SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period March 31, 1999
Commission file number 1-3919
Keystone Consolidated Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 37-0364250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, TX 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 458-0028
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
Number of shares of common stock outstanding at May 13, 1999: 9,926,531
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1998
and March 31, 1999 3-4
Consolidated Statements of Operations - Three months
ended March 31, 1998 and 1999 5
Consolidated Statements of Cash Flows - Three months
ended March 31, 1998 and 1999 6
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 1999 7
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1998 1999
<S> <C> <C>
Current assets:
Notes and accounts receivable $ 36,786 $ 48,701
Inventories 52,239 50,054
Deferred income taxes 18,985 17,948
Prepaid expenses and other 3,916 5,944
Total current assets 111,926 122,647
Property, plant and equipment 354,682 350,826
Less accumulated depreciation 198,582 194,815
Net property, plant and equipment 156,100 156,011
Other assets:
Restricted investments 8,624 8,746
Prepaid pension cost 120,516 123,016
Deferred financing costs 3,493 3,378
Goodwill 1,115 1,087
Other 4,083 4,264
Total other assets 137,831 140,491
$405,857 $419,149
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
1998 1999
<S> <C> <C>
Current liabilities:
Notes payable and current maturities of
long-term debt $ 29,912 $ 50,989
Accounts payable 34,002 28,885
Accrued OPEB cost 10,000 10,000
Other accrued liabilities 37,457 34,844
Total current liabilities 111,371 124,718
Noncurrent liabilities:
Long-term debt 101,852 101,394
Accrued OPEB cost 99,047 98,705
Deferred income taxes 6,162 7,375
Negative goodwill 24,065 23,726
Other 10,283 9,780
Total noncurrent liabilities 241,409 240,980
Stockholders' equity:
Common stock 10,569 10,656
Additional paid-in capital 51,763 52,398
Accumulated deficit (9,243) (9,591)
Treasury stock, at cost (12) (12)
Total stockholders' equity 53,077 53,451
$405,857 $419,149
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1999
<S> <C> <C>
Revenues and other income:
Net sales $96,104 $91,717
Interest 226 82
Other, net 113 121
96,443 91,920
Costs and expenses:
Cost of goods sold 88,173 83,663
Selling 1,519 1,803
General and administrative 3,466 6,081
Overfunded defined benefit pension credit (2,308) (2,500)
Interest 2,593 3,516
93,443 92,563
Income (loss) before income taxes 3,000 (643)
Provision (benefit) for income taxes 798 (295)
Net income (loss) 2,202 (348)
Dividends on preferred stock 70 -
Net income (loss) available for common shares $ 2,132 $ (348)
Net income (loss) per share available for common shares:
Basic $ .23 $ (.04)
Diluted $ .22 $ (.04)
Weighted average common and common equivalent
shares outstanding:
Basic 9,318 9,838
Diluted 9,526 9,838
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,202 $ (348)
Depreciation and amortization 4,739 5,853
Amortization of deferred financing costs 126 130
Deferred income taxes 720 2,249
Other, net 22 (443)
Change in assets and liabilities:
Accounts receivable (15,611) (12,436)
Inventories (1,660) 1,345
Prepaid pension cost (2,308) (2,500)
Accounts payable 5,379 (3,797)
Other, net (4,529) (3,984)
Net cash used by operating activities (10,920) (13,931)
Cash flows from investing activities:
Capital expenditures (16,185) (6,537)
Other, net (773) (151)
Net cash used by investing activities (16,958) (6,688)
Cash flows from financing activities:
Revolving credit facilities, net 5,728 21,074
Other notes payable and long-term debt:
Additions - 103
Principal payments (484) (558)
Common stock issued 82 -
Preferred stock dividend payments (70) -
Net cash provided by financing activities 5,256 20,619
Net change in cash and cash equivalents (22,622) -
Cash and cash equivalents, beginning of period 22,622 -
Cash and cash equivalents, end of period $ - $ -
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized $ 4,858 $ 5,840
Income taxes 77 673
Common stock contributed to employee benefit plan $ 616 $ 722
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Additional
Common paid-in Accumulated Treasury
Stock capital deficit stock Total
<S> <C> <C>
Balance - December 31, 1998 $10,569 $51,763 $(9,243) $(12) $53,077
Net loss - - (348) - (348)
Issuance of common stock 87 635 - - 722
Balance - March 31, 1999 $10,656 $52,398 $(9,591) $(12) $53,451
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
The consolidated balance sheet at December 31, 1998 has been condensed from
the Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 1999 and the consolidated statements of
operations and cash flows for the interim periods ended March 31, 1998 and 1999,
and the consolidated statement of stockholders' equity for the interim period
ended March 31, 1999, have each been prepared by the Company, without audit. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows have been made. However, it should be
understood that accounting measurements at interim dates may be less precise
than at year end. The results of operations for the interim periods are not
necessarily indicative of the operating results for a full year or of future
operations.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted. The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 (the "Annual
Report").
