<PAGE> 1
==============================================================================
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, 1999
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 33-63274
--------
CHATWINS GROUP, INC.
------------------------------------------------------
(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
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 885-5501
----------------------------------------------------
(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 November 15, 1999, 290,212 shares of common stock, par value $.01 per
share, were outstanding.
Exhibit index is on page 30.
Page 1 of 31 pages.
==============================================================================
<PAGE> 2
CHATWINS GROUP, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at
September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statement of Income and
Comprehensive Income for the three and nine
months ended September 30, 1999 and 1998 5
Condensed Consolidated Statement of Cash Flows for
the nine months ended September 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 28
(b) Reports on Form 8-K 28
SIGNATURES 29
<PAGE> 3
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This report contains or incorporates by reference certain forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act which are intended to be covered by the safe harbors
created thereby. Those statements include, but may not be limited to, the
discussions of the Company's expectations concerning growth strategies and
penetrations of new markets, mergers and joint ventures, financings and/or
refinancings, asset sales, transactions with affiliates, the effects of the
year 2000 (Y2K) on electronic technology on which the Company is directly or
indirectly dependent and assumptions regarding certain matters. Also, when
the words "believes," "expects," "anticipates," "intends," "estimates,"
"plans," or similar terms or expressions are used in this report, forward-
looking statements are being made. Note that all forward-looking statements
involve risks and uncertainties, including, without limitation, factors which
could cause the future results and shareholder values to differ materially
from those expressed in the forward-looking statements. Although the Company
believes that the assumptions underlying the forward-looking statements
contained in this report are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurances that the forward-looking
statements included or incorporated by reference in this report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included or incorporated by reference herein, the
inclusion of such information should not be regarded as a representation by
the Company or any other person that the Company's objectives and plans will
be achieved. In addition, the Company does not intend to, and is not
obligated to, update these forward-looking statements after filing and
distribution of this report, even if new information, future events or other
circumstances have made them incorrect or misleading as of any future date.
<PAGE> 4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHATWINS GROUP, INC.
CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(in thousands)
At September 30, At December 31,
1999 1998
--------------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 69 $ 197
Receivables, net 23,128 29,654
Inventories, net 14,619 14,506
Other current assets 3,439 3,816
Net assets of discontinued operations - 24,646
-------- --------
Total current assets 41,255 72,819
Property, plant and equipment, net 16,934 17,542
Investments, net 6,565 6,707
Due from related parties 2,836 1,403
Goodwill, net 3,420 3,575
Other assets, net 6,645 6,430
-------- --------
Total assets $ 77,655 $108,476
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Revolving Credit Facility $ - $ 34,005
Current maturities of debt 25,019 25,010
Trade payables 10,512 14,151
Other current liabilities 8,965 8,818
Net liabilities of discontinued operations 3,251 -
-------- --------
Total current liabilities 47,747 81,984
Senior notes due 2003, net 24,946 24,962
Other long-term debt 48 95
Other liabilities 2,591 1,533
-------- --------
Total liabilities 75,332 108,574
Commitments and contingent liabilities - -
Redeemable preferred stock 8,824 8,482
Warrant value 14 14
Stockholders' equity (6,515) (8,594)
-------- --------
Total liabilities and stockholders' equity $ 77,655 $108,476
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
CHATWINS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(in thousands, except share and per share information)(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------- ------- ------- -------
Net sales $26,512 $35,946 $88,125 $98,950
Cost of sales 21,551 29,089 72,363 79,107
------- ------- ------- -------
Gross profit 4,961 6,857 15,762 19,843
Selling, general & administrative 3,231 3,717 9,994 11,095
Other (income) expense, net 131 43 441 169
------- ------- ------- -------
Operating profit 1,599 3,097 5,327 8,579
Interest expense, net 1,812 1,864 5,419 5,505
Equity loss from continuing
operations of affiliate 32 365 99 3,807
------- ------- ------- -------
Income (loss) from continuing
operations before income taxes (245) 868 (191) (733)
Provision for (benefit from)
income taxes (128) 329 (66) (309)
------- ------- ------- -------
Income (loss) from continuing
operations (117) 539 (125) (424)
------- ------- ------- -------
Discontinued operations, net of tax:
Income (loss) from discontinued
operations (43) (296) 578 (428)
Gain on disposal of Discontinued
Klemp (domestic) 7,603 - 7,603 -
Provision for estimated expenses
of Discontinued Klemp (domestic) (1,320) - (1,320) -
Estimated loss on disposal of
Discontinued Klemp (foreign) (3,689) - (3,689) -
Estimated loss on disposal of
discontinued oil and gas operations (472) - (472) -
Equity income (loss) from discontinued
operations of affiliate 115 - 22 (274)
------- ------- ------- -------
Total income (loss) from
discontinued operations 2,194 (296) 2,722 (702)
------- ------- ------- -------
Cumulative effect from change in
accounting principle, net of tax - - (176) -
------- ------- ------- -------
Net and comprehensive
income (loss) $ 2,077 $ 243 $ 2,421 $(1,126)
======= ======= ======= =======
<PAGE> 6
Earnings applicable to common stock $ 1,963 $ 129 $ 2,079 $(1,468)
======= ======= ======= =======
Earnings per share - basic:
Continuing operations $ (0.80) $ 1.47 $ (1.61) $ (2.64)
Discontinued operations 7.57 (1.02) 9.39 (2.43)
Change in accounting principle - - (0.60) -
------- ------- ------- -------
Basic earnings (loss) per share $ 6.77 $ 0.45 $ 7.18 $ (5.07)
======= ======= ======= =======
Average shares outstanding 289,787 289,677 289,746 289,677
======= ======= ======= =======
Earnings per share - diluted:
Continuing operations $ (0.80) $ 1.45 $ (1.61) $ (2.64)
Discontinued operations 7.57 (1.01) 9.39 (2.43)
Change in accounting principle - - (0.60) -
------- ------- ------- -------
Basic earnings (loss) per share $ 6.77 $ 0.44 $ 7.18 $ (5.07)
======= ======= ======= =======
Average shares outstanding 289,787 292,887 289,746 289,677
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE> 7
CHATWINS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(in thousands)
(unaudited)
Nine Months Ended
September 30,
1999 1998
------- -------
Cash provided by (used in) operating activities $ (375) $ 1,725
------- -------
Cash flow from investing activities:
Proceeds from sale of Discontinued Klemp (domestic) 32,052 -
Proceeds from sale of property 4,563 -
Capital expenditures (2,296) (4,252)
Investment in joint venture - (100)
------- -------
Cash provided by (used in) investing activities 34,319 (4,352)
------- -------
Cash flow from financing activities:
Repayments of debt (48) (48)
Net change in revolving credit facilities (34,005) 2,133
Increase in consolidated subsidiary indebtedness (118) -
------- -------
Cash provided by (used in) financing activities (34,171) 2,085
------- -------
Net decrease in cash and cash equivalents (227) (542)
Change in cash of discontinued operations 99 (24)
Cash and cash equivalents, beginning of year 197 630
------- -------
Cash and cash equivalents, end of period $ 69 $ 64
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE> 8
CHATWINS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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, 1999 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/A (Amendment No. 1) for the year ended December 31,
1998.
