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 quarter ended September 30, 1996
------------------
Commission file number 1-3919
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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 Identification No.)
incorporation or organization)
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 Section 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 5, 1996: 9,186,424
---------
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
-----
Page
number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1995
and September 30, 1996 3-4
Consolidated Statements of Operations - Three months
and nine months ended September 30, 1995 and 1996 5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1995 and 1996 6-7
Consolidated Statement of Redeemable Preferred Stock
and Common Stockholders' Equity (Deficit) - Nine
months ended September 30, 1996 8
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, SEPTEMBER 30,
ASSETS 1995 1996
------------ -------------
<S>
Current assets: <C> <C>
Restricted short-term investments $ - $ 1,180
Notes and accounts receivable 31,363 40,795
Inventories 35,631 29,671
Deferred income taxes 3,685 9,298
Prepaid expenses 2,026 1,594
-------- --------
Total current assets 72,705 82,538
-------- --------
Property, plant and equipment 245,759 254,608
Less accumulated depreciation 159,323 168,370
-------- --------
Net property, plant and equipment 86,436 86,238
-------- --------
Other assets:
Restricted investments 2,410 6,438
Unrecognized pension obligation 8,427 -
Deferred income taxes 24,485 -
Prepaid pension - 103,303
Other 4,359 4,572
-------- --------
Total other assets 39,681 114,313
-------- --------
$198,822 $283,089
======== ========
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
December 31, SEPTEMBER 30,
LIABILITIES, REDEEMABLE PREFERRED STOCK AND 1995 1996
------------ -------------
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Notes payable and current long-term debt $ 18,750 $ 17,760
Accounts payable 26,534 39,812
Accounts payable to affiliates 39 59
Accrued pension cost 7,170 -
Accrued OPEB cost 7,776 8,719
Other accrued liabilities 19,297 31,704
-------- --------
Total current liabilities 79,566 98,054
-------- --------
Noncurrent liabilities:
Long-term debt 11,195 17,852
Accrued pension cost 39,222 -
Accrued OPEB cost 97,868 100,946
Negative goodwill - 5,727
Deferred income taxes 453 11,495
Other 8,011 14,816
-------- --------
Total noncurrent liabilities 156,749 150,836
-------- --------
Redeemable preferred stock - 5,100
-------- --------
Common stockholders' equity (deficit):
Common stock 6,362 9,916
Additional paid-in capital 20,013 46,329
Accumulated deficit (27,599) (27,134)
Net pension liabilities adjustment (36,257) -
Treasury stock, at cost (12) (12)
-------- --------
Total common stockholders' equity (deficit) (37,493) 29,099
-------- --------
$198,822 $283,089
======== ========
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $82,921 $82,703 $269,171 $252,821
Other, net 37 151 361 337
------- ------- -------- --------
82,958 82,854 269,532 253,158
------- ------- -------- --------
Costs and expenses:
Cost of goods sold 76,382 74,531 243,886 232,206
Selling 1,089 992 3,452 2,998
General and administrative 3,346 5,197 13,243 14,493
Interest 886 808 2,520 2,677
------- ------- -------- --------
81,703 81,528 263,101 252,374
------- ------- -------- --------
Income before income taxes 1,255 1,326 6,431 784
Provision for income taxes 496 534 2,541 319
------- ------- -------- --------
Net income $ 759 $ 792 $ 3,890 $ 465
======= ======= ======== ========
Income per common and common
equivalent share $ .14 $ .14 $ .69 $ .08
======= ======= ======== ========
Weighted average common and common
equivalent shares outstanding 5,661 5,654 5,682
------- -------- --------
5,690
------- ======= -------- --------
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,890 $ 465
Depreciation 9,689 10,530
Deferred income taxes 855 (2,271)
Other, net 301 1,075
-------- --------
14,735 9,799
Change in assets and liabilities:
Notes and accounts receivable 1,758 (7,754)
Inventories 3,038 5,564
Accounts payable (8,441) 1,960
Accrued pension cost (8,724) (4,871)
Other, net (886)) 864
--------- --------
Net cash provided by operating activities 1,480 5,562
-------- --------
Cash flows from investing activities:
Capital expenditures (11,951) (10,423)
Merger costs - (935)
Other, net 812 129
-------- --------
Net cash used by investing activities (11,139) (11,229)
-------- --------
Cash flows from financing activities:
Revolving credit facility, net 12,940 (458)
Other notes payable and long-term debt:
Additions 81 9,461
Principal payments (3,364) (3,336)
Common stock issued, net 2 -
-------- --------
Net cash provided by financing activities 9,659 5,667
-------- --------
Net change in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
-------- --------
Cash and cash equivalents, end of period $ - $ -
======== ========
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1995 1996
---- ----
<S> <C> <C>
Supplemental disclosures:
Cash paid for:
Interest, net of amount capitalized $ 2,826 $ 3,031
Income taxes 1,181 991
Common stock contributed to employee benefit plan $ 597 $ 522
Business combination:
Net assets consolidated:
Noncash assets $ - $101,981
Liabilities - (60,906)
Negative goodwill - (5,727)
-------- --------
- 35,348
Redeemable preferred stock issued, including
accumulated unpaid dividends - (5,100)
Common stock issued - (29,313)
-------- --------
Cash paid $ - $ 935
======== ========
</TABLE>
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Nine months ended September 30, 1996
(In thousands)
Redeemable
preferred
stock
---------
[S] [C]
Balance at
December 31, 1995 $ -
Net income -
Issuance of stock:
Merger 5,100
Other -
Pension adjustment, net -
Merger of pension
plans, net
-
------
Balance at
September 30, 1996 $5,100
======
<TABLE>
Common stockholders' equity (deficit)
---------------------------------------------------------------------
Total common
Additional Net pension stockholders'
Common paid-in Accumulated liabilities Treasury equity
stock capital deficit adjustment stock (deficit)
------ --------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 $6,362 $20,013 $(27,599) $(36,257) $ (12) $(37,493)
Net income - - 465 - - 465
Issuance of stock:
Merger 3,500 25,813 - - - 29,313
Other 54 503 - - - 557
Pension adjustment,
net - - - 3,554 - 3,554
Merger of pension
plans, net
- - - 32,703 - 32,703
------ ------- -------- -------- ----- --------
Balance at
September 30, 1996 $9,916 $46,329 $(27,134) $ - $ (12) $ 29,099
====== ======= ======== ======== ===== ========
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Prior to September 27, 1996, Keystone Consolidated Industries, Inc. (the
"Company" or "Keystone") was a majority-owned subsidiary of Contran Corporation
("Contran"). On September 27, 1996, the Company acquired DeSoto, Inc.
("DeSoto") in a merger transaction and, as a result, Contran's ownership in the
Company was reduced to 41%. See Note 2. Contran may continue to be deemed to
control Keystone.
The consolidated balance sheet at December 31, 1995 has been condensed from
the Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 1996 and the consolidated statements
of operations and cash flows for the interim periods ended September 30, 1995
and 1996, and the consolidated statement of redeemable preferred stock and
stockholders' equity (deficit) for the interim period ended September 30, 1996
have 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, 1995 (the "Annual
Report") and the Company's Joint Proxy Statement and Prospectus dated August 23,
1996 related to the DeSoto merger (the "Joint Proxy Statement").
Note 2 - Merger:
On September 27, 1996, the stockholders of Keystone and DeSoto approved the
merger of the two companies (the "Merger"), in which DeSoto became a wholly-
owned subsidiary of Keystone. DeSoto manufactures household cleaning products
including powdered and liquid laundry detergents and performs contract
manufacturing and packaging of household cleaning products. Keystone issued
approximately 3.5 million shares of its common stock (approximately $29.3
million at the $8.375 per share market price on September 27, 1996) and 435,458
shares of Keystone preferred stock ($3.5 million redemption value beginning on
July 21, 1997 plus $1.6 million in accumulated, unpaid dividends) in exchange
for all of the outstanding common stock and preferred stock, respectively, of
DeSoto. Each DeSoto common stockholder received .7465 of a share of Keystone
common stock for each share of DeSoto common stock.
In connection with the Merger, Keystone assumed certain options to purchase
DeSoto common stock and converted them to options to acquire approximately
139,000 shares of Keystone common stock at a price of $5.86 to $13.56 per share.
Keystone also assumed certain DeSoto warrants giving holders the right to
acquire the equivalent of 447,900 shares of Keystone common stock at a price of
$9.38 per share.
Simultaneous with the Merger, Keystone's three underfunded defined benefit
pension plans were merged with and into DeSoto's overfunded defined benefit
pension plan, which resulted in an overfunded plan for financial reporting
purposes. See Note 6.
Pursuant to the Merger Agreement, Keystone was obligated to, and has caused
DeSoto to pay, approximately $5.9 million in October 1996 to certain of DeSoto's
trade creditors who are parties to a trade composition agreement with DeSoto,
and DeSoto will pay an additional $1.4 million, plus interest at 8%, to such
trade creditors within one year of the Merger. Additionally, Keystone was
obligated to immediately pay to the holders of DeSoto preferred stock
approximately $1.6 million in accumulated, unpaid dividends, which amounts were
also paid in October 1996. See Note 8.
As a result of these and other transactions related to the Merger, Keystone
required additional funding from its primary lender. In order to obtain such
additional funds, Keystone received the consent of the Pension Benefit Guaranty
Corporation (the "PBGC") to increase Keystone's allowable borrowings by $20
million upon consummation of the Merger and the merger of the Keystone defined
benefit pension plans with and into the DeSoto defined benefit pension plan.
The PBGC's consent was required due to prior agreements with the PBGC whereby
the PBGC and Keystone agreed to certain borrowing restrictions. See Note 4.
Keystone accounted for the Merger by the purchase method of accounting and,
accordingly, DeSoto's results of operations and cash flows will be included in
the Company's consolidated financial statements subsequent to the Merger. The
purchase price has been allocated to the individual assets acquired and
liabilities assumed of DeSoto based upon preliminary estimated fair values. The
actual allocation of the purchase price may be different from the preliminary
allocation due to adjustments in the purchase price and refinements in estimates
of the fair values of the net assets acquired. Negative goodwill resulting from
the Merger will be amortized on the straight-line basis over 20 years.
The following pro forma financial information has been prepared assuming the
Merger and the subsequent merger of the defined benefit pension plans occurred
as of January 1, 1995. The pro forma financial information also reflects
adjustments to assume that (i) the April 1996 sale of DeSoto's Union City,
California business, and (ii) the 1995 sales of DeSoto's businesses in Thornton
and South Holland, Illinois had occurred on December 31, 1994. The pro forma
financial information is not necessarily indicative of actual results had the
transactions occurred at the beginning of the periods, nor do they purport to
represent results of future operations of the merged companies.
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1995 1996
---- ----
(Unaudited)
(In millions, except per
share data)
<S> <C> <C>
Revenues and other income $283.9 $264.8
Net income $ 7.0 $ .1
Net income (loss) available to common stockholders $ 6.7 $ (.3)
Net income (loss) per Keystone common share $ .72 $(.03)
</TABLE>
Note 3 - Inventories:
Inventories are stated at the lower of cost or market. At September 30,
1996, 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.
