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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 33-63274
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CHATWINS GROUP, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 74-2156829
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
300 WEYMAN PLAZA, SUITE 340
PITTSBURGH, PENNSYLVANIA 15236
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(Address of principal executive offices, including zip code)
(412) 885-5501
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(Registrant's telephone number, including area code)
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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
At October 31, 1997, 242,887 shares of common stock, par value $.01 per share,
were outstanding.
Exhibit index is on page 16.
Page 1 of 17 pages.
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CHATWINS GROUP, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statement of Income for the
three and nine months ended September 30, 1997 and 1996 4
Condensed Consolidated Statement of Cash Flows for
the nine months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 15
(b) Reports on Form 8-K 15
SIGNATURES 15
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE><CAPTION> CHATWINS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(in thousands)
At September 30, At December 31,
1997 1996
--------------- --------------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 660 $ 356
Receivables, net 31,621 26,405
Inventories (note 2) 19,884 19,106
Other current assets 3,189 3,512
-------- --------
Total current assets 55,354 49,379
Property, plant and equipment, net 31,048 29,734
Investments, net 12,461 12,452
Goodwill, net 4,834 4,849
Other assets, net 7,067 6,165
-------- --------
Total assets $110,764 $102,579
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current maturities of debt $ 768 $ 767
Trade payables 17,030 12,879
Amount due to related parties - 579
Other current liabilities 12,033 8,863
-------- --------
Total current liabilities 29,831 23,088
Revolving Credit Facility 23,116 23,629
Senior notes due 2003, net 49,894 49,876
Other long-term debt 823 870
Other liabilities 4,956 4,316
-------- --------
Total liabilities 108,620 101,779
Commitments and contingent liabilities (note 5) - -
Minority interests 1,077 1,125
Redeemable preferred stock 7,912 7,570
Warrant value 210 210
Stockholders' equity (note 3) (7,055) (8,105)
-------- --------
Total liabilities and stockholders' equity $110,764 $102,579
======== ========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE><CAPTION> CHATWINS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(in thousands, except share and per share information)(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $47,587 $36,560 $138,339 $114,526
Cost of sales 38,789 29,367 112,072 91,405
------- ------- -------- --------
Gross profit 8,798 7,193 26,267 23,121
Selling, general & administrative 5,798 4,931 16,623 15,159
Other expense, net 117 122 486 697
------- ------- -------- --------
Operating profit 2,883 2,140 9,158 7,265
Interest expense, net 2,452 2,400 7,319 7,158
Minority interests (2) - (104) -
------- ------- -------- --------
Income (loss) before income
taxes and equity in
earnings of affiliate 433 (260) 1,943 107
Provision for income taxes 132 (52) 556 13
------- ------- -------- --------
Income (loss) before equity in
earnings of affiliate 301 (208) 1,387 94
Equity in income (loss) from
continuing operations of affiliate 102 (20) 5 (220)
Equity in income from discontinued
operations of affiliate - - - 428
------- ------- -------- --------
Net income (loss) $ 403 $ (228) $ 1,392 $ 302
======= ======= ======== ========
Earnings applicable to common stock $ 289 $ (342) $ 1,050 $ (40)
======= ======= ======== ========
Earnings (loss) per common share:
Before equity income of affiliate $ 0.64 $ (1.10) $ 3.57 $ (0.85)
Continuing operations of affiliate 0.35 (0.07) 0.02 (0.75)
Discontinued operations of affiliate - - - 1.46
------- ------- -------- --------
Earnings (loss) per common share $ 0.99 $ (1.17) $ 3.59 $ (0.14)
======= ======= ======== ========
Average equivalent common
shares outstanding 292,887 292,887 292,887 292,887
======= ======= ======== ========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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<TABLE><CAPTION> CHATWINS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(in thousands)(unaudited)
Nine Months Ended
September 30,
1997 1996
------- -------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 1,392 $ 302
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,589 2,379