Effective January 1, 1999, the Company adopted the AICPA's Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities." Such adoption
is reported as the cumulative effect of a change in accounting principle and
resulted in the write-off of $176,000 of start-up costs, net of taxes of
$91,000. Such start-up costs primarily related to the Company's international
subsidiaries.
<PAGE> 9
NOTE 2: DISCONTINUED OPERATIONS
During the second quarter of 1999, the Company's management adopted a
plan to exit the grating manufacturing business through the disposition of
substantially all the business and assets of the Company's Klemp division
(Discontinued Klemp). Upon adoption of the plan, the Company classified and
began accounting for Discontinued Klemp, including its international grating
subsidiaries, as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
(APB 30), which requires discontinued operations to be reported separately
from continuing operations.
On May 28, 1999, the Company entered into a non-binding letter of intent
(LOI) with AMICO, which was subsequently amended on July 12, 1999 and on
August 17, 1999, for the sale of the domestic business and assets of
Discontinued Klemp. On September 30, 1999, the Company completed the sale of
its domestic grating business and assets to AMICO for $32.1 million in cash
and the assumption by AMICO of certain operating liabilities, subject to post-
closing adjustments. Substantially all of the cash proceeds from the sale
were used to pay down borrowings under the NationsBank Facility, which remains
in place.
The sale of the domestic business and assets of Discontinued Klemp
resulted in a pre-tax gain of approximately $12.7 million, classified within
discontinued operations, net of tax, at $7.6 million. The Company retained
certain obligations of Discontinued Klemp and is obligated to pay various
expenses of the sale, all of which have been estimated to total approximately
$2.2 million and are classified within discontinued operations, net of tax, at
$1.3 million, and within net assets (liabilities) of discontinued operations
as reserve for estimated expenses. Obligations retained and expenses required
to be paid by the Company primarily include non-cancelable lease commitments
and legal and professional fees.
During the third quarter of 1999, the Company's management adopted a plan
to liquidate its oil and gas business through the disposition of all of its
oil and gas related assets. Upon adoption of the plan, the Company classified
and began accounting for the oil and gas business as a discontinued operation
in accordance with APB 30. Discontinued oil and gas operations for the three
and nine month periods ended September 30, 1999 and 1998 are classified in the
accompanying consolidated statements of income and comprehensive income as
income (loss) from discontinued operations, net of tax effects.
The remaining assets and liabilities of discontinued operations include
the assets and liabilities of its Mexican and Chinese grating manufacturing
discontinued businesses, which were not sold as part of the sale of the
domestic business and assets of Discontinued Klemp to AMICO, and the assets
and liabilities of its discontinued oil and gas operations. Management has
estimated that the sales of such discontinued operations will result in pre-
tax losses of $6.1 million for the foreign grating operations and $0.8 million
for the oil and gas operations. Such estimated losses on disposal are
classified within discontinued operations, net of tax, at $3.7 million and
$0.5 million, respectively, and within net assets (liabilities) of
discontinued operations as reserve for estimated loss on disposal.
<PAGE> 10
The assets, liabilities and equity accounts of discontinued operations
have been separately classified on the balance sheet as net assets
(liabilities) of discontinued operations. A summary of these assets,
liabilities and equity accounts follows (in thousands):
At September 30, At December 31,
1999 1998
--------------- --------------
ASSETS: (unaudited)
Cash and cash equivalents $ 243 $ 144
Receivables, net 1,650 8,686
Inventories, net 445 6,240
Other current assets 246 918
Property, plant and equipment, net 3,746 14,829
Other assets, net 1,180 2,719
-------- --------
Total assets 7,510 33,536
-------- --------
LIABILITIES AND EQUITY:
Current maturities of debt 662 756
Trade payables 629 6,293
Other current liabilities 518 1,468
Reserve for estimated expenses 2,200 -
Reserve for estimated loss on disposal 6,936 -
Other long-term debt 680 680
Other liabilities 82 79
Minority interest 890 968
Cumulative translation adjustment (1,836) (1,354)
-------- --------
Total liabilities and equity 10,761 8,890
-------- --------
Net assets (liabilities) of
discontinued operations $ (3,251) $ 24,646
======== ========
Pursuant to APB 30, the consolidated financial statements reflect the
operating results of discontinued operations separately from continuing
operations. Summarized results of discontinued operations follow (in
thousands) (unaudited):
Three Months Ended September 30, 1999 1998
-------------------------------- -------- --------
Net sales $ 14,229 $ 14,686
Loss before taxes (72) (477)
Nine Months Ended September 30,
-------------------------------
Net sales $ 40,345 $ 42,011
Income (loss) before taxes 963 (728)
The above results of discontinued operations include allocated interest
expense of $664,000 and $656,000 for the three month periods ended September
30, 1999 and 1998, respectively, and $1,905,000 and $1,888,000 for the nine
month periods ended September 30, 1999 and 1998, respectively. The above
results of discontinued operations for the nine months ended September 30,
1999 includes a $1,681,000 gain on sale of the property which comprised the
former Chicago manufacturing location of the Klemp division.
<PAGE> 11
NOTE 3: INVENTORIES
Inventories are comprised of the following (in thousands):
At September 30, At December 31,
1999 1998
--------------- --------------
(unaudited)
Raw materials $ 3,091 $ 6,144
Work-in-process 6,048 4,797
Finished goods 5,547 3,632
------- -------
Total inventories 14,686 14,573
Less: LIFO reserves (67) (67)
------- -------
Inventories, net $14,619 $14,506
======= =======
NOTE 4: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
equity for the nine month period ended September 30, 1999 (in thousands):
Par Capital
Value in
of Trea- Excess Notes Accum-
Common sury of Par Receiv- ulated
Stock Stock Value able Deficit Total
------ ----- ------- ------- -------- --------
At January 1, 1999 $ 3 $(500) $1,860 $(1,001) $ (8,956) $ (8,594)
Activity
(unaudited):
Net income - - - - 2,421 2,421
Preferred stock
accretions - - - - (342) (342)
--- ----- ------ ------- -------- --------
At September 30, 1999 $ 3 $(500) $1,860 $(1,001) $ (6,877) $ (6,515)
=== ===== ====== ======= ======== ========
<PAGE> 12
The computations of basic and diluted earnings per common share (EPS) for
the nine month periods ended September 30, 1999 and 1998 are as follows (in
thousands, except share and per share amounts)(unaudited):
Average
Income Shares EPS
-------- -------- -------
Nine months ended September 30, 1999:
Net income $ 2,421
Less: Preferred stock dividend accretions (342)
--------
Income available to common stockholders,
shares outstanding and basic
and diluted EPS $ 2,079 289,746 $ 7.18
======== ======== =======
Nine months ended September 30, 1998:
Net loss $ (1,126)
Less: Preferred stock dividend accretions (342)
--------
Income available to common stockholders,
shares outstanding and basic
and diluted EPS $ (1,468) 289,677 $ (5.07)
======== ======== =======
For the nine month periods ended September 30, 1999 and 1998, assumed exercise
of warrants has an anti-dilutive effect on per-share earnings from continuing
operations. Therefore, basic and diluted EPS are the same for both periods.
