-----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, BMmR1s6UmBHfU0sqSsDO6YGNdNKtk2BOGTodTelEDntkM+44/qFCdkBFQYkTWu5E H5cc9ZvuzO4IULdAyUD96w== 0000055604-98-000009.txt : 19981111 0000055604-98-000009.hdr.sgml : 19981111 ACCESSION NUMBER: 0000055604-98-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981110 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: SEC FILE NUMBER: 001-03919 FILM NUMBER: 98741474 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 September 30, 1998 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 November 9, 1998: 9,837,495 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 31, 1997 and September 30, 1998 3-4 Consolidated Statements of Operations - Three months and nine months ended September 30, 1997 and 1998 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 1997 and 1998 6 Consolidated Statement of Redeemable Preferred Stock and Common Stockholders' Equity - Nine months ended September 30, 1998 7 Notes to Consolidated Financial Statements 8-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 6. Exhibits and Reports on Form 8-K 19 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, September 30, ASSETS 1997 1998 Current assets: Cash and cash equivalents $ 22,622 $ - Notes and accounts receivable 37,841 42,210 Inventories 53,930 49,110 Deferred income taxes 18,869 19,503 Prepaid expenses 1,175 1,583 Total current assets 134,437 112,406 Property, plant and equipment 293,883 339,691 Less accumulated depreciation 181,129 195,503 Net property, plant and equipment 112,754 144,188 Other assets: Restricted investments 7,694 8,156 Prepaid pension cost 111,072 118,155 Deferred financing costs 3,795 3,609 Goodwill 1,229 1,144 Other 3,150 4,219 Total other assets 126,940 135,283 $374,131 $391,877
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30, 1997 1998 Current liabilities: Notes payable and current maturities of long-term debt $ 3,789 $ 17,548 Accounts payable 29,679 33,064 Accrued OPEB cost 8,415 8,415 Other accrued liabilities 39,870 34,808 Total current liabilities 81,753 93,835 Noncurrent liabilities: Long-term debt 103,055 102,033 Accrued OPEB cost 101,470 101,026 Deferred income taxes 2,963 5,336 Negative goodwill 25,421 24,404 Other 11,758 10,570 Total noncurrent liabilities 244,667 243,369 Redeemable preferred stock 3,500 - Stockholders' equity: Common stock 10,029 10,560 Additional paid-in capital 47,191 51,716 Accumulated deficit (12,997) (7,591) Treasury stock, at cost (12) (12) Total stockholders' equity 44,211 54,673 $374,131 $391,877
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three months ended Nine months ended September 30, September 30, 1997 1998 1997 1998 Revenues and other income: Net sales $85,046 $87,125 $277,427 $289,148 Interest 570 119 577 440 Other, net 1,223 11 1,658 439 86,839 87,255 279,662 290,027 Costs and expenses: Cost of goods sold 76,889 81,207 247,481 265,217 Selling 1,082 1,357 3,542 4,432 General and administrative 3,830 5,829 13,110 12,587 Overfunded defined benefit pension credit (3,241) (2,467) (4,741) (7,083) Interest 2,383 2,483 5,119 7,362 80,943 88,409 264,511 282,515 Income (loss) before income taxes 5,896 (1,154) 15,151 7,512 Provision (benefit) for income taxes 2,197 (447) 5,481 1,949 Net income (loss) 3,699 (707) 9,670 5,563 Dividends on preferred stock 70 17 210 157 Net income (loss) available for common shares $ 3,629 $ (724) $ 9,460 $ 5,406 Net income (loss) per share available for common shares: Basic $ .39 $ (.07) $ 1.02 $ .58 Diluted $ .38 $ (.07) $ 1.01 $ .57 Weighted average common and common equivalent shares outstanding: Basic 9,285 9,661 9,262 9,446 Diluted 9,583 9,661 9,384 9,613
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 1997 and 1998 (In thousands)
