<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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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 April 30, 1999, 289,787 shares of common stock, par value $.01 per share,
were outstanding.
Exhibit index is on page 24.
Page 1 of 29 pages.
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<PAGE> 2
CHATWINS GROUP, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statement of Income and
Comprehensive Income for the three months ended
March 31, 1999 and 1998 4
Condensed Consolidated Statement of Cash Flows for
the three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 22
(b) Reports on Form 8-K 22
SIGNATURES 23
The Registrant hereby amends the following items of its Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999 for the adoption of the
American Institute of CPAs Accounting Standards Executive Committee's
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities."
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHATWINS GROUP, INC.
CONSOLIDATED BALANCE SHEET
AT MARCH 31, 1999 AND DECEMBER 31, 1998
(in thousands)
At March 31, At December 31,
1999 1998
----------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 184 $ 341
Receivables, net 36,930 38,340
Inventories, net (note 2) 19,959 20,746
Other current assets 6,468 4,734
-------- --------
Total current assets 63,541 64,161
Property, plant and equipment, net 32,246 32,371
Investments, net 6,166 6,807
Due from related parties 1,882 1,403
Goodwill, net 4,434 4,505
Other assets, net 5,892 8,119
-------- --------
Total assets $114,161 $117,366
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Revolving Credit Facility $ 33,606 $ 34,005
Current maturities of debt 25,769 25,766
Trade payables 17,859 20,444
Other current liabilities 10,966 10,286
-------- --------
Total current liabilities 88,200 90,501
Senior notes due 2003, net 24,968 24,962
Other long-term debt 728 775
Other liabilities 1,138 1,612
-------- --------
Total liabilities 115,034 117,850
Commitments and contingent liabilities (note 5) - -
Minority interests 996 968
Redeemable preferred stock 8,596 8,482
Warrant value 14 14
Stockholders' equity (note 3) (10,479) (9,948)
-------- --------
Total liabilities and stockholders' equity $114,161 $117,366
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
CHATWINS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(in thousands, except share and per share information)(unaudited)
Three Months Ended
March 31,
1999 1998
------- -------
Net sales $46,364 $43,747
Cost of sales 37,412 34,652
------- -------
Gross profit 8,952 9,095
Selling, general & administrative 5,664 5,811
Other expense, net 209 93
Minority interests 27 (2)
------- -------
Operating profit 3,052 3,193
Interest expense, net 2,475 2,437
------- -------
Income before income taxes and equity income (loss)
from operations of affiliate 577 756
Provision for income taxes 230 307
------- -------
Income before equity income (loss)
from operations of affiliate 347 449
Equity income (loss) from operations of affiliate (423) 62
Cumulative effect of change in accounting principle (176) -
------- -------
Net income (loss) (252) 511
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (165) -
------- -------
Comprehensive income (loss) $ (417) $ 511
======= =======
Income (loss) applicable to common stock $ (366) $ 397
======= =======
Earnings per common share - basic:
Before equity income (loss) from affiliate $ 0.80 $ 1.38
Operations of affiliate (1.46) 0.25
Change in accounting principle (0.60) -
------- -------
Earnings (loss) per common share - basic $ (1.26) $ 1.63
======= =======
Average equivalent shares outstanding - basic 289,677 242,887
======= =======
Earnings per common share - diluted:
Before equity income (loss) from affiliate $ 0.79 $ 1.15
Operations of affiliate (1.44) 0.21
Change in accounting principle (0.60) -
------- -------
Earnings (loss) per common share - diluted $ (1.25) $ 1.36
======= =======
Average equivalent shares outstanding - diluted 292,887 292,887
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
CHATWINS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(in thousands)
(unaudited)
Three Months Ended
March 31,
1999 1998
------- -------
Cash flow from operating activities:
Net income (loss) $ (252) $ 511
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 1,013 988
Amortization 362 225
Minority share of losses 27 (2)
Equity in net loss (income) of affiliate 423 (62)
Changes in assets and liabilities, net of
the purchase of a business:
Decrease in receivables 1,410 2,101
Decrease (increase) in inventories 787 (3,480)
Increase (decrease) in trade payables (2,585) 2,121
Net change in other assets and liabilities 49 119
------- -------
Cash provided by operating activities 1,234 2,521
------- -------
Cash flow from investing activities:
Capital expenditures (944) (1,057)
------- -------
Cash used in investing activities (944) (1,057)
------- -------
Cash flow from financing activities:
Repayments of debt (48) (48)
Net change in revolving credit facilities (399) (1,771)
------- -------
Cash used in financing activities (447) (1,819)
------- -------
Net decrease in cash and cash equivalents (157) (355)
Cash and cash equivalents, beginning of year 341 734
------- -------
Cash and cash equivalents, end of period $ 184 $ 379
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
CHATWINS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 month
period ended March 31, 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 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.