Amortization 669 750
Minority share of losses (104) -
Equity in income of affiliate (5) (208)
Changes in assets and liabilities, net of
the purchase of a business:
Decrease (increase) in receivables (5,216) 5,146
Increase in inventories (778) (1,342)
Increase (decrease) in trade payables 4,151 (4,262)
Net change in other assets and liabilities 2,585 1,201
------- -------
Cash provided by operating activities 5,283 3,966
------- -------
Cash flow from investing activities:
Receipts from related parties - 3,664
Investment in joint venture - (150)
Capital expenditures (3,840) (3,175)
------- -------
Cash provided by (used in) investing activities (3,840) 339
------- -------
Cash flow from financing activities:
Increase in consolidated subsidiary indebtedness 1 456
Repayments of debt (48) (48)
Repayments to related parties (579) (2,320)
Net repayments under revolver (513) (2,290)
------- -------
Cash used in financing activities (1,139) (4,202)
------- -------
Net increase in cash and cash equivalents 304 103
Cash and cash equivalents, beginning of year 356 357
------- -------
Cash and cash equivalents, end of period $ 660 $ 460
======= =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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CHATWINS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all normal recurring
adjustments considered necessary for a fair statement of the results of
operations have been included. The results of operations for the three and
nine month periods ended September 30, 1997 are not necessarily indicative of
the results of operations for the full year. When reading the financial
information contained in this Quarterly Report, reference should be made to
the financial statements, schedules and notes contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
NOTE 2: INVENTORIES
<TABLE>
Inventories are comprised of the following (in thousands):
At September 30, At December 31,
1997 1996
--------------- --------------
(unaudited)
<S> <C> <C>
Raw materials $10,358 $ 9,886
Work-in-process 6,789 7,059
Finished goods 3,559 2,959
------- -------
Total inventories 20,706 19,904
Less: LIFO reserves (822) (798)
------- -------
Inventories $19,884 $19,106
======= =======
</TABLE>
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NOTE 3: STOCKHOLDERS' EQUITY
<TABLE>
The following represents a reconciliation of the change in stockholders'
equity for the nine month period ended September 30, 1997 (in thousands):
Par Capital Accum-
Value in ulated
of Trea- Excess Notes Accum- Trans-
Common sury of Par Receiv- ulated lation
Stock Stock Value able Deficit Adjmt. Total
------ ----- ------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
At January 1,
1997 $ 3 $(500) $1,664 $(1,001) $ (7,583) $(688) $ (8,105)
Activity
(unaudited):
Net income - - - - 1,392 - 1,392
Preferred stock
accretions - - - - (342) - (342)
--- ----- ------ ------- -------- ----- --------
At September 30,
1997 $ 3 $(500) $1,664 $(1,001) $ (6,533) $(688) $ (7,055)
=== ===== ====== ======= ======== ===== ========
</TABLE>
Earnings per share amounts are based on the weighted average equivalent
number of shares of common stock outstanding during the period. In
calculating earnings (loss) per common share, income before income taxes has
been adjusted for dividends earned on preferred stock for the three and nine
month periods ended September 30, 1997 and 1996 of $114,000 and $342,000,
respectively, in each.
NOTE 4: RELATED PARTY TRANSACTIONS
The Company has a consulting agreement with Stanwich Partners, Inc. under
which $75,000 and $225,000 were expensed in each of the three and nine month
periods ended September 30, 1997 and 1996, respectively.
During the first quarter of 1997, the Company made payments totalling
$0.5 million to Mr. Charles E. Bradley (Mr. Bradley), Chairman of the Board of
the Company and President, Chief Executive Officer and a Director of Reunion,
in final repayment of the Parkdale Note, including interest thereon.
On January 6 and June 6, 1997, the Company made the third and fourth of
four principal repayments of $50,000 each, plus interest, of the Gesterkamp
Note. The Gesterkamp Note is owned by Mr. Franklin Myers, a director of
Reunion. As of June 30, 1997, the Gesterkamp Note was fully repaid.
NOTE 5: COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various litigation matters in the ordinary
course of business. In the opinion of management, settlement of these various
litigation matters and other contingent matters will not have any material
effect on the Company's financial position. The Company has no adverse
commitments at September 30, 1997.