<PAGE> 13
NOTE 5: RELATED PARTY TRANSACTIONS
SPI Consulting Agreement
The Company has a consulting agreement with Stanwich Partners, Inc. under
which $225,000 was expensed in each nine month period ended September 30, 1999
and 1998.
CPS Leasing
The Company has entered into various operating lease agreements with CPS
Leasing, Inc. (CPSL), a company owned 80% by Consumer Portfolio Services and
20% by Charles E. Bradley Jr., President of Consumer Portfolio Services, a
director of the Company and son of Charles E. Bradley Sr., Chairman of the
Board, Director and shareholder of the Company. During the first nine months
of 1999, the Company made lease payments totaling $331,401 to CPSL.
Kingway
Pursuant to a services agreement entered into between Stanwich
Acquisition Corp., which is doing business as Kingway Material Handling
Company (Kingway), and the Company, the Company provides Kingway with
manufacturing facilities and overhead support with its surplus floor space at
its Auto-Lok division in Acworth, GA. Kingway's common stock is wholly owned
by directors, shareholders and/or members of the executive managements of the
Company and Reunion Industries, Inc. (Reunion). During the first nine months
of 1999, costs totaling $2,415,772 were charged to Kingway under this services
agreement. At September 30, 1999, the Company had receivables totaling
$2,112,000 from Kingway.
NAPTech
Pursuant to a services agreement entered into between NPS Acquisition
Corp., which is doing business as NAPTech Pressure Systems (NAPTech), and the
Company's CPI division, the Company provides certain administrative services
to NAPTech. NAPtech's common stock is wholly owned by Mr. Bradley. During
the first nine months of 1999, costs totaling $575,890 were charged to NAPTech
under this services agreement. At September 30, 1999, the Company had
receivables totaling $723,792 from NAPTech.
Oneida Rostone Corp.
At September 30, 1999, the Company had notes receivable totalling
$475,000 from Oneida Rostone Corp.
Oneida Rostone Corp., Reunion's plastic products segment, obtains its
property, casualty, and product and general liability insurance coverage
through the Company. During the first nine of 1999, the rate for such
insurance was $23,500 per month, which represented the approximate cost of
such insurance to the Company.
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
In June 1993, the U.S. Customs Service (Customs) made a demand on the
Company's former industrial rubber distribution division for $612,948 in
marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
<PAGE> 14
importations of "unmarked" hose products from 1982 to 1986. Following the
Company's initial response raising various arguments in defense,including
expired statute of limitations, Customs responded in January 1997 by reducing
its demand to $370,968 and reiterating that demand in October 1997. The
Company restated its position and continues to decline payment of the claim.
Should the claim not be resolved, Customs threatens suit in the International
Court of Claims. The Company continues to believe, based on consultation with
counsel, that there are facts which raise a number of procedural and
substantive defenses to this claim, which will be vigorously defended. There
is no applicable insurance coverage.
The Company is involved in various other 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 does not
have any adverse commitments at September 30, 1999.
NOTE 7: OPERATING SEGMENT DISCLOSURES
The Company considers its separately identifiable divisions to be its
operating segments pursuant to the management approach. The following
represents a description of each division.
Alliance - Alliance designs, engineers and manufactures cranes used in a
wide range of steel and aluminum mill applications and large special purpose
cranes used in marine and aerospace applications and heavy industrial plants.
Alliance also manufactures lighter duty cranes for various industrial
applications, coke oven machinery and other large steel-related fabrications.
In recent years, Alliance has expanded and diversified its engineering and
manufacturing capabilities to offer a variety of equipment and related
engineering, fabrication, maintenance and repair services.
Auto-Lok - Auto-Lok manufactures high quality roll formed and structural
steel fabricated storage racks for industrial and commercial handling systems
and general storage applications. In addition, Auto-Lok participates on
larger contracts in the sale of total material handling systems through
purchasing and reselling related components such as decking and carton flow
devices, and subcontracting of rack erection.
CPI - CPI specializes in manufacturing large, seamless pressure vessels
for the above ground storage and transportation of highly pressurized gases
such as natural gas, hydrogen, nitrogen, oxygen and helium. These pressure
vessels are provided to customers such as industrial gas producers and
suppliers, the alternative fueled vehicle compressed natural gas fuel
industry, chemical and petrochemical processing facilities, shipbuilders,
NASA, public utilities and gas transportation companies.
Hanna - Hanna designs and manufactures a broad line of hydraulic and
pneumatic cylinders, actuators, accumulators and manifolds. These products
are used in a wide variety of industrial and mobile machinery and equipment
requiring the application of force in a controlled and repetitive process.
Hanna's specialty is custom cylinders in both small quantities packaged by its
distributors with valves, pumps and controls as complete fluid power systems
and large quantities sold directly to equipment manufacturers.
Steelcraft - Steelcraft manufactures and sells cold-rolled steel leaf
springs. Its principal customers are manufacturers of trailers for boats,
small utility vehicles and golf carts and makers of recreational vehicles and
agricultural trailers.
<PAGE> 15
The following represents the disaggregation of financial data by
operating segment for the nine months ended September 30, 1999 and 1998 and at
September 30, 1999 and December 31, 1998 (in thousands)(unaudited):
Capital Total
Net Sales EBITDA Spending Assets(1)
--------- --------- --------- ---------
Nine months ended and at
September 30, 1999:
------------------------
Alliance $ 19,283 $ (170) $ 146 $ 13,257
Auto-Lok 23,349 2,401 234 11,880
CPI 18,137 3,360 694 18,580
Hanna 24,700 3,624 306 16,287
Steelcraft 2,656 262 96 1,596
Headquarters - (1,753) 30 16,055
Discontinued Operations - - 790 -
-------- -------- -------- --------
Totals $ 88,125 7,724 $ 2,296 $ 77,655
======== ======== ========
Depreciation and amortization (2,937)
Interest expense(2) (4,879)
Equity loss from continuing
operations of affiliate (99)
--------
Loss before income taxes $ (191)
========
Nine months ended September 30, 1998
and at December 31, 1998:
------------------------------------
Alliance $ 31,502 $ 2,559 $ 177 $ 18,111
Auto-Lok 19,427 1,391 360 10,645
CPI 19,766 4,038 1,186 20,117
Hanna 25,131 4,152 243 17,544
Steelcraft 3,124 589 6 1,651
Headquarters - (1,894) 54 15,762
Discontinued Klemp - - 2,226 24,646
-------- -------- -------- --------
Totals $ 98,950 10,835 $ 4,252 $108,476
======== ======== ========
Depreciation and amortization (2,616)
Interest expense(2) (5,145)
Equity loss from continuing
operations of affiliate (3,807)
--------
Loss before income taxes $ (733)
========
(1) Headquarters total assets at September 30, 1999 and December 31, 1998 are
primarily comprised of deferred tax assets and the Company's investment in
Reunion common stock.