1997 1998 Cash flows from operating activities: Net income $ 9,670 $ 5,563 Depreciation and amortization 9,692 14,535 Amortization of deferred financing costs 337 378 Deferred income taxes 2,492 1,735 Other, net 137 859 Change in assets and liabilities: Notes and accounts receivable (2,320) (6,658) Inventories (2,885) 4,820 Accounts payable (4,065) 3,385 Prepaid pension cost (4,741) (7,083) Other, net 6,433 (6,435) Net cash provided by operating activities 14,750 11,099 Cash flows from investing activities: Capital expenditures (17,400) (46,526) Proceeds from sale of property, plant and equipment 2,708 10 Other, net 166 (725) Net cash used by investing activities (14,526) (47,241) Cash flows from financing activities: Revolving credit facilities, net (31,095) 13,738 Other notes payable and long-term debt: Additions 100,294 95 Principal payments (19,502) (1,096) Preferred stock dividend payments (210) (157) Deferred financing costs paid (3,767) - Exercise of warrants and redemption of preferred stock, net - 701 Common stock issued - other 317 239 Net cash provided by financing activities 46,037 13,520 Net change in cash and cash equivalents 46,261 (22,622) Cash and cash equivalents, beginning of period - 22,622 Cash and cash equivalents, end of period $ 46,261 $ - Supplemental disclosures: Cash paid for: Interest, net of amount capitalized $ 4,037 $ 10,351 Income taxes 2,700 139 Common stock contributed to employee benefit plan $ 578 $ 616
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY Nine months ended September 30, 1998 (In thousands)
Common stockholders' equity Redeemable Additional preferred Common paid-in Accumulated Treasury stock Stock capital deficit stock Total Balance - December 31, 1997 $ 3,500 $10,029 $47,191 $(12,997) $ (12) $44,211 Net income - - - 5,563 - 5,563 Exercise of warrants and redemption of preferred stock, net (3,500) 448 3,753 - - 4,201 Issuance of common stock - other - 83 772 - - 855 Preferred dividends declared 157 - - (157) - (157) Preferred dividends paid (157) - - - - - Balance - September 30, 1998 $ - $10,560 $51,716 $ (7,591) $ (12) $54,673
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, 1997 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at September 30, 1998 and the consolidated statements of operations and cash flows for the interim periods ended September 30, 1997 and 1998, and the consolidated statement of redeemable preferred stock and common stockholders' equity for the interim period ended September 30, 1998, 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, 1997 (the "Annual Report"). Contran Corporation ("Contran") and other entities related to Harold C. Simmons hold approximately 50% of the Company's outstanding stock at September 30, 1998. Contran may be deemed to control the Company. Note 2 - Acquisition: In November 1994, the Company entered into a Joint Venture Agreement with an unrelated party and acquired a 20% interest in Engineered Wire Products, Inc. ("EWP"), a manufacturer and distributor of wire mesh for the concrete pipe and road construction business. On December 23, 1997, Keystone acquired the remaining 80% of EWP (the "Acquisition") and EWP became a wholly-owned subsidiary of Keystone. Keystone paid $11.2 million in cash to acquire the remaining 80% interest in the joint venture. Keystone accounted for the step acquisition of EWP by the purchase method of accounting and the purchase price has been allocated to the individual assets acquired and liabilities assumed of EWP 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 following pro forma financial information has been prepared assuming the Acquisition and Keystone's August 1997 $100 million bond offering and application of the net proceeds therefrom occurred on January 1, 1997. The pro forma financial information is not necessarily indicative of actual results had these transactions occurred at January 1, 1997, nor do they purport to represent results of future operations of the combined companies.
Three months ended Nine months ended September 30, 1997 September 30, 1997 (In millions, except per share data) Revenues and other income $90.3 $293.0 Operating income 9.0 22.1 Net income 5.6 10.8 Net income available to common stockholders 5.5 10.6 Net income available for common shares per common share - diluted $ .59 $ 1.13
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 78% of total inventories and the first-in, first-out or average cost methods are used to determine the cost of other inventories.
