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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 1998
REGISTRATION NO. 333-35955
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2
TO
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 FEBRUARY 2, 1998
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 , 1998, 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 September
30, 1997, the Company had approximately $101.5 million of senior 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. None of the Subsidiaries have guaranteed the Notes.
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 the ordinary course of business of such holders, and such holders
are not engaged in, and do not intend to engage in, a
<PAGE> 3
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 , 1998,
unless extended by the Company in its sole discretion (the "Expiration Date").
Notwithstanding the foregoing, the Company will not extend the Expiration Date
beyond , 1998. 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 , 1998.
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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
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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, June 30, 1997 and September 30, 1997; and (3) the Company's Current
Reports on Form 8-K filed September 4, 1997 and January 16, 1998.
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 , 1998.
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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
Risk Factors.............................................. 5
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........................... 12
Liabilities Associated with DeSoto........................ 12
Plant Utilization and Capacity............................ 12
Labor Relations........................................... 12
Control Person and Potential Conflicts of Interest........ 12
Absence of a 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.......................... 19
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 CONDITION
AND RESULTS OF OPERATIONS................................. 24
BUSINESS.................................................... 32
MANAGEMENT.................................................. 42
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 47
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS.................................................... 49
DESCRIPTION OF REVOLVING CREDIT FACILITY AND RELATED
MATTERS................................................... 51
DESCRIPTION OF NOTES........................................ 53
General................................................... 53
Principal, Maturity and Interest.......................... 54
Optional Redemption....................................... 54
Mandatory Redemption...................................... 54
Repurchase at the Option of Holders....................... 54
Security.................................................. 58
Certain Bankruptcy Limitations............................ 60
Certain Covenants......................................... 60
Events of Default and Remedies............................ 66
No Personal Liability of Directors, Officers, Employees
and Stockholders....................................... 67
Legal Defeasance and Covenant Defeasance.................. 67
Possession, Use and Release of Collateral................. 68
Use of Trust Moneys....................................... 69
Transfer and Exchange..................................... 69
Amendment, Supplement and Waiver.......................... 70
Concerning the Trustee.................................... 70
Additional Information.................................... 71
Book-Entry, Delivery and Form............................. 71
Registration Rights; Liquidated Damages................... 72
Certain Definitions....................................... 73
PLAN OF DISTRIBUTION........................................ 84
LEGAL MATTERS............................................... 84
EXPERTS..................................................... 85
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
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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
The Company believes that it is a leading manufacturer of steel fabricated
wire products, industrial wire and carbon steel rod for the agricultural,
industrial, construction, original equipment manufacturer and retail consumer
markets and that 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 September 30, 1997, the Company had net sales of $355.8 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. Prior to December
23, 1997, Keystone owned a 20% equity interest in EWP and had rights under
certain circumstances to acquire the remaining 80%. On December 23, 1997,
Keystone purchased the 80% of EWP
1
<PAGE> 9
not already owned by the Company for a total of $11.2 million in cash, using
available funds on hand, and the assumption of EWP's liabilities. See
"Business -- Products, Markets and Distribution."
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, will be a credit for financial reporting purposes of
approximately $6.3 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 39%. 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.
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<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 , 1998 unless
extended by the Company in its sole discretion (the
"Expiration Date"). Notwithstanding the foregoing,
the Company will not extend the Expiration Date to
beyond , 1998.
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."
3
<PAGE> 11
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.
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. In the event of a Change of Control,
there can be no assurance that the Company will
have sufficient funds available, or will
4
<PAGE> 12
be permitted by covenants contained in its
then-existing credit agreements, to repurchase the
Notes. In addition, a Change of Control constitutes
an event of default under the Revolving Credit
Facility, which may, under certain circumstances,
constitute an Event of Default (as defined) under
the Indenture. See "Description of Notes -- Events
of Default and Remedies."
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. In the event of an Asset Sale, there
can be no assurance that covenants contained in the
Company's then-existing credit agreements will
permit the Company to repurchase the Notes.
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 September 30, 1997, the Company had
approximately $101.5 million of senior
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."
RISK FACTORS
Holders of Notes should carefully consider the risk factors set forth under
the caption "Risk Factors" beginning on page 8, which include factors relating
to: (i) the Company's high level of indebtedness and ability to service
indebtedness; (ii) restrictive covenants and asset encumbrances to which the
Company is subject; (iii) the security for the Notes; (iv) cyclicality,
competition and market factors affecting the Company; (v) the Company's
substantial employee postretirement obligations; (vi) environmental matters
relating to the Company; (vii) risks in implementing the Company's capital
improvements plan; (viii) scrap steel and other material costs; (ix) the
Company's operating results and liquidity; (x) liabilities associated with
DeSoto; (xi) plant utilization and capacity; (xii) labor relations; (xiii)
control person and potential conflicts of interest; (xiv) absence of a public
market for the Notes; and (xv) consequences of failure to exchange.
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 nine month periods ended September 30, 1996 and 1997 and the
balance sheet data as of September 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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $252,821 $277,427
Gross profit............................. 37,443 32,521 36,982 32,748 34,026 20,615 29,946
Operating income......................... 16,049 13,077 12,908 11,298 10,730 5,527 20,562
Interest expense (credit)(1)............. 3,036 6,575 (1,165) 3,385 3,741 2,677 5,119
Income before income taxes............... 8,340 1,130 12,389 8,078 4,240 784 15,151
Net income (loss)........................ (64,803) 749 7,561 4,887 2,584 465 9,670
OTHER FINANCIAL DATA:
Cash contributions to defined benefit
pension plans.......................... $ 19,933 $ 14,955 $ 20,069 $ 18,702 $ 9,664 $ 9,664 $ --
Capital expenditures..................... 7,459 7,349 12,742 18,208 18,992 10,423 17,400
Depreciation and amortization............ 10,525 11,084 11,585 11,961 12,425 10,530 9,692
Ratio of earnings to fixed charges(2).... 3.7x 1.2x -- 3.0x 1.9x 1.1x 3.6x
Pro forma ratio of earnings to fixed
charges(2)............................. -- -- 2.5x
OTHER OPERATING DATA:
Product shipments (in tons):
Fabricated wire products............... 262 257 267 242 222 172 181
Industrial wire........................ 121 149 168 164 159 122 132
Carbon steel rod....................... 302 337 316 287 307 232 230
-------- -------- -------- -------- -------- -------- --------
Total.............................. 685 743 751 693 688 526 543
======== ======== ======== ======== ======== ======== ========
Average selling prices per ton:
Fabricated wire products............... $ 681 $ 685 $ 690 $ 707 $ 716 $ 722 $ 712
Industrial wire........................ 456 455 479 492 478 478 476
Carbon steel rod....................... 272 296 313 322 298 298 315
Average total production cost per ton.... 406 420 437 452 428 441 438
Average scrap purchase cost per ton...... 85 110 125 128 125 127 122
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital(3)........................................ $ 67,439
Property, plant and equipment, net........................ 96,103
Total assets.............................................. 366,394
Total debt................................................ 101,477
Redeemable preferred stock................................ 3,500
Stockholders' equity...................................... 41,556
</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. On a pro forma
basis, the Company's earnings were insufficient to cover total fixed charges
in 1996 and the nine months ended September 30, 1996. The pro forma coverage
deficiency in 1996 and the nine months ended September 30, 1996, was $2.3
million and $4.2 million, respectively.
(3) Working capital 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 September 30, 1997, the aggregate total outstanding senior
indebtedness of the Company was approximately $101.5 million. See
"Capitalization." The Company expects its total debt service requirements
through the end of 1999, including both principal and interest payments, will
approximate $2.5 million per quarter or $10.0 million per year based on its
level of indebtedness at September 30, 1997. 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. In addition, a Change of Control constitutes an event of default
under the Revolving Credit Facility, which may, under certain circumstances,
constitute an Event of Default under the Indenture. 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,
including, for example, an increase in the price of scrap steel and other
materials used by the Company or a decrease in the demand for, or market price
of, the Company's products. 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
8
<PAGE> 16
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 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 September 30, 1997 was
approximately $93.5 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
9
<PAGE> 17
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 in the
Company's postretirement medical and life insurance benefit obligation and the
associated expense ("OPEB expense"). As of September 30, 1997, the Company had
an accumulated postretirement health care and life insurance benefit liability
of $110.0 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 nine months of 1997, OPEB expense and cash payments amounted to $6.2
million and $5.4 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 will not 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 September 30, 1997, approximately 94% 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 September 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 "Certain Relationships and Related Transactions" and 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 $1.1 million during the first nine months of
1997. At September 30, 1997, the Company's financial statements reflected total
accrued liabilities of $17.4 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
10
<PAGE> 18
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 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. The Company has not entered into any long-term contracts
for the purchase or supply of scrap steel and it is, therefore, subject to the
price fluctuation of scrap steel. 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.
11
<PAGE> 19
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
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. 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 45% 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. In addition, a Change of Control constitutes an event of default
under the Revolving Credit Facility, which may, under certain circumstances,
constitute an Event of Default under the Indenture. See "Description of
Notes -- Events of Default and Remedies." 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.
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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 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 was approximately $96.3 million. The Company used $52.4 million of the net
proceeds from the issuance of the Senior Notes to repay borrowings under the
Company's Revolving Credit Facility and to retire amounts outstanding under the
Company's term loan (the "Term Loan"). Both the Company's Revolving Credit
Facility and Term Loan bore interest at 1% over the prime rate (effective rate
of 9.5% on August 7, 1997) and had an original maturity date of December 31,
1999. 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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<PAGE> 21
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. Notwithstanding the foregoing,
the Company will not extend the Expiration Date to beyond , 1998.
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
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<PAGE> 23
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.
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.
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<PAGE> 24
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 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.
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<PAGE> 25
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 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.
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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 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
19
<PAGE> 27
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.
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 September 30, 1997. 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
SEPTEMBER 30,
1997
-------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Notes payable and current maturities of long term debt:
Revolving Credit Facility(1).............................. $ --
Other..................................................... 334
--------
Total notes payable and current maturities of long
term debt......................................... 334
--------
Long-Term debt:
9 5/8% Senior Secured Notes due 2007...................... 100,000
Other..................................................... 1,143
--------
Total long term debt.............................. 101,143
--------
Redeemable preferred stock, no par value; 500,000 shares
authorized;
435,456 shares issued..................................... 3,500
--------
Stockholders' equity:
Common stock, $1.00 par value; 12,000,000 shares
authorized;
9,296,533 shares issued at stated value(2)............. 10,027
Additional paid-in capital................................ 47,166
Accumulated deficit....................................... (15,625)
Treasury stock -- 1,134 shares, at cost................... (12)
--------
Total stockholders' equity........................ 41,556
--------
Total capitalization.............................. $146,533
========
</TABLE>
- ---------------
(1) Under the Revolving Credit Facility, the Company had $54.4 million available
for borrowing at September 30, 1997 (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 732,361 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 nine month periods ended September 30, 1996 and 1997 and the balance sheet
data as of September 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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $252,821 $277,427
Cost of goods sold................ 278,808 312,665 327,453 312,909 297,149 232,206 247,481
-------- -------- -------- -------- -------- -------- --------
Gross profit...................... 37,443 32,521 36,982 32,748 34,026 20,615 29,946
Selling expenses.................. 4,833 5,032 5,101 4,367 3,855 2,998 3,542
General and administrative
expenses........................ 21,280 20,309 20,675 17,185 22,779 14,493 13,110
Operating income.................. 16,049 13,077 12,908 11,298 10,730 5,527 20,562
Interest expense
(credit)(1)..................... 3,036 6,575 (1,165) 3,385 3,741 2,677 5,119
Income before income taxes........ $ 8,340 $ 1,130 $ 12,389 $ 8,078 $ 4,240 $ 784 15,151
Provision for income taxes........ 3,194 381 4,828 3,191 1,656 319 5,481
-------- -------- -------- -------- -------- -------- --------
Income before changes in
accounting principles........... 5,146 749 7,561 4,887 2,584 465 9,670
Cumulative effect of changes in
accounting
principles(2)................... (69,949) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).......... $(64,803) $ 749 $ 7,561 $ 4,887 $ 2,584 $ 465 $ 9,670
======== ======== ======== ======== ======== ======== ========
Net income (loss) available for
common shares(3)................ $(64,803) $ 749 $ 7,561 $ 4,887 $ 2,514 $ 465 $ 9,460
======== ======== ======== ======== ======== ======== ========
Primary net income before changes
in accounting principles
available for common shares per
share........................... $ .92 $ .14 $ 1.35 $ .86 $ .38 $ .08 $ 1.01
======== ======== ======== ======== ======== ======== ========
Fully diluted net income before
changes in accounting principles
available for common shares per
share........................... $ .92 $ .14 $ 1.35 $ .86 $ .38 $ .08 $ 1.00
======== ======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding:
Primary......................... 5,572 5,495 5,601 5,654 6,560 5,682 9,386
======== ======== ======== ======== ======== ======== ========
Fully diluted................... 5,572 5,495 5,601 5,654 6,560 5,682 9,443
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Cash contributions to defined
benefit pension plans........... $ 19,933 $ 14,955 $ 20,069 $ 18,702 $ 9,664 $ 9,664 $ --
Capital expenditures.............. 7,459 7,349 12,742 18,208 18,992 10,423 17,400
Depreciation and amortization..... 10,525 11,084 11,585 11,961 12,425 10,530 9,692
Ratio of earnings to fixed
charges(4)...................... 3.7x 1.2x -- 3.0x 1.9x 1.1x 3.6x
Pro forma ratio of earnings to
fixed charges(4)................ -- -- 2.5x
</TABLE>
22
<PAGE> 30
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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........ 262 257 267 242 222 172 181
Industrial wire................. 121 149 168 164 159 122 132
Carbon Steel Rod................ 302 337 316 287 307 232 230
-------- -------- -------- -------- -------- -------- --------
Total...................... 685 743 751 693 688 526 543
======== ======== ======== ======== ======== ======== ========
Average selling prices per ton:
Fabricated wire products........ $ 681 $ 685 $ 690 $ 707 $ 716 $ 722 $ 712
Industrial wire................. 456 455 479 492 478 478 476
Carbon Steel Rod................ 272 296 313 322 298 298 315
Average total production cost per
ton............................. 406 420 437 452 428 441 438
Average scrap purchase cost per
ton............................. 85 110 125 128 125 127 122
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------- AS OF
SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(5)........................ $ 777 $ 6,385 $ 2,529 $ (6,861) $(15,907) $ 67,439
Property, plant and equipment, net........ 84,822 80,769 81,147 86,436 92,608 96,103
Total assets.............................. 202,109 206,654 205,601 198,822 302,368 366,394
Total debt................................ 34,485 27,190 26,054 29,945 51,780 101,477
Redeemable preferred stock................ -- -- -- -- 3,500 3,500
Stockholders' equity (deficit)............ (39,036) (50,908) (40,579) (37,493) 31,170 41,556
</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 $210,000 in the nine months ended September 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. On a pro forma basis, the Company's earnings were
insufficient to cover total fixed charges in 1996 and the nine months ended
September 30, 1996. The pro forma coverage deficiency in 1996 and the nine
months ended September 30, 1996 was $2.3 million and $4.2 million,
respectively.
(5) Working capital represents current assets minus current liabilities.
23
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company believes that it is a leading manufacturer of fabricated wire
products, industrial wire and carbon steel rod for the agricultural, industrial,
construction, original equipment manufacturer and retail consumer markets and
that 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. Prior to December 23, 1997, the Company had a 20% equity interest in
EWP together with an option to acquire the remaining 80%. On that date, Keystone
purchased the 80% of EWP not already owned by the Company. Keystone paid a total
of $11.2 million in cash, using available funds, to acquire the remaining 80% of
EWP and assumed EWP's liabilities. EWP is now a wholly owned subsidiary of
Keystone as a result of Keystone's acquisition of the remaining 80% of EWP. In
1995, the Company contributed to EWP, among other things, certain equipment as
part of its capital contribution. As a result, through December 23, 1997, the
Company did not sell the fabricated wire products previously manufactured on the
equipment contributed to EWP. During 1996, the Company manufactured 4,000 tons
of these fabricated wire products as compared to 13,000 tons in 1995. As part of
the joint venture agreement, the Company supplied EWP with all of its rod
requirements. EWP then converted the rod to fabricated wire products which were
primarily used in the concrete pipe and road construction businesses. During
1996, 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.
24
<PAGE> 32
The Company consumes a significant amount of energy in its manufacturing
operations and, accordingly, its profitability can also be adversely affected by
the volatility in the price of coal, oil and natural gas resulting in increased
energy, transportation, freight, scrap and supply costs. The Company purchases
electrical energy for its Peoria, Illinois facility from a regulated utility
under an interruptible service contract which provides for more economical
electricity rates but allows the utility to refuse or interrupt power to the
Company's manufacturing facilities during periods of peak demand. The utility
has in the past refused or interrupted service to the Company resulting in
decreased production and higher costs associated with the related downtime.
The majority of the Company's 1,930 employees are represented by two labor
unions, the Independent Steel Workers Alliance ("ISWA"), representing
approximately 1,120 employees, and the International Association of Machinists
and Aerospace Workers (Local 2082) ("IAMAW"), representing approximately 170
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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 91.8 89.2
Gross profit................................... 10.1 9.5 10.3 8.2 10.8
Selling expenses............................... 1.4 1.3 1.2 1.2 1.3
General and administrative expense............. 5.7 5.0 6.9 5.7 4.7
Overfunded defined benefit pension credit...... -- -- -- -- (1.7)
Income before income taxes..................... 3.4% 2.3% 1.3% .3% 5.5%
Provision for income taxes..................... 1.3 .9 .5 .1 2.0
----- ----- ----- ----- -----
Net income from continuing operations.......... 2.1% 1.4% .8% .2% 3.5%
===== ===== ===== ===== =====
</TABLE>
Nine months ended September 30, 1997 compared to nine months ended September
30, 1996
During the first nine months of 1997, the Company produced 488,000 tons of
billets as compared to 481,000 tons in the first nine months of 1996. The
Company's rod production during the first nine months of 1997 increased to
546,000 tons as compared to 516,000 tons during the first nine months of 1996.
This increase was due primarily to a 31,000 ton increase in purchased billets.
Net sales increased to $277.4 million in the first nine months of 1997 from
$252.8 million in the first nine months of 1996. Of these sales, fabricated wire
products represented $128.6 million (46%) in 1997 and $124.1 million (49%) in
1996; industrial wire represented $62.9 million (23%) in 1997 and $58.4 million
(23%) in 1996; and carbon steel rod represented $72.4 million (26%) in 1997 and
$69.1 million (27%) in 1996.
Fabricated wire products prices decreased 1% while shipments increased 5%
to 181,0000 tons in 1997 from 172,000 tons in 1996. Industrial wire prices
remained level with the prior year while shipments increased 8% to 132,000 tons
in 1997 from 122,000 tons in 1996. Carbon steel rod prices increased 6% and
shipments declined 1% to 230,000 tons in 1997 from 232,000 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 45% to $29.9 million in the first nine
months of 1997 from $20.6 million in the first nine months of 1996. Gross profit
increased to 10.8% in 1997 from 8.2% in 1996, primarily as a result of lower
scrap costs and pension expense offset by higher rod conversion costs and
increased purchased billets. During the first nine months of 1997, the Company
purchased 519,000 tons of scrap at an average price of $122 per ton as compared
to 1996 purchases of 489,000 tons at an average price of $127 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 $4.8 million in the first nine months of 1996. As a result of the
overfunded status of the Company's defined benefit pension plan, Keystone
recorded a pension credit of $4.7 million in the first nine months of 1997. For
financial reporting purposes, the Company will recognize a non-cash pension
credit of approximately $6.3 million in 1997 and, cash contributions for defined
benefit pension plan fundings will not be required in 1997 and currently does
not expect to be required to make any contributions in 1998. However, future
variances from actuarially assumed rates, including the rate of return
26
<PAGE> 34
on pension plan assets, may result in increases or decreases in pension expense
or credit and future funding requirements. See Note 7 to the Consolidated
Financial Statements.
