-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F98HDWYpYyBm4UsBnq8QzY1uHEljPjBsA20f2ucleaLHj3i0G9JDem1S5AQt3xls iALkeEqWjWnmnl8wZJAX/g== 0000055604-97-000006.txt : 19970815 0000055604-97-000006.hdr.sgml : 19970815 ACCESSION NUMBER: 0000055604-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE CONSOLIDATED INDUSTRIES INC CENTRAL INDEX KEY: 0000055604 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 370364250 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03919 FILM NUMBER: 97663852 BUSINESS ADDRESS: STREET 1: 5430 LBJ FWY STE 1740 STREET 2: THREE LINCOLN CENTRE CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144580028 MAIL ADDRESS: STREET 1: 5430 LBJ FWY STE 1740 STREET 2: THREE LINCOLN CENTRE CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: KEYSTONE STEEL & WIRE CO DATE OF NAME CHANGE: 19710506 10-Q 1 KEYSTONE CONSOLIDATED INDUSTRIES FORM 10-Q 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 June 30, 1997 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 August 11, 1997 9,287,898 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 31, 1996 and June 30, 1997 3-4 Consolidated Statements of Operations - Three months and six months ended June 30, 1996 and 1997 5 Consolidated Statements of Cash Flows - Six months ended June 30, 1996 and 1997 6 Consolidated Statement of Redeemable Preferred Stock and Common Stockholders' Equity - Six months ended June 30, 1997 7 Notes to Consolidated Financial Statements 8-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K 20 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, June 30, ASSETS 1996 1997 Current assets: Notes and accounts receivable $35,974 $ 43,798 Inventories 36,533 35,834 Deferred income taxes 16,381 17,488 Prepaid expenses 1,542 626 Total current assets 90,430 97,746 Property, plant and equipment 262,441 271,333 Less accumulated depreciation 169,833 176,680 Net property, plant and equipment 92,608 94,653 Other assets: Restricted investments 7,691 7,442 Prepaid pension cost 104,726 106,226 Deferred income taxes 2,181 - Other 4,732 4,391 Total other assets 119,330 118,059 $302,368 $310,458
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30, 1996 1997 Current liabilities: Notes payable and current maturities of long-term debt $ 34,760 $ 39,204 Accounts payable 34,419 31,485 Accounts payable to affiliates 159 167 Accrued OPEB cost 8,368 8,397 Other accrued liabilities 28,631 32,722 Total current liabilities 106,337 111,975 Noncurrent liabilities: Long-term debt 17,020 15,306 Accrued OPEB cost 100,818 101,271 Negative goodwill 27,057 26,099 Other 16,466 14,697 Total noncurrent liabilities 161,361 157,373 Redeemable preferred stock 3,500 3,500 Stockholders' equity: Common stock 9,920 9,994 Additional paid-in capital 46,347 46,882 Accumulated deficit (25,085) (19,254) Treasury stock, at cost (12) (12) Total stockholders' equity 31,170 37,610 $302,368 $310,458
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three months ended Six months ended June 30, June 30, 1996 1997 1996 1997 Revenues and other income: Net sales $90,655 $103,232 $170,118 $192,381 Other, net 154 243 186 442 90,809 103,475 170,304 192,823 Costs and expenses: Cost of goods sold 83,288 89,801 157,675 170,592 Selling 967 1,215 2,006 2,460 General and administrative 4,314 4,897 9,296 9,280 Overfunded defined benefit pension credit - (750) - (1,500) Interest 902 1,346 1,869 2,736 89,471 96,509 170,846 183,568 Income (loss) before income taxes 1,338 6,966 (542) 9,255 Provision for income taxes (benefit) 528 2,619 (215) 3,284 Net income (loss) 810 4,347 (327) 5,971 Dividends on preferred stock - 70 - 140 Net income (loss) available for common shares $ 810 $ 4,277 $ (327) $ 5,831 Primary net income (loss) available for common shares per common and common equivalent share $ .14 $ .46 $ (.06) $ .63 Fully diluted net income (loss) available for common shares per common and common equivalent share $ .14 $ .45 $ (.06) $ .62 Weighted average common and common equivalent shares outstanding: Primary 5,693 9,295 5,678 9,279 Fully diluted 5,693 9,406 5,678 9,335
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 1996 and 1997 (In thousands)