<TABLE>
<CAPTION>
December 31, SEPTEMBER 30,
1995 1996
------------ -------------
(In thousands)
<S> <C> <C>
Raw materials $12,669 $12,243
Work in process 13,825 11,638
Finished products 10,258 8,743
Supplies 13,552 12,241
------- -------
50,304 44,865
Less LIFO reserve 14,673 15,194
------- -------
$35,631 $29,671
======= =======
</TABLE>
Note 4 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, SEPTEMBER 30,
1995 1996
------------ -------------
(In thousands)
<S> <C> <C>
Commercial credit agreements:
Revolving credit facility $14,561 $14,103
Term loan 13,050 19,999
Other 2,334 1,510
------- -------
29,945 35,612
Less current maturities 18,750 17,760
------- -------
$11,195 $17,852
======= =======
</TABLE>
In connection with the Merger, Keystone's revolving credit facility was
amended and increased from $35 million to $55 million. See Note 2. In addition,
Keystone's term loan was increased from $10.5 million to $20 million, and the
proceeds therefrom were used to reduce the revolving credit facility. The
revolving credit facility, as amended, is collateralized primarily by the
Company's trade receivables and inventories, bears interest at 1% over the prime
rate and matures December 31, 1999. The effective interest rate at September
30, 1996 was 9.25%. The amount of available borrowings is based on formula-
determined amounts of trade receivables and inventories, less the amount of out-
standing letters of credit. Additional borrowings available were $35.5 million
at September 30, 1996. This credit facility requires the Company's daily cash
receipts to be used to reduce the outstanding borrowings, which results in the
Company maintaining zero cash balances.
The Company's term loan, as amended, bears interest at the prime rate plus
1%, and is due in monthly installments of $.3 million plus accrued interest,
through November 1999, with one final installment of the remaining principal and
interest on December 31, 1999. The term loan is with the same financial
institution that provides the Company's revolving credit facility and requires
compliance with the restrictive covenants, security agreement and certain other
terms of the revolving credit facility, and is further collateralized by the
Company's property, plant and equipment. The term loan becomes due and payable
if the Company's revolving credit facility is terminated.
The Company's credit agreements contain restrictive covenants including
certain minimum working capital and net worth requirements and a prohibition
against the payment of dividends on Keystone common stock without lender
consent.
Note 5 - Income taxes:
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% are
presented in the following table.
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Expected tax expense, at statutory rates $ 2,251 $ 274
Impact of elimination of the pension liabilities
adjustment component of stockholders' equity - 8,509
Reduction of deferred income tax asset valuation
allowance - (8,500)
U.S. state income taxes and other, net 290 36
------- -------
$ 2,541 $ 319
======= =======
</TABLE>
The $8.5 million impact of elimination of the pension liabilities
adjustment component of stockholders' equity arises primarily because of the
adoption of Statement of Financial Accounting Standards No. 109 in 1992, when
the initial recognition of a deferred income tax asset related to the Company's
accrued pension cost was recognized in earnings as part of the cumulative effect
of change in accounting principle.
As a result of the merger of the defined benefit pension plans and the
elimination of the Company's accrued pension cost, Keystone reduced its deferred
income tax asset valuation allowance by $8.5 million during the third quarter of
1996. The net deferred tax asset valuation allowance amounted to $30 million
and $21.5 million at December 31, 1995 and September 30, 1996, respectively.
Note 6 - Pension plans:
Simultaneous with the Merger, Keystone's three underfunded defined benefit
pension plans were merged with and into DeSoto's overfunded defined benefit
pension plan resulting in an overfunded plan for financial reporting purposes.
As a result, Keystone's unrecognized pension obligation asset, additional
minimum pension liability and pension liabilities adjustment component of
stockholders' equity were eliminated.
The following table sets forth the estimated funded status of the Company's
defined benefit pension plan at September 30, 1996.
<TABLE>
<CAPTION>
September 30, 1996
------------------
(In thousands)
<S> <C>
Plan assets at fair value $313,610
Projected benefit obligation 263,658
--------
Plan assets in excess of projected benefit obligation 49,952
Unrecognized net loss from experience different from
actuarial assumptions 46,343
Unrecognized net obligation 7,008
--------
Prepaid pension cost $103,303
========
</TABLE>
During the mid 1980's, Keystone received permission from the Internal
Revenue Service to defer certain annual pension plan contributions. Such
deferred amounts were payable to the plans, with interest, over a 15 year
period. Due to the merger of the pension plans, the Company will no longer be
required to make these deferred contributions provided the Plan maintains a
specified funded status.
Note 7 - Other accrued liabilities:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
(In thousands)
<S> <C> <C>
Current:
Salary, wages, vacations and other
employee expenses $ 9,342 $11,155
Environmental 4,111 6,637
Accrued excise tax and related interest 1,033 -
Accrued restructuring costs - 5,414
Other 4,811 8,498
------- -------
$19,297 $31,704
======= =======
Noncurrent:
Environmental $ 6,677 $11,113
Other 1,334 3,703
------- -------
$ 8,011 $14,816
======= =======
</TABLE>
Accrued restructuring costs at September 30, 1996 relate primarily to the
closure or disposition of former DeSoto businesses.
Note 8 - Redeemable preferred stock:
In connection with the Merger, Keystone issued 435,458 shares of Keystone
Series A Senior Preferred Stock for all of the outstanding preferred stock of
DeSoto. The preferred stock may be redeemed by Keystone, in whole or, from time
to time, in part, at a cash redemption price equal to $8.0375 per share (or an
aggregate of $3.5 million) plus all accrued but unpaid dividends thereon,
whether or not earned or declared (the "Liquidation Preference"), at any time
after July 21, 1997 or at certain other times. Dividends are payable to holders
of the preferred stock quarterly, at the rate of 8% of the Liquidation
Preference. If such dividends are in arrears for four quarterly periods,
dividends for any subsequent quarterly periods are payable to holders of the
preferred stock at the rate of 10% of the Liquidation Preference. Redeemable
preferred stock at September 30, 1996 includes $1.6 million of cumulative unpaid
dividends which were subsequently paid in October 1996.
Holders of the preferred stock are entitled to one vote for each share of
such stock voting together as one class with holders of Keystone's common stock.
If the accrued dividends for two or more quarterly dividend periods shall not
have been paid to holders of any shares of the Company's preferred stock,
holders of a majority of such stock shall have the exclusive right, voting as a
separate class, to elect two directors of Keystone.
Note 9 - Contingencies:
Environmental matters. As discussed in the Annual Report, the Company is
involved in the closure of inactive waste disposal units at its facility in
Peoria, Illinois. In addition, the Company is subject to federal and state
"Superfund" legislation at three sites involving cleanup of landfills and
disposal facilities which allegedly received hazardous substances generated by
discontinued operations of the Company. The Company has accrued its estimated
costs related to these issues. The Company believes its comprehensive general
liability insurance policies provide indemnification for certain costs the
Company incurs at the "Superfund" sites and has recorded receivables for the
estimated insurance recoveries. There was no significant change in the status
of these environmental matters during the first nine months of 1996.
As reported in the Joint Proxy Statement, DeSoto has been identified by
government authorities as one of the parties responsible for the cleanup costs
of waste disposal sites, many of which are "Superfund" sites, and for alleged
contamination. In addition, damages are being claimed against DeSoto in private
actions for alleged personal injury or property damage in the case of certain
other waste disposal sites. The Company has deposited funds in restricted cash
accounts in connection with certain of the Company's environmental liabilities.
These deposits are shown as restricted investments on the accompanying balance
sheet. DeSoto has access, under certain conditions, to a portion of these
restricted investments for any expenses or liabilities incurred by DeSoto
regarding certain sites. As such, a portion of these restricted investments are
shown as a current asset on the accompanying consolidated balance sheet to the
extent they relate to sites for which the Company has recognized a current
accrued environmental liability.
For additional information related to commitments and contingencies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the Annual Report and the Joint Proxy Statement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
The Company's principal operations are the manufacture and sale of carbon
steel rod, wire and wire products for agricultural, industrial, construction,
commercial, original equipment manufacturers 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. As
discussed in Note 2 to the Consolidated Financial Statements, on September 27,
1996, the Company acquired DeSoto, and DeSoto became a wholly-owned subsidiary
of Keystone. DeSoto manufactures household cleaning products including powdered
and liquid laundry detergents and performs contract manufacturing and packaging
of household cleaning products. On a pro forma basis, the DeSoto operations
would have added $14.4 million and $11.6 million to the consolidated revenues of
the Company during the nine month periods ended September 30, 1995 and 1996,
respectively.
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 seasonality thereof), general economic
conditions, competitive products and substitute products, customers and
competitor strategies, the impact of price and production decisions,
environmental matters, government regulations and possible changes therein, and
the ultimate resolution of pending litigation and possible future litigation as
discussed in this Quarterly Report and the Annual Report, including, without
limitation, the section referenced above.
During the third quarter of 1996, billet production at the Company's steel
mill in Peoria, Illinois of 172,000 tons increased 11% from production in the
comparable 1995 period. This increase was primarily a result of down-time
associated with equipment repairs and electrical power refusals and
interruptions during the 1995 third quarter. The Company purchases electrical
energy from a regulated utility under an interruptible service contract which
provides for more economical electricity rates but allows the utility to refuse
or interrupt power during periods of peak demand. Billet production of 481,000
tons for the first nine months of 1996 approximated that of the comparable 1995
period as the increased production in the third quarter of 1996 was offset by
lower production levels during the first quarter of 1996 due to start-up
problems in January 1996 following the annual maintenance shut-down and
abnormally cold weather.
The Company's billet production capacity is less than its rod production
capacity, and as such, the Company periodically purchases billets from other
manufacturers to increase the utilization of its Peoria rod mill and thus assure
the Company's ability to meet customer orders. The decision to purchase billets
depends on billet prices, product demand and other market conditions. The
Company purchased 36,000 tons of billets during the first nine months of 1996
compared to 56,000 tons in the first nine months of 1995. The Company currently
anticipates purchasing 11,000 tons of billets during the remainder of 1996
whereas 5,000 tons were purchased during the last quarter of 1995.
Rod production during the third quarter of 1996 was 179,000 tons, up 22%
from the 1995 third quarter. This third quarter increase was primarily a result
of lower billet production and purchases as well as power refusals and
interruptions during the 1995 period. Rod production of 516,000 tons during the
first nine months of 1996 was 3% higher than in the comparable 1995 period as
elimination of the third quarter 1995 production problems was partially offset
primarily by unscheduled downtime due to the 1996 first quarter start-up and
weather problems and rod mill equipment failures.