Selling expenses increased to $3.5 million in the first nine months of 1997
from $3.0 million in the first nine months of 1996, but remained relatively
constant as a percentage of net sales.
General and administrative expenses decreased $1.4 million during the first
nine months of 1997 as compared to the first nine months of 1996. This decrease
was primarily due to lower environmental charges. At September 30, 1997 the
Company's financial statements reflected accrued liabilities of $17.4 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 nine months of 1997 was higher than the first
nine months of 1996 due principally to higher borrowing levels. Average
borrowings by the Company under its revolving credit facility, term loan and the
Senior Notes approximated $64.1 million in the first nine months of 1997 as
compared to $37.5 million in the first nine months of 1996. During the first
nine months of 1997, the average interest rate paid by the Company was 9.5% per
annum as compared to 9.3% per annum in the first nine months of 1996.
As a result of the issuance of the Senior Notes, interest expense in the
future is expected to be greater than the historic levels in the fourth quarter
of 1996 or the first nine months of 1997.
In August 1997, the Company recorded a pre-tax gain of approximately $1.8
million resulting from the sale of a building that was used by one of the
Company's former operating divisions. The operating division was sold in 1989,
but the Company retained the building.
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 first nine
months of 1997 increased to $9.7 million from $.5 million in the first nine
months 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
27
<PAGE> 35
1996, as compared to 1995. During 1996 and 1995 the Company charged pension
expense of approximately $3.7 million and $8.7 million, respectively, to cost of
goods sold.
Selling expenses decreased 11% to $3.9 million in 1996 from $4.4 million in
1995 but remained relatively constant as a percentage of net sales.
General and administrative expenses increased 32.6%, or $5.6 million, in
1996. This increase was primarily a result of higher expenses related to the
Company's environmental remediation project at its Peoria, Illinois facility
($6.7 million in 1996 as compared to $3.6 million in 1995), increased insurance
costs due to abnormally low levels in 1995 and costs incurred in connection with
a possible joint venture that, upon termination of discussions with the
potential joint venture partner, were charged to expense in 1996.
Interest expense 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
28
<PAGE> 36
the Company was 10.3% per annum as compared to 8.0% per annum in 1994. Average
borrowings by the Company under its Revolving Credit Facility and Term Loan
approximated $31.8 million in 1995 as compared to $28.3 million in 1994. During
1993, the Company accrued approximately $4.0 million for the estimated interest
cost as a result of an unfavorable U.S. Supreme Court decision related to the
Company's 1983 and 1984 contributions of certain real property to its pension
plans. In 1994, pursuant to the terms of an agreement with the Internal Revenue
Service, the interest due was reduced to approximately $.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 September 30, 1997, the Company had working capital of $67.4 million,
including $46.3 million of cash and cash equivalents. The Company did not have
any outstanding borrowings under its $55 million Revolving Credit Facility at
September 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.
Under the terms of the Indenture, the Company's ability to borrow in excess of
$25 million under the Revolving Credit Facility is dependent upon maintenance of
a Consolidated Cash Flow Ratio (as defined), for the most recently completed
four fiscal quarters of at least 2.5 to 1. Available borrowings under the
Revolving Credit Facility, which expires December 31, 1999, were $54.4 million
at September 30, 1997. However, under the terms of the Indenture, borrowings
under the Revolving Credit Facility as of September 30, 1997 would be limited to
approximately $51.2 million.
The Company had net deferred tax assets of $19.7 million at September 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 nine months of 1997, the Company's operating activities
provided approximately $14.8 million of cash compared to $5.8 million in the
first nine months of 1996. In addition to higher earnings in the first nine
months 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 $9.7 million in the first nine months 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 nine months of 1997 and will not be required
to make contributions to the pension plan during the remainder of 1997 and
currently does not expect to be required to make any contributions in 1998.
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
29
<PAGE> 37
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 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.
The Company repaid the outstanding borrowings under the Revolving Credit
Facility and Term Loan 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.
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. In
October 1997, DeSoto settled the matter with the IRS for a payment of
approximately $2.6 million, including interest of approximately $1.1 million.
Such payment was within previously accrued amounts.
During December 1997, the Company used $11.2 million of available funds to
purchase the 80% of EWP not already owned by Keystone.
Keystone is presently negotiating with another Company to purchase that
Company's agricultural fencing product manufacturing equipment and related
inventory for approximately $13 million and Keystone expects to incur additional
costs of $6 million to $9 million to relocate and integrate such equipment into
its manufacturing facilities. There can be no assurance that this transaction
will be completed.
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 1997, the Company
commenced a three year, $75 million capital improvement plan to upgrade certain
of its plant and equipment and eliminate production capacity bottlenecks in
order to reduce costs and improve production efficiency. The principal
components of the Company's capital improvements plan include reconfiguring its
electric arc furnace, replacing the caster and upgrading its wire and rod mills.
During the first nine months of 1997, the Company made capital expenditures of
approximately $17.4 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 $26 million and are related primarily to upgrades and
debottlenecking 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. The Company's
ability to incur new debt in the future will be limited by the terms of the
Indenture.
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<PAGE> 38
Management believes the cash flows from operations together with available
cash and the funds available under the Revolving Credit Facility will be
sufficient to fund the anticipated needs of its operations and capital
improvements plan for the remainder of 1997 and the year ending December 31,
1998. This belief is based upon management's assessment of various financial and
operational factors, including, but not limited to, assumptions relating to
product shipments, product mix and selling prices, production schedules,
productivity rates, raw materials, electricity, labor, employee benefits and
other fixed and variable costs, working capital requirements, interest rates,
repayments of long-term debt, capital expenditures, and available borrowings
under 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.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
programs that have date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities.
The Company is in the process of evaluating the modifications to existing
software and new software required to mitigate the Year 2000 Issue. The Company
has also initiated formal communications with its significant suppliers and
large customers to determine the extent to which the Company is vulnerable to
those third parties failure to minimize their own Year 2000 Issue. The Company
will utilize both internal and external sources to reprogram or replace and test
its software, and it expects to complete its evaluation in the first quarter of
1998 and to have any required modifications completed prior to December 31,
1999. However, if such modifications are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company. In addition, there can be no assurance that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company. Because the Company has not completed the evaluation of its Year 2000
Issue, it is not able to quantify the costs that may be incurred in order to
eliminate its Year 2000 Issue.
The date on which the Company plans to complete any necessary Year 2000
modifications is based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
31
<PAGE> 39
BUSINESS
GENERAL
The Company believes that it is a leading manufacturer of steel fabricated
wire products, industrial wire and carbon steel rod for the agricultural,
industrial, construction, original equipment manufacturer and retail consumer
markets and that 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
32
<PAGE> 40
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 six 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 completed the arc
shop reconfiguration and related projects during the third quarter of
1997 for a total cost of $6.9 million.
- 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
$34.7 million. As of September 30, 1997, the Company had spent $700,000
on this project.
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<PAGE> 41
- 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
nine months ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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% 32.6% 49.3%
Industrial wire........... 22.3 22.1 23.6 23.4 23.1 23.2 23.2 23.2
Carbon steel rod.......... 42.2 27.3 41.4 26.8 44.6 28.1 44.2 27.5
----- ----- ----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== ===== =====
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997
-------------------
PERCENT PERCENT
OF TONS OF
PRODUCT SHIPPED SALES
------- -------- --------
<S> <C> <C>
Fabricated wire
products................ 33.3% 48.7%
Industrial wire........... 24.3 23.8
Carbon steel rod.......... 42.4 27.5
----- -----
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 located in Upper Sandusky, Ohio 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 had 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. In December 1997, Keystone purchased the 80%
of EWP not already owned by the Company. Keystone paid a total of $11.2
million in cash, using available funds, to acquire the remaining 80% of
EWP and assumed EWP's liabilities. Management believes EWP broadens its
fabricated wire product line and in the future may provide an opportunity
to shift additional rod production to a higher margin, value-added
fabricated wire product.
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<PAGE> 42
- Industrial Wire. The Company is one of the largest manufacturers of
industrial wire in the United States. At its Peoria, Illinois,
Hortonville, Wisconsin, Sherman, Texas and Caldwell, Texas facilities,
the Company produces custom-drawn industrial wire in a variety of gauges,
finishes and packages for further consumption by the Company's fabricated
wire products operations and for sale to industrial fabrication and
original equipment manufacturer customers. The Company's drawn wire is
used by customers in the production of a broad range of finished goods,
including nails, coat hangers, barbecue grills, air conditioners, tools,
refrigerators and other appliances. Management believes that with a few
exceptions, its industrial wire customers do not generally compete with
the Company.
- Carbon Steel Rod. The Company produces low carbon steel rod at its rod
mill located in Peoria, Illinois. Low carbon steel rod, with carbon
content of up to 0.38%, is more easily shaped and formed than higher
carbon rod and is suitable for a variety of applications where ease of
forming is a consideration. In 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 2.7 million square feet for
manufacturing and office space, approximately 80% of which is located at the
Company's Peoria, Illinois facility.
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<PAGE> 43
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
Engineered Wire Products..... Upper Sandusky, OH 76,000 Fabricated wire products
Keystone Fasteners........... Springdale, AR 76,000 Fabricated wire products
Sherman Wire of Caldwell..... Caldwell, TX 75,000 Fabricated wire products and
industrial wire
Fox Valley Steel & Wire...... Hortonville, WI 74,000 Fabricated wire products and
industrial wire
</TABLE>
The Company believes 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 six wire and wire product
fabrication facilities. The manufacturing process commences in the Peoria,
Illinois arc shop with scrap steel being loaded into an electric arc furnace and
converted into molten steel. The molten steel is then transferred to a ladle
refining furnace where the molten steel chemistries and temperatures are
monitored and adjusted to specifications prior to casting. The molten steel is
then transferred from the ladle refining furnace by ladle into a six-strand
continuous casting machine from which it emerges in five-inch square strands
that are cut to predetermined lengths, referred to as billets. These billets,
along with any billets purchased from outside suppliers, are then transferred to
the adjoining rod mill.
Upon entering the rod mill, the billets pass through a computer-controlled,
multi-zone recuperative reheat furnace. The heated billets are fed into the
rolling line, where they pass through various finishing stands during the rod
production process. After rolling, the rod is coiled and cooled. After cooling,
the coiled rod passes through inspection stations for metallurgical, surface and
diameter checks. Finished coils are compacted and tied, and either transferred
to the Company's other facilities for processing into wire, nails and other
fabricated wire products or shipped to rod customers.
While the Company does not maintain a significant "shelf" inventory of
finished rod, it generally has on hand approximately a one-month supply of
fabricated wire and wire products inventory which enables 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
from numerous sources. The purchase of scrap steel is highly competitive and its
price volatility is influenced by periodic shortages, freight costs, weather,
and other conditions beyond the control of the Company. The cost of scrap can
fluctuate significantly and product selling prices cannot always be adjusted,
especially in the short-term, to recover the costs of large increases in scrap
prices. The Company has not entered into any long-term contracts for the
purchase or supply of scrap steel and it is, therefore, subject to the price
fluctuation of scrap steel. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's manufacturing processes consume large amounts of energy in
the form of electricity and natural gas. The Company purchases electrical energy
for its Peoria facility from a regulated utility under an
36
<PAGE> 44
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.
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.
37
<PAGE> 45
EMPLOYMENT
The Company currently employs approximately 1,930 people, of whom
approximately 1,120 are represented by the Independent Steel Workers Alliance
("ISWA") at its Peoria, Illinois facilities and approximately 170 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 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 $30 million at September 30, 1997. The Company does not
believe that backlog is a significant factor in its business, and believes that
substantially all of the backlog at September 30, 1997 will be filled within the
current fiscal year.
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 one year period from
the date of the DeSoto acquisition through September 30, 1997, DeSoto had net
sales of $14.0 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 September 30, 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
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<PAGE> 46
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 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 September 30, 1997, the Company has a
$9.4 million accrual representing the estimated costs remaining to be incurred
relating to the remediation efforts, exclusive of capital improvements, which
capital expenditures are not expected to be material. 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 September 30, 1997 the trust fund had balances of $2.4 million, $2.8
million and $3.0 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 September 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
39
<PAGE> 47
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 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 $6.8 million
accrued at September 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 September 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. During December 1997, DeSoto entered into an
agreement to settle its liability with respect to this site for a payment of
approximately $1.6 million. Such amount was within the previously accrued
balance.
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.
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<PAGE> 48
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 September 30, 1997
current estimates of total remaining remediation costs related to this site are
approximately $20 million. In addition to certain amounts (totaling
approximately $1.1 million at September 30, 1997) included in the trust fund
discussed below, DeSoto also has certain credits (totaling $1.0 million at
September 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 September 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 September 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 September 30, 1997 was approximately $4.2 million.
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<PAGE> 49
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.................. 70 Chairman of the Board
J. Walter Tucker, Jr. ............ 72 Vice Chairman of the Board
Robert W. Singer.................. 61 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................... 72 Director
William P. Lyons.................. 56 Director
William Spier..................... 63 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 and his term expires at the Company's annual meeting
in 1999. 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 and his term expires at the Company's annual
meeting in 1999. 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.
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> 50
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
his term expires at the Company's annual meeting in 2000. Dr. Barry 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 his term expires at the Company's annual meeting in 1998. Mr. Bass 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
his term expires at the Company's annual meeting in 1998. Mr. Connor 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 his term expires at the Company's annual meeting in 2000. Mr. Lyons 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.
William Spier has been a director of the Company since September 1996 and
his term expires at the Company's annual meeting in 2000. Mr. Spier 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 his
term expires at the Company's annual meeting in 1999. Mr. Ullman 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.
Each of the above-named directors of the Company serves until the indicated
annual meeting of stockholders of the Company or until his earlier death,
removal or resignation, and all of the executive officers of the Company serve
at the pleasure of the Company's Board of Directors.
43
<PAGE> 51
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. In October 1997, oral arguments
upon remand were heard. The judge has requested additional testimony. The
Company understands that Valhi, Tremont and the other defendants believe this
action is without merit and each intends to defend the action vigorously.
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. Discovery has been completed. A
trial date has yet to be set. The Company understands that Valhi and each of the
other defendants believe the complaint is without merit and each intends to
defend the action vigorously.
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."
44
<PAGE> 52
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and, 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, 1997, 1996 and 1995.
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) 1997 126,923 200,000 -- --
Chairman of the Board 1996 126,923 250,000 125,000 --
and former Chief Executive
Officer 1995 123,077 -- -- --
Robert W. Singer(3) 1997 185,000 100,000(5) 40,000 --(6)
President and 1996 170,000 200,000 -- 7,260
Chief Executive Officer 1995 225,000 62,500 -- 7,425
Harold M. Curdy 1997 150,000 --(5) 10,000 --(6)
Vice President -- Finance 1996 140,000 175,000 25,000 7,260
& Treasurer 1995 132,000 60,000 -- 7,425
Bert E. Downing, Jr. 1997 84,000 30,000(5) -- --(6)
Corporate Controller 1996 80,000 37,000 15,000 4,840
1995 76,000 20,000 -- 4,655
Thomas J. Glaister(4) 1997 171,636 112,500 20,000 --
President -- Keystone Steel & 1996 -- -- -- --
Wire Division 1995 -- -- -- --
</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 upon completion of the DeSoto Acquisition
and a bonus upon completion of the offering of the Senior Notes in August
1997. As of January 20, 1998, no decision has been made as to whether or not
the Company will pay Mr. Simmons a 1997 annual bonus.
(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 $65,000 and $55,000 as salary for
services rendered by Mr. Singer to Valhi during 1997 and 1996, respectively,
for which Keystone received credit under the Intercorporate Services
Agreement.
(4) Thomas J. Glaister was first elected an executive officer of the Company
when he was elected President of the Company's Keystone Steel & Wire
Division on January 13, 1997.
45
<PAGE> 53
(5) 1997 annual bonuses for Messrs. Curdy, Downing, End and Singer have not been
determined as of January 20, 1998. The reported bonuses were paid in August
1997 upon the completion of the offering of the Senior Notes and are in
addition to 1997 annual bonuses.
(6) 1997 contributions by the Company to the Company's 401(k) Plan for the
benefit of Messrs. Curdy, Downing, End and Singer have not been determined
as of January 20, 1998.
The following table sets forth certain information at December 31, 1997 and
for the fiscal year then ended with respect to stock options granted to the
Keystone Named Executive Officers. No stock appreciation rights were granted and
no options have been granted at an option price below fair market value on the
date of the grant.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER % OF TOTAL VALUE AT ASSUMED
OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM($)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED YEAR ($/SHARE) DATE 5% 10%
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Glenn R. Simmons............... -- -- -- -- -- --
Robert W. Singer(1)............ 40,000 33% 8.125 3/3/07 204,391 517,966
Harold M. Curdy(1)............. 10,000 8 8.125 3/3/07 51,098 129,492
Bert E. Downing, Jr............ -- -- -- -- -- --
Thomas J. Glaister(2).......... 20,000 17 9.25 1/13/07 116,346 294,842
</TABLE>
- ---------------
(1) Options were granted on March 3, 1997 and vest 33 1/3%, 66 2/3% and 100% on
the first, second and third anniversary of the date of grant, respectively.
(2) Options were granted on January 13, 1997 and vest 33 1/3%, 66 2/3%, and 100%
on the first, second, and third anniversary of the date of grant,
respectively.
The following table provides information, with respect to the Keystone
Named Executive Officers, concerning the value of unexercised stock options held
as of December 31, 1997. In 1997, no Keystone Named Executive Officer exercised
any stock options or stock appreciation rights.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
DECEMBER 31, 1997(#) AT DECEMBER 31, 1997($)(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Glenn R. Simmons....................... 69,163 83,337 202,067 322,933
Robert W. Singer....................... 10,000 40,000 32,500 155,000
Harold M. Curdy........................ 13,333 26,667 48,538 103,337
Bert E. Downing, Jr.................... 6,200 10,800 21,473 40,152
Thomas J. Glaister..................... -- 20,000 -- 55,000
</TABLE>
- ---------------
(1) The values shown in the table are based on the $12.00 per share closing
price of the common stock on December 31, 1997 as reported by the NYSE
Composite Tape, less the exercise price of the options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except for Mr. Donald Sommer who retired as Vice President of the Company
in 1982 and who was a director and member of the Company's Compensation
Committee until the time of his death in December 1997, 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 1997, no executive officer of the Company
served on the compensation
46
<PAGE> 54
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
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: Robert W. Singer, $27,936, Harold M. Curdy, $48,779; Bert E.
Downing, Jr., $28,960; Thomas J. Glaister, $33,800 and 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 48% 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. While no
transactions of the type described above are planned or proposed with respect to
the Company (except as otherwise set forth herein), 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
47
<PAGE> 55
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 $500,000, $465,000 and $540,000 in 1995,
1996 and 1997, respectively. The Company compensates Tucker & Branham, Inc. for
certain consulting services of Mr. Tucker on an hourly basis as his services are
requested. The fees paid Tucker & Branham, Inc. were $50,000, $79,000 and
$62,000 in 1995, 1996 and 1997, respectively.
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
$150,000, $172,000 and $175,000 in 1995, 1996 and 1997, respectively.
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.
As of September 30, 1997, the Collective Trust directly holds, among other
things, approximately 0.3% of the outstanding common stock of the Company and
0.1% of the outstanding shares of each of Valhi and Tremont common stock,
respectively. The Collective Trust is a master trust formed by Valhi to permit
the collective investment by trusts that maintain the assets of certain
participating employee benefit plans adopted by Valhi and related companies.
