant and are exercisable
for a period of 10 years from the grant date. All options were granted at prices
equal to the fair market value of the stock on the dates the options were
granted. Upon consummation of the Acquisition, each then outstanding DeSoto
Option was assumed by Keystone and converted into an option to acquire that
number of shares of Keystone Common Stock equal to the number of shares of
DeSoto Common Stock subject to such DeSoto Option multiplied by .7465 (the
"Exchange Ratio"). The exercise price of such DeSoto Options was also adjusted
by dividing such exercise price by the Exchange Ratio. The other terms of the
DeSoto Options, including vesting schedules, remain unchanged. The Keystone
options exchanged for the former DeSoto options expire two years from the date
of the Acquisition. Also effective with the Acquisition, the former DeSoto 1992
stock plan was terminated.
Changes in outstanding options are summarized in the table below.
<TABLE>
<CAPTION>
AMOUNT PAYABLE
OPTIONS PRICE PER SHARE UPON EXERCISE
------- --------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1993............. 179,500 $ 8.53-15.81 $1,950,304
Granted.................................... 9,900 10.25-11.25 106,475
Exercised.................................. (61,500) 8.53-15.77 (535,252)
Canceled................................... (16,300) 8.75-15.77 (226,825)
------- ------------ ----------
Outstanding at December 31, 1994............. 111,600 8.75-15.81 1,294,702
Granted.................................... 5,000 13.38 66,875
Exercised.................................. (200) 8.75 (1,750)
Canceled................................... (21,000) 15.77 (331,102)
------- ------------ ----------
Outstanding at December 31, 1995............. 95,400 8.75-15.81 1,028,725
Granted.................................... 185,000 8.13-11.00 1,517,500
Assumed in Acquisition..................... 147,062 5.86-13.56 1,351,519
Exercised.................................. (3,733) 6.20 (23,130)
Canceled................................... (18,733) 8.75-15.81 (234,980)
------- ------------ ----------
Outstanding at December 31, 1996............. 404,996 5.86-13.56 3,639,634
Unaudited:
Granted.................................... 7,000 8.38 58,625
Canceled................................... (20,000) 10.75-12.86 (246,650)
------- ------------ ----------
Outstanding at June 30, 1997............... 391,996 $ 5.86-13.56 $3,451,609
======= ============ ==========
</TABLE>
F-15
<PAGE> 103
The following table summarizes weighted average information about fixed
stock options outstanding at June 30, 1997.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------- -------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
---------------------- ----------------------
REMAINING REMAINING
RANGE OF CONTRACTUAL EXERCISE CONTRACTUAL EXERCISE
EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS LIFE PRICE
- --------------- ------- ----------- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$5.86-$8.75 271,170 7.5 years $ 8.02 76,070 3.2 years $ 7.66
$9.21-$13.56 120,826 1.8 $10.57 118,866 1.8 $10.57
------- -------
391,996 5.8 $ 8.81 194,936 2.3 $ 9.44
======= =======
</TABLE>
During 1994, the Company awarded 19,200 shares of restricted stock under
the terms of the 1992 Option Plan as partial consideration for compensation that
had been accrued at December 31, 1993. The restricted stock vested 40% six
months after the award date, increasing to 70% 18 months after the award date
and 100% two years after the award date. During 1994 and 1996, 1,800 and 700
shares, respectively, of restricted stock were forfeited. At December 31, 1996,
all remaining shares had been issued.
At June 30, 1997, options to purchase 194,936 shares were exercisable
(161,648 shares exercisable at prices lower than the June 30, 1997 quoted market
price of $10.875 per share) and options to purchase an additional 59,940 shares
will become exercisable in 1997. At June 30, 1997, an aggregate of 80,700 shares
were available for future grants under the 1992 Option Plan and the Director
Plan.
Prior to the Acquisition, DeSoto had granted warrants to the holders of
DeSoto preferred stock to purchase 1,200,000 shares of DeSoto common stock at an
exercise price of $7.00 per share. In connection with the Acquisition, warrants
to purchase 600,000 shares were terminated and the remaining 600,000 warrants
were converted to warrants to purchase 447,900 shares of Keystone common stock
at an exercise price of $9.38 per share. The warrants are exercisable through
July 1998. At June 30, 1997, none of the warrants to purchase Keystone common
stock had been exercised.
Had the Company elected to account for stock-based employee compensation
for all awards granted after 1994 in accordance with the fair value based
accounting method of SFAS No. 123, the impact on the Company's reported net
income available to common stockholders and related per share amounts for 1995
and 1996 would not be material.
NOTE 7 -- EMPLOYEE BENEFIT PLANS
Prior to the Acquisition, the Company maintained three noncontributory
defined benefit pension plans covering most of its employees. The Acquisition
included the simultaneous merger of Keystone's three underfunded defined benefit
pension plans with and into DeSoto's single overfunded defined benefit pension
plan (the "Plan") resulting in an overfunded plan for financial reporting
purposes. As a result, Keystone's unrecognized pension obligation asset,
additional minimum pension liability and pension liabilities adjustment
component of stockholders' equity at September 27, 1996 were eliminated.
Pension benefits are based on a combination of stated percentages of each
employee's wages and the method of calculating benefits under each of the former
plans remain unchanged as a result of the plan merger. At June 30, 1997,
approximately 92% of the Plan assets were invested in a collective investment
trust (the "Collective Trust") formed by Valhi, Inc., a majority-owned
subsidiary of Contran, to permit the collective investment by trusts which
implement employee benefit plans maintained by Contran, Valhi and related
companies, including the Company. The remainder of the Plan assets at June 30,
1997 were invested in United States Treasury Notes, corporate bonds and notes,
investment partnerships, time deposits, commercial paper, interest rate futures,
forward exchange contracts, foreign currency, certain real estate leased by the
Company, various mutual funds invested in bonds, equity and real estate,
mortgages and other short-term investments. Prior to the Acquisition,
significantly all of the pension plan assets were invested in the Collective
Trust. Harold C. Simmons is the sole trustee and the sole member of the Trust
Investment Committee for such trust.
F-16
<PAGE> 104
In addition, during years prior to the Acquisition, DeSoto sold four of its
real properties to its pension plan for approximately $10.6 million. Those
properties are still owned by the Plan and are leased to DeSoto. These real
properties amounted to approximately 3% of the Plan's assets at June 30, 1997.
See Note 16.
The Company's funding policy is to contribute amounts equal to, or
exceeding, minimum funding requirements of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The Company was granted funding
waivers from the Internal Revenue Service ("IRS") to defer the annual pension
plan contributions for the 1980, 1984 and 1985 plan years, which, in the
aggregate, amounted to $31.7 million. The deferred amounts, with interest, were
payable by the Company over fifteen years. At June 30, 1997, the remaining
balance of such deferred contributions was approximately $4.5 million. These
deferred contributions are collateralized by a lien on all of the Company's
assets. Due to the merger of the pension plans, the Company will no longer be
required to make these deferred contributions provided the Plan maintains a
specified funded status.
The components of net periodic pension cost are presented in the table
below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost........................................ $ 2,601 $ 1,811 $ 2,214
Interest cost on projected benefit obligation....... 13,691 14,460 15,258
Actual (return)/loss on plan assets................. 1,272 (22,633) (37,968)
Net amortization and deferral....................... (8,621) 15,022 24,170
------- -------- --------
Net periodic pension cost......................... $ 8,943 $ 8,660 $ 3,674
======= ======== ========
</TABLE>
The Company evaluates the discount rate used in determining the actuarial
present values of its pension obligations in response to changes in interest
rate trends and, if appropriate, adjusts the rate annually. The discount rate
used at December 31, 1996 was 7.5% (1995 -- 7.5%, 1994 -- 8.5%). The 1% decrease
in 1995 resulted in, among other things, an increase in noncurrent pension
liability of $14.7 million and a $9.0 million charge to stockholders' deficit.
Future variances from actuarially assumed rates, including the rate of
return on pension plan assets, may result in increases or decreases to prepaid
pension costs, deferred taxes, pension expense or credit, and funding
requirements.
The assumed rate of increase in future compensation levels and long-term
rate of return on assets were 3% and 10%, respectively. The vested benefit
obligation includes the actuarial present value of the vested benefits to which
an active employee is entitled if employment was terminated immediately.
F-17
<PAGE> 105
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.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $182,612 $272,855
======== ========
Accumulated benefit obligation............................ $183,143 $273,792
======== ========
Projected benefit obligation.............................. $192,192 $281,915
Plan assets at fair value................................... 136,752 328,783
-------- --------
Plan assets in excess of (less than) projected benefit
obligation................................................ (55,440) 46,868
Unrecognized net loss from experience different from
actuarial assumptions..................................... 54,589 51,291
Unrecognized net obligation being amortized over 15-19
years..................................................... 8,373 6,567
Adjustment required to recognize minimum liability.......... (53,914) --
-------- --------
Total prepaid (accrued) pension cost.............. (46,392) 104,726
Less current portion........................................ (7,170) --
-------- --------
Noncurrent prepaid (accrued) pension cost................. $(39,222) $104,726
======== ========
</TABLE>
The Company maintains several defined contribution plans covering most of
its employees. The Company contributes the lesser of an amount equal to the
participants' contributions or a formula established by the Board of Directors.
Expense related to these plans was $2.4 million in 1994, $2.3 million in 1995
and $2.2 million in 1996.
NOTE 8 -- OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Salary, wages, vacations and other employee
expenses......................................... $ 9,342 $11,085 $10,357
Environmental....................................... 4,111 5,354 6,964
Accrued excise tax and related interest............. 1,033 -- --
Disposition of former facilities.................... 301 3,518 2,986
Self insurance...................................... 1,247 1,585 2,305
Legal and professional.............................. 310 1,542 1,264
Other............................................... 2,953 5,547 8,846
------- ------- -------
$19,297 $28,631 $32,722
======= ======= =======
Noncurrent:
Environmental....................................... $ 6,677 $12,787 $10,667
Deferred gain....................................... -- 2,383 2,185
Other............................................... 1,787 1,296 1,845
------- ------- -------
$ 8,464 $16,466 $14,697
======= ======= =======
</TABLE>
The deferred gain relates to the sale of certain DeSoto properties to
DeSoto's pension plan. See Note 16.
F-18
<PAGE> 106
NOTE 9 -- POST RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company currently provides, in addition to pension benefits, medical
and life insurance benefits for certain retired employees of currently owned
businesses as well as for certain retirees of businesses which have been sold or
discontinued. Certain retirees are required to contribute to the cost of their
benefits. Under plans currently in effect, most active employees would be
entitled to receive OPEB upon retirement. OPEB expense for the years ended
December 31, 1994, 1995 and 1996 was composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost............................................... $1,396 $ 985 $1,189
Interest cost on projected benefit obligation.............. 7,421 7,123 6,967
Amortization of prior service cost......................... (343) (343) (343)
Amortization of (gains) losses............................. -- (331) 9
------ ------ ------
Total OPEB expense............................... $8,474 $7,434 $7,822
====== ====== ======
</TABLE>
The following table sets forth the actuarial present value of the estimated
accumulated OPEB obligations, none of which have been funded.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated OPEB obligations:
Current retirees.......................................... $ 69,701 $ 72,886
Fully eligible active plan participants................... 1,636 1,026
Other active plan participants............................ 25,263 25,621
-------- --------
96,600 99,533
Unrecognized net gain from experience different from
actuarial assumptions..................................... 4,150 5,102
Unrecognized prior service credit........................... 4,894 4,551
-------- --------
Total accrued OPEB cost..................................... 105,644 109,186
Less current portion........................................ 7,776 8,368
-------- --------
Noncurrent accrued OPEB cost.............................. $ 97,868 $100,818
======== ========
</TABLE>
The rates used in determining the actuarial present value of the
accumulated OPEB obligations were (i) discount rate -- 7.5% in 1996 and 1995 and
(ii) rate of increase in future health care costs -- 7% in 1997, gradually
declining to 5% in 2006 and thereafter. If the health care cost trend rate was
increased by one percentage point, OPEB expense would have increased $1.0
million in 1996 and the actuarial present value of accumulated OPEB obligations
at December 31, 1996 would have increased $9.4 million.
The Company evaluates the discount rate used in valuing its OPEB
liabilities in response to changes in interest rate trends and, if appropriate,
adjusts the rate annually. A one percent change in the discount rate results in
an approximate $8 million change in accumulated OPEB obligation.
NOTE 10 -- REDEEMABLE PREFERRED STOCK
In connection with the Acquisition, Keystone issued 435,456 shares of
Keystone Series A Senior Preferred Stock for all of the outstanding preferred
stock of DeSoto. The preferred stock may be redeemed by Keystone, in whole or,
from time to time, in part, at a cash redemption price equal to $8.0375 per
share (an aggregate of $3.5 million) plus all accrued but unpaid dividends
thereon, whether or not earned or declared (the "Liquidation Preference"), at
any time after July 21, 1997 or at certain other times. Dividends are payable to
holders of the preferred stock quarterly, at the rate of 8% of the Liquidation
Preference. If such dividends are in arrears for four quarterly periods,
dividends for any subsequent quarterly periods are payable
F-19
<PAGE> 107
to holders of the preferred stock at the rate of 10% of the Liquidation
Preference. At June 30, 1997, there were no dividend arrearages with respect to
the preferred stock.
Holders of the preferred stock are entitled to one vote for each share of
such stock, voting together as one class with holders of Keystone's common
stock. If the accrued dividends for two or more quarterly dividend periods shall
not have been paid to holders of any shares of the Company's preferred stock,
holders of a majority of such stock shall have the exclusive right, voting as a
separate class, to elect two directors of Keystone.
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Company may be deemed to be controlled by Harold C. Simmons (see Note
1). Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in various transactions with related parties, including
the Company. Such transactions may include, among other things, management and
expense sharing arrangements, advances of funds on open account, and sales,
leases and exchanges of assets. It is the policy of the Company to engage in
transactions with related parties on terms, in the opinion of the Company, no
less favorable to the Company than could be obtained from unrelated parties.
Depending upon the business, tax and other objectives then relevant, the Company
may be a party to one or more such transactions in the future. See also Note 16.
J. Walter Tucker, Jr., Vice Chairman of the Company, is a principal
stockholder of Tucker & Branham, Inc., Orlando, Florida. Although the Company
does not pay Mr. Tucker a salary, the Company has contracted with Tucker &
Branham, Inc. for management consulting services by Mr. Tucker. Fees paid to
Tucker & Branham, Inc. were $66,000 in 1994, $50,000 in 1995, $79,000 in 1996,
and $37,000 and $27,000 in the interim periods ended June 30, 1996 and 1997,
respectively.
Under the terms of an Intercorporate Services Agreement with Contran,
Contran and related companies perform certain management, financial and
administrative services for the Company on a fee basis. Aggregate fees incurred
by the Company pursuant to this agreement were $640,000 in 1994, $500,000 in
1995, $465,000 in 1996, and $233 and $243 in the interim periods ended June 30,
1996 and 1997, respectively. In addition, the Company purchased certain aircraft
services from Valhi in the amount of $128,000 in 1994, $150,000 in 1995,
$172,000 in 1996, and $47,000 and $103,000 in the interim periods ended June 30,
1996 and 1997, respectively.
Certain of Keystone's property, liability and casualty insurance risks are
insured or partially reinsured by a captive insurance subsidiary of Valhi. The
premiums paid in connection therewith were approximately $98,000 in 1994,
$39,000 in 1995 and $689,000 in 1996.
F-20
<PAGE> 108
NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Net sales............................. $79,463 $ 90,655 $82,703 $78,354
Gross profit.......................... 5,076 7,367 8,172 13,411
Net income (loss)..................... $(1,137) $ 810 $ 792 $ 2,119
======= ======== ======= =======
Net income (loss) available for common
shares............................. $(1,137) $ 810 $ 792 $ 2,049
======= ======== ======= =======
Net income (loss) available for common
shares per common and common
equivalent share................... $ (.20) $ .14 $ .14 $ .22
======= ======== ======= =======
Year ended December 31, 1995:
Net sales............................. $90,768 $ 95,482 $82,921 $76,486
Gross profit.......................... 7,491 11,255 6,539 7,463
Net income (loss) available for common
shares............................. $ 255 $ 2,876 $ 759 $ 997
======= ======== ======= =======
Net income (loss) available for common
shares per common and common
equivalent share................... $ .05 $ .50 $ .14 $ .17
======= ======== ======= =======
Six months ended June 30,1997:
Net sales............................. $89,149 $103,232
Gross profit.......................... 8,358 13,431
Net income............................ $ 1,624 $ 4,347
======= ========
Net income available for common
shares............................. $ 1,554 $ 4,277
======= ========
Primary net income available for
common shares per common and common
equivalent share................... $ .17 $ .46
======= ========
</TABLE>
Due to the timing of the issuance of common stock in connection with the
Acquisition, the sum of 1996 net income (loss) available for common shares per
common and common equivalent share is different than net income (loss) available
for common shares per common and common equivalent share for the full year.
NOTE 13 -- JOINT VENTURE
In November 1994, the Company entered into a Joint Venture Agreement with
an unrelated party and formed Engineered Wire Products, Inc. ("EWP"), a
manufacturer and distributor of wire mesh, which previously operated as a
division of the unrelated party. The Company obtained a 20% interest in EWP, in
exchange for contributions of $1 million in cash and equipment in 1994 and $1
million in cash and inventory in 1995. In connection with the Joint Venture
Agreement, the Company also entered into a Shareholders' Agreement which gives
the Company the exclusive option to acquire the remaining 80% interest in EWP at
fair market value for a period of five years. The Company accounts for its
interest in EWP under the equity method. At December 31, 1995 and 1996, the
Company's investment in EWP amounted to $2.1 million and $2.4 million,
respectively, and is included in other assets. Earnings from the Company's
investment in EWP amounted to $21,000, $125,000 and $225,000 in 1994, 1995 and
1996, respectively, and are recorded in other income. The Company's underlying
equity in net assets of EWP amounted to $1.5 million and $1.7 million at
December 31, 1995 and 1996, respectively. Sales by the Company to EWP during
1994, 1995 and 1996 amounted to $2.3 million, $13.5 million and $9.9 million,
respectively. The Company did not have any receivables from EWP at December 31,
1995 and receivables from EWP amounted to $508,000 at
F-21
<PAGE> 109
December 31, 1996. Inventory purchased from the Company and held by EWP at
December 31, 1995 and 1996 was insignificant.
NOTE 14 -- OPERATIONS
The Company's operations are comprised of two segments; the manufacture and
sale of carbon steel rod, wire and wire products for agricultural, industrial,
construction, commercial, original equipment manufacturers and retail consumer
markets and the manufacture and sale of household cleaning products. The
Company's steel and wire products are distributed primarily in the Midwestern
and Southwestern United States. The Company's household cleaning products are
sold primarily to a single customer, Sears.
<TABLE>
<CAPTION>
BUSINESS SEGMENT PRINCIPAL ENTITIES LOCATION
---------------- ------------------ --------
<S> <C> <C>
Steel and wire products Keystone Steel & Wire Peoria, Illinois
Sherman Wire Sherman, Texas
Sherman Wire of Caldwell,
Inc. Caldwell, Texas
Keystone Fasteners Springdale, Arkansas
Fox Valley Steel & Wire Hortonville, Wisconsin
Engineered Wire Products* Upper Sandusky, Ohio
Household cleaning products DeSoto Joliet, Illinois
</TABLE>
- ---------------
* Unconsolidated 20% equity affiliate.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------
1994 1995 1996 1996 1997
------ ------ ------ ------- -------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales:
Steel and wire products................. $364.4 $345.7 $328.7 $170.1 $184.0
Household cleaning products............. -- -- 2.5 -- 8.4
------ ------ ------ ------ ------
$364.4 $345.7 $331.2 $170.1 $192.4
====== ====== ====== ====== ======
Operating income:
Steel and wire products................. $ 12.9 $ 11.3 $ 10.9 $ 2.6 $ 11.7
Household cleaning products............. -- -- (.2) -- .3
------ ------ ------ ------ ------
12.9 11.3 10.7 2.6 12.0
General expenses and other, net
(credit)................................ 1.7 (.2) 2.8 1.2 --
Interest expense (credit)................. (1.2) 3.4 3.7 1.9 2.7
------ ------ ------ ------ ------
Income (loss) before income taxes.... $ 12.4 $ 8.1 $ 4.2 $ (.5) $ 9.3
====== ====== ====== ====== ======
</TABLE>
F-22
<PAGE> 110
Significantly all of the Company's capital expenditures and depreciation
expense during the years ended December 31, 1994, 1995 and 1996 and the interim
periods ended June 30, 1996 and 1997 related to the Company's steel and wire
products segment.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Identifiable assets:
Business segments:
Steel and wire products......................... $157.3 $166.4 $173.0
Household cleaning products..................... -- 2.6 3.7
------ ------ ------
157.3 169.0 176.7
Corporate.......................................... 41.5 133.4 133.8
------ ------ ------
$198.8 $302.4 $310.5
====== ====== ======
</TABLE>
Corporate assets consist principally of pension related assets, restricted
investments, deferred tax assets and corporate property, plant and equipment.