NOTE 2: INVENTORIES
Inventories are comprised of the following (in thousands):
At March 31, At December 31,
1999 1998
----------- --------------
(unaudited)
Raw materials $ 7,717 $ 8,228
Work-in-process 5,333 6,018
Finished goods 7,792 7,374
------- -------
Total inventories 20,842 21,620
Less: LIFO reserves (883) (874)
------- -------
Inventories, net $19,959 $20,746
======= =======
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NOTE 3: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
equity for the three month period ended March 31, 1999 (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
------ ----- ------- ------- -------- -------- --------
At January 1,
1999 $ 3 $(500) $1,860 $(1,001) $ (8,956) $ (1,354) $ (9,948)
Activity
(unaudited):
Net loss - - - - (252) - (252)
Preferred stock
accretions - - - - (114) - (114)
Foreign currency
translation
adjustment - - - - - (165) (165)
--- ----- ------ ------- -------- -------- --------
At March 31,
1999 $ 3 $(500) $1,860 $(1,001) $ (9,322) $ (1,519) $(10,479)
=== ===== ====== ======= ======== ======== ========
The computations of basic and diluted earnings per common share (EPS) for
the three month periods ended March 31, 1999 and 1998 are as follows (in
thousands, except share and per share amounts)(unaudited):
Income Shares EPS
-------- -------- -------
Three months ended March 31, 1999:
Net loss $ (252)
Less: Preferred stock dividend accretions (114)
--------
Income available to common stockholders,
shares outstanding and basic EPS (366) 289,677 $ (1.26)
=======
Dilutive effect of Warrants 3,210
-------- --------
Income available to common stockholders,
shares outstanding and diluted EPS $ (366) 292,887 $ (1.25)
======== ======== =======
Three months ended March 31, 1998:
Net income $ 511
Less: Preferred stock dividend accretions (114)
--------
Income available to common stockholders,
shares outstanding and basic EPS 397 242,887 $ 1.63
=======
Dilutive effect of Warrants 50,000
-------- --------
Income available to common stockholders,
shares outstanding and diluted EPS $ 397 292,887 $ 1.36
======== ======== =======
<PAGE> 8
NOTE 4: RELATED PARTY TRANSACTIONS
SPI Consulting Agreement
The Company has a consulting agreement with Stanwich Partners, Inc. under
which $75,000 was expensed in each quarter ended March 31, 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 and
son of Charles E. Bradley Sr., Chairman of the Board, Director and shareholder
of the Company (Mr. Bradley). During the first quarter of 1999, the Company
made lease payments totaling $124,336 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. During the first quarter of 1999, costs totaling
$231,863 were charged to Kingway under this services agreement. At March 31,
1999, the Company had receivables totaling $1,011,863 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 quarter of 1999, costs totaling $247,592 were charged to NAPTech
under this services agreement. At March 31, 1999, the Company had receivables
totaling $395,592 from NAPTech.
Oneida Insurances
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 quarter of 1999, the rate for such
insurance was $23,500 per month, which represented the approximate cost of
such insurance to the Company.
NOTE 5: 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
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.
<PAGE> 9
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 March 31, 1999.
NOTE 6: 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 and a disaggregation of certain
financial information by operating segment.
Alliance - Alliance, located in Alliance, Ohio, 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, located in Atlanta, Georgia, 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, located in McKeesport, Pennsylvania, 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, with locations in Chicago, Illinois and Milwaukee,
Wisconsin, 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.
Klemp - Klemp, a multi-location division, is a geographically diversified
manufacturer of metal grating products. Klemp manufactures quality steel and
aluminum bar grating products in a variety of sizes, configurations and
finishes, and also custom fabricates bar grating products for specialized
applications. Klemp products are sold for use in many industrial applications
where a combination of strength, light weight, access and a free flow of air,
<PAGE> 10
heat, water or light is desired. Its products are used in water and
wastewater treatment plants, railroad tank cars, petroleum storage facilities,
aircraft, mines, roads, bridge decks and general manufacturing facilities.
Klemp's manufacturing and fabrication facilities are located in Libertyville,
Illinois (recently relocated from Chicago, Illinois), Orem, Utah, Liberty,
Missouri, Dallas, Texas, Dayton, Texas and Pittsburgh, Pennsylvania. Results
of Klemp de Mexico and Shanghai Klemp are reported as part of the Klemp
operating segment.
Steelcraft - Steelcraft, located in Miami, Oklahoma, 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.
The following represents the disaggregation of financial data (in
thousands)(unaudited):
Total Capital
Net Sales EBITDA(1) Assets Spending
--------- --------- --------- ---------
Three months ended
March 31, 1999:
Alliance $ 7,666 $ 395 $ 16,290 $ 27
Auto-Lok 8,975 878 10,914 115
CPI 7,387 1,460 20,242 236
Hanna 8,665 1,441 17,552 150
Klemp(2) 12,694 495 32,825 331
Steelcraft 950 138 1,840 73
Headquarters/Other 27 (560) 14,498 12
-------- -------- -------- --------
Totals $ 46,364 4,247 $114,161 $ 944
======== ======== ========
Depreciation and amortization (1,375)
Interest expense(3) (2,295)
--------
Income before income taxes $ 577
========
Three months ended
March 31, 1998:
Alliance $ 9,042 $ 751 $ 13,464 $ 91
Auto-Lok 5,470 203 11,591 98
CPI 5,764 1,162 17,147 267
Hanna 8,383 1,369 16,301 49
Klemp(2) 13,946 1,219 31,714 543
Steelcraft 1,142 194 1,808 5
Headquarters/Other - (612) 21,513 4
-------- -------- -------- --------
Totals $ 43,747 4,286 $113,538 $ 1,057
======== ======== ========
Depreciation and amortization (1,213)
Interest expense(3) (2,317)
--------
Income before income taxes $ 756
========
(1) EBITDA is primary measure used by management in assessing performance.