December 31, September 30, 1997 1998 (In thousands) Raw materials: Steel and wire products $17,609 $21,200 Household cleaning products 854 798 18,463 21,998 Work in process - Steel and wire products 15,475 11,038 Finished products: Steel and wire products 16,707 14,974 Household cleaning products 150 243 16,857 15,217 Supplies - Steel and wire products 16,290 14,012 67,085 62,265 Less LIFO reserve: Steel and wire products 13,096 13,096 Household cleaning products 59 59 13,155 13,155 $53,930 $49,110
Note 4 - Notes payable and long-term debt:
December 31, September 30, 1997 1998 (In thousands) 9 5/8% Senior Secured Notes, due August 2007 $100,000 $100,000 Commercial credit agreements: Revolving credit facility - Keystone - 13,209 Revolving credit facility - EWP 2,471 3,000 Term loan - EWP 1,603 1,166 Other 2,770 2,206 106,844 119,581 Less current maturities 3,789 17,548 $103,055 $102,033
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.
Nine months ended September 30, 1997 1998 Expected tax expense, at statutory rate $ 5,303 $2,629 U.S. state income taxes, net 332 217 Amortization of negative goodwill (448) (326) Other, net 294 (571) Comprehensive provision for income taxes $ 5,481 $1,949 Comprehensive provision for income taxes: Currently payable: U.S. federal $ 5,185 $ 184 U.S. state 668 33 Alternative minimum tax credits (2,864) (3) Net currently payable 2,989 214 Deferred income taxes, net 2,492 1,735 $ 5,481 $1,949
Note 6 - Other accrued liabilities:
December 31, September 30, 1997 1998 (In thousands) Current: Salary, wages, vacations and other employee expenses $12,275 $11,163 Environmental 7,498 6,415 Self insurance 6,605 6,517 Interest 4,146 1,613 Disposition of facilities 2,306 1,471 Legal and professional 1,199 930 Other 5,841 6,699 $39,870 $34,808 Noncurrent: Environmental $ 8,606 $ 7,905 Deferred gain 1,987 1,476 Other 1,165 1,189 $11,758 $10,570
Note 7 - Contingencies: At September 30, 1998, the Company's financial statements reflected accrued liabilities of $14.3 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 8 - Preferred Stock: In July 1998, the holders of warrants to purchase 447,900 shares of Keystone's common stock at $9.38 per share exercised these warrants. Under the terms of the warrants, Keystone was required to redeem all of the outstanding preferred stock, which was also held by the warrant holders, at the aggregate $3.5 million redemption price. Net cash proceeds to the Company approximated $701,000. 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, possible disruptions of normal business activity from Year 2000 issues 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 Nine months ended September 30, September 30, 1997 1998 1997 1998 (In thousands of tons) Production volume: Billets: Produced 149 163 488 524 Purchased 29 - 67 - Rod 165 167 546 518 Sales volume: Fabricated wire products 56 80 181 252 Industrial wire 43 43 132 130 Steel rod 64 51 230 170 163 174 543 552
The following table sets forth the components of the Company's net sales for the periods indicated.
Three months ended Nine months ended September September 30, 30, 1997 1998 1997 1998 (In millions) Fabricated wire products $39.5 $50.9 $128.6 $167.8 Industrial wire 20.5 20.3 62.9 62.2 Rod 21.3 14.0 72.4 50.0 Household cleaning products and other 3.7 1.9 13.5 9.1 $85.0 $87.1 $277.4 $289.1
The following table sets forth selected operating data of the Company as a percentage of net sales for the periods indicated.