Contran Corporation ("Contran") and other entities controlled by Mr. Harold
C. Simmons, beneficially own approximately 50% of the Company. Substantially
all of Contran's outstanding voting stock is held either by trusts established
for the benefit of certain children and grandchildren of Mr. Simmons, of which
Mr. Simmons is sole trustee, or by Mr. Simmons directly. The Company may be
deemed to be controlled by Contran and Mr. Simmons.
Note 2 - Joint ventures:
In January 1999, Keystone and two unrelated parties formed Garden Zone LLC
("Garden Zone"), a joint venture to supply wire, wood and plastic products to
the consumer lawn and garden markets. Keystone owns 51% of the joint venture
and, as such, Keystone's consolidated financial statements at March 31, 1999
include the accounts of Garden Zone. Neither Keystone, or the other owners,
contributed any capital or other assets to the Garden Zone joint venture, but
Keystone did guarantee Garden Zone's new $4 million revolving credit agreement.
See Note 5. Garden Zone commenced operations in February 1999 and through March
31, 1999 incurred a pre-tax loss of $172,000, all of which accrued to Keystone
for financial reporting purposes.
In May 1999, Keystone announced it had agreed to enter into a joint venture
with Alter Peoria, Inc. ("Alter"), an unrelated entity, to operate a scrap
recycling operation at Keystone's facility in Peoria, Illinois. The joint
venture will be known as Alter Recycling Company, L.L.C. and Keystone's 50%
interest will be owned through one of Keystone's wholly-owned subsidiaries.
Keystone will contribute the property and equipment of its current Peoria scrap
facility to the joint venture and Alter will contribute an equal amount of cash
of approximately $400,000. Keystone does not currently anticipate it will be
required to make any other contributions to fund or operate this joint venture.
Note 3 - Disposition:
In January 1999, Keystone's wholly-owned subsidiary, DeSoto, Inc. sold its
household cleaning products division. DeSoto did not record any gain or loss as
a result of this sale.
Note 4 - Inventories:
Inventories are stated at the lower of cost or market. At December 31,
1998 and March 31, 1999, the last-in, first-out ("LIFO") method was used to
determine the cost of approximately three-fourths of total inventories and the
first-in, first-out or average cost methods was used to determine the cost of
other inventories.
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
(In thousands)
<S> <C> <C>
Raw materials:
Steel and wire products $17,400 $14,520
Household cleaning products 650 -
18,050 14,520
Work in process -
Steel and wire products 8,642 7,477
Finished products:
Steel and wire products 12,797 18,161
Household cleaning products 249 -
13,046 18,161
Supplies:
Steel and wire products 16,894 14,230
56,632 54,388
Less LIFO reserve:
Steel and wire products 4,334 4,334
Household cleaning products 59 -
4,393 4,334
$52,239 $50,054
</TABLE>
Note 5 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
(In thousands)
<S> <C> <C>
9 5/8% Senior Secured Notes, due August 2007 $100,000 $100,000
Commercial credit agreements:
Revolving credit facilities:
Keystone 24,580 42,601
EWP 4,000 4,766
Garden Zone - 2,287
Term loan - EWP 1,020 875
Other 2,164 1,854
131,764 152,383
Less current maturities 29,912 50,989
$101,852 $101,394
</TABLE>
Note 6 - Income taxes:
Summarized below are (i) the differences between the provision (benefit)
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 (benefit) for income taxes.