(2) Excludes amortization of debt issuance expenses of $540,000 and $360,000
for the nine month periods ended September 30, 1999 and 1998, respectively.
<PAGE> 16
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
The Company's organizational structure includes 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).
Substantially all of the Company's operations relate to metal products.
During the second quarter of 1999, the Company adopted a plan to exit the
grating manufacturing business through the sale of substantially all of the
business and assets of its Klemp division. During the third quarter of 1999,
the Company adopted a plan to liquidate its oil and gas business by the sale
of all of its oil and gas related assets. See "Recent Developments -
Discontinued Operations."
The Company's equity investment in Reunion is comprised of 1,450,000
shares of Reunion common stock constituting approximately 37% of the
outstanding common stock of Reunion. 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. The Company's investment in Reunion is being accounted for under
the equity method of accounting. The Company's 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, 1999 and 1998
as equity income (loss) from operations of affiliate. See "Possible Merger
with Reunion" below.
RECENT DEVELOPMENTS
Senior Note Purchase Offer
The Company has $50 million of 13% Senior Notes due May 1, 2003 (Senior
Notes) outstanding for which State Street Bank and Trust Company is trustee
(Trustee). When the Company acquired the Reunion common stock on June 20,
1995, it executed with the Trustee a first supplemental indenture of the
Indenture pursuant to which the Company issued the Senior Notes (Indenture).
Pursuant to this supplemental indenture, the Company agreed to offer to
purchase up to $25 million, or half, of the outstanding Senior Notes from note
holders on each of June 1, 1999 (Purchase Offer) and 2000 at par value plus
unpaid interest to the purchase date.
Pursuant to its obligations under the Indenture, on May 12, 1999, the
Company issued a notice offering to purchase up to $25.0 million of Senior
Notes on June 1, 1999. The Company further notified Senior Note holders and
the Trustee that the Company did not expect to have sufficient liquidity on
June 1, 1999 to consummate the Purchase Offer if more than $2 million worth of
Senior Notes were tendered.
As of 5:00 p.m. Eastern Daylight time on June 1, 1999, the expiration of
the Purchase Offer, holders of $24,121,000 principal amount of Senior Notes
had accepted the Purchase Offer. On June 2, 1999, the Company sent a notice
<PAGE> 17
to holders of the $24,121,000 principal amount of tendered Senior Notes
requesting that their tender be withdrawn in exchange for a withdrawal fee of
2% of principal amount of Senior Notes tendered (Withdrawal Notice). The
Withdrawal Notice also informed the tendering Senior Note holders of a:
* Third Party Purchase Offer - pursuant to an agreement dated May 28, 1999,
between the Company and Contrarian Capital, LLC (Contrarian), Contrarian
agreed to purchase Senior Notes from all tendering holders for the same price
payable by the Company in the Purchase Offer and Contrarian had already
elected to withdraw the tender of all Senior Notes it acquired, if any, in
exchange for the same 2% fee withdrawal,
and
* Possible Asset Sale - the Company had executed a non-binding letter of
intent (LOI) to sell substantially all of the assets of its Klemp division.
See "Discontinued Operations."
The Withdrawal Notice further informed tendering Senior Note holders that
if the Company did not receive withdrawal elections for the full $24,121,000
of principal amount of tendered Senior Notes, either from tendering Senior
Note holders or Contrarian, the Company did not expect to consummate any of
the purchases contemplated by the Purchase Offer, whereupon an Event of
Default would arise under the Indenture.
The Withdrawal Notice was to expire at 9:30 a.m. Eastern Daylight time on
June 7, 1999. However, on June 8, 1999, the Company sent notice to tendering
Senior Note holders that the request to withdraw tendered Senior Notes was
being extended indefinitely but could be terminated by the Company without
prior notice (Withdrawal Extension). The Withdrawal Extension also informed
the tendering Senior Note holders that:
* holders of $7,100,000 principal amount of tendered Senior Notes had
withdrawn their tenders in exchange for the 2% withdrawal fee,
* Contrarian had purchased or agreed to purchase from tendering Senior Note
holders and withdraw the tender for $16,186,000 principal amount of Senior
Notes,
and
* $835,000 principal amount of tendered Senior Notes remained outstanding
under the Purchase Offer.
Because the Company was not able to deposit with the Trustee or the
Paying Agent for the tendered Senior Notes an amount equal to 100% of the
aggregate principal amount, plus any accrued and unpaid interest, of tendered
Senior Notes by 12:30 p.m. Eastern Daylight time on June 7, 1999 as required
by the Indenture, on June 8, 1999, the Company delivered notice to the Trustee
of an Event of Default.
Ultimately, $7,125,000 principal amount of tendered Senior Notes withdrew
their tenders directly, $16,971,000 principal amount of tendered Senior Notes
were purchased and tenders withdrawn by Contrarian and $25,000 principal
amount of tendered Senior Notes were purchased and retired by the Company. In
exchange for its purchases of tendered Senior Notes on behalf of the Company,
the Company paid Contrarian a $375,000 stand-by fee in addition to the 2%
<PAGE> 18
withdrawal fee which totalled $339,420. Holders of the $7,125,000 principal
amount of Senior Notes that withdrew their tenders received withdrawal fees
totalling $142,500.
As the result of the tender withdrawals totalling $24,096,000 principal
amount of Senior Notes, either by tendering Senior Note holders or Contrarian,
the repayment by the Company of $25,000 principal amount of tendered Senior
Notes not withdrawn or sold to Contrarian and the payment by the Company of
all withdrawal and stand-by fees, the Event of Default was cured. On June 23,
1999, the Company sent notice to all tendering Senior Note holders of the
termination of the Withdrawal Extension and notice to the Trustee of the cure
of the Event of Default.
The full principal amount of the $25,000,000 of Senior Notes the Company
is required to offer to purchase on June 1, 2000 is classified as current
maturities of long-term debt in the Company's consolidated balance sheet at
September 30, 1999. See "Possible Merger with Reunion."