Net sales for the third quarter of 1996 approximated those of the comparable
1995 quarter as a 3% decline in average selling prices offset a 2% increase in
tons sold. Tons of rod and wire sold each increased 4% to 75,000 tons and
43,000 tons, respectively, while tons of wire products sold declined 2% to
55,000 tons. Rod, wire and wire products per ton selling prices declined during
the third quarter of 1996 approximately 4%, 2% and 1%, respectively, from the
per ton selling prices during the same quarter in 1995. Wire and wire products
are sold at higher per ton selling prices than rod.
Net sales for the first nine months of 1996 declined $16.4 million, or 6%
from the comparable 1995 period. Sales were adversely impacted by a decline in
per ton selling prices for rod, wire and wire products of 10%, 4% and 3%,
respectively. Total tons of product sold during the first nine months of 1996
approximated those of the comparable 1995 period as tons of rod sold increased
10% to 232,000 tons while tons of wire and wire products sold decreased by 1%
and 12%, respectively, to 122,000 tons and 294,000 tons, respectively.
Although total sales tonnage in the third quarter of 1996 increased over the
comparable 1995 period, sales tonnage for the first nine months of 1996 only
approximated the 1995 nine-month period. The Company believes this was a result
of several factors, occurring primarily in the 1996 first quarter, including
customers adjusting inventory levels, new capacity from U.S. competitors and
increased imports due to market weaknesses in other parts of the world. The
Company also believes these pressures softened somewhat in the second and third
quarters of 1996 as evidenced by a 7% year-to-year increase in order backlog at
September 30, 1996 (as compared to a 38% year-to-year decline in order backlog
at March 31, 1996). The Company currently expects 1996 fourth quarter revenues
to increase over those of the 1995 fourth quarter with higher sales tonnage
being partially offset by lower overall sales prices.
Gross profit was $8.2 million for the third quarter of 1996, an increase of
$1.7 million from the comparable 1995 period, as the gross profit margin
increased to 9.9% from 7.9%. This increase is primarily the result of lower
costs for scrap steel, the Company's primary raw material, more than offsetting
lower selling prices and increased rod conversion costs. Conversely, gross
profit of $20.6 million for the first nine months of 1996 was $4.7 million lower
than the same 1995 period as year-to-date gross profit margins decreased to 8.2%
from 9.4%. This decrease is primarily the result of lower selling prices and a
9% year-to-year increase in rod conversion costs caused, in part, by the 1996
first quarter start-up problems, unscheduled downtime and rod mill equipment
failures as well as a 27% year-to-year increase in the cost of natural gas.
Scrap steel prices were approximately 2% lower during the third quarter of 1996
as compared to the same 1995 period, while scrap costs during the first nine
months of 1996 approximated those of the same 1995 period. Scrap steel costs
are currently expected to decline from current levels during the last quarter of
1996.
Selling expenses, as a percentage of net sales, approximated 1995 levels
during the respective 1996 periods. General and administrative expenses, as a
percentage of net sales, increased to 6% in the third quarter of 1996 as
compared to 4% in the comparable 1995 period primarily as a result of increased
environmental and employee related expenses. General and administrative expenses
for the first nine months, as a percentage of net sales, increased to 6% from 5%
between the 1995 and 1996 periods also primarily as a result of increased
environmental and employee related expenses as well as increased insurance costs
and costs incurred in connection with a possible joint venture related to
recovery of zinc and other metals from electric arc furnace dust. Discussions
with the potential joint venture partner were discontinued and the incurred
costs were charged to expense. Interest expense in the 1996 periods
approximated the 1995 periods as lower interest rates were offset by increased
borrowings under the Company's revolving credit facility.
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 normal December shutdown for maintenance and
repairs at the Company's Peoria, Illinois facility impact the timing of
production, sales and purchases.
At September 30, 1996, the Company had a working capital deficit of $15.5
million. Notes payable and current long-term debt, deductions in the
computation of working capital, aggregated $17.8 million, and included
outstanding borrowings of $14.1 million under the Company's $55 million
revolving credit facility. The amount of available borrowings is based on
formula-determined amounts of trade receivables and inventories, less the amount
of outstanding letters of credit, and additional borrowings available were $35.5
million at September 30, 1996. The Company's daily cash receipts are required to
be used to reduce the outstanding borrowings, which results in the Company
maintaining zero cash balances. Borrowings under the revolving credit facility
mature December 31, 1999.
Capital expenditures during the first nine months of 1996 amounted to $10.4
million and are currently estimated to approximate $15 million for the full
year. The Company's capital expenditures for the years 1995 and 1996 are
relatively high, as compared to levels of the six preceding years, due to
modernization and expansion of the Company production facilities as well as a
new management information system at the Company's Peoria facility.
During the first nine months of 1996, the Company's pension plans had an
investment return of approximately 14.2% (an annualized rate of approximately
18.9%). This rate of return exceeds the actuarially assumed annual rate of
return of 10% and, as a result, reduced the Company's pre-merger pension
liability and pension liabilities adjustment component of stockholders' equity.
At September 30, 1996, approximately 49% of the Company's pension plan's assets
are invested in a collective investment trust (the "Collective Trust") for
Contran and its affiliates (prior to the Merger, significantly all of the plan
assets were invested in the Collective Trust). At September 30, 1996,
approximately one-fourth of the Collective Trust's assets relate to a single
security. This security has increased in value by approximately 26% since
December 31, 1995 and, as such, was a significant factor in the 14.2% overall
return for the first nine months of 1996. Variances from actuarial assumptions,
including the rate of return on pension plan assets and discount rate, will
result in increases or decreases in prepaid pension costs, deferred taxes,
pension expense and funding requirements in future periods.
The merger of Keystone's underfunded defined benefit pension plans with and
into DeSoto's overfunded defined benefit pension plan following the Merger is
expected to result in lower pension contributions and pension expense than
Keystone has historically experienced. The anticipated increase in cash flows
due to lower pension contributions is expected to eventually more than offset
the cash payments to be made as a result of the Merger. Pension contributions
during the first nine months of 1996 amounted to $9.7 million. No further
contributions will be required during 1996.
As discussed in Note 2 to the Consolidated Financial Statements, pursuant to
the terms of the Merger, Keystone was obligated to, and has caused DeSoto to
pay, approximately $5.9 million in October 1996 to certain of DeSoto's trade
creditors. In addition, Keystone was required to, and paid in October 1996, the
holders of DeSoto's preferred stock all dividend arrearages (approximately $1.6
million). Although the Company has obtained a $20 million increase, to $55
million, in its revolving credit facility, the availability of borrowings under
this agreement will likely be limited to a lower amount due to certain borrowing
base limitations. As a result of the Merger related transactions and lower than
expected sales and earnings during the first nine months of 1996, Keystone will
likely experience borrowing constraints in the short-term and may need to seek
additional increases in its borrowing base limitations during the first quarter
of 1997 to provide additional liquidity.
Management's budget, as revised to consider the Merger and related
transactions, provides for sufficient cash flows from operations and financing
activities to meet its anticipated operating needs for 1997. This budget 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 benefit and other fixed and variable
costs; working capital requirements; interest rates; repayments of long-term
debt; capital expenditures; and borrowing base limitations and resulting
availability under the Company's credit facilities. However, any significant
decline in the Company's markets, market share or selling prices, any inability
to maintain satisfactory billet and rod production levels, any significant
increase in the cost of scrap steel, or any other significant unanticipated
costs, could result in a need for funds greater than the Company currently has
available. There can be no assurance the Company would be able to obtain an
adequate amount of additional financing. Additionally, potential liabilities
under environmental laws and regulations with respect to the clean-up and
disposal of wastes beyond present accruals, or any significant increase in the
cost of providing medical coverage to active and retired employees, could have a
material adverse affect on the future liquidity, financial condition or results
of operations of the Company.
PART II.
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 9 to the Consolidated Financial Statements is incorporated herein by
reference.
PART III.
ITEM 2. Changes in securities
---------------------
In connection with the Merger, Keystone designated and issued 440,000 and
435,458 shares, respectively, of Series A Senior Preferred Stock. Such
preferred stock has liquidation and dividend rights senior to Keystone's common
stock.
Notes 2 and 8 to the Consolidated Financial Statements are incorporated
herein by reference.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On September 27, 1996 a special meeting of the stockholders of Keystone was
held for the purpose of voting upon a proposal to approve the issuance of
Keystone common stock pursuant to an Agreement and Plan of Reorganization dated
as of June 26, 1996 between Keystone and DeSoto (the "Agreement").
Results of voting at the special meeting are detailed below (5,686,424
shares were issued, outstanding and entitled to vote at the meeting).
For 4,507,575
Withheld 23,159
Abstained 8,557
---------
4,539,291
=========
After approval by the Keystone stockholders and the DeSoto stockholders at a
similar meeting, the merger was consummated on September 27, 1996.
Pursuant to the Agreement, the Keystone Board of Directors was expanded to
include William Spier and William P. Lyons, two directors of DeSoto, upon
consummation of the merger.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are included herein:
2.1 Agreement and Plan of Reorganization, dated as of June 26, 1996,
between Registrant and DeSoto, Inc. (Incorporated by reference to
Exhibit 2.1 of Registrant's Registration Statement on Form S-4
(Registration No. 333-09117)).
10.1 First Amendment to Amended and Restated Revolving Loan and Security
Agreement dated as of September 27, 1996 between Registrant and
Congress Financial Corporation (Central).
10.2 First Amendment to Term Loan and Security Agreement dated as of
September 27, 1996 between Registrant and Congress Financial
Corporation (Central).
10.3 Preferred Stockholder Waiver and Consent Agreement between Registrant,
Coatings Group, Inc., Asgard, Ltd. and Parkway M&A Capital Corporation,
(collectively, the "Sutton Entities") dated June 26, 1996.
(Incorporated by reference to Exhibit 10.7 of Registrant's Registration
Statement on Form S-4 (Registration No. 333-09117)).
10.4 Warrant Conversion Agreement between the Sutton Entities and Registrant
dated June 26, 1996. (Incorporated by reference to Exhibit 10.9 of
Registrant's Registration Statement on Form S-4 (Registration No. 333-
09117)).
10.5 Stockholders Agreement by and Among Registrant, the Sutton Entities,
DeSoto and Contran, dated June 26, 1996. (Incorporated by reference to
Exhibit 10.10 of Registrant's Registration Statement on Form S-4
(Registration No. 333-09117)).
27.1 Financial Data Schedule for the nine month period ended September
30, 1996.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1996:
A current report on Form 8-K, dated as of September 27, 1996, was filed to
report under Item 2 that the Company had merged with DeSoto, Inc.
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 14, 1996 By /s/Harold M. Curdy
-------------------------------------
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: November 14, 1996 By /s/Bert E. Downing, Jr.
-------------------------------------
Bert E. Downing, Jr.