Export sales were $2.8 million in 1994, $.9 million in 1995 and $1.5
million in 1996. These export sales were primarily to Canada and Mexico in 1994
and Canada in 1995 and 1996.
NOTE 15 -- ENVIRONMENTAL MATTERS
At June 30, 1997, the Company's financial statements reflected total
accrued liabilities of $17.6 million to cover estimated remedial costs arising
from environmental issues, including those discussed below. Although the Company
has established an accrual for estimated future required environmental
remediation costs, there is no assurance regarding the ultimate cost of remedial
measures that might eventually be required by environmental authorities or that
additional environmental hazards, requiring further remedial expenditures, might
not be, asserted by such authorities or private parties. Accordingly, the costs
of remedial measures may exceed the amounts accrued.
The Company has adopted Statement of Position 96-1, "Environmental
Remediation Liabilities," ("SOP 96-1"). The impact on the Company's financial
statements of adoption of SOP 96-1 in 1996 was not material.
Peoria facility
The Company is currently involved in the closure of inactive waste disposal
units at its Peoria facility pursuant to a closure plan approved by the Illinois
Environmental Protection Agency ("IEPA") in September 1992. The original closure
plan provides for the in-place treatment of seven hazardous waste surface
impoundments and two waste piles to be disposed of as special wastes. The
Company recorded an estimated liability for remediation of the impoundments and
waste piles based on a six phase remediation plan. The Company adjusts the
recorded liability for each Phase as actual remediation costs become known.
During the remediation of Phase I, which was completed in 1994, the Company
discovered additional contaminated soils and recorded a charge of $3.1 million
for the treatment and disposal costs related to the additional soils. During
1995, the Company began remediation of Phases II and III and completed these
Phases, as well as Phase IV during 1996. In addition, the Company began
remediation of Phase V during 1996. During 1995, additional contaminated soils
were discovered and the Company recorded a charge of $2.4 million for the
remediation costs for Phases II and III. During 1996, the Company's actual
remediation costs for Phase IV was greater than the recorded accrual and as
such, the Company recorded an additional charge of $2.8 million. In addition,
based on new cost estimates developed in 1996, the Company recorded an
additional charge of $3.6 million (approximately $2.0 million in the fourth
quarter) representing the estimated costs remaining to be incurred relating to
the uncompleted phases. At June 30, 1997, the Company has a $9.2 million accrual
representing the estimated costs remaining to be incurred relating to the
remediation efforts, exclusive of
F-23
<PAGE> 111
capital improvements. The remediation is currently expected to be complete in
1998. Pursuant to agreements with the IEPA and Illinois Attorney General's
office, the Company is depositing $3 million into a trust fund over a six-year
period ending July 1999. The Company cannot withdraw funds from the trust fund
until the fund balance exceeds the sum of the estimated remaining remediation
costs plus $2 million. At December 31, 1995 and 1996 and June 30, 1997, the
trust fund had balances of $2.4 million, $2.8 million and $2.9 million,
respectively, which amounts are included in other noncurrent assets because the
Company does not expect to have access to any of these funds until after 1998.
"Superfund" sites -- Keystone
The Company is subject to federal and state "Superfund" legislation that
imposes cleanup and remediation responsibility upon present and former owners
and operators of, and persons that generated hazardous substances deposited
upon, sites determined by state or federal regulators to contain hazardous
substances. The Company has been notified by the United States Environmental
Protection Agency ("U.S. EPA") that the Company is a potentially responsible
party ("PRP") under the federal "Superfund" legislation for the alleged release
or threat of release of hazardous substances into the environment at three
sites. These situations involve cleanup of landfills and disposal facilities
which allegedly received hazardous substances generated by discontinued
operations of the Company. At December 31, 1995 and 1996, the Company had
accrued a total liability related to these three sites of $1,121,000. At June
30, 1997, the Company had accrued $431,000 related to these sites. The Company
believes its comprehensive general liability insurance policies provide
indemnification for certain costs the Company incurs at the three "Superfund"
sites discussed below and has recorded receivables for the estimated insurance
recoveries.
In July 1991, the United States filed an action against a former division
of the Company and four other PRP's in the United States District Court for the
Northern District of Illinois (Civil Action No. 91C4482) seeking to recover
investigation and remediation costs incurred by U.S. EPA at the Byron Salvage
Yard, located in Byron, Illinois. In April 1992, Keystone filed a third-party
complaint in this civil action against 15 additional parties seeking
contribution in the event the Company is held liable for any response costs at
the Byron site. Neither the Company nor the other designated PRPs are performing
any investigation of the nature and extent of the contamination. U.S. EPA has
possession of the site, is conducting the remedial investigation. In July 1993,
the U.S. EPA made available for inspection records documenting approximately $10
million in investigation and remediation costs incurred at the site and produced
copies of the laboratory results on groundwater samples taken as a part of the
ongoing remedial investigation. During 1994, U.S. EPA released its remedial
investigation study showing ground water contamination, however U.S. EPA has not
completed a feasibility study or risk assessment for the site. Until U.S. EPA
releases its Final Record of Decision, the Company will not know whether U.S.
EPA will require any further groundwater remediation measures. In December 1996,
Keystone, U.S. EPA and the Department of Justice entered into the Fifth Partial
Consent Decree to settle Keystone's liability for EPA response costs incurred at
the site through April 1994 for a payment of $690,000. Under the agreement
Keystone is precluded from recovering any portion of the $690,000 settlement
payment from other parties to the lawsuit. In January 1997, Keystone paid the
$690,000 settlement. Keystone will remain potentially liable for EPA response
costs incurred after April 30, 1994, and natural resource damage claims, if any,
that may be asserted in the future. Keystone recovered a portion of the $690,000
payment from its insurer.
In September 1991, the Company along with 53 other PRP's, executed a
consent decree to undertake the immediate removal of hazardous wastes and
initiate a Remedial Investigation/Feasibility Study ("RI/FS") of the Interstate
Pollution Control site located in Rockford, Illinois. The Company's percentage
allocation within the group of PRP's agreeing to fund this project is currently
2.14%. However, the Company's ultimate allocation, and the ultimate costs of the
RI/FS and any remedial action, are subject to change depending, for example,
upon: the number and financial condition of the other participating PRPs, field
conditions and sampling results, results of the risk assessment and feasibility
study, additional regulatory requirements, and the success of a contribution
action seeking to compel additional parties to contribute to the costs of the
RI/FS and any remedial action. The project manager for the engineering firm
conducting the RI/FS at the site has concluded the least expensive remedial
option would be to cap the site and install and operate a soil
F-24
<PAGE> 112
vapor extraction system, at an estimated cost of approximately $2.6 million. The
remedial investigation and feasibility study is expected to be completed during
1997. The Company's current allocated share of the estimated least expensive
remedial option is $56,000.
In August 1987, the Company was notified by U.S. EPA that it is a PRP
responsible for the alleged hazardous substance contamination of a site
previously owned by the Company in Cortland, New York. There are four other PRPs
participating in the RI/FS and a contribution action is pending against eleven
additional viable companies which contributed wastes to the site. An estimate
made by the principal engineering firm responsible for the management of the
RI/FS indicated the cost of the least expensive remedial option is approximately
$3 million. This option would involve the construction of a site cap and ground
water monitoring. The likelihood that U.S. EPA will select this option will
depend on, among other things, the results of the EPA's evaluation of the
feasibility study. The Company's estimated share of the least expensive remedial
option is $375,000.
DeSoto
DeSoto is also subject to federal and state "Superfund" legislation and has
been notified by U.S. EPA that it is a PRP under the federal "Superfund"
legislation for the alleged release or threat of release of hazardous substances
into the environment at several sites. DeSoto is also involved in remediation
efforts at other non "Superfund" sites. All of these situations involve cleanup
of landfills and other facilities which allegedly received hazardous substances
generated by discontinued operations of DeSoto. DeSoto has a total of $7.1
million accrued at June 30, 1997 relative to these sites. Such accruals were
recorded by DeSoto prior to the Acquisition. Although some insurance coverage is
available to DeSoto relative to these sites, DeSoto has not recorded receivables
for expected insurance proceeds at June 30, 1997.
U.S. EPA has notified DeSoto it is a PRP responsible for the alleged
hazardous substance contamination of the American Chemical Site ("ACS"), a
chemical recycling facility located in Griffith, Indiana. The U.S. EPA alleges
that DeSoto's discontinued operations sent its wastes directly to ACS during the
1950's through the 1980's and has assigned an allocation level of approximately
5.7% to DeSoto. Cleanup costs have previously been estimated to range from $40
million to $85 million. In prior years DeSoto has paid approximately $207,000
towards the cleanup of this site. DeSoto expects to vigorously defend any
additional proceedings against it.
Prior to the Acquisition, DeSoto was notified by U.S. EPA that it is one of
50 PRPs at the Chemical Recyclers, Inc. site in Wylie, Texas. Under a consent
order from U.S. EPA, the PRP group has performed a removal action and an
investigation of soil and groundwater contamination. Such investigation revealed
certain environmental contamination. Certain PRPs that allegedly did not produce
chlorinated solvents may argue they should not be responsible for groundwater
cleanup or that responsibility should not be based on pure volume, but toxicity
should be taken into account in allocating responsibility. It is not presently
known whether DeSoto sent any chlorinated solvents to the site. It is
anticipated U.S. EPA will order further remedial action, the exact extent of
which is not currently known. DeSoto has been allocated on a non-binding interim
basis, approximately 10% of the costs for this Site.
In 1984, U.S. EPA filed suit against DeSoto by amending a complaint against
Midwest Solvent Recovery, Inc. et al ("Midco"). DeSoto was a defendant based
upon alleged shipments to an industrial waste recycling storage and disposal
operation site located in Gary, Indiana. The amended complaint sought relief
under CERCLA to force the defendants to clean up the site, pay non compliance
penalties and reimburse the government for past clean up costs. In June 1992,
DeSoto settled its portion of the case by entering into a partial consent
decree, and all but one of the eight remaining primary defendants and 93 third
party defendants entered into a main consent decree. Under the terms of the
partial consent decree, DeSoto agreed to pay its pro rata share (13.47%) of all
costs under the main consent decree. At December 31, 1996 current estimates of
total remaining remediation costs related to this site are approximately $20
million. In addition to certain amounts (totaling approximately $1.1 million at
June 30, 1997) included in the trust fund discussed below, DeSoto also has
certain credits (totaling $1.2 million at June 30, 1997) due to it under the
partial
F-25
<PAGE> 113
consent decree. These credits can be used by DeSoto (with certain limitations)
to fund its future liabilities under the partial consent decree.
In 1995, DeSoto was notified by the Texas Natural Resource Conservation
Commission ("TNRCC") that there were certain deficiencies in prior DeSoto
reports to TNRCC relative to one of DeSoto's non-operating facilities located in
Gainesville, Texas. In response to the TNRCC letter, DeSoto engaged an
environmental consulting firm to report on additional potential remediation
costs. Additional remediation costs are presently estimated to be between $1
million to $5 million.
In December 1994, DeSoto was named in a complaint filed in the United
States District Court for the Northern District of Indiana. The complaint
alleges DeSoto and numerous other parties are jointly and severally responsible
under the Comprehensive Environmental Response, Compensation and Liability Act
for the cleanup and future cleanup, plus costs and legal fees at the Ninth
Avenue Site in Gary, Indiana. The complaint also alleges DeSoto is responsible
for its allocable share of such expenses and costs. In March 1997, DeSoto
entered into a settlement agreement and resolved its liability at this site for
a payment of $490,000.
In December 1991, DeSoto and approximately 600 other PRPs were named in a
complaint alleging DeSoto and the PRPs generated wastes that were disposed of at
a Pennsauken, New Jersey municipal landfill. The plaintiffs in the complaint
were ordered by the court to show in what manner the defendants were connected
to the site. The plaintiffs provided an alleged nexus indicating garbage and
construction materials from DeSoto's former Pennsauken facility were disposed of
at the site and such waste contained hazardous material. In December 1992, the
plaintiffs responded claiming enough information had been provided, to which
DeSoto objected. The claim was dismissed without prejudice in August 1993. In
1996, DeSoto received an amended complaint containing the same allegations. This
matter is in discovery stage at June 30, 1997. DeSoto has denied any liability
with regard to this matter and expects to vigorously defend the action.
In addition to the sites discussed above, DeSoto is allegedly involved at
26 other sites at which DeSoto does not expect significant liability.
Under the terms of a 1990 asset purchase agreement of one of DeSoto's
former businesses with Sherwin-Williams, $6.0 million of the sale's proceeds
were used to establish a trust fund to fund potential clean-up liabilities. The
trust agreement expires on October 26, 2000, or when the trust is depleted,
whichever occurs first. A portion of the trust has been set aside with respect
to a specific site; the agreement governing that portion of the trust expires on
October 26, 2008. DeSoto has access to the trust fund, subject to Sherwin-
Williams' approval, for any expenses or liabilities incurred by DeSoto regarding
environmental claims relating to the sites identified in the trust agreement.
Sherwin-Williams has access to the trust fund, subject to DeSoto's approval, for
any expenses or liabilities incurred as a result of DeSoto's failure to meet its
obligations relating to the sites identified in the agreement. DeSoto was
reimbursed approximately $131,000 and $490,000 during the period from the date
of the Acquisition through December 31, 1996 and during the interim period ended
June 30, 1997, respectively, from the trust to cover waste site payments. The
balance in the trust fund, primarily invested in United States Treasury
securities and classified as a restricted investment on the balance sheet, as of
March 31, 1997 was approximately $4.1 million.
NOTE 16 -- LEASE COMMITMENTS
During years prior to the Acquisition, DeSoto completed the sale of its
real properties in Joliet, Illinois, Columbus, Georgia, South Holland, Illinois
and Union City, California, to a real property trust created by DeSoto's pension
plan. This trust paid a total of approximately $10.6 million in cash for the
properties and entered into ten-year leases of the properties to DeSoto.
DeSoto's initial annual rental obligations under these leases totaled
approximately $1.1 million plus insurance, taxes and maintenance. The gain on
the sale of these properties is being amortized over the period of the related
leases and is included in other accrued liabilities. See Note 8. The amount paid
to DeSoto by the trust and DeSoto's annual rental obligation were based upon
independent appraisals and approved by DeSoto's Board of Directors. Subsequent
to these sale and lease-back transactions, and prior to the Acquisition, DeSoto
ceased operations at its Columbus, Georgia and South Holland, Illinois
locations. In addition, DeSoto sold its business in Union City, California.
DeSoto has subleased the Columbus, Georgia and Union City, California locations
and continues to make monthly rental
F-26
<PAGE> 114
payments to the pension plan for the amount by which its rental obligation
exceeds the subtenants' rental obligations.
Payments, net of subtenant rent payments, under these leases during the
period from the date of the Acquisition through December 31, 1996, amounted to
approximately $209,000.
As of December 31, 1996, future commitments under these leases, net of
subleases, are summarized below.
<TABLE>
<CAPTION>
(IN THOUSANDS)
LEASE SUB
COMMITMENT RENTS NET
---------- ------ ------
<S> <C> <C> <C>
1997............................................ $1,367 $ 482 $ 885
1998............................................ 1,261 260 1,001
1999............................................ 1,261 263 998
2000............................................ 1,261 263 998
2001............................................ 1,220 247 973
2002 and thereafter............................. 1,703 150 1,553
------ ------ ------
$8,073 $1,665 $6,408
====== ====== ======
</TABLE>
NOTE 17 -- OTHER COMMITMENTS AND CONTINGENCIES
Current litigation
In 1992, a claim was filed against DeSoto in the Eastern Division of the
Danish High Court by an insurance carrier to a third party, for property damage
allegedly incurred when a fertilizer product manufactured by the third party,
containing a chemical sold to that party by one of DeSoto's discontinued
operations, allegedly caused or promoted, a fungus infection resulting in
failure of certain tomato crops in the United Kingdom. The damages alleged are
approximately $1.4 million. DeSoto's defense, with a reservation of rights, has
been undertaken by one of its insurance carriers. The matter continues to
proceed in Denmark, where jurisdiction has been conceded. During 1996, DeSoto
received a report from its Danish counsel that an independent expert had largely
confirmed DeSoto's position that its product was not the cause of the alleged
damage.
During 1996, DeSoto and more than 60 others were named as defendants in
four litigations in which the estates of four individuals who died of leukemia
allege their deaths were a result of exposure to benzene during the individual's
maritime careers. All four cases were tendered to DeSoto's insurance carrier who
have hired and provided defense counsel. Subsequently, one of the four cases was
dismissed, but such dismissal is being appealed by the plaintiff.
In 1991 action was filed in the District Court of Tarrant County, Texas, by
various emergency healthcare providers against DeSoto, among others, claiming
damages for alleged personal injuries purportedly related to an industrial
accident involving a DeSoto employee at its former facility in Fort Worth,
Texas. The case is set for trial in 1997. DeSoto's liability insurance covering
this matter is subject to a $500,000 self insurance retention. At December 31,
1996, DeSoto had paid approximately $200,000 for the defense and partial
settlement of this litigation and has accrued $300,000 relative to this case at
December 31, 1996. Such accrual was recorded prior to the Acquisition.
In August 1995, DeSoto commenced an action in the United States District
Court for the District of New Jersey, seeking contract and declaratory relief
with respect to environmental insurance coverage that DeSoto purchased from
Liberty Mutual Insurance Company. The suit is currently pending in the United
States District Court.
The Company is also engaged in various legal proceedings incidental to its
normal business activities. In the opinion of the Company, none of such
proceedings is material in relation to the Company's consolidated financial
position, results of operations or liquidity.
F-27
<PAGE> 115
Settled litigation
During 1993, the Company accrued an aggregate of $7.1 million for the
estimated cost of excise taxes ($3.2 million) and related interest ($3.9
million) as a result of an unfavorable U.S. Supreme Court decision related to
the Company's 1983 and 1984 contributions of certain real property to its
pension plans. In addition, to avoid a second tier $9.6 million excise tax, the
Company made a "correction" payment of $2.3 million to its pension plans. In
1994, pursuant to the terms of a Closing Agreement with the IRS, the Company
made an additional "correction" payment of approximately $3.3 million to its
pension plans and agreed to pay a total of $3.1 million in excise taxes and
interest, in three equal installments, over a two-year period beginning in June
1994. As a result, in 1994 the Company recorded a $4 million reduction in
previously accrued expenses related to this matter. At December 31, 1995 the
remaining accrued liability related to this matter amounted to approximately $1
million which was subsequently paid in 1996.
Product supply agreement
In 1996, the Company entered into a long-term product supply agreement (the
"Supply Agreement") with a vendor. The Supply Agreement provides, among other
things, that the vendor will construct a plant at the Company's Peoria, Illinois
facility and, after completion of the plant, provide the Company with all,
subject to certain limitations, of its gaseous oxygen and nitrogen needs for a
15 year period. In addition to specifying rates to be paid by the Company,
including a minimum facility fee of approximately $1.2 million per year, the
Supply Agreement also specifies provisions for adjustments to the rates and term
of the Supply Agreement. At June 30, 1997 the vendor's plant was under
construction.
Concentration of credit risk
Steel and Wire Products. The Company sells its products to agricultural,
industrial, construction, commercial, original equipment manufacturers and
retail distributors primarily in the Midwestern and Southwestern regions of the
United States. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
The Company's ten largest customers accounted for approximately 29% of steel and
wire product sales in 1994, 30% in 1995 and 33% in 1996, and approximately 33%
and 27% of steel and wire products notes and accounts receivable at December 31,
1995 and 1996, respectively.
Household cleaning products. The Company sells its household cleaning
products to primarily one customer, Sears, Roebuck & Co. ("Sears"). The Company
extends industry standard terms to its household cleaning products customers
and, generally requires no collateral. During the period from the Acquisition
through December 31, 1996, sales to Sears accounted for approximately 81% of
totals sales related to household cleaning products. Receivables from Sears at
December 31, 1996 amounted to approximately $2 million or 88% of receivables
related to sales of household cleaning products.
General. As discussed in Note 7, prior to the Acquisition, the assets of
the Company's pension plan were primarily invested in the Collective Trust, and
at June 30, 1997 approximately 92% of the pension plan assets were invested in
the Collective Trust. Securities of a single issuer composed approximately 20%,
18% and 13%, respectively, of the Collective Trusts' net assets at December 31,
1995 and 1996 and June 30, 1997, respectively. The common stock of this issuer
is publicly traded on a national exchange. During 1995, the stock's high and low
sales prices were $67.63 and $27.25 per share, respectively, and was $35.25 at
the end of the year. During 1996, the stock's high and low sales prices were
$50.63 and $35.63 per share, respectively, and was $47.63 at the end of the
year. During the interim period ended June 30, 1997, the stock's high and low
sales prices were $53.50 and $42.00 per share, respectively, and was $46.75 at
June 30, 1997.