(2) Data of international subsidiaries are reported as part of Klemp.
(3) Excludes amortization of debt issuance expenses of $180,000 and $120,000
for the three month periods ended March 31, 1999 and 1998, respectively.
<PAGE> 11
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 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).
Substantially all of the Company's operations relate to metal products.
The Company's equity investment in Reunion is comprised of 1,450,000
shares of Reunion common stock constituting approximately 38% 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 month periods ended March 31, 1999 and 1998 as equity
income (loss) from operations of affiliate. See "Delay in Possible Merger
with Reunion" below.
RECENT DEVELOPMENTS
Delay in Possible Merger with Reunion
On February 26, 1999, the Company announced that it had reinstituted
merger discussions with Reunion and that the managements of both companies
believed that additional identified financing sources would provide adequate
funds for operations of the combined companies, including redemption of the
Company's 13% Senior Notes due 2003 (Senior Notes) for which State Street Bank
and Trust Company is trustee (Trustee). On April 1, 1999, the Company further
announced that it has entered into a Merger Agreement, dated as of March 30,
1999, with Reunion pursuant to which the Company will merge with and into
Reunion, with Reunion being the surviving corporation (Merger). The Merger
will be consummated on the earliest practicable date after all of the
conditions thereto have been waived or satisfied, including, among others,
approval by Reunion's stockholders.
In connection with and to satisfy a further condition to the Merger,
Reunion is pursuing a high yield debt offering (Reunion Offering) the proceeds
of which are intended in part to be used to redeem the entire aggregate
principal amount of the Senior Notes at 104.33% of the outstanding principal
amount of the Senior Notes redeemed plus accrued and unpaid interest to the
redemption date (Redemption Price) under Section 3.07 of the Indenture
pursuant to which the Company issued the Senior Notes (Indenture) and
paragraph 7 of the Senior Notes (Optional Redemption). The Company and
Reunion have been informed by Reunion's investment banker that market
conditions for high yield debt offerings for companies like Reunion (after
giving effect to the Merger) are not favorable at this time. Therefore, the
Reunion Offering will not be consummated prior to the designated closing date
of the Merger, June 29, 1999, thereby delaying consummation of the Merger and
<PAGE> 12
the Optional Redemption that was to be accomplished with the proceeds of the
Reunion Offering.
Notwithstanding the anticipated delay of the Merger beyond June 29, 1999
the Company and, it has been informed, Reunion continue to deem the Merger to
be in the best interests of their respective stockholders. Reunion has
informed the Company that it intends to continue to pursue the Reunion
Offering in the hope that market conditions will improve and will work with
the Company in an effort to consummate the Merger within the next several
months.
Against the possibility that the Reunion Offering and Merger will be
unduly delayed, the Company is simultaneously pursuing other long-term
financing options in an amount sufficient to permit the Company to consummate
an Optional Redemption of all the Senior Notes (Long-Term Financing) and is
also considering a sale of a portion of its assets (Asset Sale). If the
Company is successful in obtaining Long-Term Financing or in consummating an
Asset Sale, the Company intends to consummate an Optional Redemption of all
the Senior Notes at the Redemption Price. Although no binding commitment has
been secured, the Company's senior secured lender has expressed an interest in
providing up to $25 million of the Long-Term Financing through an amendment to
the Company's existing secured revolving credit facility subject to (i) the
Company obtaining the balance of the funds needed from other sources and (ii)
the financing from other sources being senior unsecured or subordinate
indebtedness. There can be no assurance that the Reunion Offering, the Long-
Term Financing or an Asset Sale will be consummated and, therefore, there can
be no assurance that an Optional Redemption will occur.
See "Senior Note Purchase Offer" below and "Factors Potentially Affecting
Future Liquidity."
Senior Note Purchase Offer
The Company has $50 million of Senior Notes due May 3, 2003 outstanding.
When the Company acquired the Reunion common stock on June 20, 1995, it agreed
with the Trustee of the Senior Notes to a first supplemental indenture.
Pursuant to this supplemental indenture, the Company agreed to offer to
purchase $25 million, or half, of the outstanding Senior Notes from
Noteholders on each of June 1, 1999 (Purchase Offer) and 2000 at par value
plus unpaid interest to the purchase date. The full principal amount of the
Purchase Offer is classified as current maturities of long-term debt in the
Company's consolidated balance sheet at March 31, 1999.