Corporate Controller
(Principal Accounting Officer)
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 14, 1996 By
-----------------------------------
Harold M. Curdy
Vice President - Finance/Treasurer
(Principal Financial Officer)
Date: November 14, 1996 By
-----------------------------------
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 nine
months ended September 30, 1996 and is qualified in its entirety by reference to
such.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 41,751
<ALLOWANCES> 956
<INVENTORY> 29,671
<CURRENT-ASSETS> 82,538
<PP&E> 254,608
<DEPRECIATION> 168,370
<TOTAL-ASSETS> 283,089
<CURRENT-LIABILITIES> 98,054
<BONDS> 17,852
<COMMON> 9,916
5,100
0
<OTHER-SE> 19,183
<TOTAL-LIABILITY-AND-EQUITY> 283,089
<SALES> 252,821
<TOTAL-REVENUES> 253,158
<CGS> 232,206
<TOTAL-COSTS> 232,206
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 42
<INTEREST-EXPENSE> 2,677
<INCOME-PRETAX> 784
<INCOME-TAX> 319
<INCOME-CONTINUING> 465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 465
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
EXHIBIT 10.1
FIRST AMENDMENT TO AMENDED AND RESTATED
REVOLVING LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED REVOLVING LOAN AND
SECURITY AGREEMENT (the "First Amendment") is entered into as of September ,
--
1996 by and between KEYSTONE CONSOLIDATED INDUSTRIES, INC., a Delaware
corporation ("Borrower"), and CONGRESS FINANCIAL CORPORATION (CENTRAL), an
Illinois corporation ("Lender"). Except for terms which are expressly defined
herein, all capitalized terms used herein shall have the meaning subscribed to
them in the Loan Agreement (as defined below).
RECITALS
--------
WHEREAS, Borrower and Lender are parties to that certain Amended And
Restated Revolving Loan And Security Agreement, dated as of December 29, 1995
(the "Loan Agreement").
WHEREAS, Borrower has requested that Lender amend the Loan Agreement
to provide for, among other things, the DeSoto Acquisition and to provide
further financial accommodations under the Loan Agreement.
WHEREAS, Lender is willing to amend the Loan Agreement on the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
I. AMENDMENTS TO THE LOAN AGREEMENT.
--------------------------------
A. Introduction/Preamble. The introductory provisions of the Loan
---------------------
Agreement are hereby amended to change the reference to Lender as
being a Delaware corporation to reflect the fact that Lender is, in
fact, an Illinois corporation. All references, at any time, to Lender
are intended to refer to such Illinois corporation.
Joint Venture. All references to the "Joint Venture," the "Joint
-------------
Venture Credit Facility," and the "Joint Venture Guarantee" are hereby
deleted in their entirety.
B. Definitions.
-----------
1. Section 1 of the Loan Agreement is hereby amended by adding the
following defined terms in the appropriate alphabetical order:
a) "Caldwell" shall mean Sherman Wire of Caldwell, Inc.
b) "DeSoto Loan Agreement" shall mean that certain Revolving
Loan and Security Agreement dated as of September , 1996,
--
by and between Congress and DSO Acquisition Corporation, a
Delaware corporation.
c) "DeSoto Acquisition" shall mean the merger of DSO
Acquisition Corporation with and into DeSoto, Inc. pursuant
to the terms of the Agreement and Plan of Reorganization
(the "Merger Agreement") dated June 26, 1996, by and between
DeSoto, Inc. and Borrower.
d) "Eligible Borrower Accounts" shall mean Accounts created by
Borrower which are and continue to be acceptable to Lender
based on the criteria set forth below. In general, Accounts
shall be Eligible Borrower Accounts if:
(a) such Accounts arise from the actual and bona fide
---- ----
sale and delivery of goods by Borrower or
rendition of services by Borrower in the ordinary
course of its business which transactions are
completed in accordance with the terms and
provisions contained in any documents related
thereto;
(b) such Accounts are not unpaid for the lesser of
(i) more than ninety (90) days after the date of
the original invoice for them or (ii) more than
sixty (60) days after the due date of the original
invoice for them;
(c) such Accounts comply with the terms and
conditions contained in Section 7.2(c) of this
Agreement;
(d) such Accounts do not arise from sales on consign-
ment, guaranteed sale, sale and return, sale on
approval, or other terms under which payment by
the account debtor may be conditional or
contingent;
(e) the chief executive office of the account debtor
with respect to such Accounts is located in the
United States of America, or, at Lender's option,
if either: (i) the account debtor has delivered
to Borrower an irrevocable letter of credit issued
or confirmed by a bank reasonably satisfactory to
Lender, sufficient to cover such Account, in form
and substance reasonably satisfactory to Lender
and, if required by Lender, the original of such
letter of credit has been delivered to Lender or
Lender's agent and the issuer thereof notified of
the assignment of the proceeds of such letter of
credit to Lender, or (ii) such Account is subject
to credit insurance payable to Lender issued by an
insurer and on terms and in an amount acceptable
to Lender, or (iii) such Account is otherwise
acceptable in all respects to Lender (subject to
such lending formula with respect thereto as
Lender may determine);
(f) such Accounts do not consist of progress
billings, bill and hold invoices or retainage
invoices, except as to bill and hold invoices, if
Lender shall have received an agreement in writing
from the account debtor, in form and substance
reasonably satisfactory to Lender, confirming the
unconditional obligation of the account debtor to
take the goods related thereto and pay such
invoice;
(g) the account debtor with respect to such Accounts
has not asserted a counterclaim, defense or
dispute and does not have, and does not engage in
transactions which may give rise to, any right of
setoff against such Accounts;
(h) there are no facts, events or occurrences which
would impair the validity, enforceability or
collectability of such Accounts or reduce the
amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority,
valid and perfected security interest of Lender
and any goods giving rise thereto are not, and
were not at the time of the sale thereof, subject
to any liens except those permitted in this
Agreement;
(j) except for Engineered Wire Products, neither the
account debtor nor any director, officer or
employee of the account debtor with respect to
such Accounts is an officer, director or employee
of or is affiliated with Borrower directly or
indirectly by virtue of family membership,
ownership, control, management or otherwise;
(k) the account debtors with respect to such Accounts
are not any foreign government, the United States
of America, any State, political subdivision,
department, agency or instrumentality thereof,
unless, if the account debtor is the United States
of America, any State, political subdivision,
department, agency or instrumentality thereof,
upon Lender's request, the Federal Assignment of
Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been
complied with in a manner reasonably satisfactory
to Lender;
(l) there are no proceedings or actions which are
threatened or pending against the account debtors
with respect to such Accounts which might result
in any material adverse change in any such account
debtor's financial condition;
(m) such Accounts of a single account debtor (when
combined with Accounts owing by such account
debtor to Caldwell and Fox Valley) or its
affiliates do not constitute more than fifty (50%)
percent of all otherwise Eligible Accounts (but
the portion of the Accounts not in excess of such
percentage may be deemed Eligible Borrower
Accounts);
(n) such Accounts are not owed by an account debtor
who has Accounts (when combined with Accounts
owing by such account debtor to Caldwell and Fox
Valley) which are unpaid for the lesser of (i)
more than ninety (90) days after the date of the
original invoice for them or (ii) more than sixty
(60) days after the due date of the original
invoice for them, which constitute more than fifty
(50%) percent of the total Accounts owed to
Borrower, Caldwell and Fox Valley by such account
debtor;
(o) such Accounts are owed by account debtors whose
total indebtedness to Borrower does not exceed the
credit limit, if any, with respect to such account
debtors as established by Lender from time to time
(but the portion of the Accounts not in excess of
such credit limit may still be deemed Eligible
Borrower Accounts); and
(p) such Accounts are not owed by account debtors
which Lender has advised Borrower in writing are
not deemed to be creditworthy by Lender;
General criteria for Eligible Borrower Accounts may be
established and revised from time to time by Lender in good
faith. Any Accounts which are not Eligible Borrower
Accounts shall nevertheless be part of the Collateral.
e) "Eligible Borrower Inventory" shall mean that Inventory of
Borrower which is and at all times continues to be
acceptable to Lender in all respects. Standards of
eligibility may be fixed and revised from time to time
solely by Lender in its exclusive judgment. In determining
eligibility Lender may, but is not required to, rely on
reports and schedules of Inventory furnished by Borrower,
but reliance by Lender thereon from time to time shall not
be deemed to limit Lender's right to revise standards of
eligibility at any time as to both present and future
Inventory. In general and without limiting Lender's
discretion, Eligible Borrower Inventory shall not include:
(a) work-in-process (other than work-in-process of
Keystone Steel and Wire Division of Borrower);
(b) components which are not part of finished goods;
(c) spare parts for equipment (other than expendable
spare parts of equipment that are used on
Borrower's machinery and which have not been
installed in any of the equipment);
(d) supplies used or consumed in Borrower's business
(other than steel used or consumed by Borrower in
the process of manufacturing Inventory);
(e) Inventory at premises other than those owned and
controlled by Borrower, except if Lender shall
have received an agreement in writing from the
person in possession of such Inventory and/or the
owner or operator of such premises in form and
substance satisfactory to Lender acknowledging
Lender's first priority security interest in the
Inventory, waiving security interests and claims
by such person against the Inventory and
permitting Lender access to, and the right to
remain on, the premises so as to exercise Lender's
rights and remedies and otherwise deal with the
Collateral;
(f) Inventory subject to a security interest or lien
in favor of any person other than Lender except
those permitted in this Agreement;
(g) bill and hold goods;
(h) Inventory, which in Lender's discretion is
unserviceable, obsolete or slow moving;
(i) Inventory which is not subject to the first
priority, valid and perfected security interest of
Lender;
(j) returned, damaged and/or defective Inventory; and
(k) Inventory purchased or sold on consignment.