Sale of Property
During April 1999, the Company sold the land and building which comprised
the former Chicago, Illinois location of its Klemp division, which was
relocated to Libertyville, Illinois in early 1999. The property was sold to a
privately held Illinois limited liability corporation. Net cash proceeds
received by the Company as a result of the sale totalled $4.56 million. Of
the $4.56 million of net proceeds, $2.28 million was used to repay a portion
of borrowings under a special availability amount under the NationsBank
Facility and $2.28 million was used to repay a portion of other borrowings
under the NationsBank Facility. Once reduced, this special availability
amount may not be reborrowed. See "Liquidity and Capital Resources."
Discontinued Operations
On May 28, 1999, the Company entered into a non-binding LOI with AMICO,
which was subsequently amended on July 12, 1999 and on August 17, 1999, for
the sale of the domestic business and assets of Discontinued Klemp.
Accordingly, the net assets (liabilities) of Discontinued Klemp have been
classified in the accompanying consolidated balance sheets at September 30,
1999 and December 31, 1998 as net assets (liabilities) of discontinued
operations. Discontinued Klemp's results of operations for the three and nine
month periods ended September 30, 1999 and 1998 are classified in the
accompanying consolidated statements of income and comprehensive income as
income (loss) from discontinued operations, net of tax effects.
On September 30, 1999, the Company completed the sale of its domestic
grating business and assets to AMICO for $32.1 million in cash and the
assumption by AMICO of certain operating liabilities, subject to post-closing
adjustments. Substantially all of the cash proceeds from the sale were used
to pay down borrowings under the NationsBank Facility, which remains in place.
The sale did not include the assets and liabilities of its Mexican and Chinese
grating operations, which continue to be classified in net assets
(liabilities) of discontinued operations. See "Liquidity and Capital
Resources."
During the third quarter of 1999, the Company's management adopted a plan
to liquidate its oil and gas business through the disposition of all of its
oil and gas related assets. Upon adoption of the plan, the Company classified
<PAGE> 19
and began accounting for the oil and gas business as a discontinued operation
in accordance with APB 30. Accordingly, the net assets (liabilities) of
discontinued oil and gas operations have been classified in the accompanying
consolidated balance sheets at September 30, 1999 and December 31, 1998 as net
assets (liabilities) of discontinued operations. Discontinued oil and gas
operations for the three and nine month periods ended September 30, 1999 and
1998 are classified in the accompanying consolidated statements of income and
comprehensive income as income (loss) from discontinued operations, net of tax
effects.
Possible Merger with Reunion
On August 6, 1999, the Company announced that Reunion and the Company had
entered into an amended merger agreement. The Company and Reunion have
determined that their combined refinancing will include either total or
partial redemption of the Senior Notes, through private senior and
subordinated debt. Various alternatives for this refinancing are being
considered, some of which would require the consent of Senior Note holders
and/or modification of the Indenture. Therefore, dependent upon the selected
alternative for the refinancing, the merger may be effectively conditioned
upon approval by Senior Note holders. The Company has not yet taken any steps
to obtain such consents or modify the Indenture and there can be no assurances
that the Company would do so or, if sought, that such consents would be
obtained and/or modifications of the Indenture approved by Senior Note
holders.
The Merger is subject to approval of the amended and restated merger
agreement by Reunion stockholders by a vote to be conducted at the annual
meeting of Reunion stockholders to be held on December 15, 1999. The merger
is also conditioned upon no more than 5% of the Company's common stockholders
exercising their appraisal rights under Delaware law. There can be no
assurances that Reunion stockholders will approve the amended and restated
merger agreement. Although, the Merger is scheduled to close on December 31,
1999, there can be no assurances as to whether or when all conditions to the
Merger will be satisfied or waived or when the Merger will be consummated, if
at all.
THE YEAR 2000 (Y2K)
The Company, like most companies, utilizes electronic technology which
includes computer hardware and software systems that process information and
perform calculations that are date- and time-dependent. The Company is aware
that the coming of Y2K poses pervasive and complex problems in that virtually
every computer operation (including manufacturing equipment and other non-
information systems equipment), unless it is Y2K ready, will be affected in
some way by the rollover of the two-digit year value from "99" to "00" and the
inadvertent recognition by the electronic technology of "00" as the year 1900
rather than Y2K. The Company is also aware that it may not only be negatively
affected by the failure of its own systems to be Y2K compliant, but may also
be negatively affected if its vendors, customers, lenders and any other party
with which the Company transacts business are not Y2K ready.
In 1995, the Company undertook a project to invest in and install a time-
critical manufacturing and management information system at certain of its
significant divisions in an effort to save costs and improve information flow
by substantially improving all operational processes. Y2K-ready technology is
<PAGE> 20
part of this system and the Company anticipates no material adverse effects to
its new operating systems from Y2K.
In addition to this new system, the Company has completed its assessment
of all other systems and software in place at all locations and has identified
hardware replacements and software upgrades necessary to achieve Y2K
readiness. The identified hardware replacements and software upgrades are
scheduled to be completed and tested by the end of 1999 and will be provided
by vendors whose hardware and software have achieved Y2K readiness. The cost
of the identified hardware replacements and software upgrades are not expected
to be material and, absent the need to achieve Y2K readiness, would be a
normal part of the Company's ongoing program for maintaining up-to-date
information technology. The incremental cost of hardware replacements and
software upgrades required to achieve Y2K readiness is estimated to be less
than $0.1 million. The Company has incurred and expects to continue to incur
internal staff and other costs as a result of modifying existing systems to be
Y2K ready. Such costs will continue to be expensed as incurred and funded
through internally generated cash while costs to acquire new equipment and
software will be capitalized and depreciated over their useful lives.
In addition to internal Y2K readiness, the Company has surveyed all
significant vendors, customers, lenders and other outside parties with which
it transacts business in an effort to identify potential Y2K issues with such
parties. Results indicate that those important parties with which the Company
does business either have already achieved Y2K readiness or will be Y2K ready
during 1999. The most significant third parties with which the Company
contracts for services are its payroll services provider, its local bank of
record and its revolving credit lender, NationsBank. The Company has received
certification that its provider of payroll services is Y2K ready. Regarding
its bank and revolving credit facility lender, the Company funds its day-to-
day operations through a series of wire transfers between its revolving credit
facility lender and its local bank of record. The wire transfers are
initiated at the Company's headquarters via dial-up phone line connections.
Both the Company's local bank of record and NationsBank have indicated
publicly that they will achieve Y2K readiness during 1999. However, any
disruption in phone service as a result of Y2K could result in the Company's
inability to fund its operations and have a significant adverse impact on the
financial position and results of operations of the Company.
Management recognizes that the failure of the Company or any party with
which the Company conducts business to be Y2K ready in a timely manner could
have a material adverse impact on the operations of the Company. If the
Company's systems or the systems of its significant vendors, customers,
lenders and other outside parties with which it transacts business were to
fail because they were not Y2K ready, the Company would incur significant
costs and inefficiencies. Manual systems for manufacturing and financial
controls would have to be implemented and staffed. Significant customers
might decide to cease doing business with the Company. Disruptions in
electrical power, phone service and/or delivery of materials could cause
significant business interruptions. Similarly, business interruptions at
significant customers could result in deferred or canceled orders.