NOTE 18 -- SUBSEQUENT EVENT
On August 7, 1997, the Company completed a $100 million offering of 9 5/8%
Senior Secured Notes. The notes are due in August 2007 and are collateralized by
a second priority lien on substantially all of the existing and future fixed
assets of the Company. A portion of the $97 million net proceeds was used to
prepay and terminate the Company's term loan and repay borrowings under the
Company's revolving credit facility.
F-28
<PAGE> 116
The Senior Secured Notes (the "Notes") were issued pursuant to an Indenture
(the "Indenture") which, among other things, provides for optional redemptions,
mandatory redemptions and certain covenants including provisions that, among
other things, limit the ability of the Company to sell capital stock of
subsidiaries, enter into sale and leaseback transactions and transactions with
affiliates, create new liens and incur additional debt. In addition, the
Company's ability to borrow in excess of $25 million under the Company's $55
million Revolving Credit Facility is dependent upon maintenance of certain cash
flow ratios, as defined by the Indenture. The Indenture also limits the ability
of the Company to pay dividends or other restricted payments, as defined.
The following pro forma balance sheet information has been prepared
assuming the Offering and the application of the net proceeds thereof was
completed on June 30, 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Cash and cash equivalents................................... $ 43,275
Other current assets........................................ 97,746
Property, plant and equipment............................... 94,653
Other assets................................................ 121,559
--------
$357,233
========
Current maturities of long-term debt........................ $ 320
Other current liabilities................................... 72,703
Long-term debt.............................................. 101,140
Other long-term liabilities................................. 142,067
Redeemable preferred stock.................................. 3,500
Stockholders' equity........................................ 37,503
--------
$357,233
========
</TABLE>
F-29
<PAGE> 117
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of DeSoto, Inc.
We have audited the accompanying consolidated balance sheets of DeSoto,
Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of DeSoto, Inc. and
Subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements for 1995 have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and negative operating and financing cash flows, and has contingent liabilities
related to environmental matters, income taxes and the 1992 acquisition of J.L.
Prescott Company, that collectively raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
March 25, 1996
F-30
<PAGE> 118
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
----------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET REVENUES................................................ $101,175 $87,182 $52,339
COSTS AND EXPENSES:
Cost of sales............................................. 96,309 84,800 54,069
Selling, administrative and general....................... 18,794 11,889 10,164
Retirement security program............................... (4,753) (6,495) (6,846)
Nonrecurring expense...................................... 5,925 -- 6,159
-------- ------- -------
TOTAL OPERATING COSTS AND EXPENSES................ 116,275 90,194 63,546
-------- ------- -------
LOSS FROM OPERATIONS........................................ (15,100) (3,012) (11,207)
-------- ------- -------
OTHER CHARGES AND CREDITS:
Interest expense.......................................... 642 575 546
Nonoperating expense...................................... 1,601 -- --
Nonoperating income....................................... (4,021) (1,303) (6,360)
-------- ------- -------
Loss before Income Taxes.................................... (13,322) (2,284) (5,393)
Benefit for Income Taxes.................................... (5,232) (649) (758)
-------- ------- -------
NET LOSS.................................................... (8,090) (1,635) (4,635)
Dividends on Preferred Stock................................ (302) (319) (507)
-------- ------- -------
Net Loss Available for Common Shares........................ $ (8,392) $(1,954) $(5,142)
======== ======= =======
NET LOSS PER COMMON SHARE................................... $ (1.83) $ (0.42) $ (1.10)
======== ======= =======
Average Common Shares Outstanding........................... 4,598 4,657 4,677
======== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-31
<PAGE> 119
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
STOCK RETAINED TREASURY
$1 PAR VALUE WARRANTS EARNINGS STOCK
------------ -------- --------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
BALANCE, January 1, 1993............................ $5,619 $1,000 $61,722 $(36,868)
Net loss.......................................... -- -- (8,090) --
Accrued dividends -- redeemable preferred
stock.......................................... -- -- (302) --
Accretion of redeemable preferred stock to
liquidation preference......................... -- -- (185) --
Shares issued under employee stock options........ -- -- (1,017) 1,262
------ ------ ------- --------
BALANCE, December 31, 1993.......................... 5,619 1,000 52,128 (35,606)
Net loss.......................................... -- -- (1,635) --
Accrued dividends -- redeemable preferred
stock.......................................... -- -- (319) --
Accretion of redeemable preferred stock to
liquidation preference......................... -- -- (198) --
Shares issued under employee stock options and
other grants................................... -- -- (1,182) 1,442
------ ------ ------- --------
BALANCE, December 31, 1994.......................... 5,619 1,000 48,794 (34,164)
Net loss.......................................... -- -- (4,635) --
Accrued dividends -- redeemable preferred
stock.......................................... -- -- (507) --
Accretion of redeemable preferred stock to
liquidation preference......................... -- -- (212) --
Shares issued under employee stock options and
other grants................................... -- -- (232) 271
------ ------ ------- --------
BALANCE, December 31, 1995.......................... $5,619 $1,000 $43,208 $(33,893)
====== ====== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-32
<PAGE> 120
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
--------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
CURRENT ASSETS:
Cash........................................................ $ 1,702 $ 51
Restricted cash............................................. 58 29
Restricted short-term investments, at cost (approximates
market)................................................... 710 1,180
Trade accounts and notes receivable, less allowance for
doubtful accounts and notes of $1,819 in 1994 and $367 in
1995...................................................... 11,848 4,764
Inventories, net:
Finished goods............................................ 4,331 405
Raw materials and work-in-process......................... 4,182 380
------- -------
8,513 785
Deferred income taxes....................................... 3,295 2,049
Prepaid expenses and other assets........................... 215 231
------- -------
Total Current Assets.............................. 26,341 9,089
RESTRICTED INVESTMENTS, at cost (approximates market)....... 4,666 3,770
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and improvements....................................... -- --
Buildings and improvements.................................. 90 --
Machinery and equipment..................................... 22,783 14,440
------- -------
22,873 14,440
Less accumulated depreciation............................... 14,905 11,830
------- -------
7,968 2,610
PREPAID PENSION COSTS....................................... 39,319 46,913
OTHER NON-CURRENT ASSETS.................................... 4,818 2,586
------- -------
TOTAL ASSETS...................................... $83,112 $64,968
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $14,961 $14,263
Revolving credit agreement.................................. 8,381 --
Waste site cleanup.......................................... 2,522 2,025
Reserves and liabilities related to restructuring
programs.................................................. 1,884 3,226
Other liabilities........................................... 5,725 4,500
------- -------
Total Current Liabilities......................... 33,473 24,014
WASTE SITE CLEANUP -- LONG-TERM............................. 6,744 5,269
DEFERRED INCOME TAXES....................................... 13,392 11,461
CONTINGENCIES AND LITIGATION (Note J)....................... -- --
POST RETIREMENT AND POST-EMPLOYMENT BENEFITS................ 1,510 1,223
LONG-TERM DEFERRED GAIN..................................... 3,175 2,779
REDEEMABLE PREFERRED STOCK; series B senior preferred,
583,333 shares authorized, issued and outstanding, $6 per
share liquidation preference.............................. 3,569 4,288
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 20,000,000 shares authorized;
issued -- 5,619,274....................................... 5,619 5,619
Warrants.................................................... 1,000 1,000
Retained earnings........................................... 48,794 43,208
------- -------
55,413 49,827
Less treasury stock, at cost (947,567 shares in 1994 and
940,067 shares in 1995)................................... 34,164 33,893
------- -------
21,249 15,934
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $83,112 $64,968
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-33
<PAGE> 121
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(8,090) $(1,635) $(4,635)
Non-cash items:
Net (gain) loss on disposal of assets -- net of deferred
credit................................................. (1,434) (457) 4,177
Depreciation and amortization............................. 4,148 2,920 1,397
Pension income............................................ (5,094) (7,101) (7,594)
Deferred income taxes..................................... 407 1,390 (685)
Other non-cash items...................................... -- 174 38
------- ------- -------
Net non-cash items..................................... (1,973) (3,074) (2,667)
Changes in assets and liabilities resulting from operating
activities:
Net (increase) decrease in trade accounts and notes
receivable............................................. 5,666 (406) 5,719
Net (increase) decrease in inventories.................... (3,195) 1,933 4,585
Net decrease in other non-current assets.................. 1,237 1,102 1,344
Net increase (decrease) in other liabilities.............. 2,930 (2,284) (2,142)
Net increase (decrease) in accounts payable............... 2,422 (4,040) (698)
Net (increase) decrease in other current assets........... 1,183 (185) (458)
Net (increase) decrease in refundable income taxes........ (4,185) 6,697 --
Other..................................................... (1) 16 --
------- ------- -------
Net cash flows from (used in) operating activities.......... (4,006) (1,876) 1,048
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of liquid laundry detergent and fabric
softener sheet businesses.............................. -- -- 5,305
Proceeds from sale of assets.............................. 4,285 3,803 622
Additions to property, plant and equipment................ (1,021) (1,021) (245)
Net cash from waste site escrow........................... 917 -- --
------- ------- -------
Net cash flows from investing activities.................... 4,181 2,782 5,682
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions (payments) under revolving credit agreement..... 1,500 681 (8,381)
Proceeds from shares issued from treasury stock........... 245 70 --
Payment of mortgage loan.................................. (2,122) -- --
------- ------- -------
Net cash flows from (used in) financing activities.......... (377) 751 (8,381)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (202) 1,657 (1,651)
Cash and cash equivalents at beginning of the year.......... 247 45 1,702
------- ------- -------
Cash and cash equivalents at the end of the year............ $ 45 $ 1,702 $ 51
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-34
<PAGE> 122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of the company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Short-Term Investments. For purposes of the statements of cash flows, the
Company considers all investments purchased with a maturity of three months or
less to be cash equivalents.
Inventories. Inventories are valued at the lower of cost or market. Cost is
computed on the last-in, first-out (LIFO) method for all inventories. The cost
of products includes raw materials, direct labor and operating overhead. If the
first-in, first-out (FIFO) method of inventory accounting had been used for all
of the Company's inventories, inventories would have been $1,889,000 and
$1,493,000 higher than reported at December 31, 1994 and 1995, respectively.
Property and Depreciation. Property is recorded at cost. Repairs and
maintenance are charged to expense. Depreciation of property, plant and
equipment is provided by charges to earnings based on the estimated useful lives
of the assets, computed primarily on accelerated methods. Useful lives were
10-40 years for buildings and improvements and are 10 years for machinery and
equipment.
Goodwill and Amortization. Goodwill represented the excess of cost over the
fair value of net assets acquired, and was being amortized by the straight-line
method over 40 years until the related businesses were sold in 1995. This
goodwill was written off in 1995 as a result of the disposition of the liquid
detergent and fabric softener sheet businesses in 1995.
Reclassifications. Certain reclassifications have been made to the 1993 and
1994 financial statements and footnotes to conform with current year
presentation.
Revenue. Revenue is recognized at the time goods are shipped.
Research and Development. Research and development costs are charged to
expense. These charges were $665,000 in 1993, $345,000 in 1994, and $218,000 in
1995.
Income Taxes. Income taxes are provided based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes." Deferred income taxes are recorded to
reflect the tax consequences on future years of differences between the tax
basis of assets and liabilities and their financial reporting amounts at each
year-end.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
B. LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements for the year ended December 31, 1995
have been prepared on a going concern basis which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of business. The Company has incurred operating losses of $15.1 million, $3.0
million, and $11.2 million in 1993, 1994 and 1995, respectively; and cash flows
from operations have been $(4.0) million, $(1.9) million and $1.0 million in
1993, 1994 and 1995, respectively. Cash flows from operations in 1995, however,
included the cash proceeds from insurance settlements of $6.1 million, and $10.0
million from the reduction of working capital.
In addition to operating and financing cash flow losses, the Company
continues to be party to environmental exposures as discussed in Note I, has
received a notice of tax deficiencies from the IRS as discussed in Note F, and
has a contingent liability related to the 1992 Prescott acquisition as discussed
in Note L. Although management has used the best information available to record
the estimated liabilities for
F-35
<PAGE> 123
these matters, actual outcomes could differ from recorded amounts. Additionally,
the timing of cash required to satisfy these obligations could significantly
impact the Company's cash flows in 1996.
As part of the Company's continuing effort to manage its accounts payable
and cash flow requirements, the Company has been negotiating a Trade Composition
Agreement and a related Security Agreement with its trade creditors as
represented by a committee of six major creditors of the Company. The proposed
agreements include a standstill agreement related to accounts payable existing
as of September 22, 1995. Also, as part of the proposed Trade Composition
Agreement, the Company initiated the termination of its overfunded pension plan
to be effective contingent upon the receipt of appropriate governmental
approvals. For further information regarding the plan termination, refer to Note
C to the Consolidated Financial Statements. Under the standstill agreement, if
certain conditions are met, the creditors who sign the agreement agree not to
initiate litigation or other efforts to collect amounts owed to them. The
Company has agreed to pay each Qualified Trade Creditor (as defined) the balance
owed to that creditor within 10 days of receipt of the reverted excess pension
plan assets. If payment is not made by July 1, 1996, interest would accrue from
that date at 8% per annum on the outstanding balance. The proposed Security
Agreement would grant a security interest and lien on all of the Company's
assets to secure the obligations of the Company to the Qualified Trade
Creditors. The proposed Trade Composition Agreement further stipulates that the
Company may suspend efforts to terminate its pension plan if the Company enters
into a binding agreement for a merger, asset sale or similar transaction,
involving substantially all of the Company's assets, which provides that all
Qualified Trade Creditors will be paid in full. The Company and its creditors
have been operating within the understanding outlined above. The actual
Standstill Agreement document was circulated for signatures on March 11, 1996
and final execution of the documents has not yet been completed. The Company is
continuing to pursue, with the assistance of its investment bankers, a possible
business combination; however, there can be no assurance as to the outcome of
such efforts. For further information regarding a possible business combination,
refer to Note P to the Consolidated Financial Statements.
C. PENSION AND EMPLOYEE INVESTMENT PLANS
The Company's retirement security program includes a noncontributory
defined benefit pension plan and an employee investment plan covering
substantially all employees except certain hourly-rated employees; the Company
also contributes to union sponsored plans. The Company's pension plan benefits
are principally based on the employee's compensation and years of service. The
Company's funding policy is to contribute annually at a rate that is intended to
remain at a level percentage of compensation for the covered employees. The
Company was not required to make contributions to the Company sponsored pension
plan in 1993, 1994 and 1995 due to the plan's overfunded status.
In January 1996, the Company announced that it had notified the Pension
Benefit Guaranty Corporation of its intention to terminate the pension plan to
be effective contingent upon the receipt of appropriate governmental approvals.
The Company further intends to use 25% of the excess assets in the pension plan
to fund a replacement plan and purchase an annuity contract to cover accrued
plan benefits. The remaining excess plan assets will be subject to a 20% federal
excise tax and federal and state income taxes. If more than 75% of the excess
assets were reverted to the Company from the plan, such reversion would be
subject to a 50% federal excise tax and federal and state income taxes. The
Company intends to utilize the reversionary funds to satisfy, among other
things, various creditor obligations and stabilize ongoing operations. As an
alternative to termination of the pension plan, the Company is also continuing
to pursue a possible business combination, in its ongoing efforts to preserve
and maximize shareholder values; however, there can be no assurance as to the
outcome of such efforts. For further information regarding the possible business
combination, refer to Note P to the Consolidated Financial Statements.
The Company makes contributions to the employee investment plan in cash or
Company stock in an amount equal to 30% of employee deposits up to 5% of such
employee's gross pay.
F-36
<PAGE> 124
The costs of the pension and employee investment plans are summarized as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Noncontributory Retirement plans:
Service cost -- benefits earned during the
period......................................... $ 492 $ 671 $ 527
Interest cost on projected benefit obligation..... 5,012 4,978 5,089
Actual return on assets -- (favorable)
unfavorable.................................... (8,652) 3,962 (30,841)
Net amortization and deferral..................... (2,053) (16,824) 17,803
------- -------- --------
(5,201) (7,213) (7,422)
Employee Investment Plan.......................... 47 84 35
Contributions to Union Sponsored Plans............ 288 313 242
------- -------- --------
Total income from pension and employee
investment plans........................ $(4,866) $ (6,816) $ (7,145)
======= ======== ========
</TABLE>
The change in the net amortization and deferral from 1993 to 1994 and from
1994 to 1995 was primarily due to the difference between the actual return on
Plan assets, which was favorable in 1995 and unfavorable in 1994, versus the
expected return on Plan assets. Under Statement of Financial Accounting
Standards No. 87, the difference between the actual and expected return on
assets is deferred and amortized over subsequent periods.
The pension plan's assets at December 31, 1995 are invested in United
States Treasury Notes, corporate bonds and notes, investment partnerships,
United States Treasury Securities, time deposits, commercial paper, interest
rate futures, forward exchange contracts, foreign currency, certain real estate
operated by the Company, various mutual funds invested in bonds, equity and real
estate, mortgages and other short-term investments. The pension plan's funded
status and amounts recognized in the Company's balance sheets at December 31 are
presented below:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of vested benefit obligation........ $ 57,540 $ 65,719
======== ========
Accumulated benefit obligation.............................. $ 57,702 $ 65,877
======== ========
Plan assets at fair value................................... $135,764 $162,017
Actuarial present value of projected benefit obligation..... 59,471 66,832
-------- --------
Plan assets in excess of projected benefit obligation....... 76,293 95,185
Unrecognized net gain....................................... (27,707) (40,595)
Prior service costs......................................... 2,259 2,064
Unrecognized net asset...................................... (11,526) (9,741)
-------- --------
Prepaid pension cost recognized on the balance sheet........ $ 39,319 $ 46,913
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.9% in 1994 and 7.5% in
1995. The rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation was 5.0% in 1994 and
1995. The expected long-term rate of return on assets used in determining
pension income was 7.0% in 1994 and 8.0% in 1995.
In October 1992, the Company completed the sale of its real properties in
Joliet, Illinois, Columbus, Georgia, and Union City, California, to a real
property trust created by DeSoto's pension plan. This trust paid approximately
$6.5 million in cash for the properties and entered into a ten-year lease of the
properties to the Company. The Company's initial annualized rental obligation
was $707,000. The amount paid to the
F-37
<PAGE> 125
Company by the trust and the Company's annual rental obligation were based upon
an independent appraisal and approved by the Company's Board of Directors.
Effective January 1, 1994, the DeSoto Salaried Plan, Hourly Plan and J. L.
Prescott Plan were merged into the DeSoto Employee Retirement Plan. This action
resulted in a combination of the assets of each of these plans into one trust
fund. The method of calculating benefits under each of these plans remained
unchanged.
In March 1994, the Company ceased operations at the Columbus, Georgia
facility. Effective October 1, 1994, the Company entered into an agreement to
sublease the facility for a term of three years. The subtenant makes monthly
rental payments directly to the pension trust; the Company continues to make
monthly rental payments to the pension trust for the amount by which the
Company's initial rental obligation exceeds the subtenant's rental obligation.
In December 1994, the Company sold its real property located in South
Holland, Illinois, to the real property trust of the Company's pension plan. The
trust paid $4,117,000 in cash for the properties and has entered into a ten-year
lease of the properties to the Company. The Company's annualized rental
obligation (net of receipts from subtenants) is approximately $898,000 including
the South Holland facility. The amount paid to the Company by the trust and the
Company's annual rental obligation were based upon an independent appraisal and
approved by the Company's Board of Directors.
D. POST RETIREMENT AND OTHER POST EMPLOYMENT BENEFITS
The Company provides certain health care and life insurance benefits for
retired employees on a contributory basis. Substantially all of the Company's
employees, except certain hourly-rated employees, may become eligible for such
benefits if they reach qualifying retirement age while working for the Company.
Such benefits and similar benefits for active employees are administered by two
outside companies whose administrative fees are based upon number of
participants and claims processed. The health care program is self funded by the
Company with purchased stop loss coverage for claims over certain levels. Life
insurance benefits are funded by policies for which the Company pays premiums.
In certain cases the participants also contribute to the premium payment. The
following table presents the costs of accruing the postretirement insurance
benefits in 1993, 1994, and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost -- benefits attributed to service during the
period.................................................... $ 4 $ 14 $ 31
Interest cost on accumulated postretirement benefit
obligation................................................ 109 130 289
Amortization of unrecognized net loss....................... -- 7 115
---- ---- ----
Net periodic postretirement benefit cost.................... $113 $151 $435
==== ==== ====
</TABLE>
The following table presents the components of the Company's postretirement
benefit obligation and the amount recognized in the Company's balance sheets at
December 31.