General criteria for Eligible Borrower Inventory may be
established and revised from time to time by Lender in good
faith. Any Inventory which is not Eligible Borrower
Inventory shall nevertheless be part of the Collateral.
f) "Eligible Caldwell Accounts" shall mean Accounts created by
Caldwell which are and continue to be acceptable to Lender
based on the criteria set forth below. In general, Accounts
shall be Eligible Caldwell Accounts if:
(a) such Accounts arise from the actual and bona fide
---- ----
sale and delivery of goods by Caldwell or
rendition of services by Caldwell in the ordinary
course of its business which transactions are
completed in accordance with the terms and
provisions contained in any documents related
thereto;
(b) such Accounts are not unpaid for the lesser of
(i) more than ninety (90) days after the date of
the original invoice for them or (ii) more than
sixty (60) days after the due date of the original
invoice for them;
(c) such Accounts comply with the terms and
conditions contained in Section 7.2(c) of this
Agreement;
(d) such Accounts do not arise from sales on consign-
ment, guaranteed sale, sale and return, sale on
approval, or other terms under which payment by
the account debtor may be conditional or
contingent;
(e) the chief executive office of the account debtor
with respect to such Accounts is located in the
United States of America, or, at Lender's option,
if either: (i) the account debtor has delivered
to Caldwell an irrevocable letter of credit issued
or confirmed by a bank reasonably satisfactory to
Lender, sufficient to cover such Account, in form
and substance reasonably satisfactory to Lender
and, if required by Lender, the original of such
letter of credit has been delivered to Lender or
Lender's agent and the issuer thereof notified of
the assignment of the proceeds of such letter of
credit to Lender, or (ii) such Account is subject
to credit insurance payable to Lender issued by an
insurer and on terms and in an amount acceptable
to Lender, or (iii) such Account is otherwise
acceptable in all respects to Lender (subject to
such lending formula with respect thereto as
Lender may determine);
(f) such Accounts do not consist of progress
billings, bill and hold invoices or retainage
invoices, except as to bill and hold invoices, if
Lender shall have received an agreement in writing
from the account debtor, in form and substance
reasonably satisfactory to Lender, confirming the
unconditional obligation of the account debtor to
take the goods related thereto and pay such
invoice;
(g) the account debtor with respect to such Accounts
has not asserted a counterclaim, defense or
dispute and does not have, and does not engage in
transactions which may give rise to, any right of
setoff against such Accounts;
(h) there are no facts, events or occurrences which
would impair the validity, enforceability or
collectability of such Accounts or reduce the
amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority,
valid and perfected security interest of Lender
and any goods giving rise thereto are not, and
were not at the time of the sale thereof, subject
to any liens except those permitted in this
Agreement;
(j) neither the account debtor nor any director,
officer or employee of the account debtor with
respect to such Accounts is an officer, director
or employee of or is affiliated with Borrower or
Caldwell directly or indirectly by virtue of
family membership, ownership, control, management
or otherwise;
(k) the account debtors with respect to such Accounts
are not any foreign government, the United States
of America, any State, political subdivision,
department, agency or instrumentality thereof,
unless, if the account debtor is the United States
of America, any State, political subdivision,
department, agency or instrumentality thereof,
upon Lender's request, the Federal Assignment of
Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been
complied with in a manner reasonably satisfactory
to Lender;
(l) there are no proceedings or actions which are
threatened or pending against the account debtors
with respect to such Accounts which might result
in any material adverse change in any such account
debtor's financial condition;
(m) such Accounts of a single account debtor (when
combined with Accounts owing by such account
debtor to Borrower and Fox Valley) or its
affiliates do not constitute more than fifty (50%)
percent of all otherwise Eligible Accounts (but
the portion of the Accounts not in excess of such
percentage may be deemed Eligible Caldwell
Accounts);
(n) such Accounts are not owed by an account debtor
who has Accounts (when combined with Accounts
owing by such account debtor to Borrower and Fox
Valley) which are unpaid for the lesser of (i)
more than ninety (90) days after the date of the
original invoice for them or (ii) more than sixty
(60) days after the due date of the original
invoice for them, which constitute more than fifty
(50%) percent of the total Accounts owed to
Borrower, Caldwell and Fox Valley by such account
debtor;
(o) such Accounts are owed by account debtors whose
total indebtedness to Caldwell does not exceed the
credit limit, if any, with respect to such account
debtors as established by Lender from time to time
(but the portion of the Accounts not in excess of
such credit limit may still be deemed Eligible
Caldwell Accounts); and
(p) such Accounts are not owed by account debtors
which Lender has advised Caldwell in writing are
not deemed to be creditworthy by Lender;
General criteria for Eligible Caldwell Accounts may be
established and revised from time to time by Lender in good
faith. Any Accounts which are not Eligible Caldwell
Accounts shall nevertheless be part of the Collateral.
g) "Eligible Caldwell Inventory" shall mean that Inventory of
Caldwell which is and at all times continues to be
acceptable to Lender in all respects. Standards of
eligibility may be fixed and revised from time to time
solely by Lender in its exclusive judgment. In determining
eligibility Lender may, but is not required to, rely on
reports and schedules of Inventory furnished by Caldwell,
but reliance by Lender thereon from time to time shall not
be deemed to limit Lender's right to revise standards of
eligibility at any time as to both present and future
Inventory. In general and without limiting Lender's
discretion, Eligible Caldwell Inventory shall not include:
(a) work-in-process;
(b) components which are not part of finished goods;
(c) spare parts for equipment;
(d) supplies used or consumed in Caldwell's business
(other than steel used or consumed by Caldwell in
the process of manufacturing Inventory);
(e) Inventory at premises other than those owned and
controlled by Caldwell, except if Lender shall
have received an agreement in writing from the
person in possession of such Inventory and/or the
owner or operator of such premises in form and
substance satisfactory to Lender acknowledging
Lender's first priority security interest in the
Inventory, waiving security interests and claims
by such person against the Inventory and
permitting Lender access to, and the right to
remain on, the premises so as to exercise Lender's
rights and remedies and otherwise deal with the
Collateral;
(f) Inventory subject to a security interest or lien
in favor of any person other than Lender except
those permitted in this Agreement;
(g) bill and hold goods;
(h) Inventory, which in Lender's discretion is
unserviceable, obsolete or slow moving;
(i) Inventory which is not subject to the first
priority, valid and perfected security interest of
Lender;
(j) returned, damaged and/or defective Inventory; and
(k) Inventory purchased or sold on consignment.
General criteria for Eligible Caldwell Inventory may be
established and revised from time to time by Lender in good
faith. Any Inventory which is not Eligible Caldwell
Inventory shall nevertheless be part of the Collateral.
h) "Eligible Fox Valley Accounts" shall mean Accounts created
by Fox Valley which are and continue to be acceptable to
Lender based on the criteria set forth below. In general,
Accounts shall be Eligible Fox Valley Accounts if:
(a) such Accounts arise from the actual and bona fide
---- ----
sale and delivery of goods by Fox Valley or
rendition of services by Fox Valley in the
ordinary course of its business which transactions
are completed in accordance with the terms and
provisions contained in any documents related
thereto;
(b) such Accounts are not unpaid for the lesser of
(i) more than ninety (90) days after the date of
the original invoice for them or (ii) more than
sixty (60) days after the due date of the original
invoice for them;
(c) such Accounts comply with the terms and
conditions contained in Section 7.2(c) of this
Agreement;
(d) such Accounts do not arise from sales on consign-
ment, guaranteed sale, sale and return, sale on
approval, or other terms under which payment by
the account debtor may be conditional or
contingent;
(e) the chief executive office of the account debtor
with respect to such Accounts is located in the
United States of America, or, at Lender's option,
if either: (i) the account debtor has delivered
to Fox Valley an irrevocable letter of credit
issued or confirmed by a bank reasonably
satisfactory to Lender, sufficient to cover such
Account, in form and substance reasonably
satisfactory to Lender and, if required by Lender,
the original of such letter of credit has been
delivered to Lender or Lender's agent and the
issuer thereof notified of the assignment of the
proceeds of such letter of credit to Lender, or
(ii) such Account is subject to credit insurance
payable to Lender issued by an insurer and on
terms and in an amount acceptable to Lender, or
(iii) such Account is otherwise acceptable in all
respects to Lender (subject to such lending
formula with respect thereto as Lender may
determine);
(f) such Accounts do not consist of progress
billings, bill and hold invoices or retainage
invoices, except as to bill and hold invoices, if
Lender shall have received an agreement in writing
from the account debtor, in form and substance
reasonably satisfactory to Lender, confirming the
unconditional obligation of the account debtor to
take the goods related thereto and pay such
invoice;
(g) the account debtor with respect to such Accounts
has not asserted a counterclaim, defense or
dispute and does not have, and does not engage in
transactions which may give rise to, any right of
setoff against such Accounts;
(h) there are no facts, events or occurrences which
would impair the validity, enforceability or
collectability of such Accounts or reduce the
amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority,
valid and perfected security interest of Lender
and any goods giving rise thereto are not, and
were not at the time of the sale thereof, subject
to any liens except those permitted in this
Agreement;
(j) neither the account debtor nor any director,
officer or employee of the account debtor with
respect to such Accounts is an officer, director
or employee of or is affiliated with Borrower or
Fox Valley directly or indirectly by virtue of
family membership, ownership, control, management
or otherwise;
(k) the account debtors with respect to such Accounts
are not any foreign government, the United States
of America, any State, political subdivision,
department, agency or instrumentality thereof,
unless, if the account debtor is the United States
of America, any State, political subdivision,
department, agency or instrumentality thereof,
upon Lender's request, the Federal Assignment of
Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been
complied with in a manner reasonably satisfactory
to Lender;
(l) there are no proceedings or actions which are
threatened or pending against the account debtors
with respect to such Accounts which might result
in any material adverse change in any such account
debtor's financial condition;
(m) such Accounts of a single account debtor (when
combined with Accounts owing by such account
debtor to Borrower and Caldwell) or its affiliates
do not constitute more than fifty (50%) percent of
all otherwise Eligible Accounts (but the portion
of the Accounts not in excess of such percentage
may be deemed Eligible Fox Valley Accounts);
(n) such Accounts are not owed by an account debtor
who has Accounts (when combined with Accounts
owing by such account debtor to Borrower and
Caldwell) which are unpaid for the lesser of (i)
more than ninety (90) days after the date of the
original invoice for them or (ii) more than sixty
(60) days after the date of the original invoice
for them, which constitute more than fifty (50%)
percent of the total Accounts owed to Borrower,
Caldwell and Fox Valley by such account debtor;
(o) such Accounts are owed by account debtors whose
total indebtedness to Fox Valley does not exceed
the credit limit, if any, with respect to such
account debtors as established by Lender from time
to time (but the portion of the Accounts not in
excess of such credit limit may still be deemed
Eligible Fox Valley Accounts); and
(p) such Accounts are not owed by account debtors
which Lender has advised Fox Valley in writing are
not deemed to be creditworthy by Lender;
General criteria for Eligible Fox Valley Accounts may be
established and revised from time to time by Lender in good
faith. Any Accounts which are not Eligible Fox Valley
Accounts shall nevertheless be part of the Collateral.
i) "Eligible Fox Valley Inventory" shall mean that Inventory of
Fox Valley which is and at all times continues to be
acceptable to Lender in all respects. Standards of
eligibility may be fixed and revised from time to time
solely by Lender in its exclusive judgment. In determining
eligibility Lender may, but is not required to, rely on
reports and schedules of Inventory furnished by Fox Valley,
but reliance by Lender thereon from time to time shall not
be deemed to limit Lender's right to revise standards of
eligibility at any time as to both present and future
Inventory. In general and without limiting Lender's
discretion, Eligible Fox Valley Inventory shall not include:
(a) work-in-process;
(b) components which are not part of finished goods;
(c) spare parts for equipment;
(d) supplies used or consumed in Fox Valley's business
(other than steel used or consumed by Fox Valley
in the process of manufacturing Inventory);
(e) Inventory at premises other than those owned and
controlled by Fox Valley, except if Lender shall
have received an agreement in writing from the
person in possession of such Inventory and/or the
owner or operator of such premises in form and
substance satisfactory to Lender acknowledging
Lender's first priority security interest in the
Inventory, waiving security interests and claims
by such person against the Inventory and
permitting Lender access to, and the right to
remain on, the premises so as to exercise Lender's
rights and remedies and otherwise deal with the
Collateral;
(f) Inventory subject to a security interest or lien
in favor of any person other than Lender except
those permitted in this Agreement;
(g) bill and hold goods;
(h) Inventory, which in Lender's discretion is
unserviceable, obsolete or slow moving;
(i) Inventory which is not subject to the first
priority, valid and perfected security interest of
Lender;
(j) returned, damaged and/or defective Inventory; and
(k) Inventory purchased or sold on consignment.