Pursuant to its obligations under the Indenture, on May 12, 1999, the
Company issued a notice that it is 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, in the absence of consummation of the Merger and
Reunion Offering, an Asset Sale and/or a Long-Term Financing, the Company does
not expect to have sufficient liquidity on the Purchase Date to consummate the
Purchase Offer if more than $2 million worth of Senior Notes are tendered. As
of May 14, 1999, the date of this report, no reasonable estimate exists as to
the amount of Senior Notes which the Company may be required to purchase, if
any, on the June 1, 1999 offer date.
The Company's failure to fulfill its obligations under the Purchase Offer
would constitute a failure to pay principal under the Indenture and would
result in an Event of Default, as defined therein. An Event of Default due to
<PAGE> 13
a failure to pay principal would, pursuant to the Securities Pledge Agreement
(as defined in the Indenture), result in a Realization Event resulting in the
immediate vesting in the Collateral Agent of the voting rights of the
approximately 49% of the Company's presently outstanding common stock and
rights to dividends and distributions in respect of the Pledged Collateral
securing its obligations under the Senior Notes. In addition, upon an Event
of Default, the Trustee or the holders of at least 25% of the Senior Notes
may, by written notice to the Company, declare an acceleration of the Senior
Notes. There can be no assurances that a Realization Event or Event of
Default will not occur.
See "Delay in Possible Merger with Reunion" above and "Factors
Potentially Effecting Future Liquidity."
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."
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
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
<PAGE> 14
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 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.
Management does not expect the incremental cost to the Company of enterprise-
wide Y2K readiness to be material to its operations.
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
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
<PAGE> 15
to third-party liability in a timely and cost-effective manner.
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, 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to
Three Months Ended March 31, 1998
Net sales for the first quarter of 1999 totaled $46.4 million, compared
to $43.7 million for the first quarter of 1998. Sales for the first quarter of
1999 increased $2.6 million, or 6%, over the first quarter of 1998. The
increase in sales was primarily at Auto-Lok and CPI, partially offset by
decreases at Alliance and Klemp. Sales increased $3.5 million at Auto-Lok due
to increased product demand as well as the completion of a large contract for
one customer. Sales increased $1.6 million at CPI due primarily to product
produced and sold into the offshore drilling market. Sales decreased $1.3
million at Klemp which was comprised of a $1.8 million decline in domestic
sales offset by an increase of $0.5 million at its international operations.
Approximately $1.0 million of the domestic sales decline occurred at the Klemp
division's Chicago plant and reflected not only a soft market but disruptions
caused by the first quarter relocation of the manufacturing plant from Chicago
to a suburb north of Chicago. The remaining decline in Klemp's domestic sales
results primarily from soft markets, especially the agricultural and
petrochemical markets. Sales decreased $1.4 million at Alliance due primarily
to weakness in the steel industry market. At the other divisions, a slight
increase in sales at Hanna was offset by a decrease in sales at Steelcraft.
<PAGE> 16
Such changes were general in nature and not necessarily indicative of
significant trends.
Gross profit for the first quarter of 1999 was $9.0 million, compared to
$9.1 million of gross profit for the first quarter of 1998, a decrease of $0.1
million. First quarter 1999 gross profit margin was 19.3%, compared to 20.8%
in the first quarter of 1998. Gross profit during the first quarter of 1999
compared to the first quarter of 1998 improved $0.6 million at Auto-Lok and
$0.3 million at CPI, while declining at all other locations, primarily $0.5
million at Alliance and $0.4 million at Klemp. First quarter gross profit
margins for 1999 compared to first quarter margins for 1998 increased only at
Auto-Lok and decreased at all other divisions. The increase in gross profits
and gross profit margins at Auto-Lok is due primarily to the increased volume
noted above. The increase in gross profit at CPI is due to the increase in
volume noted above while the decrease in gross profit margins at CPI reflects
the mix of the higher volume but slightly lower margins of the offshore
product. The gross profit and gross profit margin declines at Alliance are
primarily attributable to the decline in volume. The gross profit and gross
profit margin declines at Klemp are the result of lower volume as well as the
inefficiencies and disruptions caused by the Chicago manufacturing plant
relocation noted above. The gross profit and gross profit margin declines at
Hanna are the result of a higher percentage of mobile cylinder product sales
in 1999 with their historically lower profit margins. The gross profit and
gross profit margin declines at Steelcraft are primarily attributable to the
decline in volume.
Selling, general and administrative (SGA) expenses for the first quarter
of 1999 were $5.7 million, compared to $5.8 million for the first quarter of
1998, a decrease of $0.1 million. SGA expenses as a percentage of sales
decreased to 12.2% for 1999 compared to 13.3% in 1998. The decreases in SGA
and SGA as a percentage of sales were due to an overall effort to contain and
reduce such costs.
Other expense for the first quarter of 1999 was $0.2 million, compared to
other expense of $0.1 million for the first quarter of 1998, a net increase of
$0.1 million. There were no individually significant or offsetting items in
either 1999 or 1998.
Interest expense, net, for the first quarter of 1999 was $2.5 million,
compared to $2.4 million for the first quarter of 1998, an increase of $0.1
million. A decrease in the effective borrowing rate on the Company's debt for
the first 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.
There was a tax provision of $0.3 million for the first quarter of 1999
and for the first quarter of 1998. The tax provision for both years is
directly related to income.