1996 1997 Cash flows from operating activities: Net income (loss) $ (327) $5,971 Depreciation and amortization 7,095 6,536 Deferred income taxes (2,009) 1,074 Other, net 518 753 5,277 14,334 Change in assets and liabilities: Notes and accounts receivable (8,977) (8,025) Inventories 8,829 699 Accounts payable (3,220) (2,926) Pension (3,900) (1,500) Other, net 2,938 4,334 Net cash provided by operating activities 947 6,916 Cash flows from investing activities: Capital expenditures (7,400) (9,616) Other 104 110 Net cash used by investing activities (7,296) (9,506) Cash flows from financing activities: Revolving credit facility, net 8,179 4,456 Other notes payable and long-term debt: Additions 11 247 Principal payments (1,841) (1,973) Preferred stock dividend payments - (140) Net cash provided by financing activities 6,349 2,590 Net change in cash and cash equivalents - - Cash and cash equivalents, beginning of period - - Cash and cash equivalents, end of period $ - $ - Supplemental disclosures: Cash paid for: Interest, net of amount capitalized $ 2,060 $ 2,980 Income taxes 278 928
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY Six months ended June 30, 1997 (In thousands)
Common stockholders' equity Redeemable Additional preferred Common paid-in Accumulated Treasury stock Stock capital (deficit) stock Total Balance - December 31, 1996 $3,500 $9,920 $46,347 $(25,085) $ (12) $31,170 Net income - - - 5,971 - 5,971 Issuance of common stock - 74 535 - - 609 Preferred dividends declared 140 - - (140) - (140) Preferred dividends paid (140) - - - - - Balance -June 30, 1997 $3,500 $9,994 $46,882 $(19,254) $ (12) $37,610
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, 1996 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at June 30, 1997 and the consolidated statements of operations and cash flows for the interim periods ended June 30, 1996 and 1997, and the consolidated statement of redeemable preferred stock and common stockholders' equity for the interim period ended June 30, 1997, 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, 1996 (the "Annual Report"). Contran Corporation ("Contran") holds, directly or through subsidiaries, approximately 41% of the Company's outstanding stock. Contran may be deemed to control the Company. Note 2 - Net income (loss) available for common shares per common and common equivalent share: Net income (loss) per share is based on the weighted average number of common and common equivalent shares outstanding during each year. Outstanding stock options and other common stock equivalents are excluded from the computations when the effect of their assumed exercise is antidilutive. Effective December 31, 1997, the Company will retroactively adopt Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." 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. Note 3 - Acquisition: On September 27, 1996, the stockholders of Keystone and DeSoto, Inc. ("DeSoto") approved the merger of the two companies (the "Acquisition") in which DeSoto became a wholly-owned subsidiary of Keystone. The Acquisition included the simultaneous 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. The following pro forma financial information 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 period, nor do they purport to represent results of future operations of the merged companies.
Three months ended Six months ended June 30, 1996 June 30, 1996 (In millions, except per share data) Revenues and other income $94.4 $177.7 Net income (loss) .2 (.9) Net income (loss) available to common stockholders .1 (1.1) Net income (loss) per Keystone common share $ .01 $ (.12)
Assuming the Acquisition and pension plan merger occurred January 1, 1996, pro forma net periodic defined benefit pension expense amounted to approximately $1.2 million and $2.4 million during the three month and six month periods, respectively, ended June 30, 1996. Historical pension expense during the same periods amounted to approximately $1.9 million, and $3.8 million, respectively. Note 4 - 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 total inventories and the first-in, first-out or average cost methods are used to determine the cost of other inventories.