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1999
(In thousands)
<S> <C> <C>
Expected tax expense (benefit), at statutory rate $1,050 $ (225)
U. S. state income taxes, net 66 19
Amortization of goodwill (109) (109)
Other, net (209) 20
Comprehensive provision (benefit) for income taxes $ 798 $ (295)
Comprehensive provision (benefit) for income taxes:
Currently payable (refundable):
U.S. federal $ 401 $(2,307)
U.S. state 7 (237)
Benefit of loss carryforwards (201) -
Utilization of alternative minimum tax credits (129) -
Net currently payable (refundable) 78 (2,544)
Deferred income taxes, net 720 2,249
$ 798 $ (295)
</TABLE>
Note 7 - Other accrued liabilities:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
(In thousands)
<S> <C> <C>
Current:
Salary, wages, vacations and other
employee expenses $11,560 $10,011
Environmental 7,165 7,915
Self insurance 6,950 7,170
Interest 4,054 1,608
Disposition of former facilities 1,452 1,320
Legal and professional 795 771
Other 5,481 6,049
$37,457 $34,844
Noncurrent:
Environmental $ 8,175 $ 8,175
Deferred gain 821 347
Other 1,287 1,258
$10,283 $ 9,780
</TABLE>
Note 8 - Operations:
During 1998, the Company's operations were 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. Beginning in 1999, Keystone is also engaged in the
distribution of wire, plastic and wood lawn and garden products to retailers
through Garden Zone. Garden Zone's identifiable segment assets at March 31,
1999 were approximately $3.7 million. In January 1999, Keystone sold its
household cleaning products division. See Note 3. At December 31, 1998,
identifiable segment assets related to the household cleaning products division
amounted to approximately $2.3 million.
<TABLE>
<CAPTION>
Three months ended
1998 1999
(In thousands)
<S> <C> <C>
Revenues:
Steel and wire products $92,980 $89,848
Lawn and garden products - 3,029
Household cleaning products 3,124 -
96,104 92,877
Elimination of intersegment revenues - (1,160)
$96,104 $91,717
Income (loss) before income taxes:
Operating profit (loss):
Steel and wire products $4,579 $ 2,194
Lawn and garden products - (156)
Household cleaning products 3 -
4,582 2,038
General corporate items:
Interest income 226 82
General income (expense), net 785 753
Interest expense (2,593) (3,516)
$ 3,000 $ (643)
</TABLE>
Note 9 - Contingencies:
At March 31, 1999, the Company's financial statements reflected accrued
liabilities of $16.1 million for estimated remedial 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.
For additional information related to commitments and contingencies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
Keystone is a leading manufacturer of fabricated wire products, industrial
wire and carbon steel rod for the agricultural, industrial, construction,
original equipment manufacturer and retail consumer markets. Historically, the
Company has experienced greater sales and profits during the first half of the
year due to the seasonality of sales in principal wire products markets,
including the agricultural and construction markets.
Beginning in 1999, Keystone is also engaged in the distribution of wire,
plastic and wood lawn and garden products to retailers through its 51%-owned
subsidiary Garden Zone LLC ("Garden Zone"). Garden Zone was formed as a joint
venture between Keystone and two unrelated parties in January 1999. See Note 2
to the Consolidated Financial Statements.
Prior to January 1999, Keystone was also engaged in the manufacture and
distribution of household cleaning products through its wholly-owned subsidiary
DeSoto, Inc. ("DeSoto"). In January 1999, DeSoto sold its household cleaning
products division. See Note 3 to the Consolidated Financial Statements.
The statements in this Quarterly Report on Form 10-Q relating to matters
that are not historical facts including, but not limited to, statements found in
this Item 2 - Management's Discussion And Analysis Of Financial Condition And
Results Of Operations", are forward looking statements based on management's
belief and assumptions using currently available information. Although the
Company believes the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that these expectations will prove to
be correct. Such statements involve risks and uncertainties, including, but not
limited to, cost of raw materials, future supply and demand for the Company's
products (including cyclicality thereof), general economic conditions,
competitive products and substitute products, customer and competitor
strategies, the impact of pricing and production decisions, environmental
matters, government regulations and possible changes therein, the ultimate
resolution of pending litigation, successful implementation of the Company's
capital improvements plan, possible disruptions of normal business activity from
Year 2000 issues and any possible future litigation and other risks and
uncertainties as discussed in this Quarterly Report and the Annual Report,
including, without limitation, the section referenced above. Should one or more
of these risks materialize, or should the underlying assumptions prove
incorrect, actual results could differ materially from those forecasted or
expected. The Company assumes no duty to publicly update such statements.