The dates on which the Company believes Y2K readiness will be completed
are based on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources, third party modification plans and other factors. However,
there can be no guarantees that these estimates will be achieved, or that
<PAGE> 21
there will not be delays in, or increased costs associated with, achieving
enterprise-wide Y2K readiness. Specific factors that might cause differences
between the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in these areas, timely responses to
and corrections by third-parties and suppliers, the ability to implement
interfaces between the new systems and the systems not being replaced, and
similar uncertainties. Due to general uncertainty inherent in the Y2K
problem, resulting in part from the uncertainty of the Y2K readiness of third-
parties, the Company cannot ensure its ability to resolve problems associated
with the Y2K issue that may affect its operations and business, or expose it
to third-party liability in a timely and cost-effective manner.
RESULTS OF CONTINUING OPERATIONS
Three Months Ended September 30, 1999 Compared to
Three Months Ended September 30, 1998
Net sales for the third quarter of 1999 totaled $26.5 million, compared
to $35.9 million for the third quarter of 1998. Sales for the third quarter
of 1999 decreased $9.4 million, or 26%, compared to the third quarter of 1998.
The decrease in sales occurred at all divisions of the Company but was
primarily at Alliance, CPI and Hanna. Sales decreased $5.8 million at
Alliance due primarily to a decrease in order levels which have been
negatively impacted by a downturn in large capital projects in the steel
industry due to strong foreign competition. Sales decreased $1.6 million at
CPI due primarily to a decrease in order levels in the first third of 1999 and
a change in the mix of CPI's backlog to a higher percentage of items with
longer delivery schedules. Sales decreased $1.4 million at Hanna due to a
softening in demand in its hydraulic product line. Sales decreased slightly
at Auto-Lok and Steelcraft.
Gross profit for the third quarter of 1999 was almost $5.0 million,
compared to $6.9 million of gross profit for the third quarter of 1998, a
decrease of $1.9 million. Third quarter 1999 gross profit margin was 18.7%,
compared to 19.1% in the third quarter of 1998. Gross profit during the third
quarter of 1999 compared to the third quarter of 1998 decreased $1.1 million
at Alliance, $0.5 million at both CPI and Hanna and $0.1 million at
Steelcraft, all primarily due to the inefficiencies of lower volume levels
compared to the third quarter of 1998 except for Hanna, which was due to a
change in product mix to the lower margin mobile cylinder product lines.
Auto-Lok's gross profit was up $0.2 million compared to last year's third
quarter due to its improved cost structure due to the addition of Kingway to
its formerly excess capacity. Third quarter gross profit margins for 1999
compared to third quarter margins for 1998 decreased or remained flat at all
divisions except for Auto-Lok. The increase in gross margin at Auto-Lok is
due to its improved cost structure The decreases at the remaining divisions
reflect lower volume levels and a change in product mix at Hanna.
Selling, general and administrative (SGA) expenses for the third quarter
of 1999 were $3.2 million, compared to $3.7 million for the third quarter of
1998, a decrease of $0.5 million. SGA expenses as a percentage of sales
increased to 12.2% for 1999 compared to 10.3% in 1998. The decrease in SGA
was due to an overall effort to contain and reduce such costs. The increase
in SGA as a percent of sales was due primarily to the lower volume levels in
1999.
<PAGE> 22
Other expense for the third quarter of 1999 was $0.1 million, compared to
other expense of just under $0.1 million for the third quarter of 1998. There
were no individually significant or offsetting items in either 1999 or 1998.
Interest expense, net, for the third quarters of 1999 and 1998 was
approximately $1.8 million. A decrease in the effective borrowing rate on the
Company's debt for the third quarter of 1999, due to the revolving credit
facility entered into with NationsBank in October 1998, was offset by higher
average borrowing levels in 1999 and an increase in the amortization of
deferred financing costs.
The equity losses from continuing operations of affiliate in the third
quarters of 1999 and 1998, represents the Company's share of Reunion's results
from continuing operations for each quarter.
There was a tax benefit of $0.1 million for the third quarter of 1999 and
a tax provision of $0.3 million for the third quarter of 1998. Income taxes
for both periods is directly related to the level of pre-tax results.
Nine Months Ended September 30, 1999 Compared to
Nine Months Ended September 30, 1998
Net sales for the first nine months of 1999 totaled $88.1 million,
compared to $99.0 million for the first nine months of 1998. Sales for the
first nine months of 1999 decreased $10.8 million, or 11%, from the first nine
months of 1998. The decrease in sales was primarily at Alliance, CPI and
Hanna, partially offset by an increase at Auto-Lok. Sales decreased $12.2
million at Alliance due primarily to a decrease in order levels which have
been negatively impacted by a downturn in large capital projects in the steel
industry due to strong foreign competition. CPI's sales were down $1.6
million due to decreased order levels in the first third of 1999 and Hanna's
sales were down $0.4 million due to a softening in demand in its hydraulic
product line. Auto-Lok's sales increase of $4.0 million was due to increased
product demand as well as the completion of a large contract for one customer.
Steelcraft's sales were down $0.5 million compared to last year's first nine
months.
Gross profit for the first nine months of 1999 was almost $15.8 million,
compared to $19.8 million of gross profit for the first nine months of 1998, a
decrease of $4.1 million. First nine months 1999 gross profit margin was
17.9%, compared to 20.0% in the first nine months of 1998. Gross profit
during the first nine months of 1999 compared to the first nine months of 1998
decreased $3.1 million at Alliance, $0.9 million at Hanna, $0.7 million at CPI
and $0.4 million at Steelcraft, partially offset by a $1.0 million increase at
Auto-Lok. First nine months gross profit margins for 1999 compared to first
nine months margins for 1998 increased only at Auto-Lok and decreased at all
other divisions. The increase in gross profit and margin at Auto-Lok is due
primarily to the division's increased volume. The decreases in gross profits
and margins at the remaining divisions are due to decreases in volume noted
above and a change in product mix at Hanna.
Selling, general and administrative (SGA) expenses for the first nine
months of 1999 were $10.0 million, compared to $11.1 million for the first
nine months of 1998, a decrease of $1.1 million. SGA expenses as a percentage
of sales was 11.3% for the first nine months of 1999 compared to 11.2% in
1998's first nine months. The decrease in SGA was due to an overall effort to
contain and reduce such costs. The increase in the percentage of SGA to sales
<PAGE> 23
was due to the decrease in volume.
Other expense for the first nine months of 1999 was $0.4 million,
compared to other expense of $0.2 million for the first nine months of 1998, a
net increase of $0.2 million. There were no individually significant or
offsetting items in either of the first nine months of 1999 or 1998.