December 31, June 30, 1996 1997 (In thousands) Raw materials: Steel and wire products $12,548 $12,108 Household cleaning products 526 557 13,074 12,665 Work in process - Steel and wire products 12,824 12,764 Finished products: Steel and wire products 9,954 9,320 Household cleaning products 96 335 10,050 9,655 Supplies: Steel and wire products 13,612 13,777 49,560 48,861 Less LIFO reserve: Steel and wire products 12,996 12,996 Household cleaning products 31 31 13,027 13,027 $36,533 $35,834
Note 5 - Notes payable and long-term debt:
December 31, June 30, 1996 1997 (In thousands) Commercial credit agreements: Revolving credit facility $31,095 $35,551 Term loan 19,166 17,499 Urban and Community Development Assistance Grants 1,267 1,075 Other 252 385 51,780 54,510 Less current maturities 34,760 39,204 $17,020 $15,306
See Note 9 - Subsequent Event. Note 6 - Income taxes: The difference between the provision for income taxes and the amounts that would be expected using the U.S. federal statutory income tax rate is presented in the table below.
Three months ended Six months ended June 30, June 30, 1996 1997 1996 1997 Expected tax expense, at statutory rate $ 468 $ 2,438 $ (190) $ 3,239 U.S. state income taxes, net 64 294 (31) 361 Amortization of negative goodwill - (118) - (329) Other, net (4) 5 6 13 Provision for income taxes charged to results of operations 528 2,619 (215) 3,284 Stockholders' equity - pension component (1,337) 3,241 - - Comprehensive provision for income taxes $ (809) $ 2,619 $ 3,026 $ 3,284 Comprehensive provision for income taxes: Currently payable: U.S. federal $ 2,370 $ 2,579 $ 2,612 $ 3,537 U.S. state 461 519 472 696 Alternative minimum tax credits (1,091) (1,409) (1,290) (2,023) Net currently payable 1,740 1,689 1,794 2,210 Deferred income taxes, net (2,549) 930 1,232 1,074 $ (809) $ 2,619 $ 3,026 $ 3,284
Prior to the Acquisition, DeSoto received a Report of Tax Examination charges from the Internal Revenue Service that proposed adjustments resulting in additional taxes, penalties and interest for the years 1990 through 1993. DeSoto filed a formal appeal of the proposed adjustments and, in prior years, accrued an estimate of its liability related to this matter. On August 5, 1997, DeSoto entered into a tentative agreement with the IRS to settle the matter within previously accrued amounts. Note 7 - Other accrued liabilities:
December 31, June 30, 1996 1997 (In thousands) Current: Salary, wages, vacations and other employee expenses $11,085 $10,357 Environmental 5,354 6,964 Disposition of facilities 3,518 2,986 Self insurance 1,585 2,305 Legal and professional 1,542 1,264 Other 5,547 8,846 $28,631 $32,722 Noncurrent: Environmental $12,787 $10,667 Deferred gain 2,383 2,185 Other 1,296 1,845 $16,466 $14,697
Note 8 - Contingencies: At June 30, 1997, the Company's financial statements reflected accrued liabilities of $17.6 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. Note 9 - Subsequent event: On August 7, 1997, the Company completed a $100 million offering of 9 5/8% Senior Secured Notes. The notes are due in August 2007 and are collateralized by a second priority lien on substantially all of the existing and future fixed assets of the Company. A portion of the $97 million net proceeds was used to prepay and terminate the Company's term loan and repay borrowings under the Company's revolving credit facility. The Senior Secured Notes (the "Notes") were issued pursuant to an Indenture (the "Indenture") which, among other things, provides for optional redemptions, mandatory redemptions and certain covenants including provisions that, among other things, limit the ability of the Company to sell capital stock of subsidiaries, enter into sale and leaseback transactions and transactions with affiliates, create new liens and incur additional debt. In addition, the Company's ability to borrow in excess of $25 million under the Company's $55 million Revolving Credit Facility is dependent upon maintenance of certain cash flow ratios, as defined by the Indenture. The Indenture also limits the ability of the Company to pay dividends or other restricted payments, as defined. The following pro forma balance sheet information has been prepared assuming the Offering and the application of the net proceeds thereof was completed on June 30, 1997.