The equity loss from operations of affiliate in the first quarter of 1999
of $0.4 million, and the equity income from operations of affiliate of $0.1
million in the first quarter of 1998, represents the Company's share of
Reunion's results for each quarter.
<PAGE> 17
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.
LIQUIDITY AND CAPITAL RESOURCES
General
Except for its foreign subsidiaries, 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.
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.
The NationsBank Facility includes a special availability amount, as
defined in the Financing Agreement, of $6.0 million. The special availability
amount is being reduced in $250,000 monthly increments which began in February
1999. The special availability amount was further reduced by $2.28 million in
April 1999. See "Recent Developments - Sale of Property." Once reduced, the
special availability amount may not be reborrowed. 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
<PAGE> 18
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
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 March 31, 1999 such ratios were 1.4:1 and 4.9:1, respectively,
and complied with the Financing Agreement. The Company was also in compliance
with all other representations, warranties and covenants at March 31, 1999.
Borrowings outstanding under the NationsBank Facility at March 31, 1999
totaled $33.6 million and the weighted average rate for borrowing was 7.5%.
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."
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.
Operating Activities
Operating activities provided $1.2 million of cash during the first
quarter of 1999, compared to cash provided of $2.5 million in the first
quarter of 1998, a decrease of $1.3 million. This decrease in cash provided
from operating activities was due to a decrease in income before income taxes
and equity income (loss) of $0.2 million in the first quarter of 1999 compared
to the first quarter of 1998 and changes in net working capital (defined as
receivables, inventories and trade payables for cash flow purposes) which used
<PAGE> 19
$0.4 million in cash during the first quarter of 1999 compared to $0.7 million
of cash provided during the first quarter of 1998.
Investing Activities
Investing activities used almost $1.0 million of cash during the first
quarter of 1999, compared to cash used of $1.1 million during the first
quarter of 1998, a decrease in cash used of $0.1 million, all related to a
decrease in capital expenditures during the first quarter of 1999 compared to
the first quarter of 1998.
Financing Activities
Financing activities during the first quarter of 1999 used almost $0.4
million in cash, compared to $1.8 million of cash used during the first
quarter of 1998, a decrease in cash used of $1.4 million. This decrease in
cash used is the result of a decrease of only $0.4 million in the level of net
borrowings under the revolving credit facilities during the first quarter of
1999 compared to a decrease of $1.8 million in the first quarter of 1998.
FACTORS POTENTIALLY AFFECTING FUTURE LIQUIDITY
Delay in Possible Merger with Reunion
On February 26, 1999, the Company announced that it had reinstituted
merger discussions with Reunion and that the managements of both companies
believed that additional identified financing sources would provide adequate
funds for operations of the combined companies, including redemption of the
Senior Notes. On April 1, 1999, the Company further announced the Merger.
The Merger will be consummated on the earliest practicable date after all of
the conditions thereto have been waived or satisfied, including, among others,
approval by Reunion's stockholders.
In connection with and to satisfy a further condition to the Merger,
Reunion is pursuing the Reunion Offering, the proceeds of which are intended
in part to be used to redeem the entire aggregate principal amount of the
Senior Notes at the Redemption Price under an Optional Redemption. The
Company and Reunion have been informed by Reunion's investment banker that
market conditions for high yield debt offerings for companies like Reunion
(after giving effect to the Merger) are not favorable at this time.
Therefore, the Reunion Offering will not be consummated prior to the
designated closing date of the Merger, June 29, 1999, thereby delaying
consummation of the Merger and the Optional Redemption that was to be
accomplished with the proceeds of the Reunion Offering.
Notwithstanding the anticipated delay of the Merger beyond June 29, 1999
the Company and, it has been informed, Reunion continue to deem the Merger to
be in the best interests of their respective stockholders. Reunion has
informed the Company that it intends to continue to pursue the Reunion
Offering in the hope that market conditions will improve and will work with
the Company in an effort to consummate the Merger within the next several
months.
Against the possibility that the Reunion Offering and Merger will be
unduly delayed, the Company is simultaneously pursuing the Long-Term Financing
and is also considering an Asset Sale. If the Company is successful in
<PAGE> 20
obtaining Long-Term Financing or in consummating an Asset Sale, the Company
intends to consummate an Optional Redemption of all the Senior Notes at the
Redemption Price. Although no binding commitment has been secured, the
Company's senior secured lender has expressed an interest in providing up to
$25 million of the Long-Term Financing through an amendment to the Company's
existing secured revolving credit facility subject to (i) the Company
obtaining the balance of the funds needed from other sources and (ii) the
financing from other sources being senior unsecured or subordinate
indebtedness. There can be no assurance that the Reunion Offering, the Long-
Term Financing or an Asset Sale will be consummated and, therefore, there can
be no assurance that an Optional Redemption will occur.
Senior Note Purchase Offer
The Company has $50 million of Senior Notes due May 3, 2003 outstanding.
When the Company acquired the Reunion common stock on June 20, 1995, it agreed
with the Trustee of the Senior Notes to a first supplemental indenture.