Harold C. Simmons is the sole trustee of the Collective Trust and the sole
member of the trust investment committee for the Collective Trust. Mr. Simmons
receives no compensation for serving in such capacities.
With certain exceptions, the trustee of the Collective Trust has exclusive
authority to manage and control the assets of the Collective Trust.
Administrators of the employee benefit plans participating through their
company's master trust in the Collective Trust, however, have the authority to
direct distributions and transfers of plan benefits under such participating
plans. The trust investment committee of the Collective Trust has the authority
to direct the trustee to establish investment funds, transfer assets between
investment funds and appoint investment managers and custodians. Except as
otherwise provided by law, the trustee is not responsible for the investment of
any assets of the Collective Trust that are subject to the management of an
investment manager.
Generally, the trustee cannot (i) invest more than 25% of the Collective
Trust assets in securities of a single entity (although divestiture is not
required if this limit is exceeded due to subsequent changes in the fair value
of investments) or (ii) acquire an equity interest in a company unless the
trustee determines in good faith that no entity that Harold C. Simmons controls
(a "Related Entity") has a material equity interest in such company. Such good
faith is conclusively presumed if no Related Entity holds voting securities of
such company or if the Collective Trust and all Related Entities do not own in
the aggregate five percent of the outstanding voting securities of such company
and do not request or accept representation on such company's board of
directors.
The Company may withdraw all or part of the Plan's investment in the
Collective Trust at the end of any calendar month without penalty.
48
<PAGE> 56
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
As of January 13, 1998, 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)..................... 5,200 -- 0 -- --
Paul M. Bass, Jr.(3)(4)................ 12,500 -- 0 -- --
David E. Connor(3)..................... 6,500 -- 0 -- --
Harold M. Curdy(5)..................... 28,498 -- 0 -- --
Bert E. Downing, Jr.(5)................ 7,594 -- 0 -- --
Thomas J. Glaister(5).................. 7,867 -- -- -- --
William P. Lyons(6).................... 37,127 -- 0 -- --
Glenn R. Simmons(5)(7)................. 110,267 1.2% 0 -- 1.1%
Robert W. Singer(5).................... 45,833 -- 0 -- --
William Spier(6)(8).................... 227,412 2.4 193,537 44.4% 4.3
J. Walter Tucker, Jr................... 153,450 1.7 0 -- 1.6
Richard N. Ullman(3)................... 5,500 -- 0 -- --
Harold C. Simmons(7)(9)(10)............ 4,454,073 47.9 0 -- 45.8
Dimensional Fund Advisors Inc.(11)..... 602,800 6.5 0 -- 6.2
Coatings Group, Inc.(12)............... 184,017 2.0 193,537 44.4 3.9
Vahal Corp.(13)........................ -- -- 145,152 33.3 1.5
Parkway M&A Capital Corporation(14).... 98,174 1.1 96,769 22.2 2.0
All directors and executive officers as
a group (15
persons)(3)(4)(5)(6)(8)(15).......... 679,321 7.2 193,537 44.4 8.8
</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, 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.
(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,
Glaister, Simmons and Singer, for the purchase of 16,667, 7,000, 6,667,
69,167 and 23,333 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 4,732 and 23,345 shares, respectively, pursuant to the
Company's stock option plan, of which 3,732 and 22,395, respectively,
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 3,599,759, 326,050, 250,000, 237,764, and 30,000
shares held by Contran, NL, The Harold Simmons Foundation, Inc. (the
"Foundation"), Valhi, and The Combined Master Retirement Trust (the
"Combined Trust"), respectively. Mr. Simmons' business address is 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240.
49
<PAGE> 57
Contran and NL directly hold approximately 38.7% and 3.5%, respectively, of
the Company's outstanding common stock. Valhi and Tremont are the holders
of approximately 58.3% and 17.7%, respectively, of the outstanding common
stock of NL. Contran holds, directly or indirectly through related
entities, approximately 92.5% and 46.3% 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
(No. 96-306-P) is pending in the Probate Court 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 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. The first trial of this matter ended in a
mistrial. Unless this matter is resolved through mediation or otherwise, a
new trial is expected to begin in March 1998. 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 continue to
defend the action 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
January 21, 1998.
(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 602,800 shares of the
Company's common stock as of January 13, 1998, all of which shares are held
in portfolios of DFA 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 18,433 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.
50
<PAGE> 58
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,
among other things, requires the Company to maintain certain working capital, as
defined therein, of $15 million and tangible net worth, as defined therein, of
$10 million and restricts the ability of the Company to make certain payments,
including dividends. The Revolving Credit Facility defines working capital as
current assets minus current liabilities plus any LIFO inventory reserve,
current pension and OPEB liabilities and the balance of the Revolving Credit
Facility included in current liabilities. The Revolving Credit Facility defines
tangible net worth as stockholders' equity plus any pension and OPEB liabilities
less any pension assets. The Revolving Credit Facility includes a provision for
the issuance of letters of credit in a maximum aggregate amount of $5 million.
Under the terms of the Indenture, the Company's ability to borrow in excess of
$25 million under the Revolving Credit Facility is dependent upon maintenance of
a Consolidated Cash Flow Ratio (as defined) for the most recently completed four
fiscal quarters of at least 2.5 to 1. Available borrowings under the Revolving
Credit Facility were $54.4 million at September 30, 1997. However, under the
terms of the Indenture, borrowings under the Revolving Credit Facility as of
September 30, 1997 would be limited to approximately $51.2 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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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 (except for Permitted Asset
Sales under the Indenture), 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;
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<PAGE> 60
(x) the indictment or threatened indictment of the Company, DeSoto or any
obligor under certain criminal 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 September 30, 1997, the Company 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.
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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 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
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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 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.
For purposes of the Indenture, 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.
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.
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<PAGE> 63
In the event of a Change of Control, there can be no assurance that the
Company will have sufficient funds available, or will be permitted by its
then-existing credit agreements, to repurchase the Notes.
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.
In addition, a Change of Control constitutes an event of default under the
Revolving Credit Facility, which may, under certain circumstances, constitute an
Event of Default under the Indenture. See "- - Events of Default and Remedies."
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.
For purposes of the Indenture, 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.
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
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<PAGE> 64
(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 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.
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<PAGE> 65
In the event of an Asset Sale, there can be no assurance that the Company
will be permitted by its then-existing credit agreements, to repurchase the
Notes.
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 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 September 30, 1997 was approximately $93.5 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
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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 aggregate. This facility
is located on approximately 1,295 acres. At September 30, 1997, the net book
value of the facility's land, land improvements and building improvements was
approximately $13.3 million and the net book value of the other Fixed Assets
located thereon was approximately $68.5 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 September 30, 1997, the net book value of the facility's land, land
improvements and building improvements was approximately $2.1 million and the
net book value of the other Fixed Assets located thereon was approximately $6.5
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
September 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.
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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.
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
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(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 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,
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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, 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.
For purposes of the Indenture, 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.
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.
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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 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
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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) 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
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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.
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
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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 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
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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 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.
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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 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,
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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 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
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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 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
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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 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,
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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 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,
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"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 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.
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"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 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
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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 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).
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"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.
"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.
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"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, 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;
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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).
"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;
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(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 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.
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<PAGE> 88
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
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
81
<PAGE> 89
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 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,
82
<PAGE> 90
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
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.
83
<PAGE> 91
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 , 1998 (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.
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.
84
<PAGE> 92
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 financial statements 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, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing. Reference is made
to said report which includes an explanatory paragraph that describes matters
impacting DeSoto's ability to continue as a going concern.
The financial statements of EWP as of December 31, 1996 and 1995 and for
the years then ended included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
85
<PAGE> 93
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 Nine Month
Periods Ended September 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 Nine
Month Period Ended September 30, 1997 (unaudited)...... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996 and the Nine Month
Periods Ended September 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-32
Consolidated Statements of Operations for the Years Ended
December 31, 1993, 1994
and 1995............................................... F-33
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1993, 1994, and 1995.......... F-34
Consolidated Balance Sheets as of December 31, 1994 and
1995................................................... F-35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995....................... F-36
Notes to Consolidated Financial Statements................ F-37
Quarterly Revenues and Earnings data (1994 versus 1995)... F-51
Consolidated Condensed Statements of Operations for the
Nine Months Ended September 30, 1995 and September 27,
1996 (unaudited)....................................... F-52
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and September 27,
1996 (unaudited)....................................... F-53
Notes to Consolidated Condensed Financial Statements...... F-54
FINANCIAL STATEMENTS OF ENGINEERED WIRE PRODUCTS, INC.
Independent Auditors' Report.............................. F-56
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited)......................... F-57
Statements of Income for the Years Ended December 31, 1995
and 1996 and the Nine Month Periods Ended September 30,
1996 and 1997 (unaudited).............................. F-58
Statements of Stockholders' Equity for the Years Ended
December 31, 1995 and 1996 and the Nine Month Period
Ended September 30, 1997 (unaudited)................... F-59
Statements of Cash Flows for the Years Ended December 31,
1995 and 1996 and the Nine Month Period Ended September
30, 1996 and 1997 (unaudited).......................... F-60
Notes to Financial Statements............................. F-61
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of September 30, 1997............................... P-2
Notes to Unaudited Pro Forma Condensed Consolidated
Balance Sheet as of September 30, 1997................. 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 Nine Months Ended September 30,
1997................................................... P-7
Notes to Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the Nine Months Ended
September 30, 1997..................................... P-8
</TABLE>
F-1
<PAGE> 94
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.
Dallas, Texas
February 28, 1997, except for Note 18 as
to which the date is December 23, 1997
F-2
<PAGE> 95
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ -- $ -- $ 46,261
Notes and accounts receivable, net of allowances of $537,
$469 and $647........................................... 31,363 35,974 38,081
Inventories............................................... 35,631 36,533 39,418
Deferred income taxes..................................... 3,685 16,381 19,722
Prepaid expenses.......................................... 2,026 1,542 915
-------- -------- --------
Total current assets................................ 72,705 90,430 144,397
-------- -------- --------
Property, plant and equipment:
Land, buildings and improvements.......................... 45,715 47,309 42,898
Machinery and equipment................................... 187,577 198,488 195,854
Leasehold improvements.................................... 1,204 1,221 --
Construction in progress.................................. 11,263 15,423 32,266
-------- -------- --------
245,759 262,441 271,018
Less accumulated depreciation............................... 159,323 169,833 174,915
-------- -------- --------
Net property, plant and equipment................... 86,436 92,608 96,103
-------- -------- --------
Other assets:
Restricted investments.................................... 2,410 7,691 7,507
Unrecognized net pension obligation....................... 8,427 -- --
Prepaid pension cost...................................... -- 104,726 109,468
Deferred financing costs.................................. 87 332 3,762
Deferred income taxes..................................... 24,485 2,181 --
Other..................................................... 4,272 4,400 5,157
-------- -------- --------
Total other assets.................................. 39,681 119,330 125,894
-------- -------- --------
$198,822 $302,368 $366,394
======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities of long-term debt.... $ 18,750 $ 34,760 $ 334
Accounts payable.......................................... 26,534 34,419 30,513
Accounts payable to affiliates............................ 39 159 --
Accrued pension cost...................................... 7,170 -- --
Accrued OPEB cost......................................... 7,776 8,368 8,409
Other accrued liabilities................................. 19,297 28,631 37,702
-------- -------- --------
Total current liabilities........................... 79,566 106,337 76,958
-------- -------- --------
Noncurrent liabilities:
Long-term debt............................................ 11,195 17,020 101,143
Accrued pension cost...................................... 39,222 -- --
Accrued OPEB cost......................................... 97,868 100,818 101,611
Negative goodwill......................................... -- 27,057 25,760
Other..................................................... 8,464 16,466 15,866
-------- -------- --------
Total noncurrent liabilities........................ 156,749 161,361 244,380
-------- -------- --------
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 9,296,533 shares issued at
stated value............................................ 6,362 9,920 10,027
Additional paid-in capital................................ 20,013 46,347 47,166
Net pension liabilities adjustment........................ (36,257) -- --
Accumulated deficit....................................... (27,599) (25,085) (15,625)
Treasury stock -- 1,134 shares, at cost................... (12) (12) (12)
-------- -------- --------
Total stockholders' equity (deficit)................ (37,493) 31,170 41,556
-------- -------- --------
$198,822 $302,368 $366,394
======== ======== ========
Commitments and contingencies (Notes 15, 16 and 17).
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 96
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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 $252,821 $277,427
Interest.............................. 2 157 50 47 577
Other, net............................ 16 110 539 290 1,658
-------- -------- -------- -------- --------
364,453 345,924 331,764 253,158 279,662
-------- -------- -------- -------- --------
Costs and expenses:
Cost of goods sold.................... 327,453 312,909 297,149 232,206 247,481
Selling............................... 5,101 4,367 3,855 2,998 3,542
General and administrative............ 20,675 17,185 22,779 14,493 13,110
Overfunded defined benefit pension
credit............................. -- -- -- -- (4,741)
Interest -- notes payable & long-term
debt............................... 2,688 3,385 3,741 2,677 5,119
Interest credit related to excise
tax................................ (3,853) -- -- -- --
-------- -------- -------- -------- --------
352,064 337,846 327,524 252,374 264,511
-------- -------- -------- -------- --------
Income before income taxes......... 12,389 8,078 4,240 784 15,151
Provision for income taxes.............. 4,828 3,191 1,656 319 5,481
-------- -------- -------- -------- --------
Net income......................... 7,561 4,887 2,584 465 9,670
Dividends on preferred stock............ -- -- 70 -- 210
-------- -------- -------- -------- --------
Net income available for common
shares............................. $ 7,561 $ 4,887 $ 2,514 $ 465 $ 9,460
======== ======== ======== ======== ========
Primary net income available for common
shares per common and common
equivalent share...................... $ 1.35 $ .86 $ .38 $ .08 $ 1.01
======== ======== ======== ======== ========
Fully diluted net income available for
common shares per common and common
equivalent share...................... $ 1.35 $ .86 $ .38 $ .08 $ 1.00
======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding:
Primary............................... 5,601 5,654 6,560 5,682 9,386
======== ======== ======== ======== ========
Fully diluted......................... 5,601 5,654 6,560 5,682 9,443
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 97
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
NINE MONTHS ENDED SEPTEMBER 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............... -- -- -- -- -- 9,670 -- 9,670
Issuance of stock........ -- 107 107 819 -- -- -- 926
Preferred dividends
declared............... 210 -- -- -- -- (210) -- (210)
Preferred dividends
paid................... (210) -- -- -- -- -- -- --
------- ----- ------- ------- -------- -------- ----- --------
Balance -- September 30,
1997................... $ 3,500 9,297 $10,027 $47,166 $ -- $(15,625) $ (12) $ 41,556
======= ===== ======= ======= ======== ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 98
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 7,561 $ 4,887 $ 2,584 $ 465 $ 9,670
Depreciation and amortization......... 11,585 11,961 12,425 10,530 9,692
Amortization of deferred financing
costs.............................. 147 147 181 118 337
Deferred income taxes................. 4,175 1,750 (1,249) (2,271) 2,492
Other, net............................ 1,800 858 974 1,075 137
Change in assets and liabilities:
Notes and accounts receivable...... (3,555) 10,379 (2,209) (7,754) (2,320)
Inventories........................ (317) 103 (102) 5,564 (2,885)
Accounts payable................... 4,309 (2,036) (3,873) 1,960 (4,065)
Pensions........................... (11,125) (10,042) (5,991) (4,871) (4,742)
Accrued excise tax and related
interest......................... (5,054) (1,033) (1,033) -- --
Other, net......................... 3,234 (4,416) (1,667) 961 6,434
-------- -------- -------- -------- --------
Net cash provided by operating
activities.................. 12,760 12,558 40 5,777 14,750
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures.................. (12,742) (18,208) (18,992) (10,423) (17,400)
Acquisition costs..................... -- -- (1,008) (935) --
Collection of notes receivable........ 555 1,711 168 125 166
Proceeds from disposition of property
and equipment...................... 17 106 29 4 2,708
-------- -------- -------- -------- --------
Net cash used by investing
activities.................. (12,170) (16,391) (19,803) (11,229) (14,526)
-------- -------- -------- -------- --------
</TABLE>
F-6
<PAGE> 99
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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 $ (458) $(31,095)
Other notes payable and long-term debt:
Additions............................ 208 81 9,495 9,461 100,294
Principal payments................... (3,964) (4,220) (4,194) (3,336) (19,502)
Preferred stock dividend payments....... -- -- (1,670) -- (210)
Deferred financing costs paid........... (70) (60) (425) (215) (3,767)
Common stock issued, net................ 616 2 23 -- 317
------- ------- -------- -------- --------
Net cash provided (used) by
financing activities.......... (590) 3,833 19,763 5,452 46,037
------- ------- -------- -------- --------
Net change in cash and cash equivalents... -- -- -- -- 46,261
Cash and cash equivalents, beginning of
period.................................. -- -- -- -- --
------- ------- -------- -------- --------
Cash and cash equivalents, end of
period.................................. $ -- $ -- $ -- $ -- $ 46,261
======= ======= ======== ======== ========
Supplemental disclosures:
Cash paid for:
Interest, net of amount
capitalized........................ $ 2,831 $ 3,673 $ 4,058 $ 3,031 $ 4,037
Income taxes......................... 1,721 1,560 2,210 991 2,700
Common stock contributed to employee
benefit plan......................... $ 622 $ 597 $ 522 $ 522 $ 578
Business combination:
Net assets consolidated:
Noncash assets....................... $ -- $ -- $ 99,663 $101,981 $ --
Liabilities.......................... -- -- (37,109) (60,906) --
Negative goodwill.................... -- -- (27,133) (5,727) --
------- ------- -------- -------- --------
-- -- 35,421 35,348
Redeemable preferred stock issued,
including accumulated dividends...... -- -- (5,100) (5,100) --
Common stock issued..................... -- -- (29,313) (29,313) --
------- ------- -------- -------- --------
Cash paid............................... $ -- $ -- $ 1,008 $ 935 $ --
======= ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 100
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 September 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
September 30, 1997 and for the interim periods ended September 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 $10,530,000 and
$10,972,000 during the interim periods ended September 30, 1996 and 1997,
respectively.
Investment in joint venture. Prior to December 23, 1997, the Company had a
20% interest in a joint venture and accounted 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
September 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. On December 23, 1997, Keystone acquired the 80%
ownership interest of the joint venture not already owned by the Company.
Subsequent to this acquisition, the former
F-8
<PAGE> 101
joint venture became a wholly-owned subsidiary of Keystone and, as such, is
consolidated with Keystone. See also Notes 13 and 18.
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 $.6 million and $.7 million during the interim
periods ended September 30, 1996 and 1997, respectively.
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 years
at September 30, 1997 and is stated net of accumulated amortization of
approximately $76,000 and $1,356,000 at December 31, 1996 and September 30,
1997, respectively. Amortization of negative goodwill amounted to $76,000 and
$1,280,000 in the year ended December 31, 1996 and the interim period ended
September 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
September 30, 1997.
Legal Fees. The legal costs with respect to loss contingencies are expensed
as incurred.
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.
F-9
<PAGE> 102
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. Due to the immateriality of the fair value of the
options and warrants exchanged in connection with the Acquisition (approximately
$1.2 million), Keystone did not include such value in the purchase price
allocation.
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
September 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,
---------------- NINE MONTHS ENDED
1995 1996 SEPTEMBER 30, 1996
------ ------ ------------------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues and other income........................ $364.0 $343.4 $264.8
Net income....................................... $ 9.2 $ 3.3 $ .3
Net income available to common stockholders...... $ 8.7 $ 2.9 $ .1
Net income (loss) per Keystone common share...... $ .93 $ .31 $ (.01)
</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
F-10
<PAGE> 103
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 nine months of 1996, assuming the Acquisition and pension plan
merger occurred January 1, 1996, approximates $2.8 million, as compared to
historical pension expense of $4.8 million.