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NOTE 6: NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 requires the presentation of both a "basic" and
"diluted" earnings per share with an accompanying reconciliation of the
numerator and denominator for each. This statement is effective for financial
statements for periods ended after December 15, 1997. Earlier adoption of
SFAS No. 128 is not permitted. SFAS No. 128 requires restatement of all
prior-period earnings per share data, including interim periods. Management
does not expect the adoption of SFAS No. 128 to have a significant impact on
the earnings per share disclosures of the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income, as conceptualized in FASB Concepts Statement No. 6,
"Elements of Financial Statements." SFAS No. 130, however, does not address
the issues of recognition and measurement for comprehensive income and its
components. Generally, SFAS No. 130 requires the reporting of other
comprehensive income, which refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are excluded from net
income. Examples include, but are not limited to, foreign currency
adjustments, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities, all of which are
shown as separate components of equity and excluded from net income. The
Company believes the only component of comprehensive income not included in
its net income is the foreign currency translation adjustment. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997 and requires
reclassification of prior period comparative financial statements. Earlier
adoption is permitted.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 requires that a
publicly-held company report financial and descriptive information about its
operating segments in financial statements for interim and annual periods.
SFAS No. 131 also requires disclosures with respect to products and services,
geographic areas of operation, and major customers which have not previously
been presented in consolidated financial statements and related notes. SFAS
No. 131 is effective for fiscal years beginning after December 15, 1997. The
Company expects to adopt SFAS No. 131 in 1998.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
During 1996 and the first nine months of 1997, the Company's
organizational structure included six divisions that design, manufacture and
market metal products, two majority-owned foreign joint ventures which
manufacture and fabricate metal grating, an oil and gas division and an equity
investment in Reunion Industries, Inc. (Reunion). During 1996 and the first
nine months of 1997, substantially all of the Company's operations related to
metal products.
On June 20, 1995, the Company acquired 1,450,000 shares of Reunion common
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<PAGE> 9
stock constituting approximately 38% of the then outstanding common stock of
Reunion. Reunion acquired Oneida from the Company in September 1995. Reunion
also merged Oneida with Rostone in February 1996 (see below), resulting in
Oneida Rostone Corporation (ORC). As a result, Reunion is primarily engaged
in the manufacture of high volume, precision plastics products, providing
engineered plastics services and compounding and molding thermoset polyester
resins. Reunion also has wine grape agricultural operations in Napa County,
California, which it classified as a discontinued operation during the fourth
quarter of 1996. The Company's investment in Reunion is being accounted for
under the equity method of accounting. The Company's proportional share of
Reunion's operating results is included in the accompanying condensed
consolidated statement of income for the three and nine month periods ended
September 30, 1997 and 1996 as equity income (loss) from operations of
affiliate.
The Company owns 49% of CGI Investment Corporation (CGII), which owned
100% of the outstanding preferred stock and fully diluted common stock of
Rostone, Inc. (Rostone). The merger agreement between Rostone and Oneida
provided for the payment of merger proceeds of up to $4.0 million ($2.0
million in 1997 and $2.0 million in 1998) to CGII contingent upon Rostone's
achieving specified levels of earnings before interest and taxes in 1996 and
1997. Rostone did not achieve the specified level of earnings before interest
and taxes for the payment of deferred merger proceeds in 1997. Since
Rostone's preferred stock was previously pledged by CGII to the Company to
secure the Company's December 1993 loan of $1.35 million to CGII, any merger
proceeds will be paid to the Company until the debt and related interest is
paid in full. The amount due the Company related to this loan was $1.6
million at September 30, 1997. Any merger proceeds in excess of the amount
due the Company will be payable to CGII and allocated among CGII's remaining
creditors, one of which is the Company. Under the terms of ORC's loan
facility with Congress Financial Corporation (Congress), deferred merger
proceeds to be paid in 1998, if any, may only be made from equity
contributions Reunion may provide to ORC.
On April 16, 1997, Reunion announced that the employees of Rostone, a
division of ORC, which had been working under a collective bargaining
agreement which expired on March 2, 1997, went on strike effective April 15,
1997 citing differences over wage increases and other benefits. On May 15,
1997, Reunion announced that the employees of Rostone ratified a new three-
year labor contract, ending the four-week strike. During the strike, Rostone
used office personnel, temporary workers and new hires to minimize the impact
of the strike on product shipments and the loss of customer business.
Rostone, however, experienced excess scrap, higher than normal product returns
and labor inefficiencies during the strike and incurred additional overtime
subsequent to the strike in restoring normal production. Reunion, in its Form
10-Q for the period ended June 30, 1997, indicated that management has
estimated that the strike negatively impacted Rostone's sales and operating
income by $2.0 million and $1.0 million, respectively, which the Company's
management expects could negatively impact Rostone's ability to achieve the
specified level of earnings before interest and taxes in 1997 for the payment
of deferred merger proceeds in 1998.