Interest expense, net, in the first nine months of 1999 was $5.4 million
compared to $5.5 million in the first nine months of 1998. A decrease in the
effective borrowing rate on the Company's debt for the first nine months of
1999, due to the revolving credit facility entered into with NationsBank in
October 1998, was almost fully offset by higher average borrowing levels in
1999 and an increase in the level of amortization of deferred financing costs.
The equity loss from continuing operations of affiliate in both of the
first nine months of 1999 and 1998 represents the Company's share of Reunion's
results from continuing operations for each period. Reunion's first nine
months of 1998 results from continuing operations were negatively affected by
the Bargo litigation provision it recorded in its 1998 second quarter.
There was a tax benefit of less than $0.1 million for the first nine
months of 1999 compared to a benefit of $0.3 million for the first nine months
of 1998. The tax benefits for both periods are directly related to the level
of pre-tax result of operations.
Effective January 1, 1999, the Company adopted the AICPA's Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities." Such adoption
is reported as the cumulative effect of a change in accounting principle and
resulted in the write-off of $176,000 of start-up costs, net of taxes of
$91,000. Such start-up costs primarily related to the Company's international
subsidiaries.
RESULTS OF DISCONTINUED OPERATIONS
Three Months Ended September 30, 1999 compared to
Three Months Ended September 30, 1998
Discontinued operations generated net sales during the three month
periods ended September 30, 1999 and 1998 of $14.2 million and $14.7 million,
respectively. Loss before tax was $0.1 million in 1999 and $0.5 million in
1998. The results before taxes include allocated interest expense of $664,000
for the three months ended September 30, 1999 and $656,000 for the three
months ended September 30, 1998.
On September 30, 1999, the Company completed the sale of all of the
domestic business and assets of Discontinued Klemp for $32.1 million in cash
and the assumption by AMICO of certain of Discontinued Klemp's operating
liabilities, subject to post-closing adjustment. Such sale resulted in a pre-
tax gain of approximately $12.7 million, classified within discontinued
operations, net of tax, at $7.6 million. The Company retained certain
obligations of Discontinued Klemp and is obligated to pay various expenses of
the sale, all of which have been estimated to total approximately $2.2 million
and are classified within discontinued operations, net of tax, at $1.3
million, and within net assets (liabilities) of discontinued operations as
reserve for estimated expenses. Obligations retained and expenses required to
be paid by the Company primarily include non-cancelable lease commitments and
<PAGE> 24
legal and professional fees.
The remaining assets and liabilities of discontinued operations include
the assets and liabilities of its Mexican and Chinese grating manufacturing
discontinued businesses and the assets and liabilities of its discontinued oil
and gas operations. Management has estimated that the sales of such
discontinued operations will result in pre-tax losses of $6.1 million for the
foreign grating operations and $0.8 million for the oil and gas operations.
Such estimated losses on disposal are classified within discontinued
operations, net of tax, at $3.7 million and $0.5 million, respectively, and
within net assets (liabilities) of discontinued operations as reserve for
estimated loss on disposal.
The equity income from discontinued operations of affiliate in the third
quarter represents the Company's share of Reunion's results from discontinued
operations.
Nine Months Ended September 30, 1999 compared to
Nine Months Ended September 30, 1998
Discontinued operations generated net sales during the nine month periods
ended September 30, 1999 and 1998 of $40.3 million and $42.0 million,
respectively. Income before taxes was $1.0 million in 1999 and loss before
taxes was $0.7 million in 1998. The results before taxes include allocated
interest expense of $1,905,000 for the nine months ended September 30, 1999
and $1,888,000 for the nine months ended September 30, 1998. The above
results of discontinued operations for the nine months ended September 30,
1999 includes a $1,681,000 gain on sale of the property that comprised the
former Chicago manufacturing location of Discontinued Klemp.
On September 30, 1999, the Company completed the sale of all of the
domestic business and assets of Discontinued Klemp for $32.1 million in cash
and the assumption by AMICO of certain of Discontinued Klemp's operating
liabilities, subject to post-closing adjustment. Such sale resulted in a pre-
tax gain of approximately $12.7 million, classified within discontinued
operations, net of tax, at $7.6 million. The Company retained certain
obligations of Discontinued Klemp and is obligated to pay various expenses of
the sale, all of which have been estimated to total approximately $2.2 million
and are classified within discontinued operations, net of tax, at $1.3
million, and within net assets (liabilities) of discontinued operations as
reserve for estimated expenses. Obligations retained and expenses required to
be paid by the Company primarily include non-cancelable lease commitments and
legal and professional fees.
The remaining assets and liabilities of discontinued operations include
the assets and liabilities of its Mexican and Chinese grating manufacturing
discontinued businesses and the assets and liabilities of its discontinued oil
and gas operations. Management has estimated that the sales of such
discontinued operations will result in pre-tax losses of $6.1 million for the
foreign grating operations and $0.8 million for the oil and gas operations.
Such estimated losses on disposal are classified within discontinued
operations, net of tax, at $3.7 million and $0.5 million, respectively, and
within net assets (liabilities) of discontinued operations as reserve for
estimated loss on disposal.
The equity income from discontinued operations of affiliate in the first
nine months of 1999 and the equity loss from discontinued operations of
<PAGE> 25
affiliate in the first nine months of 1998, represents the Company's share of
Reunion's results from discontinued operations for each period.
LIQUIDITY AND CAPITAL RESOURCES
General
Except for its foreign subsidiaries, which are classified as part of
discontinued operations, 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 borrowings under revolving credit arrangements, 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 same revolving
credit arrangements. The Company's foreign subsidiaries are self-sustaining
and operate almost exclusively within the countries they are located. Their
cash flows are devoted to and obligations paid by their own operations. The
Company does not provide day-to-day operating funds to the foreign operations
nor does the Company guarantee any foreign indebtedness. 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. See "Recent Developments - Discontinued Operations."
On October 30, 1998, the Company and NationsBank executed the Financing
Agreement wherein NationsBank has provided the Company with the NationsBank
Facility of up to a maximum principal amount of $40.0 million, including a
letter of credit facility of up to $5.0 million.
Availability under the NationsBank Facility is subject to a borrowing
base limitation calculated as the aggregate of 85% of eligible accounts
receivable plus the lesser of $15.0 million or the sum of 60% of finished
goods and raw materials, 50% of supplies and stores, a percentage, determined
from time to time by NationsBank, of work-in-process and the special
availability amount in effect at the time of the calculation, all of the above
as defined in the Financing Agreement. Interest under the NationsBank
Facility is determined by reference to various rates including the NationsBank
prime rate, the Federal Funds rate or LIBOR, each plus an applicable margin.
The Company may elect the rates upon notification to NationsBank with
applicable margins ranging from zero to 0.5% when using either the NationsBank
prime rate or the Federal Funds rate and from 2.0% to 2.75% when using LIBOR.