The following table sets forth the Company's production and sales volume
data for the periods indicated:
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1999
(In thousands of tons)
<S> <C> <C>
Production volume:
Billets:
Produced 171 155
Purchased - 28
Rod 172 172
Sales volume:
Fabricated wire products 76 85
Industrial wire 42 38
Steel rod 64 54
182 277
</TABLE>
The following table sets forth the components of the Company's net sales
for the periods indicated.
<TABLE>
<CAPTION>
Three months ended March 31,
(In millions)
1998 1999
<S> <C> <C>
Fabricated wire products $52.5 $58.7
Industrial wire 20.5 17.6
Rod 19.7 13.2
Lawn and garden products - 1.9
Household cleaning products 3.1 -
Other .3 .3
$96.1 $91.7
</TABLE>
The following table sets forth selected operating data of the Company as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1999
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 91.7 91.2
Gross profit 8.3 8.8
Selling expense 1.6 2.0
General and administrative expense 3.6 6.6
Overfunded defined benefit pension credit (2.4) (2.7)
Income (loss) before income taxes 3.1% (.7)%
Provision (benefit) for income taxes .8 (.3)
Net income (loss) 2.3% (.4)%
</TABLE>
Billet production during the 1999 first quarter (155,000 tons) declined
from the 1998 first quarter (171,000) tons primarily due to start-up production
problems related to the Company's new electric arc furnace installed in the 1998
fourth quarter. Although billet production during the 1999 first quarter
declined from the 1998 first quarter, rod production in the 1999 period (172,000
tons) was comparable with the 1998 period due to Keystone purchasing 28,000 tons
of billets in the 1999 period. During the 1998 period, the Company did not
purchase any billets.
Net sales of $91.7 million in the 1999 first quarter were down 5 percent
from $96.1 million in the same period in 1998. The decline in sales was due to
a 1% overall decrease in product per ton selling prices, coupled with a 3%
decrease in sales volume. Although rod production was constant between the 1999
and 1998 periods, shipments of rod declined 15% while per ton selling prices of
rod declined 21%. Industrial wire shipments during 1999 declined 9% from the
1998 quarter while per ton selling prices declined 6%. Fabricated wire product
shipments increased 11% during the 1999 first quarter as compared to the 1998
first quarter while per ton selling prices increased 1%.
Gross profit during the 1999 first quarter increased slightly to $8.1
million from $7.9 million in the 1998 first quarter as the Company's gross
margin increased from 8.3% in the 1998 period to 8.8% in the 1999 first quarter.
This increase in gross margin was due to lower costs for scrap steel, Keystone's
primary raw material, partially offset by higher production costs associated
with weather related issues and the start-up of new equipment installed at the
Company's steel mini-mill in Peoria, Illinois and purchased billet costs. The
Company believes it has identified the start-up problems and expects to have
these problems resolved by the start of the 1999 third quarter. During the 1999
first quarter, the Company purchased 111,000 tons of scrap at an average price
of $80 per ton as compared to 1998 first quarter purchases of 175,000 tons at an
average price of $125 per ton. During the 1999 first quarter, Keystone
purchased 28,000 tons of billets at an average price of $199 per ton, as
compared to none in the 1998 first quarter.
Selling expenses increased 19% to $1.8 million in the first quarter of 1999
from $1.5 million in the 1998 first quarter but remained relatively constant as
a percentage of net sales.
General and administrative expenses during the 1999 first quarter increased
$2.6 million to $6.1 million from $3.5 million in the 1998 first quarter due
primarily to higher general insurance and environmental charges, an unfavorable
legal settlement of $460,000 in the 1999 first quarter and administrative
expenses associated with the start-up of Garden Zone during the 1999 first
quarter. In addition, the 1998 first quarter included legal fee reimbursements
of $380,000.
Interest expense in the first quarter of 1999 was higher than the first
quarter of 1998 due principally to higher average borrowing levels under the
Company's revolving credit facilities. Average borrowings by the Company under
its revolving credit facilities, term loans and 9 5/8% Senior Secured Notes
approximated $142.1 million in the first quarter of 1999 as compared to $106.2
million in the first quarter of 1998. During the first quarter of 1999, the
average interest rate paid by the Company was 9.3% per annum as compared to 9.6%
per annum in the first quarter of 1998.
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.
As a result of the items discussed above, the Company incurred a net loss
during the first quarter of 1999 of $348,000 as compared to net income of $2.2
million in the first quarter of 1998.