General criteria for Eligible Fox Valley Inventory may be
established and revised from time to time by Lender in good
faith. Any Inventory which is not Eligible Fox Valley
Inventory shall nevertheless be part of the Collateral.
j) "Fox Valley" shall mean Fox Valley Steel & Wire Company.
k) "GAAP" shall mean generally accepted accounting principles
in the United States of America including the opinions and
pronouncements of the Accounting Principles Board and the
American Institute of Certified Public Accountants and the
statements and pronouncements of the Financial Accounting
Standards Boards which are applicable to the circumstances
as of the date hereof.
l) "Inventory Cap Adjustment" shall mean, at any time, the
amount, if any, by which the Inventory Utilization exceeds
$20,000,000.
m) "Inventory Utilization" shall mean, at any time, the total
outstanding amount of (i) the sum of (a) Revolving Loans,
(b) Letter of Credit Accomodations, (c) "Revolving Loans" as
defined under the DeSoto Loan Agreement, and (d) "Letter of
Credit Accomodations" as defined under the DeSoto Loan
Agreement, less (ii) the sum of the amounts then being
----
included in the Borrowing Base (or, with respect to DeSoto,
Inc., the borrowing formulas applicable in the DeSoto Loan
Agreement) by virtue of (w) Section 2.1(a)(i)(A) hereof, (x)
Section 2.1(a)(ii)(B)(i) hereof, (y) Section
2.1(a)(iii)(B)(i) hereof, and (z) Section 2.1(a)(i)(A) of
the DeSoto Loan Agreement.
n) "Net Amount of Eligible Caldwell Accounts" shall mean the
gross amount of Eligible Caldwell Accounts less (a) sales,
excise or similar taxes included in the amount thereof and
(b) returns, discounts, claims, credits and allowances of
any nature at any time issued, owing, granted, outstanding,
available or claimed with respect thereto.
o) "Net Amount of Eligible Fox Valley Accounts" shall mean the
gross amount of Eligible Fox Valley Accounts less (a) sales,
excise or similar taxes included in the amount thereof and
(b) returns, discounts, claims, credits and allowances of
any nature at any time issued, owing, granted, outstanding,
available or claimed with respect thereto.
p) "Net Amount of Eligible Borrower Accounts" shall mean the
gross amount of Eligible Borrower Accounts less (a) sales,
excise or similar taxes included in the amount thereof and
(b) returns, discounts, claims, credits and allowances of
any nature at any time issued, owing, granted, outstanding,
available or claimed with respect thereto.
q) "Person" shall mean an individual, a partnership, a
corporation, a trust, an unincorporated organization, a
government or any department or agency thereof or any other
entity.
r) "Solvent" shall mean, as to any Person, that (i) the sum of
the assets of such Person, both at a fair valuation and at
present fair salable value, will exceed its liabilities,
including contingent liabilities, (ii) such Person will have
sufficient capital with which to conduct its business as
presently conducted and as proposed to be conducted and
(iii) such Person has not incurred debts, and does not
intend to incur debts, beyond its ability to pay such debts
as they mature. For purposes of this definition, "debt"
means any liability on a claim, and "claim" means (x) a
right to payment, whether or not such right is reduced to
judgment, liquidated, disputed, undisputed, legal,
equitable, secured, or unsecured, or (y) a right to an
equitable remedy for breach of performance if such breach
gives rise to a payment, whether or not such right to an
equitable remedy is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed, secured or
unsecured. With respect to any such contingent liabilities,
such liabilities shall be computed at the amount which, in
light of all the facts and circumstances existing at the
time, represents the amount which can reasonably be expected
to become an actual or matured liability.
2. The definition of "Eligible Accounts" set forth in Section 1 of
the Loan Agreement is hereby amended and restated in its entirety
to read as follows:
"Eligible Accounts" shall mean (i) Eligible Borrower
Accounts, (ii) Eligible Caldwell Accounts, and (iii)
Eligible Fox Valley Accounts.
3. The definition of "Eligible Inventory" set forth in Section 1 of
the Loan Agreement is hereby amended and restated in its entirety
to read as follows:
"Eligible Inventory" shall mean (i) Eligible
Borrower Inventory, (ii) Eligible Caldwell
Inventory, and (iii) Eligible Fox Valley
Inventory.
4. The definition of "Inventory" set forth in Section 1 of the Loan
Agreement is hereby amended and restated as follows:
"Inventory" shall mean all of Borrower's, or, when used in
the definition of Caldwell Eligible Inventory or Fox Valley
Eligible Inventory, Caldwell's or Fox Valley's (as
applicable), now owned and hereafter existing or acquired
raw materials, work in process, finished goods and all other
inventory of whatsoever kind or nature, wherever located and
all wrapping, packaging, advertising and shipping materials,
and any documents relating thereto, and all labels and other
devices, names and marks affixed or to be affixed thereto
for purposes of selling or of identifying the same or the
seller or manufacturer thereof, and all right, title and
interest of Borrower, or, when used in the definition of
Caldwell Eligible Inventory or Fox Valley Eligible
Inventory, Caldwell or Fox Valley (as applicable) therein
and thereto, wherever located, whether now owned or
hereafter acquired by Borrower, or, when used in the
definition of Caldwell Eligible Inventory or Fox Valley
Eligible Inventory, Caldwell or Fox Valley (as applicable).
5. The definition of "Maximum Credit" set forth in Section 1 of the
Loan Agreement is hereby amended and restated in its entirety to
read as follows:
"Maximum Credit" shall mean the amount of
$55,000,000.00.
6. The definition of "Net Amount of Eligible Accounts" set forth in
Section 1 of the Loan Agreement is hereby deleted in its
entirety.
7. The definition of "Tangible Net Worth" set forth in Section 1 of
the Loan Agreement is hereby amended by inserting ", on a
consolidated basis" immediately between "(GAAP)" and the comma on
the third line thereof.
C. Section 2.1 of the Loan Agreement is hereby amended and restated in
its entirety to read as follows:
2.1 Revolving Loans.
---------------
(a) Subject to, and upon the terms and conditions
contained herein, Lender may, in its sole
discretion, agree to make Revolving Loans to
Borrower from time to time in amounts requested by
Borrower up to the amount which is equal to the
sum of:
(i) the sum of:
(a) eighty-five percent (85%) of the Net
Amount of Eligible Borrower Accounts,
plus
----
(b) the sum of (a) sixty percent (60%) of
the value of Eligible Borrower Inventory
which constitutes finished goods and (b)
the sum of fifty percent (50%) of
Eligible Borrower Inventory excluding
finished goods; plus
----
(ii) provided that Caldwell is Solvent at the time
of the proposed Revolving Loans, the sum of:
(a) the lesser of $3,500,000, or
(b) (i) eighty-five percent (85%) of
Eligible Caldwell Accounts; plus (ii)
----
the sum of (x) sixty percent (60%) of
the value of Eligible Caldwell Inventory
which constitutes finished goods and (y)
fifty percent (50%) of the value of
Eligible Caldwell Inventory excluding
finished goods; plus
----
(iii)provided that Fox Valley is Solvent at the
time of the proposed Revolving Loans, the sum
of:
(a) the lesser of $2,500,000, or
(b) (i) eighty-five percent (85%) of
Eligible Fox Valley Accounts; plus (ii)
----
the sum of (x) sixty percent (60%) of
Eligible Fox Valley Inventory which
constitutes finished goods and (y) fifty
percent (50%) of the value of Eligible
Fox Valley Inventory excluding finished
goods; less
----
(iv) any Availability Reserves; less
----
the Inventory Cap Adjustment (the calculation
determined in this Section 2.1(a) is
hereinafter referred to as the "Borrowing
Base").
(b) Lender may, in its discretion, from time to time,
upon not less than five (5) days prior notice to
Borrower, (i) reduce the lending formula with
respect to Eligible Accounts to the extent that
Lender determines in good faith that: (A) the
dilution with respect to the Accounts for any
period (based on the ratio of (1) the aggregate
amount of reductions in Accounts other than as a
result of payments in cash to (2) the aggregate
amount of total sales) has increased in any
material respect or may be reasonably anticipated
to increase in any material respect above
historical levels, or (B) the general
creditworthiness of account debtors has declined
or (ii) reduce the lending formula(s) with respect
to Eligible Borrower Inventory, Eligible Caldwell
Inventory and Eligible Fox Valley Inventory to the
extent that Lender determines that: (A) the number
of days of the turnover of the Inventory for any
period has changed in any material respect or (B)
the liquidation value of the Eligible Inventory or
any category thereof, has decreased, or (C) the
nature and quality of the Inventory has
deteriorated. In determining whether to reduce
the lending formula(s), Lender may consider
events, conditions, contingencies or risks which
are also considered in determining Eligible
Accounts, Eligible Inventory or in establishing
Availability Reserves.
(c) Except in Lender's discretion, the aggregate
amount of the Revolving Loans and the Letter of
Credit Accommodations outstanding at any time
shall not exceed the Maximum Credit minus the
-----
aggregate amount of the "Revolving Loans" (as
defined and used in the DeSoto Loan Agreement) and
the "Letter of Credit Accommodations" (as defined
and used in the DeSoto Loan Agreement). In the
event that the outstanding amount of any component
of the Revolving Loans, or the aggregate amount of
the outstanding Revolving Loans and Letter of
Credit Accommodations, exceed the amounts
available under the lending formulas, the
sublimits for Letter of Credit Accommodations set
forth in Section 2.2(c) or the Maximum Credit, as
applicable, such event shall not limit, waive or
otherwise affect any rights of Lender in that
circumstance or on any future occasions and
Borrower shall, upon demand by Lender, which may
be made at any time or from time to time,
immediately repay to Lender the entire amount of
any such excess(es) for which payment is demanded.
D. Section 5.2 of the Loan Agreement is hereby amended by inserting
"investment property," between the words "letters of credit," and
"bankers' acceptances" in the sixth line thereof.
E. The first sentence of Section 8.1 of the Loan Agreement is hereby
amended and restated to read as follows:
Borrower is a corporation duly organized and in
good standing under the laws of its state of
incorporation and is duly qualified as a foreign
corporation and in good standing in all states and
jurisdictions where the nature and extent of the
business transacted by it or the ownership of
assets makes such qualification necessary.
F. Section 8 of the Loan Agreement is hereby amended by inserting the
following immediately after Section 8.12 thereof:
Subsidiary Representations. Borrower represents
--------------------------
and warrants that all of the representations set
forth in Section 8 are true and correct with
respect to Caldwell and Fox Valley as if they were
made by each of Caldwell and Fox Valley with
respect to the various assets, businesses and
operations of Caldwell and Fox Valley
respectively. Borrower shall immediately notify
Lender, or cause each of Caldwell and Fox Valley
to notify Lender, of any fact or circumstance
which would cause this Section 8.13 to be untrue.