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN THOUSANDS
OF DOLLARS)
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Current retirees.......................................... $2,819 $2,831
Active plan participants.................................. 393 373
------ ------
Total............................................. 3,212 3,204
Unrecognized net loss....................................... 1,687 1,621
------ ------
Accrued post-retirement liability recognized on the balance
sheet..................................................... $1,525 $1,583
====== ======
</TABLE>
The assumed health care cost trend rate used to measure the expected cost
of benefits covered by the plan was 8% and 7% as of December 31, 1994 and 1995,
respectively. The weighted average discount rate used to
F-38
<PAGE> 126
measure the accumulated post-retirement insurance obligation was 9.0% for 1994
and 7.5% for 1995. A one percentage point increase in the assumed health care
cost trend rate for each future year would have resulted in additional
obligation of $288,000 at December 31, 1995 and would have increased the
aggregate service and interest cost by $29,000 in 1995.
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" effective January 1, 1994.
The impact of adoption was not material to the Company's financial position or
results of operations.
E. REVOLVING CREDIT AGREEMENT AND OTHER DEBT
On November 12, 1992, in conjunction with the acquisition of J. L. Prescott
Company ("Prescott"), the Company entered into an amended credit agreement with
Harris Trust and Savings Bank and two additional banks. The agreement had
originally provided for a two-year revolving credit facility of up to
$20,000,000. Effective October 1, 1993, the credit facility was reduced to
$15,000,000 per conditions set in the November 12, 1992 amendment. The
termination date of this amended agreement was originally October 31, 1994. In
March 1994, the facility was further amended setting a termination date of
January 1, 1995. Effective with the March 1994 amendment, the Company paid
$2,700,000 of the outstanding debt upon the receipt of its income tax refund for
fiscal year 1993. Up to the March 1994 amendment, the revolver carried an
interest rate equal to either the prime rate of Harris Trust and Savings Bank
plus 1 1/4% or the IBOR rate plus 3 1/2% (as amended in the third quarter of
1993). Effective in March 1994, the interest rate became the prime rate of
Harris Trust and Savings plus 2%.
On December 7, 1994, the Company entered into a revolving credit facility
with CIT. The agreement provided for up to $14,000,000 under a revolving credit
facility. The funds available for borrowing were based on a formula which
included specified percents of accounts receivable and inventory. The interest
rate on the facility was prime plus 1 1/4%. Commitment fees under the revolving
credit facility were calculated at 1/4 of one percent per annum of the average
unused and available portion of the facility. The facility was collateralized by
substantially all of the Company's assets. A portion of the line of credit was
available in the form of letters of credit. As of September 30, 1995, the
revolving credit agreement was terminated and the Company had no outstanding
borrowing as of that date.
Cash payments for interest were $535,000 in 1993, $575,000 in 1994 and
$546,000 in 1995.
F. INCOME TAXES
<TABLE>
<CAPTION>
1993 1994 1995
-------- ------ ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
The benefit for income taxes is comprised of:
Federal Income Taxes:
Currently Refundable..................................... $(4,808) $ -- $ --
Deferred................................................. 249 (493) (608)
------- ----- -----
Federal Income Taxes..................................... (4,559) (493) (608)
State and Local Income Taxes............................. (673) (156) (150)
------- ----- -----
Total Income Tax Benefit......................... $(5,232) $(649) $(758)
======= ===== =====
</TABLE>
Net cash refunds of income taxes were $1,446,000 in 1993, $8,742,000 in
1994 and $0 in 1995.
F-39
<PAGE> 127
A reconciliation of the statutory federal income tax rate to the effective
tax rate is presented below:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory Federal Income Tax Rate......................... (34.0)% (35.0)% (35.0)%
Effect of:
Write off of Goodwill................................... -- -- 22.0
Effect of Tax Rate Changes on Deferred Taxes............ -- 7.6 (0.9)
State Income Taxes, Net................................. (3.4) (3.6) (0.9)
E.P.A. Fine............................................. 0.3 0.3 --
Other................................................... (2.2) 2.3 0.7
----- ----- -----
Effective Rate............................................ (39.3)% (28.4)% (14.1)%
===== ===== =====
</TABLE>
The components of the net deferred income tax asset and liability were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Current Deferred Tax Asset:
Restructuring and Cost Containment........................ $ 917 $ 1,899
Inventory................................................. 1,989 531
Retirement Security Program............................... 315 272
Insurance................................................. 441 210
Valuation Reserves........................................ 844 144
Vacation Pay.............................................. 225 137
Other..................................................... (1,436) (1,144)
------- -------
Total Current Deferred Tax Asset.................. $ 3,295 $ 2,049
======= =======
Long Term Deferred Tax Liability:
Prepaid Pension........................................... $15,570 $18,390
Other Reserves............................................ 3,092 3,919
Restricted Investments.................................... 2,129 1,773
Depreciation.............................................. 2,413 1,287
Net Operating Loss Carryforward........................... (3,889) (7,681)
Waste Site Cleanup........................................ (3,669) (2,859)
Deferred Gain -- Sale of Assets........................... (1,255) (1,091)
Post Retirement Insurance................................. (624) (658)
State and Local Income Taxes.............................. (480) (459)
Valuation Reserves........................................ (404) (377)
Other..................................................... 509 (783)
------- -------
Total Long-Term Deferred Tax Liability............ $13,392 $11,461
======= =======
</TABLE>
At December 31, 1995, the company had net operating loss carryforwards of
approximately $22.0 million. These carryforwards expire between 2007 and 2010.
The Company has received a Report of Tax Examination Changes from the
Internal Revenue Service that proposes adjustments resulting in additional taxes
due of $6.5 million and penalties of $1.4 million, as well as an unspecified
amount of interest for the years 1990 through 1993. The Company has filed a
formal appeal of the proposed adjustments. The Company believes that the
resolution of this matter will not have a material adverse effect on the
Company's financial position or results of operations, although the timing of
cash required to settle any amounts ultimately due could have a significant
impact on the Company's cash flows.
F-40
<PAGE> 128
G. LEASE COMMITMENTS
The Company leases certain facilities and equipment under lease agreements
which are classified as operating leases. These leases are for remaining periods
ranging from one to ten years and in some instances include renewal provisions
at the option of the Company. Rental expense was $2,107,000 in 1993, $1,652,000
in 1994 and $1,592,000 in 1995.
RENTAL COMMITMENTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
TOTAL
------
<S> <C> <C>
1996................................................................. $1,267
1997................................................................. 1,263
1998................................................................. 1,101
1999................................................................. 1,098
2000................................................................. 1,098
2001-2004............................................................ 2,978
------
$8,805
======
</TABLE>
H. SEGMENT REPORTING
The Company operates in one industry segment, the manufacture of detergent.
The Company also performs contract manufacturing and packaging of detergents.
The Company's products are sold in retail stores, including mass merchants and
service centers, throughout the United States. The Company's revenues are
derived from several customers. There are five customers which each have
accounted for more than 10% of the Company's revenues as indicated below. The
Company no longer does business with Kmart or Benckiser as a result of the
transactions disclosed in Note O to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
% OF CONSOLIDATED
NET REVENUES
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Sears, Roebuck & Co......................................... 14% 16% 20%
Kmart....................................................... 10% 15% 10%
Procter & Gamble............................................ * 10% 13%
Benckiser................................................... * * 12%
Lever Brothers.............................................. 11% * *
</TABLE>
- ---------------
* Less than 10% of consolidated net sales.
From time to time, the Company enters into manufacturing and packaging
agreements with its contract packaging customers. These contracts include
product specifications, production procedures and other general terms. The
contracts do not obligate the customer to make any purchases.
I. ENVIRONMENTAL MATTERS
The Company has been identified by government authorities as one of the
parties potentially responsible for the cleanup costs of waste disposal sites,
many of which are on the U.S. EPA's Superfund priority list, and for certain
alleged contamination. In addition, damages are being claimed against the
Company in private actions for alleged personal injury or property damage in the
case of certain other waste disposal sites. The waste disposal sites relate to
the Company's discontinued operations. The Company's potential responsibility in
connection with these sites generally depends upon, among other things, whether
it, directly or through third parties, engaged in the business of waste disposal
or storage, shipped waste to the sites and, in those cases in which the Company
did so ship waste, the relative amount and/or composition of waste material
attributable to the Company as compared to the waste material attributable to
other solvent parties. Typically,
F-41
<PAGE> 129
the Company is one of numerous parties involved in actions or proceedings
relating to these waste disposal sites and its obligations in connection with
its share of cleanup and other costs extend over a number of years rather than
being payable at one time.
The Company believes that it has made adequate provisions for the costs it
may incur with respect to the sites. The Company provides a reserve for the
lower end of an estimated range of total loss from $7.3 to $21.6 million (after
considering information provided by independent legal counsel). These estimates
are subject to numerous variables, the effects of which are difficult to
measure, including the stage of the investigations, the nature of potential
remedies, the joint and several liability with other potentially responsible
parties and other issues. Accordingly, the reserves represent the Company's best
estimates of its potential exposure at this time. The reserve balance was $9.3
million as of December 31, 1994 and $7.3 million as of December 31, 1995. In
1995, the Company paid out approximately $2.3 million on waste site related
liabilities, excluding legal and administrative costs; of this amount $1.1
million was disbursed from the trust discussed below and $29,000 was disbursed
from the restricted cash account discussed below.
Actual costs to be incurred in future periods may vary from the estimates.
The Company's potential liability may be materially impacted in the future as a
result of final determinations of the extent of environmental damage, the share
of the cost of cleanup technology which is ultimately chosen, the extent of the
cleanup required, the solvency of other potentially responsible parties, changes
in law and unanticipated awards of damages for personal injury or property
damages. In addition, the Company has not reduced its estimates of liability to
reflect the possible proceeds of insurance coverage which may be applicable to
these costs. The Company from time to time engages in discussions with insurance
carriers regarding Company claims in this regard and the Company may pursue
litigation if no satisfactory resolution of the claims is reached. The Company
reached settlements with two insurance carriers in 1995 regarding the cost of
cleanup at certain waste disposal sites. As a result of these settlements, the
Company received proceeds in 1995 totaling approximately $6.1 million.
In connection with the Company's acquisition of Prescott in November 1992,
the Company assumed the cleanup obligations of Prescott under New Jersey's
Environmental Cleanup and Responsibility Act ("ECRA"). Pursuant to an agreement
with certain former owners of Prescott, the Company in 1993 received funds to
offset the cost of the cleanup previously held in escrow for the benefit of
Prescott. (The Company has placed these funds in a restricted cash account to
secure its cleanup obligations.) The Company currently expects that these funds
will fully cover the costs of cleanup required by New Jersey. The remaining
liability related to this site is included in the ranges above. The remaining
funds are shown on the balance sheet under the caption, restricted cash.
Under the terms of the 1990 consumer paint asset purchase agreement with
Sherwin-Williams, $6.0 million of the sale's proceeds were used to establish a
trust fund to fund potential clean-up liabilities. The trust agreement expires
on October 26, 2000, or when the trust is depleted, whichever occurs first. A
portion of the trust has been set aside with respect to a specific site; the
agreement governing that portion of the trust expires on October 26, 2008. The
Company has access to the trust fund, subject to the other party's approval, for
any expenses or liabilities incurred by the Company regarding environmental
claims relating to the sites identified in the trust agreement. Sherwin-Williams
has access to the trust fund, subject to the other party's approval, for any
expenses or liabilities incurred as a result of DeSoto's failure to meet its
obligations relating to the sites identified in the agreement. The Company was
reimbursed $145,000 in 1994 and $1,095,000 in 1995 from the trust to cover waste
site payments. The balance in the trust fund, primarily invested in United
States Treasury securities and classified as a restricted investment on the
balance sheet, as of December 31, 1995 was $4,524,000. Of the estimated range of
total loss noted above, $2.3 to $5.0 million relate to sites which are covered
by the escrow account. The accrued waste site cleanup liability that was covered
by the trust at December 31, 1995 was $2,346,000 of which $755,000 was
classified as current.
Under the terms of the 1990 industrial coatings business purchase
agreement, the Company had delivered to the Valspar Corporation an irrevocable
standby letter of credit in the amount of $2.0 million. The letter of credit was
delivered to secure the Company's obligation to indemnify Valspar for certain
environmental
F-42
<PAGE> 130
matters. The Company reached a settlement with Valspar in 1994 under which the
letter of credit was terminated.
In December 1993, the Company transferred approximately $9.0 million of
liabilities for certain of its clean-up costs and related expenses at certain
waste disposal sites to DeSoto Environmental Management, Inc. (DEMI), a
subsidiary of the Company. The Company remains liable for the potential
environmental clean-up costs if DEMI is unable to satisfy the obligations. The
purpose of DEMI is to provide focused, strategic management of the environmental
liabilities and the related clean-up costs. The Company and certain members of
the Company's management and consultants are stockholders in DEMI. Refer to Note
K of the Notes to Consolidated Financial Statements for further information.
It is the opinion of management, after evaluating the variables discussed
above as well as the anticipated time frame for remediation, that the resolution
of the waste site liability will not have a material adverse effect on the
Company's financial position, cash flows or results of operations.
J. CONTINGENCIES & LITIGATION
As previously reported, there are several shareholder actions still pending
in the Delaware courts relating to various proposals of Sutton Holding Corp. to
acquire the Company in the period 1989 to 1991. These actions, all of which
consolidated, have not been actively pursued and it appears the case was removed
from the courts calendar; however, the plaintiffs recently served a discovery
request upon the Company. The Company believes that these actions are not
material.
See Note L to the Consolidated Financial Statements for information
regarding the Contingent Value Rights ("CVR's") which were issued by the Company
to the sellers in connection with the Company's acquisition of J. L. Prescott
Company in November 1992.
The Company is also a party to other litigation arising out of the ordinary
conduct of its business or results of current and discontinued operations.
The Company believes that the disposition of all such actions, individually
and in the aggregate, will not have a material adverse effect on the Company's
financial position, cash flows, or results of operations.
K. RELATED PARTY TRANSACTIONS
In December 1993, the Company completed a number of transactions involving
certain of its subsidiaries and officers and directors. J. L. Prescott Company,
a wholly-owned subsidiary of the Company, paid off a portion of intercompany
obligations to the Company by means of the issuance of a ten-year, $9 million
principal amount, promissory note. The Company used this note to purchase 100
shares of a non-voting class of common stock of another of its subsidiaries,
DeSoto Environmental Management, Inc. ("DEMI"). (This class of common stock is
entitled to 15% of the dividends or other distributions made to all classes of
common stock.) As part of the sale of stock to the Company, DEMI assumed up to a
maximum of $9 million of certain of the Company's possible clean-up costs and
related expenses at waste disposal sites. The Company remains liable for these
possible environmental clean-up costs if DEMI is unable to satisfy these
obligations. The Company subsequently sold at a price of $1 per share the shares
of nonvoting common stock of DEMI to Anders Schroeder (Vice Chairman) (33
shares), William Spier (Chairman and Chief Executive Officer) (33 shares), Anne
Eisele (President and Chief Financial Officer) (20 shares), and Irving Kagan
(Special Counsel) (14 shares). Messrs. Schroeder and Spier subsequently sold 8
shares and 9 shares, respectively, of their common stock to John Phillips upon
his becoming President and Chief Executive Officer in 1994. Mr. Phillips sold
his shares back to Messrs. Spier and Schroeder upon his resignation in 1995.
Each of these persons agreed that upon complete satisfaction of the Company's
existing environmental clean-up liabilities or when that person ceases to be an
officer, director or consultant of the Company, the DEMI shares held by that
person would be repurchased by the Company at the greater of $1 per share or the
per share book value of DEMI. As a general matter, the value of this DEMI stock
will be dependent upon the ability of DEMI, which has no other significant
business or assets, to satisfy the Company's existing environmental liabilities
for less than $9 million, which was the approximate minimum amount included in
the 1994 estimated range of
F-43
<PAGE> 131
environmental liability. Consequently, the holders of this DEMI stock have a
direct incentive to minimize the costs of satisfying environmental liabilities.
In any event, the Company will retain 85% of the savings below the 1994
estimated minimum costs and savings which do not reduce the liabilities below
such estimated minimum will accrue entirely to the Company. This transaction was
approved by a unanimous vote of all disinterested directors.
In November 1992, the Company announced the completion of the sale of
certain real properties to a trust created by the Company's Pension Plans. In
1993, certain of these assets were repurchased from the Pension Plans by the
Company and then sold to an unrelated third party. In 1994, the Company's
facility in South Holland, Illinois, was sold to the real property trust of the
Company's Pension Plans. Refer to Note C of the Notes to Consolidated Financial
Statements for further information.
In July 1992, the Company entered into an agreement with parties related to
Sutton Holding Corp. ("Sutton"), which as of December 31, 1995 and in
conjunction with parties related to Sutton, owns 14% of the Company's
outstanding common stock and approximately 23% of all of the Company's
outstanding voting stock, providing for a cash purchase of newly issued DeSoto
securities. The investment resulted in Sutton's acquiring 583,333 shares of a
new series of DeSoto senior preferred stock and warrants to acquire 1.2 million
shares of common stock. Refer to Note L of the Notes to Consolidated Financial
Statements, for further information regarding this transaction.
L. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
As of December 31, 1995, there were 5,619,274 shares of common stock issued
of which 940,067 shares were held as treasury stock. The Company's common stock
has a $1 par value per share, and there are 20,000,000 shares authorized.
In July 1992, the Company entered into an agreement with parties related to
Sutton Holding Corp. ("Sutton"), providing for a $3.5 million cash purchase of
newly issued DeSoto securities. The investment resulted in Sutton's acquisition
of 583,333 shares of a new series of DeSoto senior preferred stock and warrants
to acquire 1.2 million shares of common stock per approval of the Company's
stockholders at the 1993 Annual Meeting.
The DeSoto senior preferred pays 8% quarterly cumulative dividends (which
increase to 10% if dividends earned remain unpaid for more than one year), has
one vote per share (voting with common stock as a single class), has a
liquidation preference of $6.00 per share, must be redeemed by the Company at
liquidation preference after eight years and may be redeemed at the Company's
option after five years. The carrying amount of the preferred shares on the
balance sheet represents the proceeds received upon issuance (net of related
expenses) plus accretion to the redemption value of the shares in five years.
The carrying value has also been increased by cumulative dividends not currently
declared. The warrants have a term of six years and are exercisable at $7.00 per
share of common stock.
Dividends have not been paid on the preferred stock since the date of
issuance. In addition, dividends may not be declared on the common stock while
dividends on the preferred stock are in arrears. At December 31, 1995 unpaid
dividends on the preferred totaled approximately $1,197,000.
The purchase price of $3.5 million for the new securities was allocated by
the Company, upon the advice of an independent financial advisor, as $2.5
million for the preferred stock and $1.0 million for the warrants. The valuation
took into account the terms of the purchase agreement and applied customary
financial analyses used in such transactions to those terms.
The agreement with Sutton resulted from negotiations between Sutton and a
Special Committee of the Company's Board of Directors comprised of persons
unaffiliated with Sutton. The Special Committee was represented by independent
legal counsel and received an opinion from an independent financial advisor,
selected by the Committee, that the arrangements with Sutton are fair, from a
financial point of view, to the stockholders of the Company (other than those
related to Sutton).
F-44
<PAGE> 132
Sutton includes entities affiliated with William Spier, Chairman and Chief
Executive Officer of the Company, and Anders Schroeder, Vice Chairman of the
Company, and entities represented by David Tobey, a director of the Company.
In 1992, the Company also amended the terms of its stockholder rights plan
to permit the parties related to Sutton to increase their ownership of common
shares and other voting securities to approximately 38.2% of the Company's
outstanding voting power (whether by exercise of warrants or acquisitions of
common shares in the market or otherwise). In addition, the plan was amended to
permit any stockholder to acquire up to 25% of the Company's outstanding voting
power (as compared to the previous 20% limit).
As a result of the $3.5 million purchase of senior preferred stock, parties
related to Sutton now hold securities representing approximately 23% of the
Company's currently outstanding voting securities. If securities issuable upon
exercise of warrants are included, parties related to Sutton would own
approximately 38% of the outstanding voting power of the Company.
In connection with the 1992 Prescott acquisition, the Company also issued
522,775 shares of DeSoto common stock, which were held in treasury, and agreed
to make a per share payment at the end of three years equal to the difference,
if any, between $12 and the highest 60-day average trading price, if lower than
$12 per share, of DeSoto common stock during the second and third years
following the acquisition, with a maximum obligation of $6 per share (the
"Contingent Value Rights" or "CVR's"). The payment shall be subject to reduction
as provided by the Agreement which governs the payment (the "Agreement"). Per
the Agreement, the payment, if any, shall be made in cash to the extent not
prohibited (as defined in the Agreement). Any payment not made in cash is to be
made by issuance of DeSoto securities and/or DeSoto common stock in that order.
As of the measurement date of the Agreement (November 12, 1995), the amount
calculated as payable under the terms of the Agreement, before the deduction of
amounts the Company believes are appropriate and permitted under the terms of
the Agreement, is $1,934,000; after applying such deductions the Company
believes it is not required to make any payment, although the CVR holders
contend otherwise, and accordingly, no obligation has been recorded related to
the Agreement. The Company intends to vigorously defend its position in this
matter, which may include additional claims by the Company.