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 impact the timing of production, sales and purchases and have
typically resulted in a use of cash from operations and increases in the
outstanding balance under the Company's revolving credit facilities during the
first quarter of each year.
At March 31, 1999 the Company had negative working capital of $2.1 million,
including $2.1 million of notes payable and current maturities of long-term debt
as well as outstanding borrowings under the Company's revolving credit
facilities of $48.9 million. The amount of available borrowings under these
credit facilities is based on formula-determined amounts of trade receivables
and inventories, less the amount of outstanding letters of credit. Under the
terms of the indenture related to the Company's 9 5/8% Senior Secured Notes,
Keystone's ability to borrow in excess of $25 million under its $55 million
revolving credit facility is dependent upon maintenance of a consolidated cash
flow ratio (as defined) for the most recently completed four fiscal quarters of
at least 2.5 to 1. At March 31, 1999, unused credit available for borrowing
under Keystone's $55 million revolving credit facility, which expires December
31, 1999, EWP's $6 million revolving credit facility, which expires June 30,
2000, and Garden Zone's $4 million revolving credit facility, which expires
December 11, 1999, were $11.6 million, $.9 million, and $.9 million,
respectively, at March 31, 1999, all of which could be borrowed under the terms
of the indenture. Keystone's $55 million revolving credit facility requires
daily cash receipts be used to reduce outstanding borrowings, which results in
the Company maintaining zero cash balances when there are balances outstanding
under this credit facility.
During the first quarter of 1999, the Company's operating activities used
approximately $13.9 million of cash compared to $10.9 million in the first
quarter of 1998 due primarily to lower earnings.
During 1997, the Company commenced a $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.
Keystone substantially completed the capital improvement plan during 1998. As
such, capital expenditures in the 1999 first quarter were substantially less
than capital expenditures during the 1998 first quarter. During the first
quarter of 1999, the Company made capital expenditures of approximately $6.5
million as compared to $16.2 million in the 1998 first quarter. Capital
expenditures for 1999 are currently estimated to be approximately $28 million
and are related primarily to upgrades and debottlenecking of production
equipment. These capital expenditures will be funded using borrowing
availability under the Company's revolving credit facilities.
At March 31, 1999, the Company's financial statements reflected accrued
liabilities of $16.1 million for estimated remediation costs arising from
environmental issues. There is no assurance regarding the ultimate cost of
remedial measures that might eventually be required by environmental authorities
or that additional environmental hazards, requiring further remedial
expenditures, might not be asserted by such authorities or private parties.
Accordingly, the costs of remedial measures may exceed the amounts accrued.
In May 1999, Keystone announced it had agreed to enter into a joint venture
with an unrelated entity to operate a scrap recycling operation at Keystone's
facility in Peoria, Illinois. See Note 2 to the Consolidated Financial
Statements.
The Company incurs significant ongoing costs for plant and equipment and
substantial employee medical benefits for both current and retired employees.
As such, the Company is vulnerable to business downturns and increases in costs,
and accordingly, routinely compares its liquidity requirements and capital needs
against its estimated future operating cash flows. As a result of this process,
the Company has in the past, and may in the future, reduce controllable costs,
modify product mix, acquire and dispose of businesses, restructure certain
indebtedness, and raise additional equity capital. The Company will continue to
evaluate the need for similar actions or other measures in the future in order
to meet its obligations. The Company also routinely evaluates acquisitions of
interests in, or combinations with, companies related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities or increasing the indebtedness of the Company. The Company's
ability to incur new debt in the future is limited by the terms of the indenture
related to the 9 5/8% Senior Secured Notes.
Approximately 1,700 of the Company's employees in Peoria, Illinois are
represented by the Independent Steel Workers Alliance ("ISWA"). Upon expiration
of the then existing collective bargaining agreement on May 3, 1999, the Company
and the ISWA entered into an extension of the agreement until May 10, 1999. On
May 8, 1999, ISWA membership ratified a new three year agreement with the
Company that provides for, among other things, increased wages and pension
benefits for the membership.
Management believes the cash flows from operations together with the funds
available under the Company's revolving credit facilities will provide
sufficient funds to fund the anticipated needs of its operations for the year
ending December 31, 1999. This belief is based upon management's assessment of
various financial and operational factors, including, but not limited to,
assumptions relating to product shipments, product mix and selling prices,
production schedules, productivity rates, raw materials, electricity, labor,
employee benefits and other fixed and variable costs, working capital
requirements, interest rates, repayments of long-term debt, capital
expenditures, and available borrowings under the Company's revolving credit
facilities. However, liabilities under environmental laws and regulations with
respect to the clean-up and disposal of wastes, or 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.