Pursuant to this supplemental indenture, the Company agreed to the Purchase
Offer. The full principal amount of the Purchase Offer is classified as
current maturities of long-term debt in the Company's consolidated balance
sheet at March 31, 1999.
Pursuant to its obligations under the Indenture, on May 12, 1999, the
Company issued a notice that it is 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, in the absence of consummation of the Merger and
Reunion Offering, an Asset Sale and/or a Long-Term Financing, the Company does
not expect to have sufficient liquidity on the Purchase Date to consummate the
Purchase Offer if more than $2 million worth of Senior Notes are tendered. As
of May 14, 1999, the date of this report, no reasonable estimate exists as to
the amount of Senior Notes which the Company may be required to purchase, if
any, on the June 1, 1999 offer date.
The Company's failure to fulfill its obligations under the Purchase Offer
would constitute a failure to pay principal under the Indenture and would
result in an Event of Default under the Indenture. An Event of Default due to
a failure to pay principal would, pursuant to the Securities Pledge Agreement,
result in a Realization Event resulting in the immediate vesting in the
Collateral Agent of the voting rights of the approximately 49% of the
Company's presently outstanding common stock and rights to dividends and
distributions in respect of the Pledged Collateral securing its obligations
under the Senior Notes. In addition, upon an Event of Default, the Trustee or
the holders of at least 25% of the Senior Notes may, by written notice to the
Company, declare an acceleration of the Senior Notes. There can be no
assurances that a Realization Event or Event of Default will not occur.
Defaults Under Indenture
In May of 1998, the Company executed a joint venture agreement with two
other non-affiliated companies pursuant to which the Company contributed
$100,000 for a 10% equity interest in Suzhou Grating Co., Ltd., a Chinese
manufacturing company. This investment constitutes a default under the
Indenture.
In May of 1998, Mr. Bradley transferred all of his shares of the
Company's common stock to the Charles E. Bradley, Sr. Family Limited
Partnership (Bradley FLP) for estate planning purposes. The Bradley FLP has
<PAGE> 21
granted voting control over such shares to SPI, which in turn has granted
voting control over such shares to Mr. Poole. Because Mr. Bradley no longer
has voting control over such shares of the Company's common stock, a breach
has occurred under the Securities Pledge Agreement. Because the Indenture is
cross-covenanted to the Securities Pledge Agreement, such breach creates a
default under the Indenture.
The Indenture provides that neither of the aforementioned defaults will
mature into an Event of Default, as defined in the Indenture, subject to the
remedies therein provided, including acceleration of the Senior Notes, until
the Trustee under the Indenture or the holders of at least 25% or more of the
Senior Notes notify the Company of the default and the default remains
unremedied for thirty (30) days after such notice. As of the date of this
report, the Company had not received notice from either the Trustee or any
Senior Note holders. In the event notice is received, the Company currently
has agreements in place that it believes would remedy each such default within
the 30 day remedy period should it become necessary. However, there can be no
assurance that an Event of Default will not result from these defaults.
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> 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
During the first quarter of 1999, one matter was submitted to a vote of a
majority of the Company's common stock and all of the Company's preferred
stock holders. The vote was conducted through written consent. The matter
submitted included approval of the merger with Reunion, pursuant to which the
Company and Reunion entered into the March 31, 1999 Merger Agreement. This
matter was consented to by security holders effective March 30, 1999. See
Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Recent Developments - Delay in Possible Merger With
Reunion."
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
----------- -------------------
4.45 Notice of Senior Note Purchase Offer
27 Financial Data Schedule (electronically
filed report only).
(b) Reports on Form 8-K - None.
<PAGE> 23
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: May 14, 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> 24
EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
----------- ------------------- --------
4.45 Notice of Senior Note Purchase Offer 25
27 Financial Data Schedule 29
N O T I C E
TO: HOLDERS OF SENIOR NOTES
FROM: Chatwins Group, Inc.
DATE: May 12, 1999
RE: Notice of Purchase Offer
Purchase Offer
- --------------
In accordance with Section 3.09 of the Indenture, dated as of May 1,
1993, as amended, between Chatwins Group, Inc., a Delaware corporation (the
"Company"), and State Street Bank and Trust Company (as successor to The First
National Bank of Boston), as Trustee (the "Trustee") (the "Indenture"), this
Notice is to inform you that the Company is making an offer to Securityholders
to purchase (the "Purchase Offer") on June 1, 1999 (the "Purchase Date") 50%
of the originally issued principal amount of the 13% Senior Notes due 2003 of
the Company (the "Securities") as more fully set forth below. (Capitalized
terms used herein but not otherwise defined herein shall have the respective
meanings ascribed to them in the Indenture.)