CGII's primary assets remaining after the sale of Rostone are two notes
receivable from affiliates of the Company and a minimal amount of cash, the
sum of which total $0.7 million at September 30, 1997. The Company is
entitled to any proceeds from the liquidation of these assets to the extent
that the Company's December 1993 loan is not paid in full. Any remaining
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proceeds would be allocated among CGII's remaining creditors, one of which is
the Company. Under the equity method of accounting, the total carrying value
of the Company's investment in and loans to CGII at September 30, 1997 was
$0.9 million.
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including statements regarding, among other things, growth strategies and
penetrations of new markets, mergers and joint ventures and transactions with
affiliates. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual outcomes could
differ from these forward-looking statements as a result of, among other
things, adverse economic conditions, competition, demand for the Company's and
competitors' products and financing difficulties. In light of these risks and
uncertainties, there can be no assurance that actual outcomes will equal the
forward-looking statements. Furthermore, the Company undertakes no obligation
to publicly update or revise any forward-looking statement whether as a result
of new information, future events or otherwise.
Results of Operations
Nine Months Ended September 30, 1997 Compared to
Nine Months Ended September 30, 1996
Net sales for the first nine months of 1997 totaled $138.3 million,
compared to $114.5 million for the first nine months of 1996. Sales for the
first nine months of 1997 increased $23.8 million, or 21%, over the first nine
months of 1996. Sales increased at all significant divisions of the Company
except for Klemp, which decreased $0.2 million. Sales increased $7.5 million
at Auto-Lok, $4.0 million at CPI, $8.6 million at Alliance and $3.3 million at
Hanna. Additionally, the Company's consolidated joint venture in China
recorded sales of $0.4 million during the first nine months of 1997 compared
to none in 1996. The increase in sales at CPI was primarily due to an
increase in orders from and shipments to one of CPI's largest customers. The
increases at Auto-Lok and Hanna are primarily due to a general increase in
demand for their products, which has resulted in higher levels of orders and
shipments. The increase in sales at Alliance is primarily due to the
significant increase in orders in the fourth quarter of 1996 and the resulting
increase in jobs in progress in the first nine months of 1997. Sales at Klemp
during the first nine months of 1997 were affected by a softening in the
markets it serves and strong competition in the Midwest.
Gross profit for the first nine months of 1997 was $26.3 million,
compared to $23.1 million for the first nine months of 1996. First nine
months 1997 gross profit increased over $3.1 million, or almost 14%. Gross
profit margin was 19.0% in the first nine months of 1997, compared to 20.2% in
the comparable 1996 period. Gross profit during the first nine months of 1997
compared to 1996 improved at the Company's Alliance, CPI, Hanna and Auto-Lok
divisions but decreased at Klemp. The increases in gross profit at Alliance,
CPI, Hanna and Auto-Lok were due to their higher volumes in the first nine
months of 1997 while Klemp's gross profit was negatively affected by its
volume decrease. Gross profit margin improved significantly at Hanna due to
the efficiencies of increased volume and remained unchanged at Alliance and
CPI. Profit margins at Auto-Lok and Klemp were negatively affected by
competitive pricing pressures in the markets they serve, primarily the Midwest
<PAGE>
<PAGE> 11
for Klemp and the Southeast for Auto-Lok.
Selling, general and administrative (SGA) expenses for the first nine
months of 1997 were $16.6 million, compared to $15.2 million for the first
nine months of 1996. However, SGA expenses as a percentage of sales decreased
to 12.0% for the first nine months of 1997 compared to 13.2% in the first nine
months of 1996. The decrease in SGA expenses as a percentage of sales was
primarily due to the 21% increase in sales while SGA expenses increased only
10% as a result of the fixed and semi-variable nature of certain expenses.
Other expense for the first nine months of 1997 was $0.5 million,
compared to $0.7 million for the first nine months of 1996, a net decrease of
$0.2 million. There were no individually significant or offsetting items in
either of the first nine months of 1997 or 1996.