Year 2000 Issue
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
programs that have date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "Year 2000 Issue"). This could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition.
The Company is in the process of taking an inventory of its information
systems to determine the modifications to existing software and new software
required to mitigate any Year 2000 Issues. The Company's evaluation includes
information systems infrastructure, financial and administrative systems,
process control and manufacturing operating systems as well as significant
vendors and customers. The Company expects this inventory will be completed
during the 1999 second quarter. Because the majority of Keystone's significant
information systems have recently been installed or updated, many of the
Company's systems and related software are already year 2000 compliant.
Keystone is utilizing both internal and external sources to reprogram or
replace and test its software and/or hardware with imbedded chips and the
Company expects to have its evaluation completed by the end of the third quarter
of 1999 and required modifications completed prior to December 31, 1999.
Although the Company expects its critical systems to be compliant by
December 31, 1999, there is no assurance these results will be achieved.
However, the impact of a failure of any of the Company's information systems
would be mitigated to the extent that other alternate processes, including
manual processes, were able to meet processing requirements. Presently,
Keystone expects alternate procedures would be able to meet the Company's
processing needs. In addition, excluding recent equipment additions that are
year 2000 compliant, a significant portion of Keystone's plant and equipment is
aged and doesn't include imbedded chip technology susceptible to Year 2000
Issues.
Keystone relies on third parties for raw materials, utilities,
transportation and other key services. In addition, the Company is dependent
upon its customers for cash flow. The Company has initiated formal
communications with its suppliers and customers to determine the extent to which
the Company is vulnerable to those third parties' failure to eliminate their own
Year 2000 Issues. Notwithstanding the Company's efforts, the ability of the
Company to affect the Year 2000 Issues preparedness of such customers and
suppliers is limited. Keystone presently expects to complete these third party
communications during the 1999 second quarter and will at that time begin
developing contingency plans for potential non-compliance by these third
parties. Year 2000 Issues that adversely impact these third parties could also
affect the operations of the Company. There can be no assurance the systems of
other companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
Because the Company has not completed the evaluation of its Year 2000
Issue, it is not able to quantify the costs that may be incurred in order to
eliminate any Year 2000 Issues. The total costs that will be incurred by
Keystone in connection with resolving its Year 2000 Issues will be impacted by
the Company's ability to successfully identify its Year 2000 Issues, the level
of effort required to remediate the issue and the ability of third parties to
successfully address their own Year 2000 Issues. Total costs incurred to date
relative to the remediation of the Company's Year 2000 Issues have been expensed
as incurred and have not been material.
Although not anticipated, the most reasonably likely worst-case scenario of
failure by the Company or its key suppliers or customers to become year 2000
compliant would be short-term slowdown or cessation of manufacturing operations
at one or more facilities and a short-term inability on the part of the Company
to process orders and billings in a timely manner, and to deliver product to
customers.
The costs of the project and the date on which the Company plans to
complete its year 2000 assessment and remediation are based on management's
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ significantly
from those plans. Specific factors that might cause differences from
management's estimates include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
relevant computer codes, and similar uncertainties. Management believes the
Company is devoting the necessary resources to identify and resolve significant
Year 2000 Issues in a timely manner.
PART II.
ITEM 1. Legal Proceedings
Reference is made to disclosure provided under the caption "Current
litigation" in Note 15 to the Consolidated Financial Statements included in the
Annual Report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included herein:
10.1*--Form of deferred compensation agreement between Registrant and
certain executive officers.
27.1 --Financial Data Schedule for the three month period ended
March 31, 1999.
* Management contract, compensation plan or agreement.
(b) Reports on Form 8-K filed during the quarter ended March 31, 1999:
None
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Keystone Consolidated Industries, Inc.
(Registrant)
Date: May 13, 1999 By /s/Harold M. Curdy
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: May 13, 1999 By /s/Bert E. Downing, Jr.
Bert E. Downing, Jr.