The NationsBank Facility also includes an unused line fee and a monthly
service charge.
The NationsBank Facility is secured by a lien in favor of NationsBank on
the Company's accounts receivable, inventory and certain other property and
accounts to the extent necessary to permit foreclosure on the accounts
receivable and inventory. The Financing Agreement expires on October 31, 2001
and is renewable annually thereafter, subject to the approval of NationsBank,
but not beyond October 31, 2005.
The NationsBank Facility includes various representations, warranties and
affirmative and negative covenants by the Company and provides NationsBank
with certain rights and remedies including, but not limited to, acceleration,
both in the event of default or subjectively, of all amounts borrowed under
the NationsBank Facility. Financial covenants in the NationsBank Facility
<PAGE> 26
include an adjusted earnings before interest, taxes, depreciation and
amortization (NationsBank EBITDA) to fixed charge coverage ratio and an
indebtedness to cash flow ratio, calculations of which are defined in the
Financing Agreement. Generally all amounts for calculation of the ratios are
derived from domestic operations and NationsBank EBITDA is adjusted for
domestic capital expenditures. These covenants require the Company to
maintain a rolling twelve-month minimum adjusted NationsBank EBITDA to fixed
charge coverage ratio of 1.2:1 and a maximum indebtedness to cash flow ratio
of 5.0:1. At September 30, 1999 such ratios were 1.3:1 and 3.1:1,
respectively, and complied with the Financing Agreement.
During April 1999, the Company sold the land and building which comprised
the former Chicago, Illinois location of its Klemp division, which was
relocated to Libertyville, Illinois in early 1999. Net cash proceeds received
by the Company as a result of the sale totalled $4.56 million and were used to
repay borrowings under the NationsBank Facility. On May 3, 1999, the Company
paid its semi-annual interest payment on the Senior Notes of $3.25 million
from funds available under the NationsBank Facility, such availability being
partially the result of the application of the property sale proceeds to the
NationsBank Facility. See "Recent Developments - Sale of Property." On
September 30, 1999, the Company sold substantially all of the domestic
business and assets of Discontinued Klemp to AMICO for $32.1 million in cash
and the assumption of certain operating liabilities of Discontinued Klemp,
subject to post-closing adjustments. Substantially all of the proceeds from
the sale were used to repay borrowings under the NationsBank Facility. See
"Recent Developments - Discontinued Operations." There were no borrowings
outstanding under the NationsBank Facility at September 30, 1999. However, on
November 1, 1999, the Company paid its semi-annual interest payment on the
Senior Notes with borrowings available under the NationsBank Facility. At
September and the weighted average rate for borrowing was 7.5%.
Based on its own liquidity, the Company was unable to consummate the
Purchase Offer on June 1, 1999, resulting in an Event of Default under the
Indenture. Such Event of Default was subsequently cured by the Company. See
"Recent Developments - Senior Note Purchase Offer." The Company is required
to offer to purchase up to $25,000,000 principal amount of Senior Notes, plus
accrued and unpaid interest through the purchase date, on June 1, 2000. The
full principal amount of this $25,000,000 of Senior Notes is classified as
current maturities of long-term debt in the Company's consolidated balance
sheet at September 30, 1999. See "Possible Merger with Reunion."
At December 31, 1998, the Company had net operating loss carryforwards
for tax return reporting purposes of approximately $5.8 million, of which $1.4
million expires in 2008, $1.2 million expires in 2011 and $3.2 million expires
in 2018. The availability of these carryforwards may be subject to
limitations imposed by the Internal Revenue Code. A U.S. federal corporate
income tax return examination has been completed for the Company's 1995 tax
year. The Company believes adequate provisions for income taxes have been
recorded for all years.
SFAS 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The Company periodically reviews
the adequacy of the valuation allowance as a result of changes in its
profitability and other factors. The valuation allowance was not changed
during 1998.
<PAGE> 27
Operating Activities
Operating activities used $0.4 million of cash during the first nine
months of 1999, compared to cash provided of $1.7 million in the first nine
months of 1998, a decrease in cash provided of $2.1 million. This decrease in
cash provided from operating activities was due primarily to changes in the
levels of working capital in each period.
Investing Activities
Investing activities provided $34.3 million of cash during the first nine
months of 1999, compared to cash used of $4.4 million during the first nine
months of 1998, an increase in cash provided of $38.7 million. The increase
in cash provided from investing activities was due to the $32.1 million of
cash proceeds from the September 30, 1999 sale of the domestic business and
assets of Discontinued Klemp (see "Recent Developments - Discontinued
Operations), the $4.6 million of cash received from the sale of property in
the second quarter of 1999 (see "Recent Developments - Sale of Property) and a
$2.0 million decrease in the level of capital expenditures in the first nine
months of 1999 compared to 1998.
Financing Activities
Financing activities during the first nine months of 1999 used almost
$34.2 million in cash, compared to $2.1 million of cash provided during the
first nine months of 1998, an increase in cash used of $36.3 million. This
increase in cash used is the result of the application of substantially all of
the proceeds from the sale of the domestic business and assets of Discontinued
Klemp to borrowings under the NationsBank Facility compared to an increase of
$2.1 million in borrowings under revolving credit facilities during the first
nine months of 1998.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risk factors which
affect the Company since the end of the preceding fiscal year.
<PAGE> 28
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 (electronically
filed report only).
(b) Reports on Form 8-K
On October 5, 1999, the Company filed a Current Report on
Form 8-K dated October 1, 1999, to report under Item 2
that, effective September 30, 1999, it completed the sale of
substantially all of the domestic business and assets
of the Klemp division to Alabama Metal Industries
Corporation (AMICO) for approximately $32.1 million
in cash and the assumption by AMICO of certain Klemp
operating liabilities and to file the press release
related to such sale as an exhibit under Item 7.
<PAGE> 29
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 15, 1999 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> 30
EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
----------- ------------------- --------
27 Financial Data Schedule 31
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 69
<SECURITIES> 0
<RECEIVABLES> 23,371
<ALLOWANCES> 243
<INVENTORY> 14,619
<CURRENT-ASSETS> 41,255
<PP&E> 37,988
<DEPRECIATION> 21,054
<TOTAL-ASSETS> 77,655
<CURRENT-LIABILITIES> 22,776<F1>
<BONDS> 49,917
0
8,824
<COMMON> 3
<OTHER-SE> (6,518)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 77,655
<SALES> 88,125
<TOTAL-REVENUES> 88,125
<CGS> 72,363
<TOTAL-COSTS> 72,363
<OTHER-EXPENSES> 10,435
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,419
<INCOME-PRETAX> (191)
<INCOME-TAX> (66)
<INCOME-CONTINUING> (125)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,421
<EPS-BASIC> 7.18
<EPS-DILUTED> 7.18
<FN>
<F1>Excludes current maturities of Senior Notes of $24,971 at 9/30/99.
</FN>
</TABLE>