Interest expense, net, for the first nine months of 1997 was $7.3
million, compared to almost $7.2 million for the first nine months of 1996. A
slightly higher level of interest expense under the Revolving Credit Facility
in the first nine months of 1997 compared to 1996 was offset by a lower level
of interest expense on related party indebtedness. The increase in interest
expense on the Revolving Credit Facility was primarily due to a .25% increase
in the prime lending rate (as defined) and a higher level of average
borrowings. The decrease in interest expense on related party indebtedness
was due to the full repayments of the Parkdale Note and Gesterkamp Note during
the first half of 1997.
Minority interests of $0.1 million represent losses during the first nine
months of 1997 allocated to the minority ownerships of the Company's CFI-Klemp
de Mexico and Shanghai Klemp joint ventures. Minority interests are
calculated based on the percentage of minority ownership.
There was a tax provision of almost $0.6 million in the first nine months
of 1997, compared to almost $0.1 million in the first nine months of 1996.
The increase in the provision was due to the increase in income before taxes.
The equity results from continuing operations of affiliate in the first
nine months of 1997 and 1996 relates to the Company's June 1995 investment in
Reunion and represents the Company's proportionate share of Reunion's results
from continuing operations for each period.
There was no equity adjustment from discontinued operations of affiliate
during the first nine months of 1997 compared to equity income of $0.4 million
in the first nine months of 1996, which represented the Company's
proportionate share of Reunion's results from discontinued operations.
The classification of Mexico as a highly-inflationary economy effective
January 1, 1997 pursuant to paragraph 11 of SFAS No. 52, "Foreign Currency
Translation" had an insignificant impact on the Company's results of
operations for the first nine months of 1997.
Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996
Net sales for the third quarter of 1997 totaled $47.6 million, compared
to $36.6 million for the third quarter of 1996. Sales for the third quarter
of 1997 increased $11.0 million, or 30%, over the third quarter of 1996.
Sales increased at all significant divisions of the Company. Sales increased
<PAGE>
<PAGE> 12
$5.4 million at Alliance, $3.3 million at Auto-Lok, $0.6 million at CPI, $0.6
million at Klemp and $0.7 million at Hanna. The increase in sales at CPI was
primarily due to an increase in orders from and shipments to one of CPI's
largest customers. The increases at Auto-Lok and Hanna are primarily due to a
general increase in demand for their products, which has resulted in higher
levels of orders and shipments. The increase in sales at Alliance is due to
the significant increase in orders in the fourth quarter of 1996 and the
resulting increase in jobs in progress during 1997. The increase in sales at
Klemp during the third quarter of 1997 was primarily due to its Atlanta
location, which began operations in August 1996 and had sales improvements
during the third quarter of 1997.
Gross profit for the third quarter of 1997 was $8.8 million, compared to
$7.2 million for the third quarter of 1996. Third quarter 1997 gross profit
increased $1.6 million, or over 22%. Gross profit margin was 18.5% in the
third quarter of 1997, compared to 19.7% in the comparable 1996 period. Gross
profit during the third quarter of 1997 compared to 1996 improved at all
significant divisions of the Company except Klemp. The increases in gross
profit were due to higher volumes in the third quarter of 1997 while Klemp's
gross profit was negatively affected by price compression due to strong
competition in the Midwest. Gross profit margin improved at Alliance, CPI and
Hanna due to the efficiencies of their increased volumes. Although
experiencing increased sales during the third quarter of 1997, Auto-Lok's and
Klemp's profit margins were negatively affected by price compression due to
strong competition.
SGA expenses for the third quarter of 1997 were $5.8 million, compared to
$4.9 million for the third quarter of 1996. However, SGA expenses as a
percentage of sales decreased to 12.2% for the third quarter of 1997 compared
to 13.5% in the third quarter of 1996. The decrease in SGA expenses as a
percentage of sales was primarily due to the 30% increase in sales in the
third quarter of 1997 compared to the 1996 third quarter while SGA expenses
increased only 18% as a result of the fixed and semi-variable nature of
certain expenses.
Other expense for the third quarter of 1997 was just over $0.1 million,
compared to $0.1 million for the third quarter of 1996. There were no
individually significant or offsetting items in either of the third quarters
of 1997 or 1996.