NOTE 3 -- INVENTORIES
Inventories are stated at the lower of cost or market. The last-in,
first-out ("LIFO") method is used to determine the cost of approximately three
fourths of the inventories held at December 31, 1995 and 1996, and September 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,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials:
Steel and wire products........................... $12,669 $12,548 $15,078
Household cleaning products....................... -- 526 461
------- ------- -------
12,669 13,074 15,539
------- ------- -------
Work in process --
Steel and wire products........................... 13,825 12,824 12,323
------- ------- -------
Finished products:
Steel and wire products........................... 10,258 9,954 10,364
Household cleaning products....................... -- 96 286
------- ------- -------
10,258 10,050 10,650
------- ------- -------
Supplies --
Steel and wire products........................... 13,552 13,612 13,934
------- ------- -------
50,304 49,560 52,446
------- ------- -------
Less LIFO reserve:
Steel and wire products........................... 14,673 12,996 12,997
Household cleaning products....................... -- 31 31
------- ------- -------
14,673 13,027 13,028
------- ------- -------
$35,631 $36,533 $39,418
======= ======= =======
</TABLE>
NOTE 4 -- NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
9 5/8% Senior Secured Notes......................... $ -- $ -- $100,000
Commercial credit agreements:
Revolving credit facility......................... 14,561 31,095 --
Term loan......................................... 13,050 19,166 --
Urban and Community Development Assistance Grants,
interest at 8%, due in semi-annual installments
through 2003...................................... 1,444 1,267 1,075
Other............................................... 890 252 402
------- ------- --------
29,945 51,780 101,477
Less current maturities........................... 18,750 34,760 334
------- ------- --------
$11,195 $17,020 $101,143
======= ======= ========
</TABLE>
F-11
<PAGE> 104
On August 7, 1997, the Company issued $100 million principal amount of
9 5/8% Senior Secured Notes (the "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
outstanding borrowings under the Company's revolving credit facility.
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, under the terms of the Indenture, the
Company's ability to borrow in excess of $25 million under the Company's $55
million revolving credit facility is dependent upon maintenance of a
Consolidated Cash Flow Ratio (as defined) for the most recently completed four
fiscal quarters of at least 2.5 to 1. The Indenture also limits the ability of
the Company to pay dividends or make other restricted payments, as defined.
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 the facility expires 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
September 30, 1997. The amount of available borrowings is based on
formula-determined amounts of trade receivables and inventories, less the amount
of outstanding letters of credit (approximately $.6 million at September 30,
1997). At September 30, 1997, the additional available borrowings under this
credit facility were $54.4 million. However, under the terms of the Indenture,
borrowings under the revolving credit facility at September 30, 1997 would be
limited to approximately $51.2 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.
The Company's revolving credit facility contains restrictive covenants,
including certain minimum working capital and net worth requirements and a
prohibition against the payment of dividends on Keystone common stock without
lender consent. The Company's revolving credit facility reprices 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 September 30, 1997, total collateralized obligations, including deferred
pension contributions (see Note 7), amounted to $106.0 million.
F-12
<PAGE> 105
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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $ 274 $ 5,303
U.S. state income taxes, net.............. 557 171 11 (119) 332
Amortization of negative goodwill......... -- -- -- -- (448)
Other, net................................ (65) 193 161 164 294
------- ------- ------- ------- -------
Provision for income taxes charged to
results of operations................ 4,828 3,191 1,656 319 5,481
Stockholders' equity -- pension
component............................... 978 (1,580) 2,272 2,272 --
------- ------- ------- ------- -------
Comprehensive provision for income
taxes................................ $ 5,806 $ 1,611 $ 3,928 $ 2,591 $ 5,481
======= ======= ======= ======= =======
Comprehensive provision for income taxes:
Currently payable:
U.S. federal......................... $ 943 $ 3,095 $ 5,428 $ 3,921 $ 5,185
U.S. state........................... 294 254 788 468 668
Benefit of loss carry forwards....... (2,247) (1,271) (23) -- --
Alternative minimum tax liabilities
(credits)....................... 1,663 (637) (3,288) (1,797) (2,864)
------- ------- ------- ------- -------
Net currently payable.............. 653 1,441 2,905 2,592 2,989
Deferred income taxes, net.............. 5,153 170 1,023 (1) 2,492
------- ------- ------- ------- -------
$ 5,806 $ 1,611 $ 3,928 $ 2,591 $ 5,481
======= ======= ======= ======= =======
</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 September 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 September 30, 1997, the Company had
approximately $1.0 million of alternative minimum tax credit carry forwards
which have no expiration date.
F-13
<PAGE> 106
The components of the net deferred tax asset are summarized below.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- ----------------------
1995 1996 1997
---------------------- ---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- ----------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tax effect of temporary
differences relating to:
Inventories................. $ 1,866 $ -- $ 2,202 $ -- $ 2,109 $ --
Property and equipment...... -- (8,189) -- (5,792) -- (3,932)
Accrued pension cost........ 10,603 -- -- -- -- --
Prepaid pension............. -- -- -- (40,843) -- (42,693)
Accrued OPEB cost........... 41,202 -- 42,583 -- 42,908 --
Accrued liabilities and
other deductible
differences.............. 7,325 -- 14,317 -- 16,165 --
Other taxable differences... -- (1,183) -- (6,228) -- (8,545)
Net operating loss carry
forwards................. -- -- 9,109 -- 9,853 --
Alternative minimum tax
credit carryforwards..... 6,546 -- 3,214 -- 992 --
Valuation allowance........... (30,000) -- -- -- -- --
-------- ------- -------- -------- -------- --------
Gross deferred tax assets
(liabilities)............ 37,542 (9,372) 71,425 (52,863) 72,027 (55,170)
Reclassification, principally
netting by tax
jurisdiction................ (9,372) 9,372 (52,863) 52,863 (55,170) 55,170
-------- ------- -------- -------- -------- --------
Net deferred tax asset
(liability).............. 28,170 -- 18,562 -- 16,857 --
Less current deferred tax
asset, net of prorata
allocation of valuation
allowance in 1995........... 3,685 -- 16,381 -- 19,722 --
-------- ------- -------- -------- -------- --------
Noncurrent deferred tax
asset (liability)........ $ 24,485 $ -- $ 2,181 $ -- $ (2,865) $ --
======== ======= ======== ======== ======== ========
</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 September 30, 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. In October 1997, DeSoto
settled the matter with the IRS for a payment of approximately $2.6 million,
including interest of approximately $1.1 million. Such payment was within
previously accrued amounts.
NOTE 6 -- STOCK OPTIONS, WARRANTS AND STOCK APPRECIATION RIGHTS PLAN
In 1997, the Company adopted its 1997 Long-Term Incentive Plan (the "1997
Plan"). Under the 1997 Plan, the Company may make awards that include, but need
not be limited to, one or more of the following types: stock options, SARs,
restricted stock, performance grants and any other type of award deemed
F-14
<PAGE> 107
consistent with the purposes of the plan. Subject to certain adjustments, an
aggregate of not more than 300,000 shares of the Company's common stock may be
issued under the 1997 Plan. Stock options granted under the 1997 Plan may
include options that qualify as incentive stock options as well as options which
are not so qualified. Incentive stock options are granted at a price not less
than 100%, or in certain instances, 110% of the fair market value of such stock
on the date of the grant. Stock options granted under the 1997 Plan may be
exercised over a period of ten, or in certain instances, five years. The vesting
period, exercise price, length of period during which awards can be exercised,
and restriction periods of all awards are determined by the Incentive
Compensation Committee of the Board of Directors.
The Company's 1992 Option Plan permits the granting of stock options, SARs
and restricted stock to key employees of the Company or its parent or
subsidiaries for up to 300,000 shares of the Company's common stock, subject to
certain adjustments. The 1992 Option Plan provides for the grant of options that
qualify as incentive stock options and for options which are not so qualified.
Incentive stock options are granted at a price not less than 100% of the fair
market value of such stock on the date of grant. The exercise price of all
options and SARs, the length of period during which the options or SARs may be
exercised, and the length of the restriction period for restricted stock awards
are determined by the Incentive Compensation Committee of the Board of
Directors. During 1997, the Company granted all remaining options available
under the 1992 Plan.
The Keystone Consolidated Industries, Inc. 1992 Non-Employee Director Stock
Option Plan (the "Director Plan") provides that each non-employee director of
the Company will annually be automatically granted an option to purchase 1,000
shares of the Company's common stock. Options are granted at a price equal to
the fair market value of such stock on the date of the grant, vest one year from
the date of the grant and expire five years from the date of the grant. Up to
50,000 shares of the Company's common stock may be issued pursuant to the
Director Plan. During 1997, the Director Plan terminated.
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.
F-15
<PAGE> 108
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.................................... 127,000 8.13-9.25 1,056,125
Exercised.................................. (32,635) 9.71 (316,951)
Canceled................................... (5,000) 10.75 (53,750)
------- ------------ ----------
Outstanding at September 30, 1997.......... 494,361 $ 5.86-13.56 $4,325,058
======= ============ ==========
</TABLE>
The following table summarizes weighted average information about fixed
stock options outstanding at September 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-$8.75 371,170 7.8 years $ 8.05 76,070 3.2 years $ 7.66
$9.21-$13.56 123,191 3.3 $10.86 101,231 2.0 $11.19
------- -------
494,361 6.6 $ 8.75 177,301 2.5 $ 9.68
======= =======
</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 1,000
shares, respectively, of restricted stock were forfeited. At December 31, 1996,
all remaining shares had been issued.
At September 30, 1997, options to purchase 185,401 shares were exercisable
(all at prices lower than the September 30, 1997 quoted market price of $14.00
per share) and options to purchase an additional 60,000 shares will become
exercisable in 1997. At September 30, 1997, an aggregate of 238,000 shares were
available for future grants under the 1997 Option 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 September 30, 1997, none of the warrants to purchase Keystone
common stock had been exercised.
F-16
<PAGE> 109
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options granted subsequent to 1994 in accordance with
the fair value based accounting method of SFAS No. 123. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for options granted in
1995, 1996 and the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
------- -------- -------------
<S> <C> <C> <C>
Risk-free interest rate............................ 6.27% 6.65% 6.84%
Dividend yield..................................... -- -- --
Volatility factor.................................. .463 .442 .443
Weighted average expected life..................... 5 years 10 years 10 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the stock price volatility.
Because Keystone's options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in the Company's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of the granted options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income available for common shares and primary net income
available for common shares per common and common equivalent share were as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ---------------
1995 1996 1997
-------- -------- ---------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income available for common shares -- as
reported........................................... $4,887 $2,514 $9,460
Net income available for common shares -- pro
forma.............................................. $4,870 $2,448 $9,218
Primary net income available for common shares per
common and common equivalent share -- as
reported........................................... $ .86 $ .38 $ 1.01
Primary net income available for common shares per
common and common equivalent share -- pro forma.... $ .86 $ .37 $ .98
Weighted average fair value per share of options
granted during the year............................ $ 6.55 $ 5.41 $ 5.49
</TABLE>
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 September 30, 1997,
approximately 94% 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 September
30, 1997 were
F-17
<PAGE> 110
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.
As of September 30, 1997, the Collective Trust directly holds, among other
things, approximately 0.3% of the outstanding common stock of the Company and
0.1% of the outstanding shares of each of Valhi and Tremont common stock,
respectively. The Collective Trust is a master trust formed by Valhi to permit
the collective investment by trusts that maintain the assets of certain
participating employee benefit plans adopted by Valhi and related companies.
Harold C. Simmons is the sole trustee of the Collective Trust and the sole
member of the trust investment committee for the Collective Trust. Mr. Simmons
receives no compensation for serving in such capacities.
With certain exceptions, the trustee of the Collective Trust has exclusive
authority to manage and control the assets of the Collective Trust.
Administrators of the employee benefit plans participating through their
company's master trust in the Collective Trust, however, have the authority to
direct distributions and transfers of plan benefits under such participating
plans. The trust investment committee of the Collective Trust has the authority
to direct the trustee to establish investment funds, transfer assets between
investment funds and appoint investment managers and custodians. Except as
otherwise provided by law, the trustee is not responsible for the investment of
any assets of the Collective Trust that are subject to the management of an
investment manager.
Generally, the trustee cannot (i) invest more that 25% of the Collective
Trust assets in securities of a single entity (although divestiture is not
required if this limit is exceeded due to subsequent changes in the fair value
of investments) or (ii) acquire an equity interest in a company unless the
trustee determines in good faith that no entity that Harold C. Simmons controls
(a "Related Entity") has a material equity interest in such company. Such good
faith is conclusively presumed if no Related Entity holds voting securities of
such company or if the Collective Trust and all Related Entities do not own in
the aggregate five percent of the outstanding voting securities of such company
and do not request or accept representation on such company's board of
directors.
The Company may withdraw all or part of the Plan's investment in the
Collective Trust at the end of any calender month without penalty.
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 September 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 September 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.
F-18
<PAGE> 111
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.
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.
F-19
<PAGE> 112
NOTE 8 -- OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Salary, wages, vacations and other employee
expenses........................................ $ 9,342 $11,085 $10,479
Environmental...................................... 4,111 5,354 7,660
Accrued excise tax and related interest............ 1,033 -- --
Disposition of former facilities................... 301 3,518 2,463
Self insurance..................................... 1,247 1,585 6,710
Interest........................................... 317 452 1,589
Legal and professional............................. 310 1,542 1,290
Other.............................................. 2,636 5,095 7,511
------- ------- -------
$19,297 $28,631 $37,702
======= ======= =======
Noncurrent:
Environmental...................................... $ 6,677 $12,787 $ 9,693
Deferred gain...................................... -- 2,383 2,086
Other.............................................. 1,787 1,296 4,087
------- ------- -------
$ 8,464 $16,466 $15,866
======= ======= =======
</TABLE>
The deferred gain relates to the sale of certain DeSoto properties to
DeSoto's pension plan. See Note 16.
NOTE 9 -- POST RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company currently provides, in addition to pension benefits, medical
and life insurance benefits for certain retired employees of currently owned
businesses as well as for certain retirees of businesses which have been sold or
discontinued. Certain retirees are required to contribute to the cost of their
benefits. Under plans currently in effect, most active employees would be
entitled to receive OPEB upon retirement. OPEB expense for the years ended
December 31, 1994, 1995 and 1996 was composed of the following:
<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>
F-20
<PAGE> 113
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. Keystone must redeem the
preferred stock at a cash redemption price equal to the Liquidation Preference,
to the maximum extent legally permissible (i) on July 1, 2000; (ii) 30 days
after a change of control of Keystone; or (iii) if, within ten days after the
exercise of any warrants to purchase Keystone Common Stock by any of the
warrantholders and preferred stockholders, such exercising warrantholders and
preferred stockholders holding at least fifty percent (50%) of the outstanding
shares of Keystone preferred stock request redemption at fair market value in
writing, provided, however, that Keystone will be required to redeem Keystone
preferred stock only to the extent that redemption payments are equal to the
aggregate cash proceeds to Keystone upon the exercise of such warrants.
Dividends are payable to holders of the preferred stock quarterly, at the rate
of 8% of the Liquidation Preference. If such dividends are in arrears for four
quarterly periods, dividends for any subsequent quarterly periods are payable to
holders of the preferred stock at the rate of 10% of the Liquidation Preference.
At September 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.
F-21
<PAGE> 114
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 $53,000 and $46,000 in the interim periods ended September 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 $349,000 and $405,000 in the interim periods ended
September 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 $120,000 and $131,000 in the interim periods
ended September 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-22
<PAGE> 115
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
======= ======== ======= =======
Nine months ended September 30, 1997:
Net sales............................. $89,149 $103,232 $85,046
Gross profit.......................... 8,358 13,431 8,157
Net income............................ $ 1,624 $ 4,347 $ 3,699
======= ======== =======
Net income available for common
shares............................. $ 1,554 $ 4,277 $ 3,629
======= ======== =======
Primary net income available for
common shares per common and common
equivalent share................... $ .17 $ .46 $ .38
======= ======== =======
</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 gave
the Company the exclusive option to acquire the remaining 80% interest in EWP at
fair market value for a period of five years. In December 1997, Keystone
purchased the 80% of EWP not already owned by the Company. Prior to December 23,
1997, the Company accounted 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
F-23
<PAGE> 116
amounted to $508,000 at December 31, 1996. Inventory purchased from the Company
and held by EWP at December 31, 1995 and 1996 was insignificant. See also Note
18.
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 prior to December 23, 1997. On that date,
Keystone acquired the 80% of EWP not already owned by the Company, resulting
in EWP becoming a wholly-owned subsidiary of Keystone. See also Note 18.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $252.8 $265.9
Household cleaning products............. -- -- 2.5 -- 11.5
------ ------ ------ ------ ------
$364.4 $345.7 $331.2 $252.8 $277.4
====== ====== ====== ====== ======
Operating income:
Steel and wire products................. $ 12.9 $ 11.3 $ 10.9 $ 5.5 $ 20.1
Household cleaning products............. -- -- (.2) -- .5
------ ------ ------ ------ ------
12.9 11.3 10.7 5.5 20.6
General expenses and other, net
(credit)................................ 1.7 (.2) 2.8 2.0 .3
Interest expense (credit)................. (1.2) 3.4 3.7 2.7 5.1
------ ------ ------ ------ ------
Income before income taxes........... $ 12.4 $ 8.1 $ 4.2 $ .8 $ 15.2
====== ====== ====== ====== ======
</TABLE>
F-24
<PAGE> 117
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 September 30, 1996 and 1997 related to the Company's steel and
wire products segment.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Identifiable assets:
Business segments:
Steel and wire products......................... $157.3 $166.4 $179.5
Household cleaning products..................... -- 2.6 3.3
------ ------ ------
157.3 169.0 182.8
Corporate.......................................... 41.5 133.4 183.6
------ ------ ------
$198.8 $302.4 $366.4
====== ====== ======
</TABLE>
Corporate assets consist principally of cash and cash equivalents 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 September 30, 1997, the Company's financial statements reflected total
accrued liabilities of $17.4 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 September 30, 1997, the Company has a $9.4 million
accrual representing the estimated costs remaining to be incurred relating to
the remediation efforts, exclusive
F-25
<PAGE> 118
of capital improvements which are not expected to be material. 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 September 30, 1997, the trust fund had balances of $2.4
million, $2.8 million and $3.0 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
September 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-26
<PAGE> 119
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 $6.8
million accrued at September 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 September 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. During December 1997, DeSoto entered into an
agreement to settle its liability with respect to this site for a payment of
approximately $1.6 million. Such amount was within the previously accrued
balance.
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
September 30, 1997) included in the trust fund discussed below, DeSoto also has
certain credits (totaling $1.0 million at September 30, 1997) due to it under
F-27
<PAGE> 120
the partial consent decree. These credits can be used by DeSoto (with certain
limitations) to fund its future liabilities under the partial consent decree.
In 1995, DeSoto was notified by the Texas Natural Resource Conservation
Commission ("TNRCC") that there were certain deficiencies in prior DeSoto
reports to TNRCC relative to one of DeSoto's non-operating facilities located in
Gainesville, Texas. In response to the TNRCC letter, DeSoto engaged an
environmental consulting firm to report on additional potential remediation
costs. Additional remediation costs are presently estimated to be between $1
million to $5 million.
In December 1994, DeSoto was named in a complaint filed in the United
States District Court for the Northern District of Indiana. The complaint
alleges DeSoto and numerous other parties are jointly and severally responsible
under the Comprehensive Environmental Response, Compensation and Liability Act
for the cleanup and future cleanup, plus costs and legal fees at the Ninth
Avenue Site in Gary, Indiana. The complaint also alleges DeSoto is responsible
for its allocable share of such expenses and costs. 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 September 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
September 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
September 30, 1997 was approximately $4.2 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-28
<PAGE> 121
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-29
<PAGE> 122
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. The vendor's plant was completed during the third
quarter of 1997. No material purchases were made pursuant to the Supply
Agreement during the first nine months of 1997.