Three months ended Nine months ended September 30, September 30, 1997 1998 1997 1998 Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 90.4 93.2 89.2 91.7 Gross profit 9.6 6.8 10.8 8.3 Selling expense 1.3 1.6 1.3 1.5 General and administrative expense 4.5 6.7 4.7 4.4 Overfunded defined benefit pension credit 3.8 2.8 1.7 2.4 Income (loss) before income taxes 6.9% (1.3)% 5.5% 2.6% Provision (benefit) for income taxes 2.6 (.5) 2.0 .7 Net income (loss) 4.3% (.8)% 3.5% 1.9%
Billet and rod production during the 1998 third quarter increased to 163,000 tons and 167,000 tons, respectively, compared with 149,000 tons and 165,000 tons during the 1997 third quarter. This increase was principally due to a two-week annual maintenance shutdown in the 1997 third quarter, which will occur during the fourth quarter in 1998. Keystone did not purchase any billets during the 1998 third quarter, whereas 29,000 tons were purchased during the 1997 third quarter at $238 per ton. Net sales increased to $87.1 million during the 1998 third quarter from $85.0 million in the same period a year ago as a 7 percent increase in volume and a favorable change in product mix were partially offset by lower overall product selling prices. During the 1998 third quarter, fabricated wire products, industrial wire and rod selling prices declined by 9%, 3% and 17%, respectively, from 1997 third quarter selling prices. However, due to the change in product mix, overall selling prices declined by only 2%. During the third quarter of 1998, higher-priced fabricated wire products comprised 46% of total tons shipped, whereas fabricated wire products comprised 34% of total tons shipped during the third quarter of 1997. Approximately one-half of the change in the percentage of fabricated wire products included in the product mix between the two periods is a result of Keystone's acquisition of Engineered Wire Products, Inc. ("EWP") in December 1997. EWP's products sell for lower prices than do Keystone's other fabricated wire products. Net sales for the first nine months of 1998 increased 4% to $289.1 million from $277.4 million for the first nine months of 1997. Industrial wire selling prices remained constant between the two periods, while fabricated wire products and rod selling prices declined by 7% and 6%, respectively. The first nine months of 1998 were also favorably impacted by the change in product mix due primarily to the EWP acquisition as fabricated wire products comprised 46% of total tons shipped, whereas fabricated wire products comprised 33% of total tons shipped during the first nine months of 1997. The 1998 third quarter's gross margin of 6.8 percent was lower than the 9.6 percent recorded during the comparable period in 1997 primarily as a result of lower sales prices, higher energy costs due primarily to a new power contract discussed below and production inefficiencies. The decline in gross margin was partially offset by lower scrap costs and $2.7 million in legal settlements with two suppliers in the 1998 period. During the 1998 third quarter, the Company purchased 201,000 tons of scrap at an average price of $111 per ton as compared to 1997 third quarter purchases of 159,000 tons at an average price of $122 per ton. For the first nine months of 1998, Keystone's gross margin declined to 8.3 percent from 10.8 percent during the 1997 period. This decline was due primarily to lower sales prices, higher energy costs, increased production and material handling costs and production inefficiencies, including unplanned equipment downtime during the first quarter of 1998 and power interruptions during the second quarter of 1998. The decline was partially offset by lower scrap costs and the favorable legal settlements. During the first nine months of 1998, the Company purchased 572,000 tons of scrap at an average price of $119 per ton as compared to 1997 purchases of 519,000 tons at an average price of $122 per ton. Keystone purchases electrical energy for the Peoria facility 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. During the 1998 second quarter, the Company entered into a new service contract with the electric utility at its Peoria facility. The new contract requires the Company to pay higher rates during months with high demands. Overall, the new contract is expected to increase energy costs by approximately $2 million per year as compared to the prior contract. Selling expenses increased to $1.4 million in the third quarter of 1998 from $1.1 million in the 1997 third quarter, but remained relatively constant as a percentage of net sales. Selling expenses increased to $4.4 million in the first nine months of 1998 from $3.5 million in the first nine months of 1997, but also remained relatively constant as a percentage of net sales. General and administrative expenses increased to $5.8 million during the third quarter of 1998 as compared to $3.8 million during the third quarter of 1997 due primarily to $1.1 million of bad debt expense related to a customer's bankruptcy and higher environmental expense. During the first nine months of 1998, general and administrative expenses amounted to $12.6 million as compared to $13.1 million during the first nine months of 1997 but as a percent of net sales, were comparable with the first nine months of 1997 as higher bad debt expense and environmental charges were offset by lower legal and insurance expense. Other income during the 1997 third quarter included a pretax gain of approximately $1.8 million from the sale of a building. Interest expense in the third quarter of 1998 was comparable with the third quarter of 1997. Interest expense in the first nine months of 1998 was higher than the first nine months of 1997 due principally to higher borrowing levels. These higher borrowing levels were due primarily to the issuance of $100 million principal amount of 9 5/8% Senior Secured Notes ("the Notes") in August 1997. Average borrowings by the Company under its revolving credit facilities, term loans and the Notes approximated $106.5 million in the first nine months of 1998 as compared to $64.1 million in the first nine months of 1997. The principal reasons for the difference between the U.S. federal statutory income tax rate and the Company's effective income tax rates are explained in Note 5 to the Consolidated Financial Statements. As a result of the items discussed above, the Company incurred a net loss during the third quarter of 1998 of $707,000 as compared to net income of $3.7 million in the third quarter of 1997, and net income during the first nine months of 1998 decreased to $5.6 million from $9.7 million in the first nine months of 1997. 