(In thousands) Cash and cash equivalents $ 43,275 Other current assets 97,746 Property, plant and equipment 94,653 Other assets 121,559 $357,233 Current maturities of long-term debt $ 320 Other current liabilities 72,703 Long-term debt 101,140 Other long-term liabilities 142,067 Redeemable preferred stock 3,500 Stockholders' equity 37,503 $357,233
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. 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 that involve a number of risks and uncertainties. Factors that could cause actual future results to differ materially from those expressed in such forward looking statements include, but are not limited to, cost of raw materials, future supply and demand for the Company's products (including cyclicality thereof), general economic conditions, competitive products and substitute products, customers and competitor strategies, the impact of pricing and production decisions, environmental matters, government regulations and possible changes therein, and the ultimate resolution of pending litigation, successful implementation of the Company's capital improvements plan and any possible future litigation as discussed in this Quarterly Report and the Annual Report, including, without limitation, the section referenced above. The following table sets forth the Company's production and sales volume data for the periods indicated.
Three months ended Six months ended June 30, June 30, 1996 1997 1996 1997 (In thousands of tons) Production volume: Billets: Produced 165 185 309 339 Purchased 17 27 21 38 Rod 176 203 337 381 Sales volume: Fabricated wire products 60 64 116 125 Industrial wire 42 51 79 89 Steel rod 89 89 157 166 191 204 352 380
The following table sets forth the components of the Company's net sales for the periods indicated.
Three months ended Six months ended June 30, June 30, 1996 1997 1996 1997 (In millions) Fabricated wire products $44.1 $ 46.3 $ 85.1 $89.2 Industrial wire 19.8 24.1 38.0 42.3 Steel rod 26.3 27.9 46.4 51.1 Household cleaning products and other .5 4.9 .6 9.8 $90.7 $103.2 $170.1 $192.4
The following table sets forth selected operating data of the Company as a percentage of net sales for the periods indicated.
Three months ended Six months ended JUNE 30, JUNE 30, 1996 1997 1996 1997 Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 91.9 87.0 92.7 88.7 Gross profit 8.1 13.0 7.3 11.3 Selling expense 1.1 1.2 1.2 1.3 General and administrative expense 4.8 4.7 5.5 4.8 Overfunded defined benefit pension credit - .7 - .8 Income (loss) before income taxes 1.5% 6.7 (.3)% 4.8 Provision (benefit) for income taxes .6 2.5 (.1)% 1.7 Net income (loss) .9% 4.2% (.2)% 3.1%
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. As a result of the increased selling prices, fabricated wire products and rod selling prices during the second quarter of 1997 increased 2% and 7%, respectively, over the 1996 second quarter. Industrial wire selling prices remained relatively constant between the two periods. Rod selling prices increased 4% while fabricated wire products and industrial wire selling prices decreased 2% and 1%, respectively, during the first six months of 1997 as compared to the first six months of 1996. Gross profit increased approximately 81% to $13.4 million in the second quarter of 1997 from $7.4 million in the 1996 second quarter. Gross profit increased to 13.0% in 1997 from 8.1% in 1996, primarily as a result of lower scrap costs and pension expense as well as slightly lower rod conversion costs. During the 1997 second quarter, the Company purchased 208,000 tons of scrap at an average price of $121 per ton as compared to 1996 second quarter purchases of 151,000 tons at an average price of $128 per ton. The acquisition of DeSoto in September 1996 included the simultaneous merger of the Company's and DeSoto's defined benefit pension plans. Pension expense charged to cost of goods sold was $1.9 million in the second quarter of 1996. The merger of the Company's defined benefit pension plans in connection with the acquisition of DeSoto in September 1996 resulted in a single overfunded defined benefit pension plan. As a result of the overfunded status of this plan, the Company recorded a pension credit of $750,000 in the second quarter of 1997. Gross profit increased approximately 76% to $21.8 million in the first half of 1997 from $12.4 million in the first half of 1996. Gross profit increased to 11.3% in 1997 from 7.3% in 1996, primarily as a result of lower scrap costs and pension expense as well as slightly lower rod conversion costs. During the first six months of 1997, the Company purchased 360,000 tons of scrap at an average price of $122 per ton as compared to 1996 purchases of 309,000 tons at an average price of $129 per ton. Pension expense charged to cost of goods sold was $3.8 million in the first half of 1996. As a result of the overfunded status of the Company's defined benefit pension plan, Keystone recorded a pension credit of $1.5 million in the first half of 1997. Selling expenses increased