G. Section 9 of the Loan Agreement is hereby amended by inserting the
following immediately after Section 9.19 thereof:
Subsidiary Covenants. All of the covenants in
--------------------
Sections 9.1, 9.2, 9.3, 9.4, 9.5, 9.6(d), 9.7,
9.8, 9.9, 9.10, 9.12, 9.15, 9.16, 9.17, 9.18 and
9.19 shall apply with respect to Caldwell and Fox
Valley as if such covenants were made by each of
Caldwell and Fox Valley with respect to their
respective assets, businesses and operations.
Borrower shall immediately notify Lender, or cause
each of Caldwell and Fox Valley to notify Lender,
of any fact or circumstance which would violate
this Section 9.20.
H. Section 9.6(d) is hereby amended by inserting "Borrower shall furnish
or cause to be furnished to Lender, on a monthly basis, (i) separate
financial statements showing current financial data for each of
DeSoto, Inc., Caldwell and Fox Valley, and (ii) the information
required by Lender to reflect and monitor the assets which are used to
determine the Borrowing Base." immediately after the period in the
twelfth line therein.
I. Section 9.7 of the Loan Agreement is hereby amended by inserting the
following sentence immediately following the last sentence thereof:
"Notwithstanding the foregoing, Lender hereby authorizes the DeSoto
Acquisition in accordance with the Merger Agreement."
J. Section 9.9 of the Loan Agreement is hereby amended and restated in
its entirety to read as follows:
Indebtedness. Borrower shall not, nor permit
------------
Caldwell or Fox Valley to, incur, create, assume,
become or be liable in any manner with respect to,
or permit to exist, any obligations or
indebtedness, except (a) the Obligations; (b)
------
trade obligations and normal accruals in the
ordinary course of business not yet due and
payable, or with respect to which the Borrower,
Caldwell or Fox Valley (as applicable) is
contesting in good faith the amount or validity
thereof by appropriate proceedings diligently
pursued and available to Borrower, Caldwell or Fox
Valley (as applicable), and with respect to which
adequate reserves have been set aside on its
books; (c) purchase money indebtedness (including
capital leases) to the extent not incurred or
secured by liens (including capital leases) in
violation of any other provision of this
Agreement; and (d) obligations or indebtedness set
forth on the INFORMATION CERTIFICATE; provided,
--------
that, (i) Borrower, Caldwell or Fox Valley (as
----
applicable) may only make regularly scheduled
payments of principal and interest in respect of
such indebtedness in accordance with the terms of
the agreement or instrument evidencing or giving
rise to such indebtedness as in effect on the date
hereof, (ii) Borrower, Caldwell and Fox Valley
shall not, directly or indirectly, (A) amend,
modify, alter or change the terms of such
indebtedness or any agreement, document or
instrument related thereto as in effect on the
date hereof, or (B) redeem, retire, defease,
purchase or otherwise acquire such indebtedness,
or set aside or otherwise deposit or invest any
sums for such purpose, (iii) Borrower, Caldwell or
Fox Valley (as applicable) shall furnish to Lender
all notices or demands in connection with such
indebtedness either received by Borrower, Caldwell
or Fox Valley (as applicable) or on their behalf,
promptly after the receipt thereof, or sent by
Borrower, Caldwell or Fox Valley (as applicable)
or on their behalf, concurrently with the sending
thereof, as the case may be, and (iv) at no time
shall any such obligations or indebtedness (a) of
Caldwell (other than indebtedness owed to Borrower
and permitted under Section 9.10 hereof) exceed
$250,000 and (b) of Fox Valley (other than
indebtedness owed to Borrower and permitted under
Section 9.10 hereof) exceed $250,000.
K. Section 9.10 of the Loan Agreement is hereby amended by deleting "(v)
advances to the Joint Venture which are approved from time to time by
Lender" in the thirteenth and fourteenth lines thereof and inserting
"(v) loans or investments of no greater than (i) $3,000,000 to Fox
Valley, provided that Fox Valley is Solvent at the time of such loans
or investments, (ii) $5,000,000 to Caldwell, provided that Caldwell is
Solvent at the time of such loans or investments, and (iii)
$10,000,000 to DeSoto, Inc. (excluding the initial investment of
approximately $70,000,000 made to initially capitalize DSO Acquisition
Corporation with the contribution of the Sherman Wire assets plus (i)
the value of Borrower's stock issued in connection with the DeSoto
Acquisition and (ii) all transaction costs related to the DeSoto
Acquisition), provided that DeSoto, Inc. is Solvent at the time of
such loans or investments" in its place.
L. Section 9.12 of the Loan Agreement is hereby amended by inserting the
following sentence immediately following the last sentence thereof:
"Notwithstanding the foregoing, Lender hereby authorizes the DeSoto
Acquisition in accordance with the Merger Agreement."
M. Section 10.1(n) of the Loan Agreement is hereby amended by (i)
inserting ", as amended," between "1986" and "shall" in the third line
thereof and (ii) deleting the word "or" in the third line thereof.
N. Section 10.1(o) of the Loan Agreement is hereby amended and restated
in its entirety to read as follows:
there shall occur a termination of that certain
Amendment and Restatement of Subordination
Agreement executed by the Trustee of the Keystone
Consolidated Industries, Inc. Master Pension Trust
(successor to the "Keystone Master Pension Trust")
in favor of Lender dated as of January 8, 1986, as
amended and restated June 30, 1987 and further
amended by a Second Amendment dated as of August
19, 1996 (although the amendment is referred to as
the "Second Amendment", there exists no prior
amendment), or the Trustee or any party succeeding
in interest thereto shall assert the termination
of such Subordination Agreement or contest the
binding effect or validity thereof; or
O. Section 10 of the Loan Agreement is hereby amended by inserting a new
Section 10.1(p) as follows:
a default under that certain Agreement dated
August 19, 1996, between the Pension Benefit
Guaranty Corporation, acting on behalf of itself
and the various Keystone Pension Plans (as defined
therein), the Keystone Master Retirement Trust,
and Borrower; or
P. Schedule 8.4 and the Information Certificate (which contains
supplemental data with respect to Desoto, Inc., Caldwell and Fox
Valley, as well as additional updated information) are attached hereto
and are hereby substituted for Schedule 8.4 and the Information
Certificate, respectively, originally attached to the Loan Agreement.
Lender acknowledges and accepts such revised Information Certificate
and Schedule 8.4 as being effective as of the date hereof for all
transactions with Lender after the date hereof.
.
=====
II. CONDITIONS TO EFFECTIVENESS OF FIRST AMENDMENT
A. First Amendment. Borrower shall have duly executed and delivered this
First Amendment.
B. Term Loan Agreement. Borrower shall have duly executed and delivered
the First Amendment to Term Loan and Security Agreement dated as of
the date hereof, by and between Lender and Borrower.
C. DeSoto Loan Facility. Acquisition Subsidiary, Inc. shall have duly
--------------------
executed and delivered the DeSoto Loan Agreement and, upon the
consummation of the DeSoto Acquisition, DeSoto, Inc. shall have
assumed the Acquisition Subsidiary, Inc.'s responsibilities under the
DeSoto Loan Agreement and all conditions precedent to the initial
advance thereunder shall have been satisfied or waived by Lender in
writing.
D. DeSoto Acquisition. The DeSoto Acquisition shall have been completed
------------------
with the terms of the Merger Agreement in form and substance
satisfactory to Lender, in its sole discretion, and Lender shall be
satisfied, in its sole discretion, that the payment of the obligations
owing by DeSoto, Inc. to its existing creditors shall be adequately
provided for by the available credit hereunder and under the DeSoto
Loan Agreement.
E. Additional Matters. Lender shall have received such other
------------------
certificates, opinions, documents and instruments relating to the
obligations or the transactions contemplated hereby and by the
Financing Agreements as may have been reasonably requested by Lender,
and all corporate and other proceedings and all other documents and
all legal matters in connection with the transactions contemplated
hereby and by the Financing Agreements shall be reasonably
satisfactory in form and substance to Lender.
F. Congress Amendment Fee. Borrower shall have paid Lender an amendment
----------------------
fee equal to $200,000.
III. REPRESENTATIONS AND WARRANTIES. In order to induce Lender to enter into
- -----------------------------------
this First Amendment, Borrower represents and warrants to Lender, upon the
effectiveness of this First Amendment, which representations and warranties
shall survive the execution and delivery of this First Amendment, that:
A. Unencumbered Assets. Borrower has no assets that are free from a
-------------------
security interest, mortgage, pledge, lien, charge or other
encumbrance.
B. Priority of Liens. The security interests and liens granted to Lender
-----------------
under the Loan Agreement and the other Financing Agreements constitute
valid and perfected first priority liens and security interests in and
upon the Collateral subject only to existing liens indicated on
Schedule 8.4 to the Loan Agreement and, with respect to Collateral
other than Accounts and Inventory, the other liens permitted under
Section 9.8 of the Loan Agreement.
C. Due Incorporation; etc. Borrower is a corporation duly incorporated,
-----------------------
validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all requisite authority to
conduct its business in each jurisdiction in which its business is
conducted.
D. No Default; etc. No Event of Default has occurred and is continuing
----------------
after giving effect to this First Amendment or would result from the
execution or delivery of this First Amendment or the consummation of
the transactions contemplated hereby.
E. Corporate Power and Authority; Authorization. Borrower has the
--------------------------------------------
corporate power and authority to execute, deliver and carry out the
terms and provisions of this First Amendment and the other Financing
Agreements, and the performance by Borrower of its obligations
hereunder and under the other Financing Agreements to which it is a
party, have been duly authorized by all requisite corporate action by
Borrower.
F. Execution and Delivery. Borrower has duly executed and delivered this
--------------------------- --------------
First Amendment.
-----------------
G. Enforceability. The Loan Agreement, as amended by this First
--------------
Amendment, constitutes a legal, valid and binding obligation of
Borrower, enforceable against Borrower in accordance with its
respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally, and by general principles
of equity.
H. No Conflicts; etc. Neither the execution, delivery or performance by
-----------------------------------------------------
Borrower of this First Amendment nor compliance by Borrower with the
terms and provisions hereof (i) will contravene any applicable
provision of any law, statute, rule, regulation, order, writ,
injunction or decree of any court or governmental instrumentality or
(ii) will conflict or be inconsistent with, or result in any breach
of, any of the terms, covenants, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of
(or the obligation to create or impose) any lien upon any property or
assets owned by it pursuant to the terms of any indenture, mortgage,
deed of trust, agreement or other instrument to which Borrower is a
party or by which Borrower or any of its property or assets is bound
or to which Borrower may be subject, or (iii) will violate any
provision of Borrower's certificate of incorporation or by-laws.