This Notice further informs you of the following:
(i) The Purchase Offer is being made pursuant to Section 3.09 of
the Indenture;
(ii) The Purchase Offer Amount is $25 million, being 50% of the
originally issued principal amount of the Securities;
(iii) The purchase price is 100% of the aggregate outstanding
principal amount of the Securities tendered and accepted for purchase pursuant
to the Purchase Offer plus accrued and unpaid interest on such Securities, if
any, to the Purchase Date (the "Purchase Price");
(iv) The Purchase Date is June 1, 1999;
(v) The Purchase Offer shall begin on the date that is 20 days
before the Purchase Date (May 12, 1999) and will end on the Purchase Date;
(vi) Any Securities not tendered or accepted for payment in
connection with the Purchase Offer will continue to accrue interest in
accordance with the Indenture and the Securities;
(vii) Any Security accepted for payment pursuant to the Purchase
Offer shall cease to accrue interest after the Purchase Date, unless the
Company defaults in making payment on the Purchase Date;
(viii) Holders electing to have a Security purchased pursuant to the
<PAGE> 26
Purchase Offer are required to surrender the Security, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Security completed,
to the Depositary, the holder of the Global Note, at:
Depository Trust Company
55 Water Street
New York, N.Y.
(ix) Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the second Business Day before the
Purchase Date, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of the Security the Holder
delivered for purchase and a statement that such Holder is withdrawing his
election to have all or a portion of the Securities purchased;
(x) If the aggregate principal amount of Securities surrendered by
the Holders, plus accrued interest thereon, exceeds the Purchase Offer Amount,
the Company will select the Securities to be purchased on a pro rata basis, or
by lot or by such method that complies with applicable legal requirements and
the requirements of any exchange on which the Securities are listed that the
Trustee considers fair and appropriate (with adjustments as may be deemed
appropriate by the Company so that only Securities in denominations of $1,000,
or integral multiples thereof, will be purchased); and
(xi) Holders whose Securities are purchased only in part will be
issued new Securities equal in principal amount to the unpurchased portion
represented by certificates for the Securities surrendered.
Reunion Merger and Long-Term Financing
- --------------------------------------
The Company has entered into a Merger Agreement, dated as of March 30,
1999, with Reunion Industries, Inc. ("Reunion") pursuant to which the Company
will merge with and into Reunion, with Reunion being the surviving corporation
(the "Merger"). The Company owns 38% of the stock of Reunion. The Merger
will be consummated on the earliest practicable date after all of the
conditions thereto have been waived or satisfied, including, among others,
approval by Reunion's stockholders.
In connection with and to satisfy a further condition to the Merger,
Reunion is pursuing a high yield debt offering (the "Reunion Offering") the
proceeds of which are intended to be used to redeem the entire aggregate
principal amount of the Securities at 104.33% of the outstanding principal
amount of the Securities redeemed plus accrued and unpaid interest to the
redemption date (the "Redemption Price") under Section 3.07 of the Indenture
and paragraph 7 of the Securities (an "Optional Redemption"). The Company and
Reunion have been informed by Reunion's investment banker that market
conditions for high yield debt offerings for companies like Reunion (after
giving effect to the Merger) are not favorable at this time. Therefore, the
Reunion Offering will not be consummated prior to the designated closing date
of the Merger, June 29, 1999, thereby delaying consummation of the Merger and
the Optional Redemption that was to be accomplished with the proceeds of the
Reunion Offering. There is no assurance that Reunion will consummate the
Reunion Offering prior to the Company's repurchase, redemption and/or
repayment in full of the Securities.
Notwithstanding the anticipated delay of the Merger beyond June 29, 1999
<PAGE> 27
the Company and, it has been informed, Reunion continue to deem the Merger to
be in the best interests of their respective stockholders. Reunion has
informed the Company that it intends to continue to pursue the Reunion
Offering in the hope that market conditions will improve and will work with
the Company in an effort to consummate the Merger within the next several
months.
Against the possibility that the Reunion Offering and Merger will be
unduly delayed, the Company is simultaneously pursuing other long-term
financing options in an amount sufficient to permit the Company to consummate
an Optional Redemption of all the Securities (the "Long-Term Financing") and
is also considering a sale of a portion of its assets (an "Asset Sale"). If
the Company is successful in obtaining Long-Term Financing or in consummating
an Asset Sale, the Company intends to consummate an Optional Redemption of all
the Securities at the Redemption Price. Although no binding commitment has
been secured, the Company's senior secured lender has expressed an interest in
providing up to $25 million of the Long-Term Financing through an amendment to
the Company's existing secured revolving credit facility subject to (i) the
Company obtaining the balance of the funds needed from other sources and (ii)
the financing from other sources being senior unsecured or subordinate
indebtedness. There can be no assurance that the Long-Term Financing or an
Asset Sale will be consummated and, therefore, there can be no assurance that
an Optional Redemption will occur.
If the Company is successful in consummating an Optional Redemption
either in connection with the Merger and Reunion Offering or consummation of a
Long-Term Financing and/or an Asset Sale, the Redemption Price will be greater
than the Purchase Price to be paid pursuant to the Purchase Offer.
Liquidity
- ---------
Management of the Company is confident it will consummate either the
Merger and Reunion Offering or a Long-Term Financing and/or Asset Sale within
the next several months. Management also believes that although it is
unlikely that it will be able to consummate the Merger and Reunion Offering or
a Long-Term Financing and/or an Asset Sale by the Purchase Date, it may be
able to obtain by the Purchase Date commitments to consummate a Long-Term
Financing and/or an Asset Sale.
