-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ted++j8JzgoUK7MEgRUTKC5k/fYvyRc+OXn4/cbG1jE3kMmTAeLv4EzQcoKSAW07 mT2RNXaheUXPu7v0UucfGg== 0000906275-99-000005.txt : 19990517 0000906275-99-000005.hdr.sgml : 19990517 ACCESSION NUMBER: 0000906275-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHATWINS GROUP INC CENTRAL INDEX KEY: 0000906275 STANDARD INDUSTRIAL CLASSIFICATION: PREFABRICATED METAL BUILDINGS & COMPONENTS [3448] IRS NUMBER: 742156829 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-63274 FILM NUMBER: 99623983 BUSINESS ADDRESS: STREET 1: 300 WEYMAN PLAZA STREET 2: STE 340 CITY: PITTSBURGH STATE: PA ZIP: 15236 BUSINESS PHONE: 4128855501 MAIL ADDRESS: STREET 1: 300 WEYMAN PLAZA STREET 2: SUITE 340 CITY: PITTSBURGH STATE: PA ZIP: 15236 10-Q 1 03/31/99 FORM 10-Q 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 March 31, 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 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. ============================================================================== 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 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 6,159 8,119 -------- -------- Total assets $114,428 $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 1,229 1,612 -------- -------- Total liabilities 115,125 117,850 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) (10,303) (9,948) -------- -------- Total liabilities and stockholders' equity $114,428 $117,366 ======== ======== See accompanying notes to condensed consolidated financial statements. 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 ------- ------- Net income (loss) (76) 511 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment (165) - ------- ------- Comprehensive income (loss) $ (241) $ 511 ======= ======= Income (loss) applicable to common stock $ (190) $ 397 ======= ======= Earnings per common share - basic: Before equity income (loss) from affiliate $ 0.80 $ 1.38 Operations of affiliate (1.46) 0.25 ------- ------- Earnings (loss) per common share - basic $ (0.66) $ 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 ------- ------- Earnings (loss) per common share - diluted $ (0.65) $ 1.36 ======= ======= Average equivalent shares outstanding - diluted 292,887 292,887 ======= ======= See accompanying notes to condensed consolidated financial statements. 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) $ (76) $ 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 (127) 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. 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. 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 ======= ======= 7 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 - - - - (76) - (76) Preferred stock accretions - - - - (114) - (114) Foreign currency translation adjustment - - - - - (165) (165) --- ----- ------ ------- -------- -------- -------- At March 31, 1999 $ 3 $(500) $1,860 $(1,001) $ (9,146) $ (1,519) $(10,303) === ===== ====== ======= ======== ======== ======== 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 $ (76) Less: Preferred stock dividend accretions (114) -------- Income available to common stockholders, shares outstanding and basic EPS (190) 289,677 $ (0.66) ======= Dilutive effect of Warrants 3,210 -------- -------- Income available to common stockholders, shares outstanding and diluted EPS $ (190) 292,887 $ (0.65) ======== ======== ======= 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 ======== ======== ======= 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. 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, 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) 14,765 12 -------- -------- -------- -------- Totals $ 46,364 4,247 $114,428 $ 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. 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 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 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 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 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. 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. 17 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 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 18 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 $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 19 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 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 20 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 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 21 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. 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. 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) 24 EXHIBIT INDEX Exhibit No. Exhibit Description Page No. ----------- ------------------- -------- 4.45 Notice of Senior Note Purchase Offer 25 27 Financial Data Schedule 29 EX-4.45 2 EXHIBIT 4.45 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 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 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% 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. EX-27 3 EXHIBIT 27
5 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. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 184 0 37,642 712 19,959 63,541 59,885 27,639 114,428 29,626 49,936 0 8,596 3 (10,303) 114,428 46,364 46,364 37,412 37,412 5,900 0 2,475 577 230 347 0 0 0 (76) (0.66) (0.65) Excludes revolving credit facility borrowings of $33,606 and current maturities of Senior Notes of $24,968 at 3/31/99.
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