I. Consents; etc. Other than the filing of mortgages and deeds of trust
------------------------------------------------------------
and the Uniform Commercial Code financing statements which have been
executed and delivered to Lender on or before the date of the First
Amendment, no order, consent, approval, license, authorization, or
validation of, or filing, recording or registration with or exemption
by, any governmental or public body or authority, or any subdivision
thereof, is required to authorize, or is required in connection with
the execution, delivery and performance of this First Amendment or the
consummation of any of the transactions contemplated hereby.
J. Representations and Warranties. All of the representations and
-----------------------------------------------------------
warranties contained in the Loan Agreement and in the other Financing
Agreements (other than those which speak expressly only as of a
different date) are true and correct as of the date of this First
Amendment after giving effect to this First Amendment.
IV. MISCELLANEOUS.
==================
A. Effect; Ratification. The amendments set forth herein are effective
----------------------------------------------------------
solely for the purposes set forth herein and shall be limited
precisely as written, and shall not be deemed to (i) be a consent to
any amendment, waiver or modification of any other term or condition
of the Loan Agreement or of any other Financing Agreements or (ii)
prejudice any right or rights that Lender may now have or may have in
the future under or in connection with the Loan Agreement or any other
Financing Agreements. Each reference in the Loan Agreement to "this
Agreement", "herein", "hereof" and words of like import and each
reference in the other Financing Agreements to the Loan Agreement
shall mean the Loan Agreement as amended hereby. This First Amendment
shall be construed in connection with and as part of the Loan
Agreement and all terms, conditions, representations, warranties,
covenants and agreements set forth in the Loan Agreement and each
other Financing Agreement, except as herein amended or waived, are
hereby ratified and confirmed and shall remain in full force and
effect.
B. Costs and Expenses. Borrower shall pay to Lender on demand all
-----------------------------------------------------------
reasonable out-of-pocket costs, expenses, title insurance premiums and
fees, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administr-
ation, collection, liquidation, enforcement and defense of the
Obligations, Lender's rights in the Collateral, this First Amendment,
the Loan Agreement, the other Financing Agreements and all other
documents related hereto or thereto, including any amendments,
supplements or consents which may hereafter be contemplated (whether
or not executed) or entered into in respect hereof and thereof,
including, but not limited to: (a) all costs and expenses of filing or
recording (including Uniform Commercial Code financing statement
filing taxes and fees, documentary taxes, intangibles taxes and
mortgage recording and title insurance taxes and fees, if applicable);
(b) costs and expenses and fees for title insurance and other
insurance premiums, environmental audits, surveys, assessments,
engineering reports and inspections, appraisal fees and search fees;
(c) costs and expenses of remitting loan proceeds, collecting checks
and other items of payment; (d) charges, fees or expenses charged by
any bank or issuer in connection with the Letter of Credit
Accommodations; (e) costs and expenses of preserving and protecting
the Collateral; (f) costs and expenses paid or incurred in connection
with obtaining payment of the Obligations, enforcing the security
interests and liens of Lender, selling or otherwise realizing upon the
Collateral, and otherwise enforcing the provisions of this First
Amendment, the Loan Agreement and the other Financing Agreements or
defending any claims made or threatened against Lender arising out of
the transactions contemplated hereby and thereby (including, without
limitation, preparations for and consultations concerning any such
matters); and (g) the fees and disbursements of counsel (including
legal assistants) to Lender in connection with the foregoing.
C. Certain Waivers; Release. Although Borrower does not believe that it
-----------------------------------------------------
has any claims against Lender, it is willing to provide Lender with a
general and total release of all such claims in consideration of the
benefits which Borrower will receive pursuant to this First Amendment.
Accordingly, Borrower for itself and any successor of Borrower hereby
knowingly, voluntarily, intentionally and irrevocably releases and
discharges Lender and its respective officers, directors, agents and
counsel (each a "Releasee") from any and all actions, causes of
action, suits, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, judgments, extents,
executions, losses, liabilities, costs, expenses, debts, dues,
demands, obligations or other claims of any kind whatsoever, in law,
admiralty or equity, which Borrower ever had, now have or hereafter
can, shall or may have against any Releasee for, upon or by reason of
any matter, cause or thing whatsoever from the beginning of the world
to the date of this First Amendment.
D. Effectiveness. This First Amendment shall immediately become
------------------------------------------------------
effective as of the date first written above upon (i) the receipt by
Lender of duly executed counterparts of this First Amendment from
Borrower and (ii) the satisfaction or written waiver of each condition
precedent contained herein.
E. Counterparts. This First Amendment may be executed in any number of
----------------------------------------------------------
counterparts, each such counterpart constituting an original but all
together constitute one and the same instrument.
F. Severability. Any provision contained in this First Amendment that is
------------ -----------------
held to be inoperative, unenforceable or invalid in any jurisdiction
-------------------------------------
shall, as to that jurisdiction, be inoperative, unenforceable or
invalid without affecting the remaining provisions of this First
Amendment in that jurisdiction or the operation, enforceability or
validity of that provision in any other jurisdiction.
G. GOVERNING LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED BY AND
------------- ---
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
------------------------------------------------
ILLINOIS.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the date first above written.
CONGRESS FINANCIAL CORPORATION (CENTRAL)
By
---------------------------------------------
Title:
-------------------------------------------
KEYSTONE CONSOLIDATED INDUSTRIES, INC.
By
---------------------------------------------
EXHIBIT 10.2
FIRST AMENDMENT TO TERM LOAN AND SECURITY AGREEMENT
This First Amendment to Term Loan and Security
Agreement (the "First Amendment") is made and entered into as of
September 27, 1996, by and between Congress Financial Corporation
(Central) ("Lender") and Keystone Consolidated Industries, Inc.
("Borrower").
RECITALS
A. Borrower and Lender are parties to that certain Term Loan
And Security Agreement dated as of December 30, 1993 ("the
Term Loan Agreement"). Capitalized terms used and not
otherwise defined in this Agreement are used as they are
defined in the Term Loan Agreement.
B. Borrower has requested and Lender has agreed that Lender
will relend to Borrower the amortized principle payments
which have been made under the prior term loan and establish
a new amortization schedule for the full term loan, all upon
the terms and subject to the conditions set forth in this
First Amendment.
NOW, THEREFORE, in consideration of the mutual
conditions and agreements set forth herein, and for other good
and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. Revised Term Loan Agreement. Subject to, and upon the terms
---------------------------
and conditions contained herein and in the Term Loan
Agreement, Lender agrees to lend to Borrower, within two (2)
business days of the Effective Date of this First Amendment,
the principal amount of $10,549,656, representing the full
payments received to date on the Term Loan, such that, as of
the date of such advance, the total principal amount of the
Term Loan shall equal $20,000,000 (such increased loan being
referred to herein as the "Reloaded Term Loan"; after the
disbursement thereof, all references to the Term Loan shall
be deemed to refer to such Reloaded Term Loan).
2. Scheduled Principal Payments. Except as provided in Sections
----------------------------
2.3 and 8.2(b) of the Term Loan Agreement, the principal
amount of the Reloaded Term Loan shall be due and payable in
38 equal monthly payments of $277,777 due on October 1, 1996
and on the first day of each month thereafter and final
payment of the remaining principal balance due on December
31, 1999.
3. Use Of Proceeds. Borrower shall use the principal amount of
---------------
the Reloaded Term Loan to reduce the principal amount of the
Revolving Loans (as defined in the Revolving Loan Agreement).
4. Representations And Warranties. Borrower represents and
-------------------------------
warrants that this First Amendment constitutes a legal, valid
and binding obligation enforceable against Borrower in
accordance with its terms.
5. Reference To And Effect Upon The Term Loan Agreement.
----------------------------------------------------
5.1. Upon the effectiveness of this First Amendment, each
reference in the Term Loan Agreement to "the Agreement,"
"hereunder," "hereof," "herein," or words of like
import, shall mean and be a reference to the Term Loan
Agreement, as amended hereby.
5.2. Except as specifically amended hereby, the Term Loan
Agreement shall remain in full force and effect and is
hereby ratified and confirmed.
5.3. The execution, delivery and effectiveness of this First
Amendment shall not operate as a waiver of any right,
power or remedy of Lender under the Term Loan Agreement,
nor constitute a waiver of any provision of the Term
Loan Agreement.
6. Governing Law. This First Amendment shall be governed by and
-------------
construed in accordance with the laws and decisions of the
State of Illinois.
7. Section Titles. The section titles contained in this First
--------------
Amendment are and shall be without substance, meaning or
content of any kind whatsoever and are not a part of the
agreement between the parties hereto.
8. Partial Invalidity. If any provision of this First Amendment
------------------
is held to be invalid or unenforceable, such invalidity or
unenforceability shall not invalidate this First Amendment as
a whole but this First Amendment shall be construed as though
it did not contain the particular provision held to be
invalid or enforceable and the rights and obligations of the
parties hereto shall be construed and enforced only to such
extent as shall be permitted by applicable law.
9. Counterparts. This First Amendment may be executed in any
------------
number of counterparts, each such counterpart constituting an
original but all together constitute one and the same
instrument.
10. Effectiveness. This First Amendment shall immediately become
-------------
effective upon the date ("Effective Date") when: (i) Lender
has received duly executed counterparts of this First
Amendment from Borrower; (ii) the satisfaction of (or waiver
by Lender) all conditions precedent contained in Section 4.1
of the Revolving Loan and Security Agreement by and between
Lender and Acquisition Subsidiary, Inc., a Delaware
corporation and wholly owned subsidiary of Lender, and (iii)
the satisfaction of (or waiver by Lender) all conditions
contained in Article II of the First Amendment to Amended and
Restated Revolving Loan and Security Agreement dated as of
the date hereof, by and between Lender and Borrower.
11. Effect; Ratification. The amendments set forth herein are
--------------------
effective solely for the purposes set forth herein and shall
be limited precisely as written, and shall not be deemed to
(i) be a consent to any amendment, waiver or modification of
any other term or condition of the Term Loan Agreement or
(ii) prejudice any right or rights that Lender may now have
or may have in the future under or in connection with the
Term Loan Agreement. Each reference in the Term Loan
Agreement to "this Agreement", "herein", "hereof" and words
of like import shall mean the Term Loan Agreement as amended
hereby. This First Amendment shall be construed in
connection with and as part of the Term Loan Agreement and
all terms, conditions, representations, warranties, covenants
and agreements set forth in the Term Loan Agreement, except
as herein amended or waived, are hereby ratified and
confirmed and shall remain in full force and effect.
IN WITNESS WHEREOF, Borrower has caused these presents
to be duly executed and delivered as of the day and year first
above written.
Borrower
KEYSTONE CONSOLIDATED INDUSTRIES,
INC.
By:
Title:
CHIEF EXECUTIVE OFFICE:
Accepted and Agreed:
CONGRESS FINANCIAL CORPORATION (CENTRAL)
By:
Title:
Address:
100 S. Wacker Drive
Suite 1940
Chicago, Illinois 60606