In the absence of consummation of the Merger and Reunion Offering, an
Asset Sale and/or a Long-Term Financing, the Company does not expect to have
sufficient liquidity on the Purchase Date to consummate the Purchase Offer if
more than $2 million worth of Securities are tendered.
If the Company fails to fulfill its obligations under the Purchase Offer,
such failure would constitute a failure to pay principal under the Indenture
and would result in an Event of Default under the Indenture. An Event of
Default due to a failure to pay principal would, pursuant to the Securities
Pledge Agreement, dated as of May 1, 1993, made by certain shareholders of the
Company and the Company in favor of State Street Bank and Trust Company (as
successor to The First National Bank of Boston), as Collateral Agent (the
"Collateral Agent") for and representative of the Securityholders (the
"Securities Pledge Agreement"), result in a Realization Event causing the
immediate vesting in the Collateral Agent of the voting rights of
approximately 49% of the Company's presently outstanding common stock. In
addition, upon an Event of Default, the Trustee or the holders of at least 25%
<PAGE> 28
of the Senior Notes may, by written notice to the Company, declare an
acceleration of the Senior Notes.
The Company is advising you of its liquidity issues should more than $2
million be tendered in the Purchase Offer and of its intentions to consummate
an Optional Redemption of all the Securities at the earliest practicable date
to allow you to make an informed decision about whether to elect to have your
Securities purchased by participating in the Purchase Offer. While the
Redemption Price payable in an Optional Redemption will be higher than the
Purchase Price payable in the Purchase Offer, there can be no assurance that
an Optional Redemption will occur. You will be required to decide between
participating in the Purchase Offer at par covered by this notice or retaining
your Securities for repurchase in an intended subsequent Optional Redemption
at 104.33% of par prior to being certain that an Optional Redemption will
occur. If you do not elect to accept the Purchase Offer and the Optional
Redemption does not occur, the Securities will continue to be outstanding and
will continue to accrue interest pursuant to the terms of the Securities and
the Indenture.
Future Redemptions
- ------------------
Assuming an Optional Redemption does not occur, the Company must make (i)
a mandatory redemption payment (the "Mandatory Redemption") on May 1 in each
of the years 2000, 2001 and 2002 (each date, a "Mandatory Redemption Date") to
retire by redemption on each Mandatory Redemption Date $12.5 million in
principal amount of the Securities and (ii) another Purchase Offer (the
"Second Purchase Offer") on June 1, 2000 (the "Second Purchase Date") to
purchase up to $25 million in principal amount of the Securities. The
purchase price for the Second Purchase Offer and each Mandatory Redemption
will be 100% of the aggregate outstanding principal amount of the Securities
tendered pursuant to the Second Purchase Offer or the Mandatory Redemption
plus accrued and unpaid interest, if any, to the Second Purchase Date or the
Mandatory Redemption Date. Thus, you will be entitled to tender your
Securities next year in the Second Purchase Offer or in a Mandatory Redemption
for the same purchase price as the Purchase Offer being made this year.
If you have any questions regarding this Notice, please contact Russell
S. Carolus, Vice President, at (412)885-5501 or by fax at (412)885-5512.
This notice contains certain forward looking statements made pursuant to
the U.S. Private Securities Litigation Reform Act of 1995. In particular,
statements with regard to the Company's intentions with respect to the Merger
and Reunion Offering and a Long-Term Financing and Asset Sale, are forward
looking in nature. By their nature forward looking statements involve risks
and uncertainties that could cause actual results to differ materially from
those expressed or implied by the forward looking statements. Information and
factors that could cause actual results to differ materially in addition to
those discussed in this notice are included in the Company's Form 10-K for the
year ended December 31, 1998 which is on file with the U.S. Securities and
Exchange Commission. The forward looking statements included in this notice
represent the Company's best judgment as of the date hereof based in part on
preliminary information and discussions with third parties and certain
assumptions which management believes to be reasonable. The Company disclaims
any obligation to update these forward looking statements.
<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/A 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> MAR-31-1999
<CASH> 184
<SECURITIES> 0
<RECEIVABLES> 37,642
<ALLOWANCES> 712
<INVENTORY> 19,959
<CURRENT-ASSETS> 63,541
<PP&E> 59,885
<DEPRECIATION> 27,639
<TOTAL-ASSETS> 114,161
<CURRENT-LIABILITIES> 29,626<F1>
<BONDS> 49,936
0
8,596
<COMMON> 3
<OTHER-SE> (10,482)
<TOTAL-LIABILITY-AND-EQUITY> 114,161
<SALES> 46,364
<TOTAL-REVENUES> 46,364
<CGS> 37,412
<TOTAL-COSTS> 37,412
<OTHER-EXPENSES> 5,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,475
<INCOME-PRETAX> 577
<INCOME-TAX> 230
<INCOME-CONTINUING> 347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (252)
<EPS-BASIC> (1.26)
<EPS-DILUTED> (1.25)
<FN>
<F1>Excludes revolving credit facility borrowings of $33,606 and current
maturities of Senior Notes of $24,968 at 3/31/99.
</FN>
</TABLE>