Interest expense, net, for the third quarter of 1997 was almost $2.5
million, compared to $2.4 million for the third quarter of 1996. A slightly
higher level of interest expense under the Revolving Credit Facility in the
third quarter of 1997 compared to 1996 was offset by a lower level of interest
expense on related party indebtedness. The increase in interest expense on
the Revolving Credit Facility was primarily due to a .25% increase in the
prime lending rate (as defined) and a higher level of average borrowings. The
decrease in interest expense on related party indebtedness was due to the full
repayment of the Parkdale and Gesterkamp Notes during the first half of 1997.
Minority interests represent net operating results during the third
quarter of 1997 allocated to the minority ownerships of the Company's CFI-
Klemp de Mexico and Shanghai Klemp joint ventures. Minority interests are
calculated based on the percentage of minority ownership.
There was a tax provision of $0.1 million in the third quarter of 1997,
compared to a benefit of almost $0.1 million in the third quarter of 1996.
<PAGE>
<PAGE> 13
The increase in the provision was due to the increase in income before taxes.
The equity income from continuing operations of affiliate of $0.1 million
in the third quarter of 1997 and the slight equity loss in the third quarter
of 1996 relate to the Company's June 1995 investment in Reunion and represents
the Company's proportionate share of Reunion's results from continuing
operations for each quarter.
There was no equity adjustment from discontinued operations of affiliate
during either the third quarter of 1997 or 1996.
The classification of Mexico as a highly-inflationary economy effective
January 1, 1997 pursuant to paragraph 11 of SFAS No. 52, "Foreign Currency
Translation" had an insignificant impact on the Company's result of operation
for the third quarter of 1997.
Liquidity and Capital Resources
General
The Company manages its liquidity as a consolidated enterprise. The
operating divisions of the Company carry minimal cash balances. Cash
generated from the divisions' operating activities generally is used to repay
previous borrowings under the Revolving Credit Facility, as well as other uses
(e.g. corporate headquarters expenses, debt service, capital expenditures,
etc.). Conversely, cash required for the divisions' operating activities
generally is provided from funds available under the Revolving Credit
Facility. Although the Company operates in relatively mature markets, it
intends to continue to invest in and grow its businesses through selected
capital expenditures as cash generation permits. Management believes that all
required principal and interest payments, as well as capital expenditures,
will be met by cash flows from operations and/or borrowings under the
Revolving Credit Facility or other financing or refinancing arrangements, if
necessary.
The Company's Revolving Credit Facility with Congress is subject to
compliance with various covenants, representations and warranties, and
contingent upon there being no events of default, all as defined in the Loan
and Security Agreement (Loan Agreement) between Congress and the Company. The
Maximum Credit (as defined in the Loan Agreement) under the Revolving Credit
Facility was initially set at $20.0 million, temporarily increased to $26
million on June 20, 1995 in connection with the Company's investment in
Reunion common stock, fixed at $25 million on October 18, 1995, temporarily
increased to $27.5 million on May 1, 1996 and, pursuant to a May 1, 1997
amendment as discussed below, fixed at $28.0 million. At September 30, 1997,
the Company was in compliance with all covenants and there were no events of
default under the Revolving Credit Facility. Borrowings outstanding under the
Revolving Credit Facility at September 30, 1997 totaled $23.1 million.
Additionally, as part of the availability under the Revolving Credit Facility,
Congress provides letter of credit accommodations of up to $4.0 million. At
September 30, 1997, the Company had a total of $0.5 million of letters of
credit outstanding.
Borrowings under the Revolving Credit Facility bear interest at an annual
rate of the Philadelphia National Bank Prime Rate plus 1.5%. The facility
<PAGE>
<PAGE> 14
also contains an unused line fee of 0.5% and a $5,000 monthly servicing fee.
The Loan Agreement expires on June 30, 1998 and is renewable annually
thereafter.
On May 1, 1997, Congress and the Company amended the Revolving Credit
Facility to provide for an increase in the Maximum Credit to $28.0 million
from $25.0 million. The proceeds from this increase in the Maximum Credit
were used for various purposes, including the Company's May 1, 1997 semi-
annual interest payment on its $50.0 million of 13% per annum senior notes.