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
total 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 September 30, 1997 approximately 94% 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 September 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 September 30, 1997, the stock's
high and low sales prices were $62.06 and $42.00 per share, respectively, and
was $54.00 at September 30, 1997.
NOTE 18 -- SUBSEQUENT EVENT
On December 23, 1997, Keystone acquired the 80% of EWP not already owned by
the Company. Previously, EWP operated as a joint venture between Price Brothers
Company ("PBC") of Dayton, Ohio and
F-30
<PAGE> 123
Keystone with Keystone owning 20% of the joint venture. EWP manufactures
fabricated wire products which are used primarily in the concrete pipe and road
construction business.
Keystone paid $11.2 million in cash to acquire PBC's 80% interest in the
joint venture using available funds on hand. The Company allocated $700,000 of
the purchase price to a two year non-compete agreement with PBC. For financial
reporting purposes, Keystone will account for the step acquisition of the 80% of
EWP not previously owned by Keystone by the purchase method.
The following pro forma balance sheet information has been prepared
assuming the EWP acquisition was completed on September 30, 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
(UNAUDITED)
<S> <C>
Cash and cash equivalents................................... $ 35,243
Other current assets........................................ 108,559
Property, plant and equipment............................... 107,318
Other assets................................................ 125,348
--------
$376,468
========
Current liabilities......................................... $ 83,389
Long-term debt.............................................. 103,248
Other long-term liabilities................................. 144,775
Redeemable preferred stock.................................. 3,500
Stockholders' equity........................................ 41,556
--------
$376,468
========
</TABLE>
F-31
<PAGE> 124
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-32
<PAGE> 125
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-33
<PAGE> 126
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-34
<PAGE> 127
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-35
<PAGE> 128
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-36
<PAGE> 129
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-37
<PAGE> 130
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-38
<PAGE> 131
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-39
<PAGE> 132
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-40
<PAGE> 133
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-41
<PAGE> 134
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-42
<PAGE> 135
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-43
<PAGE> 136
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-44
<PAGE> 137
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-45
<PAGE> 138
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-46
<PAGE> 139
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-47
<PAGE> 140
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-48
<PAGE> 141
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-49
<PAGE> 142
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-50
<PAGE> 143
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-51
<PAGE> 144
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 27,
1995 1996
------------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
NET REVENUES................................................ $ 46,373 $13,657
-------- -------
COSTS AND EXPENSES..........................................
Cost of sales............................................. 48,040 12,005
Selling, administrative and general....................... 8,550 5,374
Retirement security program............................... (5,114) (5,184)
Nonrecurring expense...................................... 5,689 1,562
-------- -------
TOTAL OPERATING COSTS AND EXPENSES.......................... 57,165 13,757
-------- -------
LOSS FROM OPERATIONS........................................ (10,792) (100)
OTHER CHARGES AND CREDITS:
Interest expense.......................................... 546 312
Nonoperating expense (income)............................. (6,360) 1,183
-------- -------
Loss before Income Taxes.................................... (4,978) (1,595)
Benefit for Income Taxes.................................... (707) (601)
-------- -------
NET LOSS.................................................... (4,271) (994)
Dividends on Preferred Stock................................ (256) (403)
-------- -------
Net Loss Available for Common Shares........................ $ (4,527) $(1,397)
======== =======
NET LOSS PER COMMON SHARE................................... $ (.97) $ (.30)
======== =======
Average Common Shares Outstanding........................... 4,676 4,684
======== =======
Dividends Declared per Common Share......................... $ -- $ --
======== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-52
<PAGE> 145
DESOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 27,
1995 1996
------------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(4,271) $ (994)
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
Depreciation and amortization............................. 1,242 237
Pension income............................................ (5,670) (5,696)
Deferred income taxes..................................... (706) (586)
Amortization of deferred gain............................. (297) (297)
Other non-cash items...................................... (48) 45
------- -------
Net non-cash items........................................ (2,836) (6,655)
Changes in assets and liabilities resulting from operating
activities:
Net decrease in trade accounts and notes receivable....... 3,125 2,201
Net decrease in inventories............................... 3,418 505
Net decrease in other current assets...................... 177 101
Net decrease in other non-current assets.................. 203 1,774
Net increase (decrease) in accounts payable............... 453 (2,371)
Net increase in other liabilities......................... 1,284 3,198
------- -------
Net cash flows from (used by) operating activities.......... 1,553 (1,247)
------- -------
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
Additions to property, plant and equipment................ (245) --
------- -------
Net cash flows from investing activities.................... 5,560 1,210
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment under Revolving Credit Agreement.................... (8,381) --
------- -------
Net decrease in cash and cash equivalents................... (1,268) (37)
Cash and cash equivalents at beginning of period............ 1,702 51
------- -------
Cash and cash equivalents at end of period.................. $ 434 $ 14
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-53
<PAGE> 146
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-54
<PAGE> 147
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-55
<PAGE> 148
INDEPENDENT AUDITORS' REPORT
Board of Directors
Engineered Wire Products, Inc.:
We have audited the accompanying balance sheets of Engineered Wire
Products, Inc. as of December 31, 1995 and 1996, and the related statements of
income, stockholders' equity and cash flows for the years then ended. 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, such financial statements present fairly, in all material
respects, the financial position of Engineered Wire Products, Inc. at December
31, 1995 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
February 28, 1997, (December 23, 1997 as to Note A)
Dayton, Ohio
F-56
<PAGE> 149
ENGINEERED WIRE PRODUCTS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash..................................................... $ 290 $ 24 $ 282
Receivables -- trade, less allowance for doubtful
accounts of $23, $21 and $39 (unaudited).............. 2,245 2,903 3,962
Inventories (Note G):
Finished products..................................... 2,720 3,728 3,149
Raw materials......................................... 1,223 1,298 3,348
Deferred income taxes (Note H)........................... 84 96 105
Prepaid expenses......................................... -- 5 4
------- ------- -------
Total current assets............................. 6,562 8,054 10,850
Property, Plant and Equipment -- Net (Note C).............. 8,995 8,680 8,232
Other Assets............................................... 50 91 92
------- ------- -------
Total............................................ $15,607 $16,825 $19,174
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable (Note D)................................... $ 1,453 $ 2,095 $ 2,507
Accounts payable, including bank overdraft of $114 in
1996 (Note G)......................................... 818 436 1,853
Due to majority shareholder (Note H)..................... 220 532 477
Accrued salaries, wages and amounts withheld............. 314 361 439
Other accrued expenses (Note F).......................... 375 445 446
Current portion of long-term debt (Note D)............... 524 1,180 973
------- ------- -------
Total current liabilities........................ 3,704 5,049 6,695
------- ------- -------
Long-Term Debt (Note D).................................... 4,131 2,954 2,105
------- ------- -------
Deferred Income Taxes (Note H)............................. 466 418 348
------- ------- -------
Stockholders' Equity:
Common stock -- no par value, 100 shares authorized,
issued and outstanding................................ 5,302 5,302 5,302
Additional paid in capital (Note A)...................... 1,301 1,301 1,301
Pension liability adjustment............................. (30) (51) (51)
Retained earnings........................................ 733 1,852 3,474
------- ------- -------
Total stockholders' equity....................... 7,306 8,404 10,026
------- ------- -------
Total............................................ $15,607 $16,825 $19,174
======= ======= =======
</TABLE>
See notes to financial statements.
F-57
<PAGE> 150
ENGINEERED WIRE PRODUCTS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------------
1995 1996 1996 1997
--------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Net sales................................. $ 20,089 $ 24,539 $ 17,998 $ 24,706
Other (Note D)............................ 36 143 117 167
--------- ---------- --------- ----------
20,125 24,682 18,115 24,873
--------- ---------- --------- ----------
Costs and Expenses:
Cost of sales............................. 16,914 19,632 14,238 19,763
Selling and administrative................ 1,356 1,700 1,354 1,381
Depreciation.............................. 486 724 549 658
Interest.................................. 383 713 540 516
--------- ---------- --------- ----------
19,139 22,769 16,681 22,318
--------- ---------- --------- ----------
Income before taxes......................... 986 1,913 1,434 2,555
Income taxes (Note H)....................... 359 794 518 933
--------- ---------- --------- ----------
Net income.................................. $ 627 $ 1,119 $ 916 $ 1,622
========= ========== ========= ==========
Income Per Common Share..................... $6,269.97 $11,185.56 $9,160.00 $16,220.00
========= ========== ========= ==========
Weighted average common shares
outstanding............................... 100 100 100 100
========= ========== ========= ==========
</TABLE>
See notes to financial statements.
F-58
<PAGE> 151
ENGINEERED WIRE PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL PENSION
--------------- PAID-IN LIABILITY RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS
------ ------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1994................... 100 $5,302 $ 400 $ -- $ 106
Net income................................... -- -- -- -- 627
Pension liability adjustment (Note F)........ -- -- -- (30) --
Additional capital contribution (Note A)..... -- -- 901 -- --
--- ------ ------ ---- ------
Balance -- December 31, 1995................... 100 5,302 1,301 (30) 733
Net income................................... -- -- -- -- 1,119
Pension liability adjustment (Note F)........ -- -- -- (21) --
--- ------ ------ ---- ------
Balance -- December 31, 1996................... 100 5,302 1,301 (51) 1,852
Net income (unaudited)....................... -- -- -- -- 1,622
--- ------ ------ ---- ------
Balance -- September 30, 1997 (unaudited)...... 100 $5,302 $1,301 $(51) $3,474
=== ====== ====== ==== ======
</TABLE>
See notes to financial statements.
F-59
<PAGE> 152
ENGINEERED WIRE PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- -----------------
1995 1996 1996 1997
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 627 $ 1,119 $ 916 $ 1,622
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation......................................... 486 724 549 658
Deferred taxes....................................... (136) (48) (104) (79)
Foreign exchange (gain) loss......................... 27 (147) (117) (167)
Loss on sale of fixed assets......................... -- 4 4 22
Changes in assets and liabilities:
Receivables....................................... 107 (657) (2,555) (1,060)
Inventories....................................... (2,012) (1,083) (561) (1,472)
Prepaid expenses.................................. -- (5) (5) 2
Accounts payable.................................. 523 (382) 219 1,416
Accrued expenses.................................. 362 42 166 78
Due to majority shareholder....................... 202 311 158 (54)
------- ------- ------- -------
Net cash (used in) provided by operating
activities................................. 186 (122) (1,330) 966
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions................................... (4,592) (418) (323) (232)
Proceeds from sale of fixed assets................... -- 5 6 --
------- ------- ------- -------
Net cash used in investing activities........ (4,592) (413) (317) (232)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in notes payable.......................... 1,453 642 1,887 412
Proceeds from long-term debt......................... 2,332 -- -- --
Payments on borrowings............................... -- (373) (231) (888)
Capital contribution................................. 901 -- -- --
------- ------- ------- -------
Net cash provided by financing activities.... 4,686 269 1,656 (476)
------- ------- ------- -------
INCREASE (DECREASE) IN CASH............................ 280 (266) 9 258
CASH:
Beginning of period.................................. 10 290 290 24
------- ------- ------- -------
End of period........................................ $ 290 $ 24 $ 299 $ 282
======= ======= ======= =======
NONCASH TRANSACTIONS:
Equipment acquisition................................ $ 2,295 $ -- $ -- $ --
======= ======= ======= =======
Minimum pension liability adjustment................. $ 76 $ 74 $ -- $ --
======= ======= ======= =======
</TABLE>
See notes to financial statements.
F-60
<PAGE> 153
ENGINEERED WIRE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND BASIS OF PRESENTATION
Prior to December 23, 1997, Engineered Wire Products, Inc. ("EWP") operated
as a joint venture between Price Brothers Company (Price Brothers) and Keystone
Steel & Wire, a division of Keystone Consolidated Industries, Inc. (Keystone).
Under the terms of the joint venture agreement Price Brothers and Keystone had
an 80% and 20% ownership interest in EWP, respectively. Keystone's 20% ownership
interest resulted from the contribution of net assets in 1994 and a contribution
of an additional $900,900 in cash in 1995.
On December 23, 1997, Keystone acquired Price Brothers' interest in EWP. As
a result, EWP became a wholly-owned subsidiary of Keystone on that date.
EWP fabricates and markets steel reinforcing mesh in both roll and sheet
form. Markets for EWP's products extend from the Midwest to the East Coast.
Products are marketed by a direct sales force that is supplemented by
manufacturer's representatives. The mesh is used as concrete reinforcement in
sewer and culvert pipe, structural building components and precast products.
The balance sheet at September 30, 1997 and the statements of income and
cash flows for the interim periods ended September 30, 1996 and 1997, and the
statement of stockholders' equity and related notes to financial statements for
the interim period ended September 30, 1997, have each been prepared by EWP,
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows in accordance with generally
accepted accounting principles 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.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Property, Plant and Equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
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 assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Income per common share is based on the weighted average number of common
shares outstanding during each period.
F-61
<PAGE> 154
ENGINEERED WIRE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
C. PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment as cost are:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Land and land improvements........................... $ 404 $ 454 $ 450
Buildings............................................ 1,685 1,732 1,667
Machinery and equipment.............................. 11,094 11,402 11,352
------- ------- -------
13,183 13,588 13,469
Less accumulated depreciation........................ 4,188 4,908 5,237
------- ------- -------
Property, plant and equipment, net................... $ 8,995 $ 8,680 $ 8,232
======= ======= =======
</TABLE>
D. NOTES PAYABLE AND LONG TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Equipment acquisition debt due March 8, 2001 with semi-
annual payments of 2,338,970 Austrian Shillings
($214,309 at December 31, 1996 and $188,191 at
September 30, 1997), plus interest at 8%............. $2,323 $1,948 $1,329
Term Loan due June 30, 2000 with quarterly payments of
$145,750 plus interest at a floating rate (9.25% at
December 31, 1996 and 9.5% at September 30, 1997).... 2,332 2,186 1,749
------ ------ ------
4,655 4,134 3,078
Less: Current maturities............................... 524 1,180 973
------ ------ ------
$4,131 $2,954 $2,105
====== ====== ======
</TABLE>
The carrying amount of the fixed rate debt approximates fair market value.
EWP has purchased forward exchange contracts for three of the Austrian
shilling payments required on the equipment acquisition debt to minimize the
risk associated with foreign currency fluctuations. As such, EWP has included
the losses on these contracts and the gains on the related acquisition debt in
other income. The market rates used for the forward contracts and to value the
foreign debt balances were based upon market rates at December 31, 1995 and
1996, and September 30, 1997. At December 31, 1996, future payments due on long
term debt, incorporating forward contracts for the next five years as of
December 31, 1996 were $1,179,552 in 1997; $1,010,678 in each of 1998 and 1999;
$719,178 in 2000 and $213,838 thereafter.
EWP has available $6,000,000 under a revolving credit agreement (credit
agreement) that expires March 31, 1998. Interest is payable at either the prime
rate or federal funds rate as defined in the agreement. At December 31, 1995 and
1996 and September 30, 1997, EWP had borrowed $1,453,000, $2,095,000 and
$2,507,000 under this agreement, respectively. EWP's inventories and accounts
receivable are collateralized under the credit agreement and term loan.
Additionally, the Company's property, plant and equipment are collateralized
under the equipment acquisition debt, credit agreement and term loan as well as
under Price Brothers' credit agreement.
F-62
<PAGE> 155
ENGINEERED WIRE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the above debt agreements contain covenants with respect to
working capital, additional borrowings, payment of dividends and certain other
matters.
Cash payments for interest during the years ended December 31, 1995 and
1996 were approximately $265,000 and $661,000, respectively. Cash payments for
interest during the nine months ended September 30, 1996 and 1997 were
approximately $491,000 and $550,000, respectively.
E. LEASES
Future minimum lease payments under operating leases with initial or
remaining lease terms in excess of one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997................................................... $114
1998................................................... 83
1999................................................... 65
2000................................................... 45
2001................................................... 5
----
Total.................................................. $312
====
</TABLE>
Certain lease agreements include provisions for purchasing the assets.
Rental expense was approximately $56,000 and $112,000 for the years ended
December 31, 1995 and 1996, respectively and $88,000 and $95,000 for the nine
month periods ended September 30, 1996 and 1997, respectively.
F. RETIREMENT PLANS
EWP has a non-contributory defined benefit pension plan covering its hourly
employees. EWP's funding policy is to contribute amounts to the plan sufficient
to meet or exceed the minimum requirements of the Employee Retirement Income
Security Act.
Net pension expense consists of the following components:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Service cost................................................ $ 8 $ 17
Interest cost on projected benefit obligation............... 15 33
Return on plan assets....................................... (28) (9)
Net amortization and deferral............................... 20 (14)
---- ----
Net pension expense......................................... $ 15 $ 27
==== ====
</TABLE>
F-63
<PAGE> 156
ENGINEERED WIRE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of the funded status of the plan:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Estimated present value of vested benefits................ $(273) $(478)
Estimated present value of non-vested benefits............ (10) (71)
----- -----
Accumulated and projected benefit obligation................ (283) (549)
Market value of plan assets (consisting primarily of stocks
and bonds)................................................ 191 453
----- -----
Projected benefit obligation in excess of plan assets....... (92) (96)
Unrecognized net loss....................................... 49 82
Unrecognized net liability to be amortized.................. 14 13
Prior service cost not yet recognized in pension cost....... 35 78
Minimum pension liability adjustment........................ (98) (173)
----- -----
Pension liability (included in other accrued expenses)...... $ (92) $ (96)
===== =====
</TABLE>
EWP recorded minimum pension liabilities for the amounts by which the
accumulated benefit obligations exceeded plan assets. In addition, an intangible
asset of $50,013 at December 31, 1995 and $91,672 at December 31, 1996, which
equaled the unrecognized prior service cost and unrecognized liabilities, and an
adjustment to shareholders equity of $30,304 at December 31, 1995 and $20,345 at
December 31, 1996 were also recorded. These adjustments may be reversed in
future periods if the minimum liability adjustment is reduced as the result of
investment performance or changes in the assumptions used to value the plan.
EWP also participates in a non-contributory defined benefit plan which is
overfunded, that covers all of the salaried employees and is maintained by Price
Brothers. In 1996, $58,511 was expensed as the service cost for this plan.
The following represents rates used in determining the pension liability
for both plans:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Assumed discount rate....................................... 6.5% 6.5%
Expected long-term rate of return on plan assets............ 7.5% 7.5%
Assumed rate of future pay increase (salary plan only)...... 4.5% 3.0%
</TABLE>
EWP also participates in a non-contributory Employee Stock Ownership Plan
(ESOP) for exempt and non-exempt salaried employees which is maintained by Price
Brothers. Contributions to the ESOP are determined on a yearly basis by Price
Brothers. ESOP expense was $29,798 and $11,334 for the years ended December 31,
1995 and 1996, respectively.
EWP also participates in a contributory 401(k) Savings Incentive Plan (SIP)
for exempt and non-exempt employees which is maintained by Price Brothers. EWP
matches a portion of the employees' contribution to the plan. SIP expense was
$12,171 and $21,409 for the years ended December 31, 1995 and 1996,
respectively.
G. RELATED PARTY TRANSACTIONS
EWP purchases inventory from Keystone. Total purchases from Keystone were
approximately $14.2 million and $10.6 million for the years ended December 31,
1995 and 1996, respectively, and $6.9 million and $11.2 million for the nine
month periods ended September 30, 1996 and 1997, respectively. Included in
accounts payable were payables of approximately $187,000 and $169,000 due to
Keystone at December 31, 1995 and 1996, respectively, and $145,000 at September
30, 1997.