to $1.2 million in the second quarter of 1997 from $1.0 million in the 1996 second quarter, but remained relatively constant as a percentage of net sales. Selling expenses increased to $2.5 million in the first half of 1997 from $2.0 million in the first half of 1996, but also remained relatively constant as a percentage of net sales. General and administrative expenses increased $.6 million during the second quarter of 1997 as compared to the second quarter of 1996. This increase was primarily due to higher employee related expenses. General and administrative expenses remained constant at $9.3 million during the first half of 1997 as compared to the first half of 1996. This was primarily due to higher employee related expenses offset by $.9 million in amortization of negative goodwill resulting from the DeSoto acquisition. At June 30, 1997, the Company's financial statements reflected accrued liabilities of $17.6 million for estimated remediation costs arising from environmental issues. There is no assurance regarding the ultimate cost of remedial measures that might eventually be required by environmental authorities or that additional environmental hazards, requiring further remedial expenditures, might not be asserted by such authorities or private parties. Accordingly, the ultimate costs of remedial measures may exceed the amounts currently accrued. Interest expense in the second quarter of 1997 was higher than the second quarter of 1996 due principally to higher average borrowing levels. Average borrowings by the Company under its revolving credit facility and term loan approximated $54.8 million in the second quarter of 1997 as compared to $39.7 million in the second quarter of 1996. During the second quarter of 1997, the average interest rate paid by the Company was 9.5% per annum as compared to 9.25% per annum in the second quarter of 1996. Interest expense in the first half of 1997 was higher than the first half of 1996 due principally to higher borrowing levels. Average borrowings by the Company under its revolving credit facility and term loan approximated $56.2 million in the first half of 1997 as compared to $39.2 million in the first half of 1996. During the first half of 1997, the average interest rate paid by the Company was 9.4% per annum as compared to 9.3% per annum in the first half of 1996. As a result of the sale of Senior Secured Notes discussed below, interest expense in the future is expected to be greater than the historic levels in the second half of 1996 or the first half of 1997. The principal reasons for the difference between the U.S. federal statutory income tax rate and the Company's effective income tax rates are explained in Note 6 to the Consolidated Financial Statements. As a result of the items discussed above, net income during the second quarter of 1997 increased to $4.3 million from $.8 million in the second quarter of 1996, and net income during the first half of 1997 increased to $5.8 million from a loss of $.3 million in the first half of 1996. 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 historical December shutdown for maintenance and repairs at the Company's Peoria facility, 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 facility during the first quarter of each year. At June 30, 1997 the Company had a working capital deficit of $14.2 million, including $39.2 million of notes payable and current maturities of long-term debt. The outstanding borrowings under the Company's $55 million revolving credit facility were $35.6 million at June 30, 1997. The amount of available borrowings under the Company's revolving credit facility is based on formula-determined amounts of trade receivables and inventories, less the amount of outstanding letters of credit. Additional available borrowings under the Company's revolving credit facility, which expires December 31, 1999, were $19.2 million at June 30, 1997. The Company's revolving credit facility requires daily cash receipts be used to reduce outstanding borrowings, which results in the Company maintaining zero cash balances. On August 7, 1997, the Company completed a $100 million offering of 9 5/8% Senior Secured Notes. The notes are due in August 2007 and are collateralized by a second priority lien on substantially all of the existing and future fixed assets of the Company. A portion of the $97 million net proceeds was used to retire the Company's term loan and repay borrowings under the Company's revolving credit facility. The balance of the net proceeds will be used for general corporate purposes, primarily financing capital expenditures. The Senior Secured Notes (the "Notes") were issued pursuant to an Indenture (the "Indenture") which, among other things, provides for optional redemptions, mandatory redemptions and certain covenants including provisions that, among other things, limit the ability of the Company to sell capital stock of subsidiaries, enter into sale and leaseback transactions and transactions with affiliates, create new liens and incur additional