M. STOCK OPTIONS AND STOCK GRANTS
Shares of stock and stock options have been granted to certain employees,
consultants, and nonemployee directors under the stock plan adopted in 1992. The
options granted to employees and consultants are qualified stock options (ISO)
and the options granted to non employee directors are nonqualified options. The
ISO options vest equally over the three years subsequent to the first
anniversary of the grant date and are exercisable for a period of 10 years from
the grant date. The nonqualified options are exercisable immediately upon grant
and are exercisable for a period of 10 years from the grant date. All options
have been granted at the prices equal to the fair market value of the stock on
the dates the options were granted. At December 31, 1995, 50,500 of the 400,000
shares of stock available for options or grants under the Company's stock option
plan remained available for grants. Options which are terminated, lapsed or
expired shall again become available for issuance under the stock option plan.
F-45
<PAGE> 133
Stock options have been granted and exercised as set forth below:
<TABLE>
<CAPTION>
OUTSTANDING OPTION PRICE EXERCISABLE
OPTIONS PER SHARE-RANGE OPTIONS
----------- --------------- -----------
<S> <C> <C> <C>
December 31, 1993............................... 181,500 5.875-10.125 83,833
Options granted............................... 122,000 5.50-7.00 27,000
Options that became exercisable............... -- 7.00-9.00 60,333
Options exercised............................. (10,000) 7.00 (10,000)
Options lapsed and canceled................... (29,000) 5.875-9.00 (19,000)
December 31, 1994............................... 264,500 5.50-10.125 142,166
Options granted............................... 27,000 4.375-4.750 27,000
Options that became exercisable............... -- 6.625-9.00 122,334
Options lapsed and cancelled.................. (35,000) 6.625-9.00 (35,000)
------- -------
December 31, 1995............................... 256,500 4.375-10.125 256,500
======= =======
</TABLE>
During 1994, 30,000 shares of common stock were granted to an officer of
the Company at no cost. All granted shares vested in 1994. The average market
price of the common stock at the close of business on the vesting dates in 1994
was $5.81. An additional 20,000 shares of common stock were granted to officers
of the Company in 1994. Of those shares, 7,500 shares vested in 1995 and 5,000
shares were canceled in 1995; the remaining shares vest over the period from
1996 to 1998. The average market price of the common stock at the close of
business on the vesting date in 1995 was $5.13.
F-46
<PAGE> 134
N. OTHER INCOME AND EXPENSE
The following are components of the respective captions in the statements
of operations:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Nonrecurring expense:
Provision for restructuring due to disposition of
liquid laundry and fabric softener sheet
businesses....................................... $ -- $ -- $ 3,100
Loss on disposition of liquid laundry detergent and
fabric softener sheet businesses................. -- -- 3,059
Provision for shutdown of Columbus, Georgia Plant... 2,000 -- --
Loss on disposition of Jean Sorelle................. 1,331 -- --
Write-down of machinery and equipment held for
resale........................................... 1,194 -- --
Provision for manufacturing and product
rationalization.................................. 900 -- --
Settlement of lawsuit (including plaintiff's legal
fees)............................................ 369 -- --
Other............................................... 131 -- --
------- ------- -------
Total....................................... $ 5,925 $ -- $ 6,159
======= ======= =======
Nonoperating expense:
Provision for waste site cleanup.................... $ 1,467 $ -- $ --
Other............................................... 134 -- --
------- ------- -------
Total....................................... $ 1,601 $ -- $ --
======= ======= =======
Nonoperating income:
Insurance settlements............................... $ (232) $ -- $(6,067)
Royalties........................................... (53) (222) (244)
Arbitration settlement -- discontinued operations... -- (837) --
Reimbursement of legal fees......................... -- (244) --
Sale of land and building........................... (3,235) -- --
Pension settlement -- discontinued operations....... (454) -- --
Other............................................... (47) -- (49)
------- ------- -------
Total....................................... $(4,021) $(1,303) $(6,360)
======= ======= =======
</TABLE>
O. DISPOSITIONS
On July 21, 1995, the Company announced the transfer and assignment of
various operations and assets involved in its liquid detergent and fabric
softener dryer sheet businesses to two separate buyers. The Company assigned the
rights to certain customers with respect to these businesses. The Company also
sold other assets which included certain accounts receivable, inventory and
machinery and equipment. The proceeds of these transactions were utilized to
reduce the Company's senior debt owed to CIT. Both transactions also provide for
the Company to receive royalties and other earn-out opportunities over a
three-year period in one case and over a four-year period in the other case.
The Company recorded a net loss on the sale of the liquid detergent and
fabric softener sheet businesses (including the write-off of related goodwill).
The Company also recorded a charge of $3.1 million in the third quarter relative
to costs associated with the closure of operating facilities relative to these
transactions. Significant components of the charge included severance, rent,
real estate taxes and amounts to reduce assets to their net realizable value.
The non-recurring expense of $6,159,000 reflects the net impact of these
transactions.
The following information is provided on a pro forma basis to illustrate
the effect of certain adjustments to the historical consolidated financial
statements that would have resulted from the above dispositions if such
transactions had occurred on January 1, 1994. The results are not necessarily
indicative of actual results had
F-47
<PAGE> 135
the foregoing transactions occurred as described above, nor do they purport to
represent results of future operations of the Company.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
-------------------
1994 1995
-------- --------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS -- UNAUDITED)
<S> <C> <C>
Net revenues................................................ $35,424 $25,082
======= =======
Net earnings................................................ $ 1,037 $ 2,682
======= =======
Net earnings per common share............................... $ 0.21 $ 0.47
======= =======
</TABLE>
The following table summarizes the non-cash aspects of the sale of the
liquid detergent and fabric softener sheet businesses:
<TABLE>
<S> <C>
Net selling prices of businesses sold....................... $6,782
Minimum royalty to be paid over a four-year period.......... 1,477
------
Cash received as part of the transactions................... $5,305
======
</TABLE>
P. SUBSEQUENT EVENT
On March 13, 1996, the Company announced that it was discussing a proposed
merger with Keystone Consolidated Industries, Inc. which, as presently
contemplated, would involve an exchange of all of the Company's shares of
outstanding stock for 3.5 million shares of Keystone common stock, in a tax-free
transaction.
Merger discussions are ongoing, and are subject to mutual due diligence by
the parties, the negotiation and signing of a definitive agreement, the approval
of DeSoto's and Keystone's boards of directors and shareholders and Keystone's
primary lender, as well as the requisite governmental review. Additionally, the
prospective transaction would require a satisfactory resolution of the payout
plan with the Company's trade creditors.
The merger with Keystone would provide an alternative to the prospective
termination of the Company's overfunded pension plan. The termination will not
occur if the proposed merger is completed. Additionally, Keystone has an
underfunded pension plan with certain funding waivers relating to prior years
and has preliminarily discussed the possible merger with the Pension Benefit
Guaranty Corporation.
There can be no assurance as to the outcome of the merger discussions; or,
in this connection, the resolution of DeSoto's trade creditor plan.
Keystone, headquartered in Dallas, Texas, is engaged in the manufacture and
distribution of fencing and wire products, carbon steel rods, industrial wire,
nails and construction products.
F-48
<PAGE> 136
QUARTERLY REVENUES AND EARNINGS DATA (1994 VERSUS 1995)
<TABLE>
<CAPTION>
1994
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net Revenues............................. $23,640 $22,286 $21,394 $19,862 $87,182
======= ======= ======= ======= =======
Gross Profit............................. $ 977 $ 639 $ 543 $ 223 $ 2,382
======= ======= ======= ======= =======
Net Earnings (Loss)...................... $ 51 $ (744) $ (782) $ (160) $(1,635)
======= ======= ======= ======= =======
Net Earnings (Loss) Per Common Share..... $ (0.01) $ (0.18) $ (0.19) $ (0.05) $ (0.42)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net Revenues.............................. $18,927 $16,314 $11,132 $5,966 $52,339
======= ======= ======= ====== =======
Gross Profit.............................. $ (516) $ (58) $(1,093) $ (63) $(1,730)
======= ======= ======= ====== =======
Net Earnings (Loss)....................... $(1,022) $ 2,897 $(6,146) $ (364) $(4,635)
======= ======= ======= ====== =======
Net Earnings (Loss) Per Common Share...... $ (0.24) $ 0.60 $ (1.33) $(0.13) $ (1.10)
======= ======= ======= ====== =======
</TABLE>
- ---------------
NOTES: The results for the fourth quarter of 1994 include $2.9 million of income
from the Company's retirement plans. The results for the first quarter of
1994 include $1.1 million of non-operating income.
In the third quarter of 1995, the Company completed the transfer and
assignment of various operations and assets involved in its liquid
detergent and fabric softener dryer sheet businesses to two separate
buyers.
The results for the second quarter of 1995 include $6.1 million of
non-operating income.
The quarterly information presented above is unaudited.
F-49
<PAGE> 137
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SIX MONTHS
------------------------------ ENDED
SEPTEMBER 30, SEPTEMBER 27, JUNE 30,
1995 1996 1996
------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET REVENUES........................................ $ 46,373 $13,657 $ 9,481
-------- ------- -------
COSTS AND EXPENSES..................................
Cost of sales..................................... 48,040 12,005 8,383
Selling, administrative and general............... 8,550 5,374 2,718
Retirement security program....................... (5,114) (5,184) (3,436)
Nonrecurring expense.............................. 5,689 1,562 1,562
-------- ------- -------
TOTAL OPERATING COSTS AND EXPENSES.................. 57,165 13,757 9,227
-------- ------- -------
EARNINGS (LOSS) FROM OPERATIONS..................... (10,792) (100) 254
OTHER CHARGES AND CREDITS:
Interest expense.................................. 546 312 --
Nonoperating expense (income)..................... (6,360) 1,183 1,184
-------- ------- -------
Loss before Income Taxes............................ (4,978) (1,595) (930)
Benefit for Income Taxes............................ (707) (601) (351)
-------- ------- -------
NET LOSS............................................ (4,271) (994) (579)
Dividends on Preferred Stock........................ (256) (403) (283)
-------- ------- -------
Net Loss Available for Common Shares................ $ (4,527) $(1,397) $ (862)
======== ======= =======
NET LOSS PER COMMON SHARE........................... $ (.97) $ (.30) $ (.18)
======== ======= =======
Average Common Shares Outstanding................... 4,676 4,684 4,684
======== ======= =======
Dividends Declared per Common Share................. $ -- $ -- $ --
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-50
<PAGE> 138
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SIX MONTHS
----------------------------- ENDED
SEPTEMBER 30, SEPTEMBER 27, JUNE 30,
1995 1996 1996
------------- ------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(4,271) $ (994) $ (579)
Non-cash items:
Loss on disposal of liquid laundry detergent and fabric
softener sheet business............................. 2,605 -- --
Net gain on disposal of property, plan and equipment... (48) 636 636
Depreciation and amortization.......................... 1,242 237 175
Pension income......................................... (5,670) (5,696) (3,797)
Deferred income taxes.................................. (706) (586) (336)
Amortization of deferred gain.......................... (297) (297) (198)
Other non-cash items................................... (48) 45 45
------- ------- -------
Net non-cash items..................................... (2,836) (6,655) (3,475)
Changes in assets and liabilities resulting from
operating activities:
Net decrease in trade accounts and notes receivable.... 3,125 2,201 2,020
Net decrease in inventories............................ 3,418 505 430
Net decrease in other current assets................... 177 101 42
Net decrease in other non-current assets............... 203 1,774 1,731
Net increase (decrease) in accounts payable............ 453 (2,371) (2,781)
Net increase in other liabilities...................... 1,284 3,198 1,393
------- ------- -------
Net cash flows from (used by) operating activities....... 1,553 (1,247) (1,219)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of liquid laundry detergent and
fabric softener sheet business...................... 5,305 -- --
Proceeds from sale of property, plant and equipment.... 500 1,210 1,210
Additions to property, plant and equipment............. (245) -- --
------- ------- -------
Net cash flows from investing activities................. 5,560 1,210 1,210
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment under Revolving Credit Agreement................. (8,381) -- --
------- ------- -------
Net decrease in cash and cash equivalents................ (1,268) (37) (9)
Cash and cash equivalents at beginning of period......... 1,702 51 51
------- ------- -------
Cash and cash equivalents at end of period............... $ 434 $ 14 $ 42
======= ======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-51
<PAGE> 139
DESOTO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations for the periods indicated.
On September 27, 1996, DeSoto merged with Keystone Consolidated Industries,
Inc. The accompanying unaudited consolidated financial statements as of and for
the nine month period ended September 27, 1996, represent the financial position
and results of operations of DeSoto immediately prior to the merger with
Keystone.
The results of operations for the nine months ended September 27, 1996 and
the six months ended June 30, 1996 are not necessarily indicative of the results
to be expected for the full year.
A. ACCOUNTING POLICIES
The reader is directed to Note A of the Notes to DeSoto's Consolidated
Financial Statements for the year ended December 31, 1995 included elsewhere
herein.
B. INCOME TAXES
The provision (benefit) for income taxes is computed at the current
estimated effective income tax rate for the year.
C. INVENTORY VALUATION
Inventory at September 27, 1996 is valued at the last-in, first out (LIFO)
method of inventory accounting. If the first-in, first out (FIFO) method of
inventory accounting had been used for all of DeSoto's inventories, inventories
would have been $1,493,000 and $520,000 higher than reported at December 31,
1995 and September 27, 1996, respectively.
D. DISPOSITIONS
On July 21, 1995, DeSoto announced the transfer and assignment of various
operations and assets involved in its liquid detergent and fabric softener dryer
sheet businesses to two separate buyers. DeSoto assigned the rights to certain
customers with respect to these businesses. DeSoto also sold other assets which
included certain accounts receivable, inventory and machinery and equipment. The
proceeds of these transactions were utilized to reduce DeSoto's senior debt owed
to CIT. Both transactions also provide for DeSoto to receive royalties and other
earn-out opportunities over a three-year period in one case and over a four-year
period in the other case. DeSoto recorded a net loss on the sale of the liquid
detergent and fabric softener sheet businesses (including the write-off of
related goodwill), and also recorded a charge of $3.1 million in the third
quarter of 1995 relative to costs associated with the closure of operating
facilities relative to these transactions. The non-recurring expense for the
nine months ended September 30, 1995 of $5.7 million reflects the net impact of
these transactions. The statement of operations for the nine months ended
September 30, 1995 includes the results of operations of these businesses.
F-52
<PAGE> 140
On April 11, 1996, DeSoto announced that it had sold the domestic business
and assets of its laundry detergent manufacturing and distribution operations,
at its Union City, California, plant, to Star Pacific, Inc. The buyer will
continue production under a sublease of the plant from DeSoto. DeSoto will
retain its international detergent business at the Union City facility, under a
production arrangement with Star Pacific. A charge of $1.6 million was recorded
in the 1996 first quarter related to the costs associated with the Union City
disposition. This provision included the write-down of fixed assets to net
realizable value, future rental commitments on a leased warehouse, and severance
pay. The provision is reflected on the statement of operations as nonrecurring
expense and the accrual is included with restructuring reserves on the balance
sheet. The statement of operations for the nine months ended September 27, 1996
includes the results of operations of this business.
F-53
<PAGE> 141
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma financial statements set forth the pro
forma Condensed Consolidated Balance Sheet of Keystone as of March 31, 1997, and
the pro forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1996 and the six month period ended June 30, 1997. These pro forma
financial statements are presented to illustrate the effect of certain
adjustments to the historical consolidated financial statements as explained in
the accompanying notes.
The accompanying pro forma Condensed Consolidated Financial Statements
should be read in conjunction with the Company's and DeSoto's historical
consolidated financial statements and notes thereto. The pro forma condensed
consolidated financial statements are presented for informational purposes only
and are not necessarily indicative of actual results had the transactions
reflected therein occurred at the dates indicated, nor do they purport to
represent results of future operations of the Company.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
P-1
<PAGE> 142
KEYSTONE CONSOLIDATED INDUSTRIES, INC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
-------------------- PRO FORMA
HISTORICAL NOTE 2 ADJUSTMENTS CONSOLIDATED
---------- ------ ----------- ------------
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents................................. $ -- (a) $100,000
(b) (53,050)
(c) (175)
(d) (3,500) $ 43,275
Notes and accounts receivable............................. 43,798 -- 43,798
Inventories............................................... 35,834 -- 35,834
Deferred income taxes..................................... 17,488 -- 17,488
Prepaid expenses.......................................... 626 -- 626
-------- -------- --------
Total current assets............................... 97,746 43,275 141,021
Property, plant and equipment, net.......................... 94,653 -- 94,653
Prepaid pension cost........................................ 106,226 -- 106,226
Restricted investments...................................... 7,442 -- 7,442
Other....................................................... 4,391 (d) 3,500 7,891
-------- -------- --------
$310,458 $ 46,775 $357,233
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current long-term debt.................. $ 39,204 (b) $(38,884) $ 320
Accounts payable.......................................... 31,652 -- 31,652
Accrued OPEB cost......................................... 8,397 -- 8,397
Other accrued liabilities................................. 32,722 (c) (68) 32,654
-------- -------- --------
Total current liabilities.......................... 111,975 (38,952) 73,023
-------- -------- --------
Noncurrent liabilities:
Long-term debt............................................ 15,306 (a) 100,000
(b) (14,166) 101,140
Accrued OPEB cost......................................... 101,271 -- 101,271
Negative goodwill......................................... 26,099 -- 26,099
Other..................................................... 14,697 -- 14,697
-------- -------- --------
Total noncurrent liabilities....................... 157,373 85,834 243,207
-------- -------- --------
Redeemable preferred stock, no par value, 500,000 shares
authorized, 435,456 shares issued......................... 3,500 -- 3,500
-------- -------- --------
Common stockholders' equity:
Common stock, $1 par value, 12,000,000 shares authorized,
9,263,898 shares issued at stated value................. 9,994 9,994
Additional paid-in capital................................ 46,882 46,882
Accumulated deficit....................................... (19,254) (c) (107) (19,361)
Treasury stock -- 1,134 shares............................ (12) -- (12)
-------- -------- --------
Total stockholders' equity......................... 37,610 (107) 37,503
-------- -------- --------
$310,458 $ 46,775 $357,233
======== ======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Balance Sheet.
P-2
<PAGE> 143
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
NOTE 1 -- BASIS OF PRESENTATION:
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30,
1997 reflects the adjustments necessary to record the financing as though such
transaction and application of proceeds had occurred on June 30, 1997.
NOTE 2 -- PRO FORMA ADJUSTMENTS:
(a) Keystone issues $100.0 million of 9 5/8% Notes at par.
(b) Outstanding balances on the Company's Revolving Line of Credit and Term
Note are repaid.
(c) Keystone pays 1% prepayment penalty on Term Note ($175,000), net of
income tax benefit.
(d) Keystone incurs $3.5 million in debt issuance costs.
P-3
<PAGE> 144
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------------------------------------------------
DESOTO AND PENSION OFFERING
HISTORICAL ------------------------------- -------------------- PRO FORMA
KEYSTONE NOTE 2 ADJUSTMENTS SUBTOTAL NOTE 2 ADJUSTMENTS CONSOLIDATED
---------- ------ ----------- -------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues and other income........... $331,764 (a) $11,610 $343,374 $ -- $343,374
-------- ------- -------- ------- --------
Costs and expenses:
Cost of goods sold................ 297,149 (a) 10,372
(c) (119)
(d) 740
(g) (2,495) 305,647 -- 305,647
Selling, general and
administrative.................. 26,634 (a) 4,086
(b) (1,286)
(c) (64)
(d) 82
(g) (276) 29,176 -- 29,176
Non recurring expense, net........ -- (a) 444 444 -- 444
Retirement security program....... -- (a) (5,184)
(d) 2,413
(g) 2,771 -- -- --
Interest.......................... 3,741 (a) 436
(e) 303 4,480 (h) 5,953 10,433
-------- ------- -------- ------- --------
327,524 12,223 339,747 5,953 345,700
-------- ------- -------- ------- --------
Income (loss) before income
taxes........................... 4,240 (613) 3,627 (5,953) (2,326)
Provision (benefit) for income
taxes............................. 1,656 (a) 575
(g) (1,309) 922 (i) (2,322) (1,400)
-------- ------- -------- ------- --------
Net income (loss)................... 2,584 121 2,705 (3,631) (926)
Dividends on preferred stock........ 70 (a) 399 469 -- 469
-------- ------- -------- ------- --------
Net income (loss) available for
common shares..................... $ 2,514 $ (278) $ 2,236 $(3,631) $ (1,395)
======== ======= ======== ======= ========
Net income (loss) per common and
common equivalent share........... $ .38 $ (.15)
======== ========
Weighted average common and common
equivalent shares outstanding..... 6,560 9,223
======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Statement of Operations.
P-4
<PAGE> 145
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
NOTE 1 -- BASIS OF PRESENTATION:
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1996 has been prepared assuming (i) the acquisition
of DeSoto by Keystone and the simultaneous merger of the two companies' defined
benefit pension plans occurred on January 1, 1996, (ii) the April 1996 sale of
DeSoto's Union City, California business occurred on December 31, 1995 and,
(iii) the Offering and application of proceeds occurred on January 1, 1996.