F-64
<PAGE> 157
ENGINEERED WIRE PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
H. INCOME TAXES
Income taxes consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------ --------------
1995 1996 1996 1997
----- ---- ----- ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Currently payable:
Federal............................................... $ 447 $631 $ 565 $ 909
State................................................. 45 206 57 103
----- ---- ----- ------
Total currently payable....................... 492 837 622 1,012
----- ---- ----- ------
Deferred:
Federal............................................... (119) (37) (90) (69)
State................................................. (14) (6) (14) (10)
----- ---- ----- ------
Total deferred................................ (133) (43) (104) (79)
----- ---- ----- ------
Total income tax.............................. $ 359 $794 $ 518 $ 933
===== ==== ===== ======
</TABLE>
Income taxes have been determined as if the Company were a separate
taxpaying entity. EWP is included in the consolidated federal and state tax
returns of Price Brothers through December 23, 1997. Therefore, the unpaid
portion of EWP's currently payable taxes have been included as amounts due to
the majority shareholder.
Total deferred income tax assets were $103,000, $130,000 and $139,000 at
December 31, 1995, 1996 and September 30, 1997, respectively, and consisted
primarily of certain accruals for financial statement purposes that were not
currently deductible for income tax purposes. Total deferred income tax
liabilities were $485,000, $452,000 and $382,000 at December 31, 1995, 1996 and
September 30, 1997, and consisted primarily of temporary differences related to
property, plant and equipment of $479,000, $399,000 and $333,000, respectively,
and temporary differences related to foreign currency transactions of $45,000 at
both December 31, 1996 and September 30, 1997 resulting in net deferred tax
liabilities of $382,000, $322,000 and $243,000 at December 31, 1995 and 1996 and
September 30, 1997, respectively.
F-65
<PAGE> 158
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma financial statements set forth
Keystone's pro forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1996 and the nine month period ended September 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, DeSoto's and EWP'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> 159
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ -------------------- PRO FORMA
KEYSTONE EWP NOTE 2 ADJUSTMENTS CONSOLIDATED
-------- ------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents............... $ 46,261 $ 282 (a) $(11,200)
(b) (100) $ 35,243
Notes and accounts receivable........... 38,081 3,962 (d) (145) 41,898
Inventories............................. 39,418 6,497 -- 45,915
Deferred income taxes................... 19,722 105 -- 19,827
Prepaid expenses........................ 915 4 -- 919
-------- ------- -------- --------
Total current assets............ 144,397 10,850 (11,445) 143,802
Property, plant and equipment, net...... 96,103 8,232 (c) 2,983 107,318
Prepaid pension cost.................... 109,468 -- -- 109,468
Restricted investments.................. 7,507 -- -- 7,507
Deferred financing costs................ 3,762 -- -- 3,762
Goodwill................................ -- -- (c) 1,326 1,326
Other................................... 2,493 92 (a) 700 3,285
Investment in EWP....................... 2,664 -- (a) 10,500
(b) 100
(c) (13,264) --
-------- ------- -------- --------
$366,394 $19,174 $ (9,100) $376,468
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current long-term
debt................................. $ 334 $ 3,480 $ -- $ 3,814
Accounts payable........................ 30,513 1,853 (d) (145) 32,221
Accrued OPEB cost....................... 8,409 -- -- 8,409
Other accrued liabilities............... 37,702 1,362 (c) (119) 38,945
-------- ------- -------- --------
Total current liabilities....... 76,958 6,695 (264) 83,389
-------- ------- -------- --------
Noncurrent liabilities:
Long-term debt.......................... 101,143 2,105 -- 103,248
Accrued OPEB cost....................... 101,611 -- -- 101,611
Negative goodwill....................... 25,760 -- -- 25,760
Other................................... 15,866 348 (c) 1,190 17,404
-------- ------- -------- --------
Total noncurrent liabilities.... 244,380 2,453 1,190 248,023
-------- ------- -------- --------
Redeemable preferred stock, no par value,
500,000 shares authorized, 435,456
shares issued........................... 3,500 -- -- 3,500
-------- ------- -------- --------
Common stockholders' equity:
Keystone common stock, $1 par value,
12,000,000 shares authorized,
9,296,533 shares issued at stated
value................................ 10,027 -- -- 10,027
EWP common stock........................ -- 5,302 (c) (5,302) --
Additional paid-in capital.............. 47,166 1,301 (c) (1,301) 47,166
Pension liability adjustment............ -- (51) (c) 51 --
Retained earnings (accumulated
deficit)............................. (15,625) 3,474 (c) (3,474) (15,625)
Treasury stock -- 1,134 shares.......... (12) -- -- (12)
-------- ------- -------- --------
Total stockholders' equity...... 41,556 10,026 (10,026) 41,556
-------- ------- -------- --------
$366,394 $19,174 $ (9,100) $376,468
======== ======= ======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Balance Sheet.
P-2
<PAGE> 160
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
NOTE 1 -- BASIS OF PRESENTATION:
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1997 reflects the adjustments necessary to record Keystone's
acquisition of the 80% of EWP not previously owned by Keystone as though such
transaction had occurred on September 30, 1997. The step acquisition is
accounted for by the purchase method.
NOTE 2 -- PRO FORMA ADJUSTMENTS:
(a) Keystone pays $10.5 million for the 80% of EWP not previously owned by
Keystone, and $700,000 for a non-compete agreement with the former EWP
majority shareholder.
(b) Keystone incurs $100,000 in acquisition related costs.
(c) Allocate purchase price as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Purchase price to be allocated
Cash paid for 80% interest in EWP......................... $10,500
Keystone investment in 20% of EWP recorded under equity
method................................................. 2,664
Transaction costs......................................... 100
-------
13,264
Historical EWP common equity................................ 10,026
-------
$ 3,238
=======
Purchase price allocation:
Adjust EWP pension liability to excess of pension plan
assets over related projected benefit obligation....... $ 119
Adjust EWP property, plant and equipment to estimated fair
value based on appraisals.............................. 2,983
Deferred income tax consequences of the above adjustments,
at effective federal and state rate of 39%............. (1,190)
Goodwill.................................................. 1,326
-------
$ 3,238
=======
</TABLE>
(d) Eliminate intercompany receivables and payables.
P-3
<PAGE> 161
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 ADJUSTMENTS
------------------------------------------------------
DESOTO AND PENSION BOND OFFERING
HISTORICAL ------------------------------- --------------------
KEYSTONE NOTE 2 ADJUSTMENTS SUBTOTAL NOTE 2 ADJUSTMENTS
---------- ------ ----------- -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues and other income..... $331,764 (a) $11,610 $343,374 $ --
-------- ------- -------- -------
331,764 11,610 343,374 -- --
-------- ------- -------- -------
Costs and expenses:
Cost of goods sold.......... 297,149 (a) 10,372
(c) (119)
(d) 740
(g) (2,495) 305,647 --
Selling, general and
administrative............ 26,634 (a) 4,086
(b) (1,286)
(c) (64)
(d) 82
(g) (276) 29,176 --
Non recurring expense,
net....................... -- (a) 444 444 --
Retirement security
program................... -- (a) (5,184)
(d) 2,413
(g) 2,771 -- --
Interest.................... 3,741 (a) 436
(e) 303 4,480 (h) 5,972
-------- ------- -------- -------
327,524 12,223 339,747 5,972
-------- ------- -------- -------
Income (loss) before income
taxes..................... 4,240 (613) 3,627 (5,972)
Provision (benefit) for income
taxes....................... 1,656 (a) 575
(g) (1,309) 922 (i) (2,329)
-------- ------- -------- -------
Net income (loss)............. 2,584 121 2,705 (3,643)
Dividends on preferred
stock....................... 70 (a) 399 469 --
-------- ------- -------- -------
Net income (loss) available
for
common shares............... $ 2,514 $ (278) $ 2,236 $(3,643)
======== ======= ======== =======
Net income (loss) per common
and common equivalent
share....................... $ .38
========
Weighted average common and
common equivalent shares
outstanding................. 6,560
========
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------
EWP
-------------------- PRO FORMA
SUBTOTAL NOTE 2 ADJUSTMENTS CONSOLIDATED
-------- ------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues and other income..... $343,374 (j) $ 24,682
(k) (10,621)
(l) (225) $357,210
-------- -------- --------
343,374 13,836 357,210
-------- -------- --------
Costs and expenses:
Cost of goods sold..........
305,647 (j) 20,338
(k) (10,621)
(m) 289 315,653
Selling, general and
administrative............
29,176 (j) 1,718
(m) 9
(n) 133
(o) 350 31,386
Non recurring expense,
net....................... 444 -- 444
Retirement security
program...................
-- -- --
Interest....................
10,452 (j) 713 11,165
-------- -------- --------
345,719 12,929 358,648
-------- -------- --------
Income (loss) before income
taxes..................... (2,345) 907 (1,438)
Provision (benefit) for income
taxes.......................
(1,407) (j) 794
(p) (48)
(q) (341) (1,002)
-------- -------- --------
Net income (loss)............. (938) 502 (436)
Dividends on preferred
stock....................... 469 -- 469
-------- -------- --------
Net income (loss) available
for
common shares............... $ (1,407) $ 502 $ (905)
======== ======== ========
Net income (loss) per common
and common equivalent
share....................... $ (.10)
========
Weighted average common and
common equivalent shares
outstanding................. 9,223
========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Statement of Operations.
P-4
<PAGE> 162
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 September
1996 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, (iii) the Offering and application of the net proceeds therefrom
occurred on January 1, 1996, and (iv) the December 23, 1997 acquisition of the
80% of EWP not previously owned by Keystone, 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 to allocate approximately 90% of adjusted pension
credit to cost of goods sold and approximately 10% to selling, general
and administrative expenses based on estimated employee/ retiree
counts.
P-5
<PAGE> 163
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.................. 369
Prepayment penalty on Term Note........................... 131
-------
$ 5,972
=======
</TABLE>
(i) Income tax expense of pro forma adjustments (h) at assumed federal and
state rate of 39%.
Adjustments relating to the acquisition of the 80% of EWP not previously
owned by Keystone.
(j) Results of operations of EWP for 1996.
(k) Eliminate intercompany sales and purchases between Keystone and EWP.
(l) Eliminate Keystone's recorded equity in EWP's 1996 earnings.
(m) Increase in depreciation expense resulting from amortization of
purchase accounting basis difference over average remaining life of 10
years.
(n) Amortization of goodwill related to the acquisition of EWP by the
straight-line method over 10 years.
(o) Amortization of non-compete agreement with the former majority
shareholder of EWP over the two year period of the agreement by the
straight-line method.
(p) Adjust EWP income taxes to assumed federal and state rate of 39%.
(q) Income tax expense of pro forma adjustments (k), (l), (m) and (o) at
assumed federal and state rate of 39%.
P-6
<PAGE> 164
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------------------
BOND OFFERING EWP
HISTORICAL ------------------------------- -------------------- PRO FORMA
KEYSTONE NOTE 2 ADJUSTMENTS SUBTOTAL NOTE 2 ADJUSTMENTS CONSOLIDATED
---------- ------ ----------- -------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues and other income................... $279,662 $ -- $279,662 (c) $ 24,873
(d) (11,216)
(e) (307) $293,012
-------- ------- -------- -------- --------
279,662 -- 279,662 13,350 293,012
-------- ------- -------- -------- --------
Costs and expenses:
Cost of goods sold........................ 247,481 -- 247,481 (c) 20,396
(d) (11,216)
(f) 215 256,876
Selling, general and administrative....... 16,652 -- 16,652 (c) 1,406
(f) 9
(g) 99
(h) 263 18,429
Overfunded defined benefit pension
credit................................. (4,741) -- (4,741) -- (4,741)
Interest.................................. 5,119 (a) 2,538 7,657 (c) 516 8,173
-------- ------- -------- -------- --------
264,511 2,538 267,049 11,688 278,737
-------- ------- -------- -------- --------
Income before income taxes................ 15,151 (2,538) 12,613 1,662 14,275
Provision for income taxes.................. 5,481 (b) (990) 4,491 (c) 933
(i) 63
(j) (309) 5,178
-------- ------- -------- -------- --------
Net income.................................. 9,670 (1,548) 8,122 975 9,097
Dividends on preferred stock................ 210 -- 210 -- 210
-------- ------- -------- -------- --------
Net income available for common shares...... $ 9,460 $(1,548) $ 7,912 $ 975 $ 8,887
======== ======= ======== ======== ========
Net income per common and common equivalent
share..................................... $ 1.01 $ .95
======== ========
Weighted average common and common
equivalent shares outstanding............. 9,386 9,386
======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Statement of Operations.
P-7
<PAGE> 165
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
NOTE 1 -- BASIS OF PRESENTATION:
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the nine months ended September 30, 1997 has been prepared assuming both the
Offering and application of the net proceeds therefrom, and the December 23,
1997 acquisition of the 80% of EWP not previously owned by Keystone 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.................................. $(2,291)
Term Note................................................. (1,209)
Notes, at 9 5/8%.......................................... 5,821
Amortization of deferred financing costs.................. 217
-------
$ 2,538
=======
</TABLE>
(b) Income tax expense of pro forma adjustments (a) at assumed federal and
state rate of 39%.
Adjustments relating to the acquisition of the 80% of EWP not previously
owned by Keystone.
(c) Results of operations of EWP for the nine months ended September 30,
1997.
(d) Eliminate intercompany sales and purchases between Keystone and EWP.
(e) Eliminate Keystone's recorded equity in EWP's earnings for the nine
months ended September 30, 1997.
(f) Increase in depreciation expense resulting from amortization of
purchase accounting basis difference over average remaining life of 10
years.
(g) Amortization of goodwill related to the acquisition of EWP by the
straight-line method over 10 years.
(h) Amortization of non-compete agreement with the former majority
shareholder of EWP over the two year period of the agreement by the
straight-line method.
(i) Adjust EWP income taxes to assumed federal and state rate of 39%.
(j) Income tax expense of pro forma adjustments (d), (e), (f) and (h) at
assumed federal and state rate of 39%.
P-8
<PAGE> 166
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> 167
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> 168
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.)
10.2 -- The Combined Master Retirement Trust between Valhi, Inc.
and Harold C. Simmons as restated effective July 1, 1995.
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).
23.4 -- Consent of Deloitte & Touche LLP.
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>
- ---------------
* Previously Filed.
(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) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated
II-2
<PAGE> 169
maximum offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) 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.
(c) 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.
(d) 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.
(e) 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> 170
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Pre-effective Amendment No. 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dallas, State of Texas, on the 2nd day of February, 1998.
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 Pre-effective
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board February 2, 1998
- -----------------------------------------------------
Glenn R. Simmons
/s/ ROBERT W. SINGER President and Chief February 2, 1998
- ----------------------------------------------------- Executive Officer
Robert W. Singer
/s/ HAROLD M. CURDY Vice President -- Finance February 2, 1998
- ----------------------------------------------------- and Treasurer (Principal
Harold M. Curdy Financial Officer)
/s/ BERT E. DOWNING, JR. Corporate Controller February 2, 1998
- ----------------------------------------------------- (Principal Accounting
Bert E. Downing, Jr. Officer)
* Director February 2, 1998
- -----------------------------------------------------
Thomas E. Barry
* Director February 2, 1998
- -----------------------------------------------------
Paul M. Bass, Jr.
* Director February 2, 1998
- -----------------------------------------------------
David E. Connor
* Director February 2, 1998
- -----------------------------------------------------
William P. Lyons
</TABLE>
II-4
<PAGE> 171
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director February 2, 1998
- -----------------------------------------------------
William Spier
* Vice Chairman of the Board February 2, 1998
- ----------------------------------------------------- and Director
J. Walter Tucker, Jr.
* Director February 2, 1998
- -----------------------------------------------------
Richard N. Ullman
By: /s/ HAROLD M. CURDY
-------------------------------------------------
Harold M. Curdy, as
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 172
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.)
10.2 -- The Combined Master Retirement Trust between Valhi, Inc.
and Harold C. Simmons as restated effective July 1, 1995.
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).
23.4 -- Consent of Deloitte & Touche LLP.
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>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 10.2
================================================================================
THE COMBINED MASTER RETIREMENT TRUST
As Restated Effective July 1, 1995
================================================================================
<PAGE> 2
<TABLE>
<CAPTION>
THE COMBINED MASTER RETIREMENT TRUST
------------------------------------
As Restated Effective July 1, 1995
Table of Contents
-----------------
ARTICLE PAGE
- ------- ----
<S> <C> <C>
1 Introduction 1
1.1 The Trust and Plans, Terms.................................................................... 1
1.2 Fiduciary Responsibilities......................................................................2
2 Management of the Trust Fund 2
2.1 The Trust Fund................................................................................ 2
2.2 Plan Administrator............................................................................ 2
2.3 Trustee's Powers and Duties................................................................... 2
2.4 Custodians.................................................................................... 6
2.5 Collective Investment Trusts................................................................... 7
2.6 Plan Accounts.................................................................................. 7
2.7 Single Fund.................................................................................... 7
3 The Trust Investment Committee 8
3.1 The Trust Investment Committee................................................................. 8
3.2 Trust Committee's Powers and Duties............................................................ 8
3.3 Manner of Action of Trust Committee............................................................ 9
3.4 Resignation or Removal of Trust Committee Member............................................... 9
4 Investment Funds, Investment Managers and Custodians 9
4.1 Investment Funds............................................................................... 9
4.2 Investment Managers........................................................................... 10
4.3 Investment Manager Custodians................................................................. 11
5 Participating Plans and Trusts, Trust Accounting 11
5.1 Eligible Plans and Trusts..................................................................... 11
5.2 Participating Plans and Trusts................................................................ 11
5.3 Trust Valuations.............................................................................. 12
5.4 Unit or Other Accounting Basis................................................................ 12
6 General Provisions 13
6.1 Qualification of the Plans and Trust.......................................................... 13
6.2 Restrictions on Reversion..................................................................... 13
6.3 Nonalienation of Plan Benefits................................................................ 13
6.4 Litigation.................................................................................... 13
6.5 Trustee's Action Conclusive................................................................... 14
6.6 Liabilities Mutually Exclusive................................................................ 14
6.7 Indemnification............................................................................... 14
6.8 Compensation and Expenses..................................................................... 15
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
6.9 Action by the Employers....................................................................... 15
6.10 Warranty...................................................................................... 15
6.11 Evidence...................................................................................... 15
6.12 Waiver of Notice.............................................................................. 15
6.13 Counterparts.................................................................................. 15
6.14 Gender and Number............................................................................. 15
6.15 Successors.................................................................................... 16
6.16 Severability.................................................................................. 16
6.17 Statutory References.......................................................................... 16
6.18 Applicable Law................................................................................ 16
6.19 Provisions to Comply with Revenue Ruling 81-100............................................... 16
7 Resignation or Removal of Trustee 16
7.1 Resignation or Removal of Trustee............................................................. 16
7.2 Successor Trustee............................................................................. 16
7.3 Duties of Retiring and Successor Trustees..................................................... 17
8 Amendment and Termination 17
8.1 Amendment..................................................................................... 17
8.2 Termination................................................................................... 17
</TABLE>
ii
<PAGE> 4
THE COMBINED MASTER RETIREMENT TRUST
THIS AGREEMENT, by and between Valhi, Inc. (the "company") and Harold
C. Simmons and his successor or successors and assigns in the trust hereby
evidenced, as trustee (the "trustee"), is effective as of July 1, 1995 and is an
amendment and restatement of such trust as originally established December 1,
1987 and as subsequently amended;
WITNESSETH THAT:
WHEREAS, the company, the other members of the controlled group of
corporations (as described in Section 414(b) of the Internal Revenue Code of
1986 (the "Code")) of which the company is a member and such other related
companies as are designated by the company (all such corporations are referred
to herein collectively as the "employers" and individually as an "employer")
maintain, and hereafter may establish, adopt, or assume, various pension, profit
sharing, savings and other retirement plans which meet the requirements of
"qualified plans" under Section 401(a) of the Code, which qualified plans are or
may be funded through various separate trust funds or may be funded directly
through the trust fund established hereunder; and
WHEREAS, it now is considered desirable and in the best interests of
the employers, their employees who are or who in the future may be covered by
such qualified plans and their beneficiaries that provision be made for the
collective investment of part or all of the assets of the qualified plans and
any separate trusts related to such qualified plans through this restated trust,
and this agreement is designed for that purpose;
NOW, THEREFORE, IT IS AGREED, in consideration of the mutual
undertakings of the parties hereto, the trust be and hereby is amended and
restated in the form of this agreement, as follows:
ARTICLE 1
Introduction
1.1 The Trust and Plans, Terms. This trust may be referred to as "The
Combined Master Retirement Trust." Unless the context indicates otherwise, the
terms "trust," "agreement," "herein," "hereunder" and similar terms mean this
agreement and the trust hereby evidenced. The qualified plans participating in
this trust from time to time are referred to herein
1
<PAGE> 5
collectively as the "plans" and individually as a "plan". A plan which
participates directly in this trust without the use of an intermediary trust is
sometimes referred to herein as a "participating plan" and an intermediary trust
which participates in this trust for the purpose of implementing a plan is
sometimes referred to herein as a "participating trust". This trust has been
created and organized in the United States and will be maintained at all times
as a domestic trust in the United States pursuant to Revenue Ruling 81-100.