debt. In addition, the Company's ability to borrow in excess of $25 million under the Company's $55 million Revolving Credit Facility is dependent upon maintenance of certain cash flow ratios, as defined by the Indenture. The Indenture also limits the ability of the Company to pay dividends or other restricted payments, as defined. If the Offering had been completed on June 30, 1997, the Company's working capital deficit would be eliminated and working capital would have increased $82.2 million to $68.0 million and the Company would have had $54.6 million of available borrowings under its revolving credit facility. During the first half of 1997, the Company's operating activities provided approximately $6.9 million of cash compared to $.9 million in the first half of 1996. In addition to higher earnings in the 1997 period, cash flow from operations was impacted by changes in relative levels of assets and liabilities, including levels of pension fundings. Defined benefit pension plan contributions were $7.7 million in the first half of 1996. Due to the DeSoto merger, the Company did not make any contributions to its pension plan during the first half of 1997 and does not expect to be required to make contributions to the pension plan during the remainder of 1997. Future variances from actuarially assumed rates, including the rate of return on pension plan assets, may result in increases or decreases to pension expense or credit and funding requirements in future periods. Immediately following the Acquisition, Keystone was obligated to, and did, cause DeSoto to pay certain of DeSoto's trade creditors (the "Trade Credit Group") 80% of the balance of the trade payables then due to the Trade Credit Group. The remaining 20% of the balance ($1.4 million) due to the Trade Credit Group, plus interest at 8%, was paid by DeSoto in February 1997. 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. During the first half of 1997, the Company made capital expenditures of approximately $9.6 million primarily related to upgrades of production equipment and an information systems project at its facility in Peoria, Illinois. Capital expenditures for 1997 are currently estimated to be approximately $26 million and are related primarily to upgrades and debottlenecking of production equipment. 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. Management believes the cash flows from operations together with available cash as a result of the Offering will provide sufficient funds to meet its anticipated operating and capital expenditure needs for the year ending December 31, 1997. 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 and capital expenditures. 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, 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 have a material adverse effect on the future liquidity, financial condition and results of operations of the Company. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Reference is made to disclosure provided under the caption "Current litigation" in Note 13 to the Consolidated Financial Statements included in the Annual Report. Note 8 to the Consolidated Financial Statements is incorporated herein by reference. ITEM 4. Submission of Matters to a Vote of Security Holders On May 9, 1997, the annual meeting of the stockholders of Keystone was held for the purpose of voting to elect one director for a term of two years and three directors for terms of three years and to approve and adopt the Keystone Consolidated Industries, Inc. 1997 Long-term Incentive Plan. Result of voting at the annual meeting are detailed below (9,208,014 common shares and 435,458 preferred shares were issued and outstanding and entitled to vote at the meeting).
For Withheld Abstained Total Directors: Richard N. Ullman 5,739,360 8,659 - 5,748,019 Thomas E. Barry 5,739,360 8,659 - 5,748,019 William P. Lyons 5,739,036 8,983 - 5,748,019 William Spier 5,738,524 9,495 - 5,748,019 Incentive Plan 5,551,570 187,474 8,975 5,748,019
ITEM 6. Exhibits and Reports on Form 8-K. (a) The following exhibit is included herein: 27.1 Financial Data Schedule for the six month period ended June 30, 1997. (b) Reports on Form 8-K filed during the quarter ended June 30, 1997: 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: August 14, 1997 By /s/Harold M. Curdy Harold M. Curdy Vice President - Finance/Treasurer (Principal Financial Officer) Date: August 14, 1997 By /s/Bert E. Downing, Jr. Bert E. Downing, Jr. Corporate Controller (Principal Accounting Officer) EX-27 2 KEYSTONE FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from Keystone Consolidated Industries, Inc.'s consolidated financial statements for the six months ended June 30, 1997 and is qualified in its entirety by reference to such. 6-MOS DEC-31-1997 JUN-30-1997 0 0 44,446 648 35,834 97,746 271,333 176,680 310,458 111,975 15,306 3,500 0 9,994 27,616 310,458 192,381 192,823 170,592 170,592 10,061 179 2,736 9,255 3,284 5,971 0 0 0 5,971 .63 .62
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