NOTE 2 -- PRO FORMA ADJUSTMENTS:
Adjustments relating to the Merger of Keystone and DeSoto and the
simultaneous merger of the pension plans.
(a) Results of operations of DeSoto from January 1, 1996 through the date
of the acquisition as adjusted to reflect the sale of DeSoto's Union
City, California business as though such sale occurred on December 31,
1995.
(b) Amortization of negative goodwill related to the Acquisition by the
straight-line method over 20 years.
(c) Reduction in depreciation expense resulting from amortization of
purchase accounting basis difference over average remaining life of two
years.
(d) Increase in pension expense due to conforming Keystone and DeSoto
mortality assumptions and purchase accounting adjustments relating to
DeSoto's defined benefit pension plan.
(e) Amortization of deferred financing costs related to the Acquisition by
the straight-line method over 3 years, and impact on interest expense
based on changes in average outstanding debt levels using weighted
average interest rate of 9.3% as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Increase (decrease) in average outstanding debt levels
related to:
Payment to DeSoto trade creditors......................... $ 7,412
Payment of DeSoto preferred stock dividends............... 1,810
Reduced defined benefit pension contributions............. (9,664)
Payment of financing and transaction costs................ 1,258
Other..................................................... 590
-------
$ 1,406
=======
</TABLE>
(f) Income tax expense of pro forma adjustments (c) through (e) at assumed
effective federal and state rate of 39%.
(g) Reclassification.
P-5
<PAGE> 146
Adjustments relating to the Offering.
(h) Impact on interest expense based on changes in average outstanding debt
levels, amortization of deferred financing costs related to the Notes
by the straight-line method over 10 years, and 1% prepayment penalty on
Term Note as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Increase (decrease) in interest expense related to:
Revolving Line of Credit.................................. $(2,867)
Term Note................................................. (1,286)
Notes, at 9 5/8%.......................................... 9,625
Amortization of deferred financing costs.................. 350
Prepayment penalty on Term Note........................... 131
-------
$ 5,953
=======
</TABLE>
(i) Income tax expense of pro forma adjustments (h) at assumed federal and
state rate of 39%.
P-6
<PAGE> 147
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL NOTE 2 ADJUSTMENTS CONSOLIDATED
---------- ------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues and other income.......................... $192,823 $ -- $192,823
-------- ------- --------
Costs and expenses:
Cost of goods sold............................... 170,592 -- 170,592
Selling, general and administrative.............. 11,740 -- 11,740
Overfunded defined benefit pension credit........ (1,500) -- (1,500)
Interest......................................... 2,736 (a) 2,225 4,961
-------- ------- --------
183,568 2,225 185,793
-------- ------- --------
Income before income taxes....................... 9,255 (2,225) 7,030
Provision for income taxes......................... 3,284 (b) (868) 2,416
-------- ------- --------
Net income......................................... 5,971 (1,357) 4,614
Dividends on preferred stock....................... 140 -- 140
-------- ------- --------
Net income available for common shares............. $ 5,831 $(1,357) $ 4,474
======== ======= ========
Net income per common and common equivalent
share............................................ $ .63 $ .48
======== ========
Weighted average common and common equivalent
shares outstanding............................... 9,279 9,279
======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Statement of Operations.
P-7
<PAGE> 148
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
NOTE 1 -- BASIS OF PRESENTATION:
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the six months ended June 30, 1997 has been prepared assuming the Offering and
application of proceeds occurred on January 1, 1996.
NOTE 2 -- PRO FORMA ADJUSTMENTS:
(a) Impact on interest expense based on changes in average outstanding debt
levels and amortization of deferred financing costs related to the
Notes by the straight-line method over 10 years:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Increase (decrease) in interest expense related to:
Revolving Line of Credit.................................. $(1,900)
Term Note................................................. (863)
Notes, at 9 5/8%.......................................... 4,813
Amortization of deferred financing costs.................. 175
-------
$ 2,225
=======
</TABLE>
(b) Income tax expense of pro forma adjustments (a) at assumed federal and
state rate of 39%.
P-8
<PAGE> 149
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS
THE BANK OF NEW YORK
<TABLE>
<C> <C> <C>
By Registered or Facsimile Transmissions: By Hand or
Certified Mail: (Eligible Institutions Only) Overnight Delivery:
THE BANK OF NEW YORK (212) 815-6339 THE BANK OF NEW YORK
101 BARCLAY STREET, 7E CONFIRM BY TELEPHONE: 101 BARCLAY STREET
NEW YORK, NEW YORK 10286 (212) 815-3687 CORPORATE TRUST SERVICES WINDOW
ATTN: REORGANIZATION SECTION FOR INFORMATION CALL: GROUND LEVEL
(212) 815-3687 NEW YORK, NEW YORK 10286
ATTN: REORGANIZED SECTION
</TABLE>
Until (90 days after the date of this Prospectus) all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE> 150
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that,
to the extent a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding, whether civil, criminal, administrative or investigative or in
defense of any claim, issue, or matter therein (hereinafter a "Proceeding"), by
reason of the fact that he is or was a director, officer, employee or agent of a
corporation or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise (collectively an "Agent" of the
corporation), he shall be indemnified against expenses (including attorney's
fees) actually and reasonably incurred by him in connection therewith.
Section 145 also provides that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened
Proceeding by reason of the fact that he is or was an Agent of the corporation,
against expenses (including attorney's fees), judgment, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interest of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; provided, however, that in
an action by or in the right of the corporation, the corporation may not
indemnify such person in respect of any claim, issue, or matter as to which he
is adjudged to be liable to the corporation unless, and only to the extent that,
the Court of Chancery or the court in which such proceeding was brought
determines that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is reasonably entitled to indemnity.
Article V of the Bylaws of Registrant provides with respect to the
indemnification of directors and officers that the Registrant shall indemnify to
the same extent currently permitted by Section 145 of the DGCL, each person that
such Section grants the Registrant power to indemnify. Article Eleventh of the
Certificate of Incorporation of the Registrant provides that no director shall
be personally liable to the corporation or any of its stockholders for monetary
damages for breach of fiduciary duty as a director, except with respect to (1) a
breach of the director's duty of loyalty to the corporation or its stockholders,
(2) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (3) liability under Section 174 of the DGCL, or
(4) a transaction from which the director derived an improper personal benefit.
Article Eleventh further provides that the liability of the corporation's
directors to the corporation or its stockholders will be limited to the fullest
extent permitted by Section 102(b)(7) of the DGCL, as amended from time to time.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
II-1
<PAGE> 151
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1 -- Certificate of Incorporation, as amended and filed with
the Secretary of State of Delaware (Incorporated by
reference to Exhibit 3.1 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1990.)
3.2 -- Bylaws of the Registrant, as amended and restated
December 30, 1994 (Incorporated by reference to Exhibit
3.2 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.)
4.1 -- Indenture dated as of August 7, 1997 relating to the
Registrant's 9 5/8% Senior Secured Notes due 2007
(Incorporated by reference to Exhibit 4.1 to the
Registrant's Form 8-K filed September 4, 1997.)
5.1 -- Opinion of Rogers & Hardin LLP
10.1 -- Registration Rights Agreement Dated as of August 7, 1997,
among the Registrant, Wasserstein Perella Securities,
Inc. and PaineWebber Incorporated (Incorporated by
reference to Exhibit 99.1 to the Registrant's Form 8-K
filed September 4, 1997.)
12 -- Statement Regarding Computation of Ratios.
21 -- Subsidiaries of the Registrants.
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Rogers & Hardin LLP (included in their opinion
filed as Exhibit 5.1).
24 -- Powers of Attorney (included in the Signature Pages).
25 -- Statement on Form T-1 of Eligibility of Trustee.
99.1 -- Form of Letter of Transmittal relating to the 9 5/8%
Notes.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Letter to Clients.
99.4 -- Form of Letter to Nominees.
</TABLE>
(B) FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements or
notes thereto.
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment to the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 152
(b) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(c) The undersigned Registrant hereby undertakes to respond to requests for
information that are incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 153
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 19th day of September, 1997.
KEYSTONE CONSOLIDATED
INDUSTRIES, INC.
By: /s/ ROBERT W. SINGER
----------------------------------
Robert W. Singer
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Each person whose signature appears below hereby authorizes Robert W.
Singer and Harold M. Curdy and each of them, to file one or more amendments
(including post-effective amendments) to the Registration Statement, with all
exhibits thereto, which amendments may make such changes as any of such persons
deems appropriate, and each person, individually and in each capacity stated
below, hereby appoints each of such persons as attorney-in-fact and agent, with
full power of substitution and resubstitution, to execute in his name and on his
behalf any such amendments to the Registration Statement, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GLENN R. SIMMONS Chairman of the Board September 19, 1997
- -----------------------------------------------------
Glenn R. Simmons
/s/ ROBERT W. SINGER President and Chief September 19, 1997
- ----------------------------------------------------- Executive Officer
Robert W. Singer
/s/ HAROLD M. CURDY Vice President -- Finance September 19, 1997
- ----------------------------------------------------- and Treasurer (Principal
Harold M. Curdy Financial Officer)
/s/ BERT E. DOWNING, JR. Corporate Controller September 19, 1997
- ----------------------------------------------------- (Principal Accounting
Bert E. Downing, Jr. Officer)
/s/ THOMAS E. BARRY Director September 19, 1997
- -----------------------------------------------------
Thomas E. Barry
/s/ PAUL M. BASS, JR. Director September 19, 1997
- -----------------------------------------------------
Paul M. Bass, Jr.
/s/ DAVID E. CONNOR Director September 19, 1997
- -----------------------------------------------------
David E. Connor
/s/ WILLIAM P. LYONS Director September 19, 1997
- -----------------------------------------------------
William P. Lyons
</TABLE>
II-4
<PAGE> 154
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD A. SOMMER Director September 19, 1997
- -----------------------------------------------------
Donald A. Sommer
/s/ WILLIAM SPIER Director September 19, 1997
- -----------------------------------------------------
William Spier
/s/ J. WALTER TUCKER, JR. Vice Chairman of the Board September 19, 1997
- ----------------------------------------------------- and Director
J. Walter Tucker, Jr.
/s/ RICHARD N. ULLMAN Director September 19, 1997
- -----------------------------------------------------
Richard N. Ullman
</TABLE>
II-5
<PAGE> 155
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1 -- Certificate of Incorporation, as amended and filed with
the Secretary of State of Delaware (Incorporated by
reference to Exhibit 3.1 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1990.)
3.2 -- Bylaws of the Registrant, as amended and restated
December 30, 1994 (Incorporated by reference to Exhibit
3.2 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.)
4.1 -- Indenture dated as of August 7, 1997 relating to the
Registrant's 9 5/8% Senior Secured Notes due 2007
(Incorporated by reference to Exhibit 4.1 to the
Registrant's Form 8-K filed September 4, 1997.)
5.1 -- Opinion of Rogers & Hardin LLP
10.1 -- Registration Rights Agreement Dated as of August 7, 1997,
among the Registrant, Wasserstein Perella Securities,
Inc. and PaineWebber Incorporated (Incorporated by
reference to Exhibit 99.1 to the Registrant's Form 8-K
filed September 4, 1997.)
12 -- Statement Regarding Computation of Ratios.
21 -- Subsidiaries of the Registrants.
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Rogers & Hardin LLP (included in their opinion
filed as Exhibit 5.1).
24 -- Powers of Attorney (included in the Signature Pages).
25 -- Statement on Form T-1 of Eligibility of Trustee.
99.1 -- Form of Letter of Transmittal relating to the 9 5/8%
Notes.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Letter to Clients.
99.4 -- Form of Letter to Nominees.
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF ROGERS & HARDIN LLP]
September 18, 1997
Keystone Consolidated Industries, Inc.
Three Lincoln Centre
5430 LBJ Freeway
Suite 1740
Dallas, Texas 75240-2697
Ladies and Gentlemen:
We have acted as counsel to Keystone Consolidated Industries, Inc., a
Delaware corporation ("Issuer") in connection with the preparation of a
Registration Statement on Form S-4 (the "Registration Statement") relating to
the offer to exchange an aggregate principal amount of up to $100,000,000 of 9
5/8% Senior Secured Notes due 2007 (the "Exchange Notes") of the Issuer for a
like principal amount of 9 5/8% Senior Secured Notes due 2007 (the "Original
Notes") of the Issuer that were issued and sold in a transaction exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"). The Original Notes were issued under, and the Exchange Notes are to be
issued under, an Indenture, dated as of August 7, 1997 (the "Indenture"),
between the Issuer and The Bank of New York, as trustee (the "Trustee"). The
exchange will be made pursuant to the exchange offer (the "Exchange Offer")
contemplated by the Registration Statement.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Registration Statement, the
Offering Memorandum of the Original Notes dated August 4, 1997, and such
corporate records, agreements, documents and other instruments, and such
certificates or comparable documents of public officials and of officers and
representatives of the Issuer, and have made such inquiries of such officers
and representatives, as we have deemed relevant and necessary as a basis for
the opinions hereinafter set forth.
In our examinations hereunder, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to authentic originals of all documents submitted to us as
certified or reproduced copies. As to various questions of fact material to
such opinions, we have relied without independent check or verification upon
representations contained in certificates of, or communications with, the
Issuer.
Based upon the foregoing, and subject to the qualifications stated
herein, we are of the opinion that the Exchange Notes have been duly authorized
and, when duly executed by the
<PAGE> 2
Keystone Consolidated Industries, Inc.
September 18, 1997
Page 2
proper officers of the Issuer, duly authenticated by the Trustee and issued by
the Issuer in accordance with the terms of the Indenture, will constitute
legal, valid and binding obligations of the Issuer, will be entitled to the
benefits of the Indenture and will be enforceable against the Issuer in
accordance with their terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance and other similar
laws affecting the enforcement of creditors' rights generally and except as
enforcement thereof is subject to general principles of equity (regardless of
whether enforcement is considered in a proceedings in equity or at law).
We are members of the bar of the State of Georgia, and the opinions
expressed herein are limited to the laws of the State of Georgia, the General
Corporation Law of the State of Delaware, and the federal laws of the United
States as in effect on the date of this opinion and to the specific legal
matters expressly addressed herein, and no opinion is expressed or implied with
respect to the laws of any other jurisdiction or any legal matter not expressly
addressed herein.
These opinions are limited to matters expressly set forth herein and
no opinion is to be implied or may be inferred beyond the matters expressly
stated herein. This letter speaks only as of the date hereof and is limited to
present statutes, regulations and administrative and judicial interpretations.
We undertake no responsibility to update or supplement this letter after the
date hereof.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the reference to us in the Prospectus included as
part of the Registration Statement. In giving such consents, we do not hereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act.
Very truly yours,
/s/ Rogers & Hardin
ROGERS & HARDIN
<PAGE> 1
EXHIBIT 12
KEYSTONE CONSOLIDATED SUBSIDIARIES, INC.
AND SUBSIDIARIES
STATEMENTS REGARDING COMPUTATION OF EARNINGS TO FIXED CHARGES
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, 1994, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30 1996 AND 1997
(In Thousands Except Ratios)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Net income (loss)
before changes in
accounting principles...... $ 5,146 $ 749 $ 7,561 $ 4,887 $ 2,584 $ (327) $ 5,971
Provision (benefit)
for income
taxes...................... 3,194 381 4,828 3,191 1,656 (215) 3,284
Fixed charges............... 3,069 6,600 (1,003) 3,702 4,160 2,068 2,956
Capitalized interest........ (33) (25) (162) (317) (419) (199) (220)
Equity in earnings
of joint venture........... -- -- (21) (225) (125) (70) (169)
-------- ------- -------- -------- -------- -------- --------
$ 11,376 $ 7,705 $ 11,203 $ 11,238 $ 7,856 $ 1,257 $ 11,822
======== ======= ======== ======== ======== ======== ========
Fixed charges --
Interest expense........... $ 3,069 $6,600 $ (1,003) $ 3,702 $ 4,160 $ 2,068 $ 2,956
======== ======= ======== ======== ======== ======== ========
Ratio of earnings
to fixed charges........... 3.7x 1.2x -- 3.0x 1.9x -- (1) 4.0x
======== ======= ======== ======== ======== ======== ========
Pro Forma
Earnings:
Net income (loss)......... $ (1,077) $ (2,088) $ 4,614
Provision (benefit)
For income losses........ (684) (1,341) 2,416
Fixed charges............... 9,742 4,757 4,961
Capitalized interest........ (419) (199) (220)
Equity in earnings
of joint venture.......... (125) (70) (169)
-------- -------- --------
$ 7,437 $ 1,059 $ 11,602
======== ======== ========
Fixed charges --
Interest expense........... $ 9,742 $ 4,757 $ 4,961
======== ======== ========
Ratio of earnings to
fixed charges.............. -- (2) -- (2) 2.3x
======== ======== ========
</TABLE>
- ----------------------------------
(1) The Company's earnings were insufficient to cover total fixed charges
in the six months ended June 30, 1996. The coverage deficiency was $.8
million
(2) The Company's pro forma earnings were insufficient to cover total
pro forma fixed charges in 1996 and the six months ended June 30, 1996.
The pro forma coverage deficiency in 1996 and the six months ended
June 30, 1996 was $2.3 million and $3.7 million, respectively.
<PAGE> 1
EXHIBIT 21
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of Percent of
Incorporation Voting Securities
Name of Corporation or Organization Held (1)
- --------------------------------- --------------- -----------------
<S> <C> <C>
Sherman Wire of Caldwell, Inc. Nevada 100.0%
Fox Valley Steel and Wire Company Wisconsin 100.0%
(formerly Wire Products Company)
DeSoto, Inc. Delaware 100.0%
J.L. Prescott Company New Jersey 100.0%
DeSoto Environmental
Management, Inc. Delaware 100.0%
DeSoto Subsidiary Two Corporation New Jersey 100.0%
</TABLE>
(1) Held by the Registrant or the indicated subsidiary of the Registrant.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our report dated February 28, 1997, on our audits of the financial statements,
financial statement schedule incorporated by reference and the financial
statements included of Keystone Consolidated Industries, Inc. and Subsidiaries.
We also consent to the references to our firm under the captions "Experts."
COOPERS & LYBRAND L.L.P.
Dallas, Texas
September 18, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated March 26, 1996 and to all references to our Firm in this
registration statement.
ARTHUR ANDERSEN LLP
Chicago, Illinois
September 19, 1997
<PAGE> 1
EXHIBIT 25
- --------------------------------------------------------------------------------
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
------------------
Keystone Consolidated Industries, Inc.
(Exact name of obligor as specified in its charter)
Delaware 37-0364250
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Three Lincoln Centre
5430 LBJ Freeway
Suite 1740
Dallas, Texas 75240-2697
(Address of principal executive offices) (Zip code)
------------------
9 5/8% Senior Secured Notes
(Title of the indenture securities)
- --------------------------------------------------------------------------------
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(D).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE> 3
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-3-
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 16th day of September, 1997.
THE BANK OF NEW YORK
By: /s/ WALTER N. GITLIN
---------------------------
Name: WALTER N. GITLIN
Title: VICE PRESIDENT
- 3 -
<PAGE> 5
Exhibit 7
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business March 31,
1997, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin................. $ 8,249,820
Interest-bearing balances .......... 1,031,026
Securities:
Held-to-maturity securities ........ 1,118,463
Available-for-sale securities ...... 3,005,838
Federal funds sold and Securities pur-
chased under agreements to resell...... 3,100,281
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................32,895,077
LESS: Allowance for loan and
lease losses ..............633,877
LESS: Allocated transfer risk
reserve........................429
Loans and leases, net of unearned
income, allowance, and reserve 32,260,771
Assets held in trading accounts ...... 1,715,214
Premises and fixed assets (including
capitalized leases) ................ 684,704
Other real estate owned .............. 21,738
Investments in unconsolidated
subsidiaries and associated
companies .......................... 195,761
Customers' liability to this bank on
acceptances outstanding ............ 1,152,899
Intangible assets .................... 683,503
Other assets ......................... 1,526,113
-----------
Total assets ......................... $54,746,131
===========
LIABILITIES
Deposits:
In domestic offices ................ $25,614,961
Noninterest-bearing ......10,564,652
Interest-bearing .........15,050,309
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 15,103,615
Noninterest-bearing .........560,944
Interest-bearing .........14,542,671
Federal funds purchased and Securities
sold under agreements to repurchase. 2,093,286
Demand notes issued to the U.S.