1.2 Fiduciary Responsibilities. All fiduciaries with respect to the
trust (including the employers, the trustee, the trust investment committee, the
plan administrator of each participating plan and any investment managers and
custodians appointed hereunder) shall discharge their duties with respect to the
trust solely in the interests of participants and beneficiaries of the plans and
for the exclusive purpose of providing benefits under the plans and defraying
reasonable expenses of administration of the plans and this trust, with the
care, skill, prudence and diligence under the circumstances then prevailing that
a prudent person acting in a like capacity and familiar with such matters would
use in the conduct of an enterprise of like character and with like aims.
ARTICLE 2
Management of the Trust Fund
2.1 The Trust Fund. Unless the context indicates otherwise, the term
"trust fund" as of any date means all property then held under this agreement by
the trustee, any custodian or any insurance company.
2.2 Plan Administrator. The "plan administrator" with respect to each
plan is the person or committee appointed by the sponsor of that plan or, if no
such person or committee has been appointed, the plan sponsor. In addition to
the powers, rights, duties and responsibilities specifically granted to or
imposed on a plan administrator under a plan or elsewhere in this trust, the
plan administrator of a participating plan shall have the responsibility for
directing the distribution of benefits of that plan. The distribution of
benefits under a plan which participates herein through the use of a
participating trust shall be made from such participating trust. The trust
committee described in section 3.1 shall certify to the trustee the person or
persons appointed as the plan administrator with respect to each plan and the
trustee may rely on the last such certificate received by the trustee.
2
<PAGE> 6
2.3 Trustee's Powers and Duties. Except to the extent to which
authority with respect to the management of the trust fund has been allocated to
others in accordance with this agreement, the trustee shall have exclusive
authority and discretion to manage and control the trust fund. (In this regard,
the authority to direct distributions and transfers of plan benefits under a
plan has been allocated to the plan administrator of that plan, the authority to
direct investments may be allocated to one or more investment managers pursuant
to section 4.2, the authority to hold assets of the trust fund may be allocated
to one or more custodians or insurance companies pursuant to section 4.3 or this
section 2.3 and certain authorities with respect to the establishment of
investment funds, the transfer of assets between investment funds and the
appointment of investment managers and custodians have been allocated to the
trust committee pursuant to Article 3). Except as otherwise provided by law, the
trustee shall not be responsible for the investment of any assets of the trust
fund which are subject to management by an investment manager or for seeing that
the requirement of proper diversification of such assets or the total trust fund
has been met, and the trustee need not take into account the investment of any
assets of the trust fund which are subject to management by an investment
manager in meeting the trustee's responsibilities with respect to the assets of
the trust fund which are not subject to management by an investment manager. The
trustee shall have the following powers, rights and duties in addition to those
provided elsewhere in this agreement or by law:
(a)(1) To invest and reinvest part or all of the
trust fund in any real or personal property (including
any stocks, mutual fund shares, partnership interests,
venture capital investments, bonds, debentures, notes,
commercial paper, treasury bills, options (including
call options and put options, whether or not covered or
listed on a recognized trading exchange), warrants,
futures (including financial futures, stock index
futures and commodity futures, whether or not covered
or listed on a recognized trading exchange), short
selling of any securities, commodities, metals, gems,
collectibles, any common, commingled or collective
trust funds or pooled investment funds described in
section 2.5, any deposit accounts or funds maintained
by a legal reserve life insurance company in accordance
with an agreement between the trustee and such
insurance company or a group annuity contract issued by
such insurance company to the trustee as
contractholder, any interest-bearing deposits held by
any bank or similar financial institution, any
qualifying employer real property or qualifying
employer securities, as defined in Sections 407(d)(4)
and (5), respectively, of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and
any other real or personal property, and to use in the
trustee's discretion margin accounts with respect to
any of the foregoing investments).
3
<PAGE> 7
(a)(2) Notwithstanding section 2.3(a)(1), in no
event shall the trustee (i) invest more than 25% of the
total trust fund in the securities of a single entity,
except securities guaranteed by the full faith and
credit of the U.S. Government (referred to herein as
the "25% Limitation"), or (ii) acquire or purchase an
equity interest in a company unless the trustee
determines in good faith that no Related Entity (as
defined in section 2.3(a)(5)) of Harold C. Simmons has
any material equity interest in such company (referred
to herein as the "Coinvestment Limitation"). Nothing in
this section 2.3(a)(2) shall require the divestiture by
the trust of any securities of a single entity the
value of which, due to appreciation or depreciation in
value after the date of purchase of any investment
(including the securities of such single entity) held
by the trust, constitutes more than 25% of the total
trust fund. Further, where securities are held pursuant
to one or more acquisitions, purchases or investments
which meet the 25% Limitation and the Coinvestment
Limitation and a transaction occurs with the issuer of
such securities or a controlled affiliate of such
issuer pursuant to which such securities are redeemed
or exchanged for other securities or other assets of
such issuer or a controlled affiliate, such transaction
shall be considered to meet the 25% Limitation and
Coinvestment Limitation and the requirements of section
2.3(a)(3) below, and shall not require a divestiture of
any such other securities or assets under said section
2.3(a)(3) or any other provision hereof. For purposes
of making the determination required by the
Coinvestment Limitation, good faith shall be
conclusively presumed and an equity investment in a
company shall be permitted (i) if no Related Entity
holds, acquires or purchases any voting securities of
such company, or (ii) if the trust and all Related
Entities (x) do not hold, acquire, or purchase, in the
aggregate, more than five percent of the outstanding
voting securities of such company and (y) do not
request or accept representation on such company's
board of directors.
(a)(3) Nothing in this section 2.3(a) or under the
powers, rights and duties granted the trust committee
in section 3.2 shall require the divestiture by the
trust of any securities issued by a company if, after
the date that the trustee determines further investment
in the securities of such company is impermissible
because of the 25% Limitation (the "Determination
Date"), Related Entities acquire or purchase
outstanding voting securities of such company so long
as (i) the Related Entities, in the aggregate, do not
hold more than 10% of the outstanding voting securities
of such company; (ii) the trust and all Related
Entities do not request or accept representation on
such company's board of directors; and (iii) after the
Determination Date, the trust does not acquire or
purchase any additional outstanding voting securities
of such company unless such acquisition or purchase can
be made consistent with both the 25% Limitation and the
Coinvestment Limitation stated in subparagraph (a)(2)
above.
(a)(4) Nothing in this section 2.3(a) or under the
powers, rights and duties granted the trust committee
in section 3.2 shall require the divestiture by the
trust of any equity investment held by any
participating trust as of December 1, 1987 and
contributed to the trust, and, notwithstanding anything
4
<PAGE> 8
in section 2.3(a) to the contrary or under the powers,
rights and duties granted the trust committee in
section 3.2, the trustee shall be entitled to make on
behalf of the trust all decisions affecting the
interest of the trust as a holder of such equity
investment, including, but not limited to, the exercise
of any and all preemptive, subscription or stock
purchase rights which the trust may at any time acquire
as a result of holding such equity investment.
(a)(5) For purposes of this paragraph (a), a
"Related Entity" means Harold C. Simmons and each
entity, other than this trust, that directly or
indirectly through one or more intermediaries, could be
deemed to be controlled by Harold C. Simmons.
(b) To retain in cash such amounts as the trustee
considers advisable and as are permitted by applicable
law and to deposit any cash so retained in any
depository (including any bank acting as trustee) which
the trustee may select.
(c) To manage, sell, insure and otherwise deal
with all real and personal property held by the trustee
on such terms and conditions as the trustee shall
decide.
(d) To vote stock and other voting securities
personally or by proxy (and to delegate the trustee's
powers and discretions with respect to such stock or
other voting securities to such proxy), to exercise
subscription, conversion and other rights and options
(and make payments from the trust fund in connection
therewith), to take any action and to abstain from
taking any action with respect to any reorganization,
consolidation, merger, dissolution, recapitalization,
refinancing and any other plan or change affecting any
property constituting a part of the trust fund (and in
connection therewith to delegate the trustee's
discretionary powers and pay assessments, subscriptions
and other charges from the trust fund), to hold or
register any property from time to time in the
trustee's name or in the name of a nominee or to hold
it unregistered or in such form that title shall pass
by delivery (provided that except as authorized by
regulations issued by the Secretary of Labor, the
indicia of ownership of the assets of the trust fund
shall not be maintained outside the jurisdiction of the
district courts of the United States) and to borrow
from anyone (to the extent permitted by law) such
amounts from time to time as the trustee considers
desirable to carry out this trust (and to mortgage or
pledge all or part of the trust fund as security).
(e) To tender and vote qualifying employer
securities held as a part of the trust fund as the
trust committee directs.
(f) When directed by an investment manager the
trustee shall acquire, retain or dispose of such
investments as the investment manager directs, when
directed by the trust committee the trustee shall (i)
establish investment funds and transfer assets between
investment funds (and to
5
<PAGE> 9
a custodian) as the trust committee directs, (ii)
invest assets in a deposit account or fund or group
annuity contract maintained or issued by a legal
reserve life insurance company (and apply for or
execute any necessary contract or agreement) as the
trust committee directs, (iii) acquire, retain or
dispose of qualifying employer real property or
qualifying employer securities as the trust committee
directs, and (iv) effect withdrawals from the
investment funds and distribute the proceeds to
participating trusts or other trusts funding
participating plans as the trust committee directs, and
when advised or directed by an independent fiduciary
appointed with respect to part or all of the trust
fund, the trustee may follow the advice or direction of
such appointed independent fiduciary.
(g) When directed by the plan administrator of a
participating plan (i) to make payments from the trust
fund without inquiring as to whether a recipient is
entitled thereto (and the trustee shall not be liable
for any such payment made in good faith), (ii) to
transfer a participant's benefits in accordance with
the provisions of the plan for his benefit to any other
trust or other funding entity which forms a part of
another pension, profit sharing, savings or other
retirement plan which meets the requirements of a
"qualified plan" under section 401(a) of the Code, and
(iii) to receive and hold for any participant or any
employee of the employers any qualifying rollover
contribution to the plan permitted under the plan and
any funds or property transferred in accordance with
the provisions of the plan to the trustee from any
other trust or other funding entity which forms a part
of another pension, profit sharing, savings or other
retirement plan which meets the requirements of a
"qualified plan" under section 401(a) of the Code.
(h) To waive, modify, reduce, compromise, release,
contest, arbitrate, settle or extend the time of
payment of any claim or demand of any nature in favor
of or against the trustee or all or any part of the
trust fund, to retain any disputed property until an
appropriate final adjudication or release is obtained,
and to maintain in the trustee's discretion any
litigation the trustee considers necessary in
connection with the plans or the trust fund.
(i) To withhold, if the trustee considers it
advisable, all or any part of any payment required to
be made hereunder as may be necessary and proper to
protect the trustee or the trust fund against any
liability or claim on account of any estate,
inheritance, income or other tax or assessment
attributable to any benefit payable under a plan, and
to discharge any such liability with any part or all of
such payment so withheld provided that at least ten
days prior to discharging any such liability with any
amount so withheld the trustee shall notify the plan
administrator and the trust committee in writing of the
trustee's intent to do so.
(j) To maintain records reflecting all receipts
and payments under this agreement and such other
records as the trust committee may specify, which
records may be audited from time to time by the trust
committee or anyone named by the trust committee.
6
<PAGE> 10
(k) To report to the trust committee as of each
valuation date (as described in section 5.3) and at
such other times as the trust committee may request the
then net worth of each investment fund (that is, the
fair market value of all assets of each investment
fund, less liabilities known to the trustee, other than
liabilities to persons entitled to benefits under the
plans) on the basis of such data and information as the
trustee considers reliable.
(l) To furnish periodic accounts to the trust
committee for such periods as the trust committee may
specify showing all investments, receipts,
disbursements and other transactions involving the
trust during the accounting period, and also showing
the assets of each investment fund and the trust fund
held at the end of that period (which account shall be
conclusive on all persons to the extent permitted by
law, except as to any act or transaction as to which
the trust committee files with the trustee written
exceptions or objections within 180 days after receipt
of the account).
(m) To furnish the trust committee with such
information in the trustee's possession as the
employers may need for tax or other purposes.
(n) To employ accountants, advisors, agents,
counsel, consultants, custodians, depositories, experts
and other persons, to delegate discretionary powers to
such persons and to reasonably rely upon the
information and advice furnished by such persons;
provided that each such delegation and the acceptance
thereof by each such persons shall be in writing; and
provided further that the trustee may not delegate the
trustee's responsibilities (other than custodial
responsibilities) for the management or control of the
assets of the trust fund. The trustee's power to
appoint custodians pursuant to section 2.4 is in
addition to the power of the trust committee under
section 4.3 to designate certain custodians which serve
also as investment managers.
(o) To perform all other acts which in the
trustee's judgment are appropriate for the proper
management, investment and distribution of the trust
fund.
2.4 Custodians. In addition to the appointment powers of the trust
committee in section 4.3 with respect to investment managers also serving as
custodians, the trustee may designate brokerage firms, banks or other
appropriate financial or investment entities to serve solely as "custodian" of
assets forming a part of the trust fund. In such event the trustee shall enter
into such custodial agreements as it considers appropriate and shall transfer
such assets of the trust fund for which the trustee has custodial responsibility
as the trustee considers desirable to the custodian, and the custodian shall
have custodial responsibility for the holding and administration of such assets,
as agent of the trustee, until its employment as a custodian is terminated, at
which
7
<PAGE> 11
time the custodian shall return the assets to the trustee. Upon the trustee's
written consent, a custodian shall have the power to delegate its custodial
responsibility with respect to all or a part of the assets it holds in custody
by the appointment of a subcustodian.
2.5 Collective Investment Trusts. Subsection 2.3(a) permits the
trustee or any investment manager to invest any part or all of the trust assets
for which the trustee or investment manager has investment responsibility in any
common, collective or commingled trust fund or pooled investment fund which is
qualified under section 401(a) and entitled to tax exemption under section
501(a) of the Code and which is maintained by a bank or trust company (including
a bank or trust company acting as trustee). Accordingly, the trustee or any
investment manager may invest in any such fund, provided that any investment of
the assets of an investment fund shall comply with the investment requirements
of that investment fund. To the extent that any trust assets are invested in any
such fund, the provisions of the documents under which such common, collective
or commingled trust fund or pooled investment fund are maintained shall govern
any investment therein and such provisions, as amended from time to time, are
hereby incorporated herein and made a part of this agreement.
2.6 Plan Accounts. A separate account (a "plan account") shall be
established and maintained in the name of each participating plan and
participating trust to reflect the portion of the trust fund attributable to
that participating plan or participating trust. As of each December 31, and at
such other times as the trust committee shall direct, each plan account shall be
appropriately adjusted, in accordance with such rules as may be established by
the trust committee, to reflect any contributions and disbursements made under a
plan during the accounting period ending on that date and the plan's share of
income, losses, appreciation and depreciation of the trust fund during that
accounting period and such other items as the trust committee may determine. To
the extent investment funds are established as a part of the trust fund, each
plan account shall reflect the portion of each investment fund attributable to a
participating plan or participating trust as provided in section 5.4.
2.7 Single Fund. Unless and only to the extent otherwise directed by
the trust committee, all assets of the trust fund and of each investment fund,
and the income thereon, shall be held and invested as a single fund for the
purpose of providing benefits under the plans as they apply to the employers and
their respective employees, and the trustee shall not be required to make any
separate investment of the trust fund or an investment fund for the account of
any single plan. If for any purpose it becomes necessary as of any date to
determine the portion of the trust
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fund or any investment fund allocable to any single plan or to any particular
group of employees or former employees of any employer covered by a plan, such
portion of the trust fund or investment fund shall be determined by the trust
committee. In making such determination, the trust committee shall take into
consideration the separate plan accounts maintained to reflect the assets of
each plan and such other factors as the trust committee considers appropriate,
and may obtain the advice and assistance of an actuary selected by the trust
committee for this purpose. Any such determination by the trust committee shall
be conclusive upon the employers, employees and former employees of the
employers and all other persons. The trustee shall have no duty or
responsibility to question any determination or direction by the trust committee
under this section.
ARTICLE 3
The Trust Investment Committee
3.1 The Trust Investment Committee. The responsibilities described in
section 3.2 regarding the investment of the assets of this trust are the
responsibilities of the trust investment committee (the "trust committee")
consisting of one or more persons appointed by the company for this purpose.
Harold C. Simmons will be the sole initial member of the trust committee. The
company will certify to the trustee from time to time the persons appointed as
members of the trust committee and the persons who are selected as chairman and
secretary, respectively, of the trust committee, and the trustee may rely on the
latest certificate received by the trustee. With respect to any direction of the
trust committee, the trustee may rely on an instrument signed by a majority of
the trust committee members or by the chairman or secretary of the trust
committee.
3.2 Trust Committee's Powers and Duties. In addition to the powers,
rights and duties granted to or imposed on the trust committee elsewhere in this
agreement or by law, the trust committee shall have the following powers, rights
and duties with respect to the trust fund:
(a) To appoint and remove investment managers and
custodians pursuant to sections 4.2 and 4.3,
respectively.
(b) From time to time to direct the trustee to
establish investment funds and transfer assets between
investment funds, to transfer assets of an investment
fund held by the trustee to a custodian, or to invest
assets in a deposit account or fund or group annuity
contract maintained or issued by a legal reserve life
insurance company (and to apply for or execute any
necessary contract or
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agreement: provided that any such contract or agreement
must meet the requirements of a guaranteed benefit
policy as defined in Section 401(b)(2)(B) of ERISA).
(c) From time to time to direct the trustee to
acquire, retain or dispose of qualifying employer real
property or qualifying employer securities (subject to
the applicable limitation of Section 407 of ERISA) and
to tender and vote qualifying employer securities as
the trust committee directs.
(d) To establish and review from time to time an
appropriate investment policy and investment guidelines
regarding the investment of the trust fund and to
report from time to time to the employers regarding
such policy and guidelines (and any modifications
thereto) and regarding the investment performance of
the trust fund, any investment funds and any appointed
investment managers.