Corporate Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Keystone
Consolidated Industries, Inc.'s consolidated financial statements for the three
months ended March 31, 1999 and is qualified in its entirety by reference to
such.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 53,466
<ALLOWANCES> 4,765
<INVENTORY> 50,054
<CURRENT-ASSETS> 122,647
<PP&E> 350,826
<DEPRECIATION> 194,815
<TOTAL-ASSETS> 419,149
<CURRENT-LIABILITIES> 124,718
<BONDS> 101,394
0
0
<COMMON> 10,656
<OTHER-SE> 42,795
<TOTAL-LIABILITY-AND-EQUITY> 419,149
<SALES> 91,717
<TOTAL-REVENUES> 91,920
<CGS> 83,663
<TOTAL-COSTS> 83,663
<OTHER-EXPENSES> 5,269
<LOSS-PROVISION> 115
<INTEREST-EXPENSE> 3,516
<INCOME-PRETAX> (643)
<INCOME-TAX> (295)
<INCOME-CONTINUING> (348)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (348)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
EXHIBIT 10.1
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT, made as of January 1, 1999, to be effective as of January
1, 1998, by and between, Keystone Consolidated Industries, Inc., a Delaware
corporation, (the "COMPANY") and _______________________ ("EMPLOYEE"), amends
and restates in its entirety that certain Deferred Compensation Agreement dated
as of January 1, 1998, by and between the Company and Employee.
W I T N E S S E T H:
WHEREAS, Employee has been and is presently employed by the Company and
currently serves as an employee thereof; and
WHEREAS, Employee possesses an intimate knowledge of the business and
affairs of the Company and its policies, procedures, methods and personnel; and
WHEREAS, the Company desires to further compensate Employee for services
performed by establishing a deferred compensation arrangement on Employee's
behalf.
NOW, THEREFORE, for and in consideration of the mutual premises,
representations and covenants herein contained, the parties hereto mutually
agree as follows:
1. Deferred compensation shall be credited by the Company to a reserve
account on its accounting books (the "RESERVE ACCOUNT"), on behalf of
Employee, and such deferred compensation shall be deferred and
accumulated.
2. The amount of deferred compensation to be credited to the Reserve
Account on behalf of Employee shall be such amount as agreed upon from
time to time by Employee and the Company.
3. An additional amount shall be credited to the Reserve Account, in lieu
of interest, at the end of each calendar quarter and on the date
payment is made pursuant to Section 4 of this Agreement, equal to the
Prime Rate plus two percent (2%) per annum, as may be adjusted from
time to time, multiplied by the balance outstanding in the Reserve
Account on a daily basis during each calendar quarter. The "Prime
Rate" for purposes of this Agreement shall mean the fluctuating
interest rate per annum in effect from time to time equal to the base
rate on corporate loans as reported as the Prime Rate in the Money
Rates column of the Wall Street Journal, Southwest Edition.
4. Upon the termination of Employee's employment with the Company,
voluntarily, involuntarily or by retirement, death or disability, the
Company shall pay in cash the full credit balance in the Reserve
Account to or on behalf of Employee in a lump sum within one-hundred
eighty (180) days of such termination.
5. It is specifically understood and agreed by the parties hereto that
the deferred compensation provided for in this Agreement shall not be
funded. The obligation of the Company hereunder is a contractual
obligation to make the payments of deferred compensation when due in
accordance with the terms hereof, and the parties hereto do not intend
that the amounts credited to the Reserve Account are to be held by the
Company in trust, escrow or other fiduciary capacity for Employee.
The amounts credited to the Reserve Account shall not be subject in
any manner to attachment or other legal process for debts of Employee
or his successors, legal representatives or assigns, for any reason;
and neither Employee, nor any legal representative, successor or
assign shall have any right against the Company with respect to any
portion of the amounts credited to the Reserve Account, except as a
general unsecured creditor of the Company. Neither Employee nor his
successors, assigns or legal representatives shall have any right to
assign, transfer, pledge, hypothecate, anticipate or otherwise
alienate any payment of deferred compensation to become due in the
future to such person, and any attempt to do so shall be void and will
not be recognized by the Company.
6. It is agreed by Employee and the Company that the correct outstanding
balance of the Reserve Account, computed as of ___________________,
was $__________.
IN WITNESS WHEREOF, the parties have hereunto affixed their signatures as
of January 1, 1999.
ATTEST: KEYSTONE CONSOLIDATED
INDUSTRIES, INC.
______________________________ _________________________________
EMPLOYEE:
__________________________________