Treasury ........................... 239,354
Trading liabilities .................. 1,399,064
Other borrowed money:
With remaining maturity of one year
or less .......................... 2,075,092
With remaining maturity of more than
one year ......................... 20,679
Bank's liability on acceptances exe-
cuted and outstanding .............. 1,160,012
Subordinated notes and debentures .... 1,014,400
Other liabilities .................... 1,840,245
-----------
Total liabilities .................... 50,560,708
-----------
EQUITY CAPITAL
Common stock ........................ 942,284
Surplus ............................. 731,319
Undivided profits and capital
reserves .......................... 2,544,303
Net unrealized holding gains
(losses) on available-for-sale
securities ........................ ( 19,449)
Cumulative foreign currency transla-
tion adjustments .................. ( 13,034)
-----------
Total equity capital ................ 4,185,423
-----------
Total liabilities and equity
capital ........................... $54,746,131
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Alan R. Griffith
J. Carter Bacot Directors
Thomas A. Renyi
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
OFFER FOR ANY AND ALL OUTSTANDING
9 5/8% SENIOR SECURED NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER SENIOR NOTE)
IN EXCHANGE FOR
9 5/8% SENIOR SECURED NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER SENIOR NOTE)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
PURSUANT TO THE PROSPECTUS DATED , 1997
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1997, UNLESS THE OFFER IS EXTENDED. TENDERS MAY
BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
The Exchange Agent For The Exchange Offer Is:
The Bank of New York
By Registered or Certified Mail By Hand or Overnight Delivery
The Bank of New York The Bank of New York
101 Barclay Street, 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Attn.: Reorganization Section, ______ Ground Level
New York, New York 10286
Attn.: Reorganization Section, _____
Facsimile Transmissions:
(Eligible Institutions Only)
(212) 571-3080
To Confirm by Telephone
or for Information Call:
(212) 815-6333
Delivery of this letter of transmittal to an address other than as set
forth above or transmission of this letter of transmittal via facsimile to a
number other than as set forth above does not constitute a valid delivery.
The undersigned acknowledges that he or she has received the
Prospectus, dated ______, 1997 (the "Prospectus"), of Keystone Consolidated
Industries, Inc., a Delaware corporation (the "Issuer"), and this Letter of
Transmittal, which together constitute the Issuer's offer (the "Exchange
Offer") to exchange an aggregate principal amount of up to $100,000,000 9 5/8%
Senior Secured Notes due 2007, which have been registered under the Securities
Act of 1933, as amended (the "Securities Act") (the "Exchange Notes") of the
Issuer for a like principal amount of the issued and outstanding 9 5/8% Senior
Secured Notes due 2007 (the "Original Notes") of the Issuers from the holders
thereof.
<PAGE> 2
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same
meaning given them in the Prospectus (as defined below).
This Letter of Transmittal is to be completed by holders of Original
Notes either if Original Notes are to be forwarded herewith or if tenders of
Original Notes are to be made by book-entry transfer to an account maintained
by The Bank of New York (the "Exchange Agent") at The Depository Trust Company
(the "Book-Entry Transfer Facility" or "DTC") pursuant to the procedures set
forth in "The Exchange Offer -- How to Tender" in the Prospectus.
Holders of Original Notes whose certificates (the "Certificates") for
such Original Notes are not immediately available or who cannot deliver their
Certificates and all other required documents to the Exchange Agent on or prior
to the Expiration Date (as defined in the Prospectus) or who cannot complete
the procedures for book-entry transfer on a timely basis, must tender their
Original Notes according to the guaranteed delivery procedures set forth in
"The Exchange Offer -- How to Tender" in the Prospectus.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
2
<PAGE> 3
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
The undersigned has completed the appropriate boxes below and signed
this Letter of Transmittal to indicate the action the undersigned desires to
take with respect to the Exchange Offer.
<TABLE>
<CAPTION>
============================================================================================================
- ------------------------------------------------------------------------------------------------------------
DESCRIPTION OF ORIGINAL NOTES 1 2 3
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate
Name(s) and Address(es) of Registered Holder(s): Liquidation Liquidation
(Please fill in, if blank Certificate Amount of Amount of
Number(s)* Original Notes Original Notes
Tendered**
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------------------
* Need not be completed if Original Notes are being tendered by book-entry holders.
** Unless otherwise indicated in the column, a holder will be deemed to have all Original Notes
represented by the Original Notes indicated in Column 2. See Instruction 4.
============================================================================================================
</TABLE>
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: _____________________________________________
Account Number:______________________________________________________________
Transaction Code Number:_____________________________________________________
3
<PAGE> 4
[ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED ORIGINAL NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s): ________________________________________
Window Ticket Number (if any): ___________________________________
Date of Execution of Notice of Guaranteed Delivery:_________________
Name of Institution which Guaranteed Delivery:______________________
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution:______________________________________
Account Number:_____________________________________________________
Transaction Code Number:____________________________________________
[ ] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED ORIGINAL
NOTES ARE TO BE RETURNED BY CREDITING THE BOOK-ENTRY TRANSFER FACILITY ACCOUNT
NUMBER SET FORTH ABOVE.
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE ORIGINAL NOTES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE
PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:___________________________________________________________________________
Address:________________________________________________________________________
LADIES AND GENTLEMEN:
Upon the terms and subject to the conditions of the Exchange Offer,
the undersigned hereby tenders to the Issuer the above described aggregate
principal amount of the Issuer's 9 5/8% Senior Secured Notes due 2007 (the
"Original Notes") in exchange for a like aggregate principal amount of the
Issuer's 9 5/8% Senior Secured Notes due 2007 (the "Exchange Notes") which have
been registered under the Securities Act upon the terms and subject to the
conditions set forth in the Prospectus dated , 1997 (as the same
may be amended or supplemented from time to time, the "Prospectus"), receipt of
which is acknowledged, and in this Letter of Transmittal (which, together with
the Prospectus, constitute the "Exchange Offer").
4
<PAGE> 5
Subject to and effective upon the acceptance for exchange of all or
any portion of the Original Notes tendered herewith in accordance with the
terms and conditions of the Exchange Offer (including, if the Exchange Offer is
extended or amended, the terms and conditions of any such extension or
amendment), the undersigned hereby sells, assigns and transfers to or upon the
order of the Issuer all right, title and interest in and to such Original Notes
as are being tendered herewith. The undersigned hereby irrevocably constitutes
and appoints the Exchange Agent as its agent and attorney-in-fact (with full
knowledge that the Exchange Agent is also acting as agent of the Issuer in
connection with the Exchange Offer) with respect to the tendered Original
Notes, with full power of substitution (such power of attorney being deemed to
be an irrevocable power coupled with an interest) subject only to the right of
withdrawal described in the Prospectus, to (i) deliver Certificates for
Original Notes to the Issuer together with all accompanying evidences of
transfer and authenticity to, or upon the order of, the Issuer, upon receipt by
the Exchange Agent, as the undersigned's agent, of the Exchange Notes to be
issued in exchange for such Original Notes, (ii) present Certificates for such
Original Notes for transfer, and to transfer the Original Notes on the books of
the Issuer, and (iii) receive for the account of the Issuer all benefits and
otherwise exercise all rights of beneficial ownership of such Original Notes,
all in accordance with the terms and conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED
HAS FULL POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE
ORIGINAL NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR
EXCHANGE, THE ISSUER WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE
THERETO, FREE AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES,
AND THAT THE ORIGINAL NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE
CLAIMS OR PROXIES. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY
ADDITIONAL DOCUMENTS DEEMED BY THE ISSUER OR THE EXCHANGE AGENT TO BE NECESSARY
OR DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE ORIGINAL
NOTES TENDERED HEREBY, AND THE UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS
UNDER THE REGISTRATION RIGHTS AGREEMENT. THE UNDERSIGNED HAS READ AND AGREES TO
ALL OF THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the
Original Notes tendered hereby should be printed above, if they are not already
set forth above, as they appear on the Certificates representing such Original
Notes. The Certificate number(s) and the Original Notes that the undersigned
wishes to tender should be indicated in the appropriate boxes above.
If any tendered Original Notes are not exchanged pursuant to the
Exchange Offer for any reason, or if Certificates are submitted for more
Original Notes than are tendered or accepted for exchange, Certificates for
such nonexchanged or nontendered Original Notes will be returned (or, in the
case of Original Notes tendered by book-entry transfer, such Original Notes
will be credited to an account maintained at DTC), without expense to the
tendering holder, promptly following the expiration or termination of the
Exchange Offer.
The undersigned understands that tenders of Original Notes pursuant to
any one of the procedures described in "The Exchange Offer -- How to Tender" in
the Prospectus and in the
5
<PAGE> 6
instruction, attached hereto will, upon the Issuer's acceptance for exchange of
such tendered Original Notes, constitute a binding agreement between the
undersigned and the Issuer upon the terms and subject to the conditions of the
EXCHANGE OFFER. The undersigned recognizes that, under certain
circumstances set forth in the Prospectus, the Issuer may not be required to
accept for exchange any of the Original Notes tendered hereby.
Unless otherwise indicated herein in the box entitled "Special
Issuance Instructions" below, the undersigned hereby directs that the Exchange
Notes be issued in the name(s) of the undersigned or, in the case of a
book-entry transfer of Original Notes, that such Exchange l Notes be credited
to the account indicated above maintained at DTC. If applicable, substitute
Certificates representing Original Notes not exchanged or not accepted for
exchange will be issued to the undersigned or, in the case of a book-entry
transfer of Original Notes, will be credited to the account indicated above
maintained at DTC. Similarly, unless otherwise indicated under "Special
Delivery Instructions," please deliver Exchange Notes to the undersigned at the
address shown below the undersigned's signature.
BY TENDERING ORIGINAL NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL,
THE UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (I) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE ISSUER, (II) ANY EXCHANGE NOTES TO BE RECEIVED BY THE
UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (III)
THE UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO
PARTICIPATE IN A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF
EXCHANGE NOTES TO BE RECEIVED IN THE EXCHANGE OFFER, AND (IV) IF THE
UNDERSIGNED IS NOT A BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND DOES
NOT INTEND TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES
ACT) OF SUCH EXCHANGE NOTES. BY TENDERING ORIGINAL NOTES PURSUANT TO THE
EXCHANGE OFFER AND EXECUTING THIS LETTER OF TRANSMITTAL, A HOLDER OF ORIGINAL
NOTES WHICH IS A BROKER-DEALER REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN
INTERPRETIVE LETTERS ISSUED BY THE STAFF OF THE DIVISION OF CORPORATION FINANCE
OF THE SECURITIES AND EXCHANGE COMMISSION TO THIRD PARTIES, THAT (A) SUCH
ORIGINAL NOTES HELD BY THE BROKER-DEALER ARE HELD ONLY AS A NOMINEE, OR (B)
SUCH ORIGINAL NOTES WERE ACQUIRED BY SUCH BROKER-DEALER FOR ITS OWN ACCOUNT AS
A RESULT OF MARKET MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES AND IT WILL
DELIVER THE PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING
THE REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH
EXCHANGE NOTES (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY DELIVERING A
PROSPECTUS, SUCH BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN
"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE ISSUER HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE
REGISTRATION RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR
SUPPLEMENTED FROM TIME TO TIME, MAY BE USED BY A PARTICIPATING
6
<PAGE> 7
BROKER-DEALER (AS DEFINED BELOW) IN CONNECTION WITH RESALES OF EXCHANGE NOTES
RECEIVED IN EXCHANGE FOR ORIGINAL NOTES, WHERE SUCH ORIGINAL NOTES WERE
ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF
MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES, FOR A PERIOD ENDING ___
DAYS AFTER THE EXPIRATION DATE (SUBJECT TO EXTENSION UNDER CERTAIN LIMITED
CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS) OR, IF EARLIER, WHEN ALL SUCH
EXCHANGE NOTES HAVE BEEN DISPOSED OF BY SUCH PARTICIPATING BROKER-DEALER. IN
THAT REGARD, EACH BROKER-DEALER WHO ACQUIRED ORIGINAL NOTES FOR ITS OWN ACCOUNT
AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A "PARTICIPATING
BROKER-DEALER"), BY TENDERING SUCH ORIGINAL NOTES AND EXECUTING THIS LETTER OF
TRANSMITTAL, AGREES THAT, UPON RECEIPT OF NOTICE FROM THE ISSUER OF THE
OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT
CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY MATERIAL
RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT
NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED OR INCORPORATED BY
REFERENCE THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE,
NOT MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS SPECIFIED IN THE
REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER-DEALER WILL SUSPEND
THE SALE OF EXCHANGE NOTES PURSUANT TO THE PROSPECTUS UNTIL THE ISSUER HAS
AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH MISSTATEMENT OR OMISSION
AND HAVE FURNISHED COPIES OF THE AMENDED OR SUPPLEMENTED PROSPECTUS TO THE
PARTICIPATING BROKER-DEALER OR THE ISSUER HAS GIVEN NOTICE THAT THE SALE OF THE
EXCHANGE NOTES MAY BE RESUMED, AS THE CASE MAY BE. IF THE ISSUER GIVES SUCH
NOTICE TO SUSPEND THE SALE OF THE EXCHANGE NOTES, THEY SHALL EXTEND THE 90-DAY
PERIOD REFERRED TO ABOVE DURING WHICH PARTICIPATING BROKER-DEALERS ARE ENTITLED
TO USE THE PROSPECTUS IN CONNECTION WITH THE RESALE OF EXCHANGE NOTES BY THE
NUMBER OF DAYS DURING THE PERIOD FROM AND INCLUDING THE DATE OF THE GIVING OF
SUCH NOTICE TO AND INCLUDING THE DATE WHEN PARTICIPATING BROKER-DEALERS SHALL
HAVE RECEIVED COPIES OF THE SUPPLEMENTED OR AMENDED PROSPECTUS NECESSARY TO
PERMIT RESALES OF THE EXCHANGE NOTES OR TO AND INCLUDING THE DATE ON WHICH THE
ISSUER HAS GIVEN NOTICE THAT THE SALE OF EXCHANGE NOTES MAY BE RESUMED, AS THE
CASE MAY BE.
Holders of Original Notes whose Original Notes are accepted for
exchange will not receive accrued interest on such Original Notes for any
period from and after the last Interest Payment Date to which interest has been
paid or duty provided for on such Original Notes prior to the original issue
date of the Exchange Notes or, if no such interest has been paid or duly
provided for, will not receive any accrued interest on such Original Notes, and
the undersigned waives the right to receive any interest on such Original Notes
accrued from and after such Interest Payment Date or, if no such interest has
been paid or duly provided for, from and after , 1997.
The undersigned will, upon request, execute and deliver any additional
documents deemed
7
<PAGE> 8
by the Issuer to be necessary or desirable to complete the sale, assignment and
transfer of the Original Notes tendered hereby. All authority herein conferred
or agreed to be conferred in this Letter of Transmittal shall survive the death
or incapacity of the undersigned and any obligation of the undersigned
hereunder shall be binding upon the heirs, executors, administrators, personal
representatives, trustees in bankruptcy, legal representatives, successors and
assigns of the undersigned. Except as stated in the Prospectus, this tender is
irrevocable.
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF
ORIGINAL NOTES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED
THE ORIGINAL NOTES AS SET FORTH IN SUCH BOX.
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE ) (NOTE: SIGNATURE(S) MUST BE
GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Original Notes hereby tendered or on the register of
holders maintained by the Issuer, or by any person(s) authorized to become the
registered holder(s) by endorsements and documents transmitted herewith
(including such opinions of counsel, certifications and other information as
may be required by the Issuer or the Trustee for the Original Notes to comply
with the restrictions on transfer applicable to the Original Notes). If
signature is by an attorney-in-fact, executor, administrator, trustee,
guardian, officer of a corporation or another acting in a fiduciary capacity or
representative capacity, please set forth the signer's full title. See
Instruction 5.
8
<PAGE> 9
(SIGNATURE(S) OF HOLDER(S))
Date: ___________ , 199_
Name(s) ____________________________________________________________________
____________________________________________________________________
(PLEASE PRINT)
Capacity (full title)________________________________________________________
Address:_____________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number:______________________________________________
(Tax Identification or Social Security Number(s))____________________________
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 2 AND 5)
_____________________________________________________________________________
(Authorized Signature)
Date: ________________, 199_
Name of Firm_________________________________________________________________
_____________________________________________________________________________
Capacity (full title)________________________________________________________
(PLEASE PRINT)
Address______________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number______________________________________
9
<PAGE> 10
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if the Exchange Notes or Original Notes not tendered are
to be issued in the name of someone other than the registered holder of the
Original Notes whose name(s) appear(s) above.
Issue
[ ] Original Notes not tendered to:
[ ] Exchange Notes, to:
Name(s)______________________________________________________________________
Address______________________________________________________________________
_____________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number_______________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER(S))
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if Exchange Notes or Original Notes not tendered are to be
sent to someone other than the registered holder of the Original Notes whose
name(s) appear(s) above, or such registered holder(s) at an address other than
that shown above.
Mail
[ ] Original Notes not tendered to:
[ ] Exchange Notes, to:
Name(s)_____________________________________________________________
Address_____________________________________________________________
____________________________________________________________________
(INCLUDE ZIP CODE)
10
<PAGE> 11
Area Code and Telephone Number______________________________________
____________________________________________________________________
(TAX IDENTIFICATION OR SOCIAL
SECURITY NUMBER(S))
INSTRUCTIONS FORMING PART OF THE TERMS
AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be completed either if
(a) Certificates are to be forwarded herewith or (b) tenders are to be made
pursuant to the procedures for tender by book-entry transfer set forth in "The
Exchange Offer--How to Tender" in the Prospectus. Certificates, or timely
confirmation of a book-entry transfer of such Original Notes into the Exchange
Agent's account at DTC, as well as this Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, and any other documents required by this Letter of Transmittal,
must be received by the Exchange Agent at its address set forth herein on or
prior to the Expiration Date.
Holders who wish to tender their Original Notes and (i) whose Original
Notes are not immediately available or (ii) who cannot deliver their Original
Notes, this Letter of Transmittal and all other required documents to the
Exchange Agent on or prior to the Expiration Date or (iii) who cannot complete
the procedures for delivery by book-entry transfer on a timely basis, may
tender their Original Notes by properly completing and duly executing a Notice
of Guaranteed Delivery pursuant to the guaranteed delivery procedures set forth
in "The Exchange Offer--How to Tender" in the Prospectus. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution
(as defined below); (ii) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form made available by the Company,
must be received by the Exchange Agent on or prior to the Expiration Date; and
(iii) the Certificates (or a book-entry confirmation (as defined in the
Prospectus)) representing all tendered Original Notes may be tendered in whole
or in part, in proper form for transfer, together with a Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, with any required
signature guarantees and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent within three New York Stock
Exchange, Inc. trading days after the date of execution of such Notice of
Guaranteed Delivery, all as provided in "The Exchange Offer--How to Tender" in
the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or
transmitted by facsimile or mail to the Exchange Agent, and must include a
guarantee by an Eligible Institution in the form set forth in such Notice. For
Original Notes to be properly tendered pursuant to the guaranteed delivery
procedure, the Exchange Agent must receive a Notice of Guaranteed Delivery on
or prior to the Expiration Date. As used herein and in the Prospectus,
"Eligible Institution" means a firm or other entity identified in Rule 17Ad-15
under the Exchange Act as "an eligible guarantor institution," including (as
such terms are defined therein) (i) a bank; (ii) a broker, dealer, municipal
securities broker or dealer or government securities broker or dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association.
11
<PAGE> 12
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
The Issuer will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder
(which term, for purposes of this document, shall include any
participant in DTC whose name appears on the register of holders
maintained by the Issuer as the owner of the Original Notes) of
Original Notes tendered herewith, unless such holder(s) has completed
either the box entitled "Special Issuance Instructions" or the box
entitled "Special Delivery Instructions" above, or (ii) such Original
Notes are tendered for the account of a firm that is an Eligible
Institution.
In all other cases, an Eligible Institution must guarantee the
signature(s) on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned
"Description of Original Notes" is inadequate, the Certificate number(s) and/or
the principal amount of Original Notes and any other required information
should be listed on a separate signed schedule which is attached to this Letter
of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Original Notes
will be accepted only in the principal amount of $1,000 (1 Original Note) and
integral multiples of $1,000 in excess thereof. If less than all the Original
Notes evidenced by any Certificate submitted are to be tendered, fill in the
principal amount of Original Notes which are to be tendered in the box entitled
"Principal Amount of Original Notes Tendered (if less than all)." In such case,
new Certificate(s) for the remainder of the Original Notes that were evidenced
by your old Certificate(s) will only be sent to the holder of the Original
Note, promptly after the Expiration Date. All Original Notes represented by
Certificates delivered to the Exchange Agent will be deemed to have been
tendered unless other-wise indicated.
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written or facsimile
transmission of such notice of withdrawal must be timely received by the
Exchange Agent at one of its addresses set forth above or in the Prospectus on
or prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who
12
<PAGE> 13
tendered the Original Notes to be withdrawn, the aggregate principal amount of
Original Notes to be withdrawn, and (if Certificates for Original Notes have
been tendered) the name of the registered holder of the Original Notes as set
forth on the Certificate for the Original Notes, if different from that of the
person who tendered such Original Notes. If Certificates for the Original Notes
have been delivered or otherwise identified to the Exchange Agent, then prior
to the physical release of such Certificates for the Original Notes, the
tendering holder must submit the serial numbers shown on the particular
Certificates for the Original Notes to be withdrawn and the signature on the
notice of withdrawal must be guaranteed by an Eligible Institution, except in
the case of Original Notes tendered for the account of an Eligible Institution.