3.3 Manner of Action of Trust Committee. The members of the trust
committee may act at a meeting (including a meeting at different locations by
telephone conference) or in writing without a meeting and any trust committee
member by writing may delegate any or all of his rights, powers, duties and
discretions to any other member with the consent of such other member. The
action or decision of a majority of the members of the trust committee as to a
matter shall be considered the action or decision of the trust committee. If
there shall be an even division of the members of the trust committee on any
question, a disinterested party selected by the trust committee shall decide the
matter and such party's decision shall be controlling. The certificate of the
chairman or secretary of the trust committee that it has taken or authorized any
action shall be conclusive in favor of any person relying on such certification.
Subject to applicable law, no member of the trust committee shall be liable for
an act or omission of the other trust committee members in which the former had
not concurred.
3.4 Resignation or Removal of Trust Committee Member. Any trust
committee member may resign at any time by giving 10 days' prior written notice
to the company, and the company may remove any trust committee member by giving
prior written notice to the trust committee member. The company shall notify the
other trust committee members of any resignation or removal of a trust committee
member and the appointment of a successor trust committee member.
ARTICLE 4
Investment Funds, Investment Managers and Custodians
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4.1 Investment Funds. From time to time the trust committee may cause
the trustee to establish one or more investment funds (the "investment funds")
for the purpose of reflecting the separate investment and reinvestment of the
trust fund. The trust committee shall be responsible for allocating the assets
of the trust fund among the investment funds. The trustee shall have
responsibility for the investment of an investment fund unless an investment
manager has been appointed with respect to that fund or unless the investment
fund is invested in a deposit account, deposit administration fund or group
annuity contract established with a legal reserve life insurance company. All
income, losses, appreciation and depreciation attributable to the assets of an
investment fund shall be credited to that fund. Investments of each investment
fund shall be made in accordance with investment guidelines established by the
trust committee for that investment fund. The trust committee shall provide the
trustee and each investment manager appointed with respect to an investment fund
with the investment guidelines for that fund and with any modifications in such
investment guidelines made from time to time by the trust committee.
Notwithstanding the fact that an investment manager may be appointed with
responsibility for the management of an investment fund, unless directed
otherwise by the investment manager the trustee shall have the responsibility
for the investment of cash balances held by the trustee from time to time as a
part of such investment fund in short term cash equivalents (such as short term
commercial paper, treasury bills and similar securities, and for this purpose
the trustee may invest in any appropriate common, commingled or collective short
term investment fund). In addition, the trustee shall have the power, right and
duty to sell any such short term investments as may be necessary to carry out
the instructions of the investment manager with respect to the investment of the
investment fund.
4.2 Investment Managers. The trust committee may from time to time
appoint one or more professional investment advisers other than the trustee as
an "investment manager" of the entire trust fund or any investment fund
maintained as a part of the trust fund. Any such appointment shall be made by
written notice to the investment manager and the trustee and shall specify the
portion of the trust fund to be managed by the investment manager and the
powers, rights and duties of the trustee hereunder that are allocated to the
investment manager with respect to such portion of the trust fund. Upon such
notice to the trustee of the appointment of an investment manager, the
investment manager shall be authorized to direct the trustee regarding the
investment and reinvestment of the assets of the portion of the trust fund
subject to management by the investment manager and the trustee shall receive,
hold and transfer assets
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purchased or sold by the investment manager in accordance with its directions.
The appointment of an investment manager shall continue in effect until the
trustee receives written notice to the contrary from the trust committee or the
investment manager. An investment manager may resign at any time upon 30 days'
prior written notice to the trust committee and the trustee and the trust
committee may remove an investment manager at any time upon prior written notice
to the investment manager and the trustee. An investment manager shall have
complete investment responsibility for the assets of the trust fund with respect
to which it has been appointed as investment manager and, except as otherwise
provided by law, the trustee shall have no obligation as to the investment of
such assets during the period they are subject to management by an investment
manager. Each investment manager appointed pursuant to this section shall be a
registered investment adviser under the Investment Advisers Act of 1940, a bank
(as defined in said Act), or a legal reserve life insurance company qualified to
manage the assets of the plan under the laws of more than one state. In
addition, each investment manager shall be required to acknowledge to the trust
committee in writing that it accepts such appointment and that it is a fiduciary
with respect to the plan and trust.
4.3 Investment Manager Custodians. If a national banking association
or a state bank is appointed by the trust committee as the investment manager of
any investment fund, the trust committee may, with the trustee's consent, also
designate such bank to be employed by the trustee as "custodian" of the assets
from time to time forming part of that investment fund. In such event, the
trustee shall enter into an appropriate custodial agreement with the bank
appointed as investment manager naming the investment manager as custodian of
the investment fund and delegating the trustee's powers with respect to the
management of the investment fund to the custodian. Upon such an appointment the
trustee shall transfer the assets of the investment fund to the custodian and
the custodian shall have responsibility for the holding and administration of
the assets of the investment fund, as agent of the trustee, until its employment
as custodian is terminated, at which time the custodian shall return all assets
of the investment fund to the trustee. Notwithstanding the foregoing, if the
trust committee designates a legal reserve life insurance company as the
investment manager of any investment fund, the trust committee may also
designate the insurance company as custodian of the investment fund. In such
event, the trustee shall execute an appropriate agreement reflecting the
investment of the assets of that investment fund by the insurance company and
the insurance company shall for purposes of this agreement be deemed to be the
custodian of the assets of the investment fund for which the insurance
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<PAGE> 16
company is designated as investment manager. In addition to its duties as
investment manager, each custodian shall maintain the records and accounts and
shall submit to the appropriate persons the periodic reports otherwise required
of the trustee with respect to the portion of the trust fund held by the
custodian.
ARTICLE 5
Participating Plans and Trusts, Trust Accounting
5.1 Eligible Plans and Trusts. Any pension, profit sharing, savings
or other retirement plan maintained or hereafter established, adopted or assumed
by an employer which meets the requirements of a qualified plan under Section
401(a) of the Code shall be considered an "eligible plan" and any trust
maintained or hereafter established, adopted or assumed by an employer which is
exempt from taxation under Section 501(a) of the Code and which forms a part of
a pension, profit sharing, savings or other retirement plan which meets the
requirements of Section 401(a) of the Code shall be considered an "eligible
trust"; provided that such plan or trust permits the deposit of part or all of
its assets in this trust and allows the trust committee to have investment
responsibility with respect to the assets of such plan or trust.
5.2 Participating Plans and Trusts. At the direction of the trust
committee the trustee shall accept a transfer of assets from an eligible plan or
an eligible trust and, upon the acceptance of such assets, such eligible plan or
eligible trust shall become a participating plan or participating trust, as the
case may be, under this trust. Until all of its investments in this trust have
been withdrawn and the proceeds distributed, a participating plan or
participating trust shall continue as such. As provided in section 2.6, the
trustee shall establish and maintain a separate plan account in the name of each
participating plan and participating trust to reflect the investments in the
trust fund or investment funds under this trust of such participating plan or
participating trust. By virtue of its investment herein, each plan participating
herein as a participating plan or through a participating trust shall be
considered to have incorporated as a part of such plan the provisions of this
trust, and such provisions shall govern all investments herein.
5.3 Trust Valuations. A "valuation date" shall be the date of the
initial deposit by a participating plan or participating trust hereunder, the
last day of each calendar month ending after that date and any other date
designated as such by the trust committee. The adjusted net worth of each
separate investment fund (or, if none, of the entire trust fund) shall be
determined as
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of each valuation date before giving effect to any withdrawals from that fund as
of that date or any new or additional investments in that fund as of that date.
For purposes hereof, a deposit by a participating plan or participating trust in
an investment fund (whether a new deposit or a transfer from another investment
fund) may be referred to as an "investment" in the investment fund.
5.4 Unit or Other Accounting Basis. Unless the trust committee
establishes another accounting method or modifies the method set forth below,
investments of a participating plan or participating trust in an investment fund
shall be reflected in the plan account for that plan on a "unit" basis. As of
the date of the initial investment in an investment fund by any participating
plan or participating trust, an initial unit value shall be determined for that
investment fund such that the plan's investment in that fund shall be
represented by a number of full units, each of which have a value between ten
dollars and eleven dollars, carried to the sixth decimal. Such number of units
shall be credited to the account of the participating plan or participating
trust as of the initial valuation date for that investment fund. As of each
subsequent valuation date:
(a) The unit value of each investment fund shall
be revalued by adjusting the value of all outstanding
units upward or downward so that the total value of all
such units equals the adjusted net worth of that
investment fund.
(b) Withdrawals to be made from that investment
fund as of that date shall be made on the basis of the
new unit value as of that date and the accounts of
participating plans or participating trusts withdrawing
part or all of their investments as of that date shall
be charged accordingly.
(c) The accounts of participating plans or
participating trusts making new or additional
investments in the investment fund as of that valuation
date shall be credited with units based on the new unit
value as of that valuation date.
From time to time the trust committee may direct the trustee to divide or
combine units so that units shall have a greater or lesser value under an
investment fund. With the consent of the trust committee, deposits in an
investment fund may be made in property other than cash, valued at its fair
market value, as determined by the trustee. All deposits to an investment fund
may be made only at the direction of the trust committee and only as of a
valuation date, and all withdrawals, transfers and distributions from an
investment fund may be made only at the direction of the trust committee and
only as of a valuation date. The trust committee shall direct such withdrawals
at the request of an employer that maintains or adopts a participating plan or a
participating trust. Notwithstanding the foregoing, if it is determined that a
participating plan or participating trust has ceased to be a qualified employer
plan or qualified employer trust for any reason, all investments of
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<PAGE> 18
that participating plan or participating trust shall be withdrawn and
distributed to the participating plan or participating trust as soon as
practicable thereafter. If the date of such distribution is not otherwise a
valuation date, such date shall be a special valuation date hereunder.
ARTICLE 6
General Provisions
6.1 Qualification of the Plans and Trust. The plans and the trust
taken together are intended to qualify under Section 401 of the Code and the
trust is intended to qualify for tax exemption under Section 501(a) of the Code
(or under any comparable provisions of any future legislation which amend or
supersede said provisions of the Code). Unless and until advised to the contrary
the trustee, any investment managers and all other persons dealing with the
trustee and any investment manager shall be entitled to assume that the plans
and the trust are so qualified and tax exempt.
6.2 Restrictions on Reversion. Except to the extent permitted by a
plan, the employers shall have no right, title or interest in the assets of the
trust fund, nor will any part of the assets of the trust fund revert or be
repaid to any employer or be diverted to any purpose other than as permitted
under the plan.
6.3 Nonalienation of Plan Benefits. The rights or interests of any
plan participant or any plan participant's beneficiaries to any benefits or
future payments hereunder shall not be subject to attachment or garnishment or
other legal process by any creditor of any such plan participant or beneficiary,
nor shall any such plan participant or beneficiary have any right to alienate,
anticipate, commute, pledge, encumber or assign any of the benefits or rights
which he or she may expect to receive (contingently or otherwise) under a plan
or this trust, except as may be required by the tax withholding provisions of
the Code or of a state's income tax act.
6.4 Litigation. In any action or proceeding regarding this trust, the
trust committee, any plan benefits or the administration of a plan, employees or
former employees of the employers, their beneficiaries and any other persons
having or claiming to have an interest in this trust or the plan shall not be
necessary parties and shall not be entitled to any notice of process. Any final
judgment which is not appealed or appealable and which may be entered in any
such action or proceeding shall be binding and conclusive on the parties hereto
and all persons having or claiming to have any interest in this trust or the
plans. To the extent permitted by law, if a legal
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action is begun against the plan administrator, the employers, the trust
committee or the trustee by or on behalf of any person and such action results
adversely to such person, or if a legal action arises because of conflicting
claims to a plan participant's or other person's benefits, the costs to the
employers, the plan administrator, the trust committee or the trustee of
defending the action will be charged to the sums, if any, which were involved in
the action or were payable to the plan participant or other person concerned.
Acceptance of participation in a plan shall constitute a release of the
employers, the plan administrator, the trust committee, the trustee and their
agents from any and all liability and obligation not involving willful
misconduct or gross neglect to the extent permitted by applicable law.
6.5 Trustee's Action Conclusive. Except as otherwise provided by law,
the trustee's exercise or non-exercise of its powers and discretions in good
faith shall be conclusive on all persons. No one shall be obliged to see to the
application of any money paid or property delivered to the trustee, except to
the extent such person is acting as an investment manager as respects such money
or property. The certificate of the trustee that the trustee is acting according
to this agreement will fully protect all persons dealing with the trustee. If
there is a disagreement between the trustee and anyone as to any act or
transaction reported in any accounting, the trustee shall have the right to a
settlement of its account by any proper court.
6.6 Liabilities Mutually Exclusive. To the extent permitted by law,
the trustee, the employers, the trust committee, the plan administrators of the
plans and the investment managers shall be responsible only for their own
respective acts or omissions.
6.7 Indemnification. To the extent permitted by law, no person
(including the trustee, any former trustee, the trust committee, any present or
former trust committee member, any present or former plan administrator, and any
present or former director, officer or employee of an employer) shall be
personally liable for any act done or omitted to be done in good faith in the
administration of the plans or this trust or the investment of the trust fund.
To the extent permitted by law, each present or former director, officer or
employee of an employer and each present or former custodian to whom the plan
administrator, the trust committee or an employer has delegated any portion of
its responsibilities under the plans, each present and former trust committee
member, each present or former trustee and each present or former plan
administrator shall be indemnified and saved harmless under any liability
insurance or other indemnification arrangement with respect to the plans or this
trust from and against any and all claims of liability to which they are
subjected by reason of any act done or omitted to be done in good faith in
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connection with the administration of the plans or this trust or the investment
of the trust fund, including all expenses reasonably incurred in their defense
if the employers fail to provide such defense; provided, however, that each
present or former corporate trustee shall be indemnified and saved harmless only
with respect to claims of liability to which such corporate trustee is subjected
by reason of its compliance with any directions given in accordance with the
provisions of the plans or this trust by an investment manager, the plan
administrator, the trust committee or any person duly authorized by the plan
administrator, the trust committee or the employers, or, if the trustee is not
required by law to act without the receipt of such directions, by its failure to
act in the absence of such directions.
6.8 Compensation and Expenses. All reasonable compensation, costs,
charges and expenses incurred in the administration of this trust, as agreed
upon between the company and the trustee, between the trust committee and an
investment manager, custodian, or insurance company, or between the company or
the trust committee and any agent, expert, counsel or other person, will, to the
extent not paid by the employers in such proportions as the company shall
direct, be paid from the trust fund; provided that expenses incurred in
connection with the sale, investment and reinvestment of the trust fund (such as
brokerage, postage, express and insurance charges and transfer taxes) shall be
paid from the trust fund and provided further that Harold C. Simmons shall
receive no compensation for serving hereunder.
6.9 Action by the Employers. Any action required or permitted of an
employer under this trust shall be by resolution of its Board of Directors, by a
duly authorized committee of its Board of Directors, or by a person or persons
authorized by resolution of its Board of Directors or such committee.
6.10 Warranty. The employers warrant that all directions or
authorizations by a plan administrator or the trust committee, whether for the
payment of money or otherwise, will comply with the plans and this trust.
6.11 Evidence. Evidence required of anyone under this agreement shall
be signed, made or presented by the proper party or parties and may be by
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable.
6.12 Waiver of Notice. Any notice required under this agreement may be
waived by the person entitled to such notice.
6.13 Counterparts. This agreement may be executed in two or more
counterparts, any one of which will be an original without reference to the
others.
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6.14 Gender and Number. Words denoting the masculine gender shall
include the feminine and neuter genders and the singular shall include the
plural and the plural shall include the singular wherever required by the
context.
6.15 Successors. This trust will be binding on all persons entitled to
benefits hereunder and their respective heirs and legal representatives, and on
the plan administrators, the trust committee, the trustee and their successors.
6.16 Severability. If any provision of this agreement is held to be
illegal or invalid, such illegality or invalidity shall not affect the remaining
provisions of this agreement, and this agreement be construed and enforced as if
such illegal or invalid provisions had never been inserted therein.
6.17 Statutory References. Any references in this agreement to a
Section of the Code or of ERISA shall include any comparable section or sections
of any future legislation which amends, supplements or supersedes said Section.
6.18 Applicable Law. The trust shall be construed in accordance with
the provisions of ERISA and other applicable federal law and, to the extent not
inconsistent with such laws, with the laws of the state of Texas.
6.19 Provisions To Comply With Revenue Ruling 81-100. This trust is
hereby adopted as a part of each plan. Each plan and each related trust which
implements a plan shall be eligible to invest its assets through this trust, and
each such plan shall by virtue of such investments be considered to have
incorporated as a part thereof the provisions of this trust. Only those plans
and trusts which remain qualified and tax exempt under Sections 401(a) and
501(a) of the Code may continue to invest their assets in this trust. No assets
of a plan may be used for or diverted to any purpose other than for the
exclusive benefit of participants and beneficiaries under such plan, and no
assets of a plan held under this trust may be assigned or alienated by
participants in such plan or by such plan. This trust has been created as a
trust under the laws of the State of Texas and at all times shall be maintained
as such.
ARTICLE 7
Resignation or Removal of Trustee
7.1 Resignation or Removal of Trustee. A trustee may resign at any
time by giving 30 days' prior written notice to the company and the trust
committee, and the company may
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remove a trustee by giving prior written notice to the trustee and the trust
committee. The trust committee shall notify the investment managers, plan
administrators and employers of any changes in trustee.
7.2 Successor Trustee. In the event of the resignation or removal of a
trustee, a successor trustee shall be appointed by the company as soon as
practicable. Notice of any such appointment shall be given by the company to the
retiring trustee, the successor trustee and the trust committee.
7.3 Duties of Retiring and Successor Trustees. In the event of the
resignation or removal of a trustee, the retiring trustee shall promptly furnish
to the successor trustee and the trust committee a final account of its
administration of the trust. A successor trustee shall succeed to the right and
title of the predecessor trustee in the assets of the trust fund and the
retiring trustee shall deliver the property comprising the trust fund to the
successor trustee together with any instruments of transfer, conveyance,
assignment and further assurance as the successor trustee may reasonably
require. Each successor trustee shall have all the powers conferred by this
agreement as if originally named trustee. To the extent permitted by law, no
successor trustee shall be personally liable for any act or failure to act of a
predecessor trustee.
ARTICLE 8
Amendment and Termination
8.1 Amendment. This trust may be amended from time to time by the
company; provided that the duties and liabilities of the trustee, the trust
committee or the plan administrator of a participating plan cannot be changed
substantially without its consent: and provided further that, except as
permitted in accordance with the provisions of section 6.2, under no condition
shall an amendment result in the return or the repayment to the employers of any
part of the trust fund or the income from it or result in the distribution of
the trust fund for the benefit of anyone other than persons entitled to benefits
under the plans.
8.2 Termination. If a plan is terminated, this trust and all the
rights, titles, powers, duties, discretions and immunities imposed on or
reserved to the trustee, the employers, any investment managers, the trust
committee and the plan administrator shall continue in effect with respect to
the plan until all assets of the plan have been distributed by the trustee
either to the participating trust implementing the plan or, if no such
participating trust implements the plan, as directed by the plan administrator
under the plan.
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IN WITNESS WHEREOF, the company has caused this agreement to be signed
and attested by its duly authorized officers, and the trustee has signed this
agreement, as of the day and year first above written.
VALHI, INC.
ATTEST: By
---------------------------------
Michael A. Snetzer
Its President
- --------------------------
Its Assistant Secretary
------------------------------------
Harold C. Simmons, As Trustee
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Pre-effective
Amendment No. 2 to 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 caption "Experts."
COOPERS & LYBRAND L.L.P.
Dallas, Texas
January 30, 1998
<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 25, 1996 and to all references to our Firm in this
registration statement.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 2, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-35955 of Keystone Consolidated Industries, Inc. on Form S-4 of our report
dated February 28, 1997 (December 23, 1997 as to Note A) on Engineered Wire
Products, Inc., appearing in the Prospectus, which is part of this Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Dayton, OH
January 26, 1998