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 facility during the first quarter of each year. At September 30, 1998 the Company had working capital of $18.6 million, including $1.3 million of notes payable and current maturities of long-term debt as well as outstanding borrowings under the Company's revolving credit facilities of $16.2 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 Senior Secured Notes, the Company'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. Additional available borrowings under Keystone's $55 million revolving credit facility, which expires December 31, 1999, and EWP's $6 million revolving credit facility, which expires June 30, 2000, were $41 million and $3 million, respectively, at September 30, 1998, all of which could be borrowed under the terms of the Indenture. The Company'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 nine months of 1998, the Company's operating activities provided approximately $11.1 million of cash compared to $14.8 million in the first nine months of 1997. Lower earnings in the 1998 period and higher interest payments due to the issuance of the Notes in August 1997 reduced cash flows from operating activities. Interest payments of $4.8 million are due on the Notes in the first and third quarters of each year. Cash paid for interest during the first nine months of 1998 and 1997 amounted to $10.4 million and $4.0 million, respectively. During the third quarter of 1997, DeSoto received approximately $4.7 million from one of its insurors in exchange for releasing the insuror from coverage of, or certain years of, environmental related liabilities. Such amount is included in the Company's self insurance accruals at December 31, 1997 and September 30, 1998. In February 1998, the Company purchased certain agricultural fencing product manufacturing equipment and related inventory from Insteel Industries, Inc. ("Insteel"), for approximately $13 million. Keystone expects to incur capital costs of approximately $6 million to relocate and integrate such equipment into its manufacturing facilities, $5 million of which has been incurred through September 30, 1998. The majority of the remaining costs are expected to be incurred in the 1998 fourth quarter. As part of the agreement with Insteel, Keystone also acquired Insteel's former customer list and certain other records and Insteel agreed not to compete with Keystone in the North American agricultural fencing products business for a period of five years. During the first nine months of 1998, the Company made capital expenditures of approximately $46.5 million primarily related to upgrades of production equipment at its facility in Peoria, Illinois and the Insteel equipment purchase. Capital expenditures for all of 1998, including those related to the purchase of equipment from Insteel, are currently estimated to be approximately $57 million and are related primarily to upgrades and debottlenecking of production equipment. 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. Keystone completed the installation of the new caster in the third quarter of 1998. The remaining capital expenditures will be funded using borrowing availability under the Company's revolving credit facilities. At September 30, 1998, the Company's financial statements reflected accrued liabilities of $14.3 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. 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 the funds available under the Company's revolving credit facilities will provide sufficient funds to fund the anticipated needs of its operations and capital improvements plan for the remainder of 1998 and 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 and 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 1998 fourth 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 the Company expects to have its evaluation completed by the end of 1998 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 relys 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 significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to eliminate their own Year 2000 Issues. Keystone presently expects to complete these third party communications during the 1998 fourth 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 effect 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. 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. OTHER INFORMATION ITEM 1. Legal Proceedings Reference is made to disclosure provided under the caption "Current litigation" in Note 7 to the Consolidated Financial Statements included in the Annual Report. ITEM 6. Exhibits and Reports on Form 8-K (a) The following exhibit is included herein: 27.1 Financial Data Schedule for the nine month period ended September 30, 1998. (b) Reports on Form 8-K filed during the quarter ended September 30, 1998: 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: November 10, 1998 By /s/Harold M. Curdy Harold M. Curdy Vice President - Finance/Treasurer (Principal Financial Officer) Date: November 10, 1998 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 nine months ended September 30, 1998 and is qualified in its entirety by reference to such. 9-MOS DEC-31-1998 SEP-30-1998 0 0 46,443 4,233 49,110 112,406 339,691 195,503 391,877 93,835 102,033 0 0 10,560 44,113 391,877 289,148 290,027 265,217 265,217 8,644 1,292 7,362 7,512 1,949 5,563 0 0 0 5,563 .58 .57
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