If Original Notes have been tendered pursuant to the procedures for book entry
transfer set forth in the Prospectus under "The Exchange Offer -- How to
Tender," the notice of withdrawal must specify the name and number of the
account at DTC to be credited with the withdrawal of Original Notes, in which
case a notice of withdrawal will be effective if delivered to the Exchange
Agent by written or facsimile transmission. Withdrawals of tenders of Original
Notes may not be rescinded. Original Notes properly withdrawn will not be
deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described in the Prospectus under "The Exchange
Offer -- How to Tender."
All questions as to the validity, form and eligibility (including time
of receipt) of such withdrawal notices will be determined by the Issuer, in its
sole discretion, whose determination shall be final and binding on all parties.
None of the Issuer, any affiliates or assigns of the Issuer, the Exchange Agent
or any other person shall be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure
to give any such notification. Any Original Notes which have been tendered but
which are withdrawn will be returned to the holder thereof without cost to such
holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS.
If this Letter of Transmittal is signed by the registered holder(s) of the
Original Notes tendered hereby, the signatures) must correspond exactly with
the name(s)(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Original Notes tendered hereby are owned of record by
two or more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Original Notes are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and must submit proper
evidence satisfactory to the Issuer, in its sole discretion, of each such
person's authority so to act.
When this Letter of Transmittal is signed by the registered owner(s)
of the Original Notes listed and transmitted hereby, no endorsements) of
Certificate(s) or separate bond power(s) are required unless Exchange Notes are
to be issued in the name of a person other than the registered
13
<PAGE> 14
holder(s). Signature(s) on such Certificate(s) or bond power(s) must be
guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Original Notes listed, the Certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or names of the registered owner(s) appear(s) on the Certificates, and also
must be accompanied by such opinions of counsel, certifications and other
information as the Issuer or the Trustee for the Original Notes may require in
accordance with the restrictions on transfer applicable to the Original Notes.
Signatures on such Certificates or bond powers must be guaranteed by an
Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If Exchange Notes are
to be issued in the name of a person other than the signer of this Letter of
Transmittal, or if Exchange Notes are to be sent to someone other than the
signer of this Letter of Transmittal or to an address other than that shown
above, the appropriate boxes on this Letter of Transmittal should be completed.
Certificates for Original Notes not exchanged will be returned by mail or, if
tendered by book-entry transfer, by crediting the account indicated above
maintained at DTC. See Instruction 4.
7. IRREGULARITIES. The Issuer will determine, in its sole discretion,
all questions as to the form of documents, validity, eligibility (including
time of receipt) and acceptance for exchange of any tender of Original Notes,
which determination shall be final and binding on all parties. The Issuer
reserves the absolute right to reject any and all tenders determined by either
of them not to be in proper form or the acceptance of which, or exchange for
which, may, in the view of counsel to the Issuer, be unlawful. The Issuer also
reserves the absolute right, subject to applicable law, to waive any of the
conditions of the Exchange Offer set forth in the Prospectus under "The
Exchange Offer -- Conditions to the Exchange Offer" or any conditions or
irregularity in any tender of Original Notes of any particular holder whether
or not similar conditions or irregularities are waived in the case of other
holders. The Issuer's interpretation of the terms and conditions of the
Exchange Offer (including this Letter of Transmittal and the instructions
hereto) will be final and binding. No tender of Original Notes will be deemed
to have been validly made until all irregularities with respect to such tender
have been cured or waived. The Issuer, any affiliates or assigns of the Issuer,
the Exchange Agent, or any other person shall not be under any duty to give
notification of any irregularities in tenders or incur any liability for
failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES.
Questions and requests for assistance may be directed to the Exchange Agent at
its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange Agent
or from your broker, dealer, commercial bank, trust company or other nominee.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. Federal
income tax law, a holder whose tendered Original Notes are accepted for
exchange is required to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 below. If the
Exchange Agent is not provided with the correct TIN, the
14
<PAGE> 15
Internal Revenue Service (the "IRS") may subject the holder or other payee to a
$50 penalty. In addition, payments to such holders or other payees with respect
to Original Notes exchanged pursuant to the Exchange Offer may be subject to
31% backup withholding.
The box in Part 2 of the Substitute Form W-9 may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part 2 is checked, the
holder or other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in Part 2 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 31% of all payments made prior to the time a properly certified TIN is
provided to the Exchange Agent. The Exchange Agent will retain such amounts
withheld during the 60 day period following the date of the Substitute Form
W-9. If the holder furnishes the Exchange Agent with its TIN within 60 days
after the date of the Substitute Form W-9, the amounts retained during the 60
day period will be remitted to the holder and no further amounts shall be
retained or withheld from payments made to the holder thereafter. If, however,
the holder has not provided the Exchange Agent with its TIN within such 60 day
period, amounts withheld will be remitted to the IRS as backup withholding. In
addition, 31% of all payments made thereafter will be withheld and remitted to
the IRS until a correct TIN is provided.
The holder is required to give the Exchange Agent the TIN (e.g.,
social security number or employer identification number) of the registered
owner of the Original Notes or of the last transferee appearing on the
transfers attached to, or endorsed on, the Original Notes. If the Original
Notes are registered in more than one name or are not in the name of the actual
owner, consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below, and write "exempt" on the face
thereof, to avoid possible erroneous backup withholding. A foreign person may
qualify as an exempt recipient by submitting a properly completed IRS Form W-8,
signed under penalties of perjury, attesting to that holder's exempt status.
Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax.
Rather, the U.S. Federal income tax liability of a person subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained.
10. WAIVER OF CONDITIONS. The Issuer reserves the absolute right to
waive satisfaction of any or all conditions enumerated in the Prospectus.
11. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering holders of Original Notes,
by execution of this Letter of Transmittal, shall waive any right to receive
notice of the acceptance of their Original Notes for exchanges.
15
<PAGE> 16
Neither the Issuer, the Exchange Agent nor any other person is
obligated to give notice of any defect or irregularity with respect to any
tender of Original Notes nor shall any of them incur any liability for failure
to give any such notice.
12. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate(s)
representing Original Notes have been lost, destroyed or stolen, the holder
should promptly notify the Exchange Agent. The holder will then be instructed
as to the steps that must be taken in order to replace the Certificate(s). This
Letter of Transmittal and related documents cannot be processed until the
procedures for replacing lost, destroyed or stolen Certificate(s) have been
followed.
13. SECURITY TRANSFER TAXES. Holders who tender their Original Notes
for exchange will not be obligated to pay any transfer taxes in connection
therewith. If, however, Exchange Notes are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of the
Original Notes tendered, or if a transfer tax is imposed for any reason other
than the exchange of Original Notes in connection with the Exchange Offer, then
the amount of any such transfer tax (whether imposed on the registered holder
or any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL
OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO
THE EXPIRATION DATE.
TO BE COMPLETED BY ALL TENDERING SECURITYHOLDERS
(SEE INSTRUCTION 9)
PAYER'S NAME: THE BANK OF NEW YORK
16
<PAGE> 17
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PART 1--PLEASE PROVIDE YOUR TIN ON THE LINE TIN:
AT RIGHT AND CERTIFY BY SIGNING AND -----------------------
DATING BELOW Social Security Number or
Employer Identification Number
----------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 2 - TIN Applied For [ ]
Form W-9
Department Of The
Treasury Internal
Revenue Service
----------------------------------------------------------------------------------------------------------
Payor's Request For CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
Taxpayer
Identification Number (1) the number shown on this form is my correct taxpayer identification number (or I am
("TIN") waiting for a number to be issued to me).
and Certification
(2) I am not subject to backup withholding either because (i) I am exempt from backup
withholding, (ii) I have not been notified by the Internal Revenue Service ("IRS")
that I am subject to backup withholding as a result of a failure to report all
interest or dividends, or (iii) the IRS has not notified me that I am no longer
subject to backup withholding, and
(3) any other information provided on this form is true and correct.
Signature Date , 1997
----------------------------------- ------------------
- -----------------------------------------------------------------------------------------------------------------------------------
You must cross out item (iii) in Part (2) above if you have been notified by the IRS that you are subject to backup
withholding because of underreporting interest or dividends on your tax return and you have not been notified by the IRS that
you are no longer subject to backup withholding.
- -----------------------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN CIRCUMSTANCES RESULT IN BACKUP WITHHOLDING OF 31% OF ANY AMOUNTS
PAID TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 2 OF SUBSTITUTE FORM W-9
- -----------------------------------------------------------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (1) I have
mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center
or Social Security Administration Office or (2) I intend to mail or deliver an application in the near future. I understand
that if I do not provide a taxpayer identification number by the time of payment, 31% of all payments made to me on account of
the Exchange Notes shall be retained until I provide a taxpayer identification number to the Exchange Agent and that, if I do not
provide my taxpayer identification number within 60 days, such retained amounts shall be remitted to the Internal Revenue
Service as backup withholding and 31% of all reportable payments made to me thereafter will be withheld and remitted to the
Internal Revenue Service until I provide a taxpayer identification number.
Signature Date , 1997
-------------------------------------------------- ------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
ANY AND ALL OUTSTANDING
9 5/8% SENIOR SECURED NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER SENIOR NOTE)
OF
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
This Notice of Guaranteed Delivery, or one substantially equivalent to
this form, must be used to accept the Exchange Offer (as defined below) if (i)
certificates for the Issuer's (as defined below) 9 5/8% Senior Secured Notes
due 2007 (the "Original Notes") are not immediately available, (ii) Original
Notes, the Letter of Transmittal and all other required documents cannot be
delivered to The Bank of New York (the "Exchange Agent") on or prior to 5:00
P.M. New York City time, on the Expiration Date (as defined in the Prospectus
referred to below) or (iii) the procedures for delivery by book-entry transfer
cannot be completed on a timely basis. This Notice of Guaranteed Delivery may
be delivered by hand, overnight courier or mail, or transmitted by facsimile
transmission, to the Exchange Agent. See "The Exchange Offer -- How to Tender"
in the Prospectus. In addition, in order to utilize the guaranteed delivery
procedure to tender Original Notes pursuant to the Exchange Offer, a completed,
signed and dated Letter of Transmittal relating to Original Notes (or facsimile
thereof) must also be received by the Exchange Agent prior to 5:00 P.M. New
York City time, on the Expiration Date. Capitalized terms not defined herein
have the meanings assigned to them in the Prospectus.
The Exchange Agent For The Exchange Offer Is:
THE BANK OF NEW YORK
By Registered or Certified Mail By Hand or Overnight Delivery
The Bank of New York The Bank of New York
101 Barclay Street, 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Attn.: Reorganization Section, ________ Ground Level
New York, New York 10286
Attn.: Reorganization Section, ______
Facsimile Transmissions:
(Eligible Institutions Only)
(212) 571-3080
Confirm by Telephone:
(212) 815-6333
For Information Call:
(212) 815-6333
<PAGE> 2
Delivery of this Notice Of Guaranteed Delivery to an address other
than as set forth above or transmission of this Notice of Guaranteed Delivery
via facsimile to a number other than as set forth above will not constitute a
valid delivery.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
Ladies and Gentlemen:
The undersigned hereby tenders to Keystone Consolidated Industries,
Inc., a Delaware company (the "Issuer"), upon the terms and subject to the
conditions set forth in the Prospectus dated 1997 (as the same may
be amended or supplemented from time to time, the "Prospectus"), and the
related Letter of Transmittal (which together constitute the "Exchange Offer"),
receipt of which is hereby acknowledged, the aggregate principal amount of
Original Notes set forth below pursuant to the guaranteed delivery procedures
set forth in the Prospectus under the caption "The Exchange Offer -- How to
Tender."
Aggregate Principal Amount Name(s) of Registered Holder(s):
Amount Tendered: $ * ______________________________________
Certificate No.(s)
(if available):_______________________
______________________________________
Total Principal Amount Represented by
Original Notes Certificate(s)
$_____________________________________
If Original Notes will be tendered by book-entry transfer, provide the
following information:
DTC Account Number:___________________
Date: ________________________________
__________________________
* Must be in denominations of a Liquidation Amount of $1,000 and any
integral multiple thereof, and not less than $100,000 aggregate Liquidation
Amount.
<PAGE> 3
________________________________________________________________________________
All authority herein conferred or agreed to be conferred shall
survive the death or incapacity of the undersigned and every obligation of the
undersigned hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the undersigned.
________________________________________________________________________________
PLEASE SIGN HERE
X______________________________ __________________________________
X______________________________ __________________________________
Signature(s) of Owner(s) Date
or authorized signatory
Area Code and Telephone Number:_____________________________________
Must be signed by the holder(s) of the Original Notes as their name(s)
appear(s) on certificates for Original Notes or on a security position listing,
or by person(s) authorized to become registered holder(s) by endorsement and
documents transmitted with this Notice of Guaranteed Delivery. If signature is
by a trustee, executor, administrator, guardian, attorney-in-fact, officer or
other person acting in a fiduciary or representative capacity, such person must
set forth his or her full title below.
Please print name(s) and address(es)
Name(s):
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
Capacity: _______________________________________________________________
Address(es):
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
<PAGE> 4
THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, as an "eligible
guarantor institution," including (as such terms are defined therein): (i) a
bank; (ii) a broker, dealer, municipal securities broker, municipal securities
dealer, government securities broker, government securities dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or learning agency; or (v) a savings association that is a
participant in a Securities Transfer Association recognized program (each of
the foregoing being referred to as an "Eligible Institution"), hereby
guarantees to deliver to the Exchange Agent, at one of its addresses set forth
above, either the Original Notes tendered hereby in proper form for transfer,
or confirmation of the book-entry transfer of such Original Notes to the
Exchange Agent's account at The Depository Trust Company, pursuant to the
procedures for book-entry transfer set forth in the Prospectus, in either case
together with one or more properly completed and duly executed Letter(s) of
Transmittal (or facsimile thereof) and any other required documents within
three New York Stock Exchange trading days after the date of execution of this
Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Original Notes tendered hereby to the Exchange Agent within
the time period set forth above and that failure to do so could result in a
financial loss to the undersigned.
(PLEASE PRINT)
__________________________________ ____________________________________
Name of Firm: Authorized Signature
__________________________________ ____________________________________
Address Title
__________________________________ ____________________________________
Zip Code (Please Type or Print)
__________________________________ ____________________________________
Area Code and Telephone Number
NOTE: DO NOT SEND CERTIFICATES FOR ORIGINAL NOTES WITH THIS FORM. CERTIFICATES
FOR ORIGINAL NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
<PAGE> 1
EXHIBIT 99.3
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
OFFER TO EXCHANGE ALL OUTSTANDING
9 5/8% SENIOR SECURED NOTES DUE 2007
ISSUED IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR 9 5/8% SENIOR SECURED NOTES DUE 2007
To Our Clients:
Enclosed for your consideration is a Prospectus dated , 1997
(as the same may be amended or supplemented from time to time, the
"Prospectus") and a form of Letter of Transmittal (the "Letter of Transmittal")
relating to the offer (the "Exchange Offer") by Keystone Consolidated
Industries, Inc. (the "Issuer") to exchange each outstanding 9 5/8% Senior
Secured Note due 2007 issued and sold in reliance upon an exemption from
registration under the Securities Act of 1933, as amended (collectively, the
"Original Notes"), for one 9 5/8% Senior Secured Note due 2007.
The material is being forwarded to you as the beneficial owner of
Original Notes carried by us for your account or benefit but not registered in
your name. A tender of any Original Notes may be made only by us as the
registered holder and pursuant to your instructions. Therefore, the Issuer
urges beneficial owners of Original Notes registered in the name of a broker,
dealer, commercial bank, trust company or other nominee to contact such
registered holder promptly if they wish to tender Original Notes in the
Exchange Offer.
Accordingly, we request instructions as to whether you wish us to
tender any or all Original Notes, pursuant to the terms and conditions set
forth in the Prospectus and Letter of Transmittal. We urge you to read
carefully the Prospectus and Letter of Transmittal before instructing us to
tender your Original Notes.
YOUR INSTRUCTIONS TO US SHOULD BE FORWARDED AS PROMPTLY AS POSSIBLE IN
ORDER TO PERMIT US TO TENDER ORIGINAL NOTES ON YOUR BEHALF IN ACCORDANCE WITH
THE PROVISIONS OF THE EXCHANGE OFFER. The Exchange Offer will expire at 5:00
p.m., New York City Time, on , 1997, unless extended (the "Expiration
Date"). Original Notes tendered pursuant to the Exchange Offer may be
withdrawn, subject to the procedures described in the Prospectus, at any time
prior to the Expiration Date.
The Exchange Offer is not being made to nor will exchange be accepted
from or on behalf of holders of Original Notes in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction.
If you wish to have us tender any or all of your Original Notes held
by us for your account or benefit, please so instruct us by completing,
executing and returning to us the instruction form that appears below. The
accompanying Letter of Transmittal is furnished to you for informational
purposes only and may not be used by you to tender Original Notes held by us
and registered in our name for your account or benefit.
<PAGE> 2
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of the Issuer.
This will instruct you to tender the principal amount of Original
Notes indicated below held by you for the account or benefit of the undersigned
pursuant to the terms of and conditions set forth in the Prospectus and the
Letter of Transmittal.
Box 1 [ ] Please tender my Original Notes held by you for my account or
benefit. I have identified on a signed schedule attached
hereto the number of Original Notes to be tendered if I wish
to tender less than all of my Original Notes.
Box 2 [ ] Please do not tender any Original Notes held by you for my
benefit.
Date:_____________________________, 1997
________________________________________________________
________________________________________________________
Signature(s)
________________________________________________________
________________________________________________________
Please print name(s) here
Unless a specific contrary instruction is given in a signed Schedule attached
hereto, your signature(s) hereon shall constitute an instruction to us to
tender all your Original Notes.
<PAGE> 1
EXHIBIT 99.4
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
OFFER TO EXCHANGE ALL OUTSTANDING
9 5/8% SENIOR SECURED NOTES DUE 2007
ISSUED IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR 9 5/8% SENIOR SECURED NOTES DUE 2007
To Securities Dealers, Commercial Banks
Trust Companies and Other Nominees:
Enclosed for your consideration is a Prospectus dated , 1997
(as the same may be amended or supplemented from time to time, the
"Prospectus") and a form of Letter of Transmittal (the "Letter of Transmittal")
relating to the offer (the "Exchange Offer") by Keystone Consolidated
Industries, Inc. (the "Issuer") to exchange each outstanding 9 5/8% Senior
Secured Note due 2007 issued and sold in reliance upon an exemption from
registration under the Securities Act of 1933, as amended (collectively, the
"Original Notes"), for one 9 5/8% Senior Secured Note due 2007.
We are asking you to contact your clients for whom you hold Original
Notes registered in your name or in the name of your nominee. In addition, we
ask you to contact your clients who, to your knowledge, hold Original Notes
registered in their own name. The Issuer will not pay any fees or commissions
to any broker, dealer or other person in connection with the solicitation of
tenders pursuant to the Exchange Offer. You will, however, be reimbursed by the
Issuer for customary mailing and handling expenses incurred by you in
forwarding any of the enclosed materials to your clients. The Issuer will pay
all transfer taxes, if any, applicable to the tender of Original Notes to it or
its order, except as otherwise provided in the Prospectus and the Letter of
Transmittal.
Enclosed are copies of the following documents:
1. The Prospectus;
2. A Letter of Transmittal for your use in connection with
the tender of Original Notes and for the information of your clients;
3. A form of letter that may be sent to your clients for
whose accounts you hold Original Notes registered in your name or the
name of your nominee, with space provided for obtaining the clients'
instructions with regard to the Exchange Offer;
4. A form of Notice of Guaranteed Delivery; and
5. Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
<PAGE> 2
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED (THE "EXPIRATION
DATE"). ORIGINAL NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE
WITHDRAWN, SUBJECT TO THE PROCEDURES DESCRIBED IN THE PROSPECTUS, AT ANY TIME
PRIOR TO THE EXPIRATION DATE.
To tender Original Notes, certificates for Original Notes or a
Book-Entry Confirmation, a duly executed and properly completed Letter of
Transmittal or a facsimile thereof, and any other required documents, must be
received by the Exchange Agent as provided in the Prospectus and the Letter of
Transmittal.
If a holder desires to accept the Exchange Offer and time will not
permit a Letter of Transmittal or Original Notes to reach the Exchange Agent
before the Expiration Date or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected by delivery of a Notice
of Guaranteed Delivery by an Eligible Institution.
Additional copies of the enclosed material may be obtained from the
Exchange Agent, The Bank of New York, by calling the telephone number set forth
in the Prospectus.
Very truly yours,
----------------------------------
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY PERSON AS AN AGENT OF THE ISSUERS OR THE EXCHANGE AGENT, OR AUTHORIZE YOU
OR ANY OTHER PERSON TO MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH
RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE
PROSPECTUS AND THE LETTER OF TRANSMITTAL.