At December 31, 1996, the Company had net operating loss carryforwards
for tax reporting purposes of approximately $8.0 million, of which $2.0
million expires between 1998 and 2005 with the remainder thereafter, including
approximately $5.0 million in 2008. The ultimate realization of this benefit
depends on the Company's ability to generate sufficient taxable income in the
future. While the Company believes that the benefit of such net operating
losses will be fully or partially realized by future operating results, prior
losses have prompted management to leave on its books at December 31, 1996, a
valuation reserve for a portion of such future benefits, in accordance with
SFAS No. 109, "Accounting for Income Taxes."
Operating Activities
Operating activities provided $5.3 million of cash during the first nine
months of 1997, compared to cash provided of $4.0 million in the first nine
months of 1996, an increase of $1.3 million. An increase in income before
depreciation and amortization of $1.2 million in the first nine months of 1997
compared to 1996 was offset by an increase of $1.4 million in cash used during
the first nine months of 1997 compared to 1996 to fund increases in net
working capital (defined as receivables, inventories and trade payables for
cash flow purposes), primarily an increase in receivables as a result of the
increase in sales volume. Additionally, changes in other assets and
liabilities provided $2.6 million in cash during the first nine months of 1997
compared to $1.2 million of cash provided in the 1996 first nine months, an
increase in cash provided of $1.5 million. This increase is primarily due to
certain cash outlays at Klemp during the first nine of 1996 related to the
Company's joint venture in China which did not recur in the first nine months
of 1997.
Investing Activities
Investing activities used over $3.8 million of cash during the first nine
months of 1997, compared to cash provided of $0.3 million during the first
nine months of 1996, an increase in cash used of $4.2 million. During the
first nine months of 1996 the Company received $3.7 million in cash in
repayment of previous advances made to Oneida and made a $0.2 million
investment in Shanghai Klemp, none of which recurred in the first nine months
of 1997. Additionally, there was a $0.7 million increase in capital
expenditures, from $3.2 million in the 1996 first nine months to over $3.8
million during the 1997 first nine months.
Financing Activities
Financing activities during the first nine months of 1997 used over $1.1
million in cash, compared to $4.2 million of cash used from financing
activities during the first nine months of 1996, a decrease in cash used of
<PAGE>
<PAGE> 15
almost $3.1 million. This decrease in cash used is primarily the result of a
decrease of $0.5 million in the level of net borrowings under the Revolving
Credit Facility during the first nine months of 1997 compared to a decrease of
$2.3 million in the first nine months of 1996, as well as a decrease of $1.7
million in repayments to related parties, from $2.3 million in the first nine
months of 1996 to $0.6 million in the first nine months of 1997.
Additionally, there was an increase in debt of $0.4 million during the first
nine months of 1996 at the Company's Shanghai Klemp consolidated joint venture
which did not recur during the first nine months of 1997.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith in accordance
with Item 601 of Regulation S-K:
Exhibit No. Exhibit Description
----------- -------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
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, thereto duly authorized.
Date: November 14, 1997 CHATWINS GROUP, INC.
----------------- (Registrant)
By: /s/ Joseph C. Lawyer
-------------------------------
Joseph C. Lawyer
President and Chief
Executive Officer
By: /s/ John M. Froehlich
-------------------------------
John M. Froehlich
Vice President, Chief Financial
Officer and Treasurer
(chief financial and accounting officer)
<PAGE>
<PAGE> 16
EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
----------- ------------------- --------
27 Financial Data Schedule 17
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's financial statements included in the Form 10-Q for the period-end
indicated below and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 660
<SECURITIES> 0
<RECEIVABLES> 32,707
<ALLOWANCES> 1,086
<INVENTORY> 19,884
<CURRENT-ASSETS> 55,354
<PP&E> 53,314
<DEPRECIATION> 22,266
<TOTAL-ASSETS> 110,764
<CURRENT-LIABILITIES> 29,831
<BONDS> 49,894
0
7,912
<COMMON> 3
<OTHER-SE> (7,058)
<TOTAL-LIABILITY-AND-EQUITY> 110,764
<SALES> 138,339
<TOTAL-REVENUES> 138,339
<CGS> 112,072
<TOTAL-COSTS> 112,072
<OTHER-EXPENSES> 17,109
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,319
<INCOME-PRETAX> 1,943
<INCOME-TAX> 556
<INCOME-CONTINUING> 1,392
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,392
<EPS-PRIMARY> 3.59
<EPS-DILUTED> 3.59
</TABLE>
