-----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, AnIThcZAYPDD2TDx+ScLexHyFW10iyKHtyrETcQ4eaNpuwCE2WjDisNGCZtwL/5q KVf5VnrBrCU0TUrPTse1ig== 0000906275-99-000016.txt : 19990817 0000906275-99-000016.hdr.sgml : 19990817 ACCESSION NUMBER: 0000906275-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99693614 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 06/30/99 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 June 30, 1999 ------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission File Number 33-63274 -------- CHATWINS GROUP, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) DELAWARE 74-2156829 - ------------------------ ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 300 WEYMAN PLAZA, SUITE 340 PITTSBURGH, PENNSYLVANIA 15236 ------------------------------------------------------------ (Address of principal executive offices, including zip code) (412) 885-5501 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At June 30, 1999, 289,787 shares of common stock, par value $.01 per share, were outstanding. Exhibit index is on page 26. Page 1 of 34 pages. ============================================================================== 2 CHATWINS GROUP, INC. INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet at June 30, 1999 and December 31, 1998 3 Condensed Consolidated Statement of Income and Comprehensive Income for the three and six months ended June 30, 1999 and 1998 4 Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 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 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 24 (b) Reports on Form 8-K 24 SIGNATURES 25 FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This report contains or incorporates by reference certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, the discussions of the Company's expectations concerning growth strategies and penetrations of new markets, mergers and joint ventures, financings and/or refinancings, asset sales, transactions with affiliates, the effects of the year 2000 (Y2K) on electronic technology on which the Company is directly or indirectly dependent and assumptions regarding certain matters. Also, when the words "believes," "expects," "anticipates," "intends," "estimates," "plans," or similar terms or expressions are used in this report, forward- looking statements are being made. Note that all forward-looking statements involve risks and uncertainties, including, without limitation, factors which could cause the future results and shareholder values to differ materially from those expressed in the forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included or incorporated by reference in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included or incorporated by reference herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Company's objectives and plans will be achieved. In addition, the Company does not intend to, and is not obligated to, update these forward-looking statements after filing and distribution of this report, even if new information, future events or other circumstances have made them incorrect or misleading as of any future date. 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CHATWINS GROUP, INC. CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999 AND DECEMBER 31, 1998 (in thousands) At June 30, At December 31, 1999 1998 ----------- -------------- (unaudited) ASSETS: Cash and cash equivalents $ 81 $ 213 Receivables, net 24,951 29,696 Inventories, net 13,300 14,506 Other current assets 3,540 3,816 Net assets of discontinued operations 22,699 23,560 -------- -------- Total current assets 64,571 71,791 Property, plant and equipment, net 17,744 18,590 Investments, net 6,500 6,707 Due from related parties 2,303 1,403 Goodwill, net 3,473 3,575 Other assets, net 5,595 6,430 -------- -------- Total assets $100,186 $108,496 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Revolving Credit Facility $ 31,213 $ 34,005 Current maturities of debt 25,016 25,010 Trade payables 9,685 14,151 Other current liabilities 7,583 8,838 -------- -------- Total current liabilities 73,497 82,004 Senior notes due 2003, net 24,943 24,962 Other long-term debt 48 95 Other liabilities 1,415 1,533 -------- -------- Total liabilities 99,903 108,594 Commitments and contingent liabilities - - Redeemable preferred stock 8,710 8,482 Warrant value 14 14 Stockholders' equity (8,441) (8,594) -------- -------- Total liabilities and stockholders' equity $100,186 $108,496 ======== ======== See accompanying notes to condensed consolidated financial statements. 4 CHATWINS GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (in thousands, except share and per share information)(unaudited) Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 1999 1998 1999 1998 ------- ------- ------- ------- Net sales $27,997 $33,203 $61,667 $63,004 Cost of sales 23,546 26,327 50,866 50,018 ------- ------- ------- ------- Gross profit 4,451 6,876 10,801 12,986 Selling, general & administrative 3,494 3,737 6,763 7,378 Other (income) expense, net (1,524) (53) (1,371) 126 ------- ------- ------- ------- Operating profit 2,481 3,192 5,409 5,482 Interest expense, net 1,771 1,803 3,588 3,604 ------- ------- ------- ------- Income from continuing operations before income taxes 710 1,389 1,821 1,878 Provision for income taxes 284 535 728 735 ------- ------- ------- ------- Income from continuing operations 426 854 1,093 1,143 Net of tax adjustments: Equity income (loss) 286 (2,401) (137) (2,339) Loss from discontinued operations (79) (333) (399) (173) Loss from accounting principle change - - (176) - ------- ------- ------- ------- Net and comprehensive income (loss) $ 633 $(1,880) $ 381 $(1,369) ======= ======= ======= ======= Earnings applicable to common stock $ 519 $(1,994) $ 153 $(1,597) ======= ======= ======= ======= Earnings per common share - basic: Continuing operations $ 1.08 $ 3.05 $ 2.98 $ 3.77 Equity income (loss) 0.99 (9.89) (0.47) (9.63) Discontinued operations (0.28) (1.36) (1.38) (0.72) Change in accounting principle - - (0.60) - ------- ------- ------- ------- Basic earnings (loss) per share $ 1.79 $ (8.20) $ 0.53 $ (6.58) ======= ======= ======= ======= Average shares outstanding - basic 289,774 242,887 289,726 242,887 ======= ======= ======= ======= Earnings per common share - diluted: Continuing operations $ 1.06 $ 2.53 $ 2.95 $ 3.13 Equity income (loss) 0.98 (8.20) (0.47) (7.99) Discontinued operations (0.27) (1.14) (1.36) (0.59) Change in accounting principle - - (0.60) - ------- ------- ------- ------- Diluted earnings (loss) per share $ 1.77 $ (6.81) $ 0.52 $ (5.45) ======= ======= ======= ======= Average shares outstanding - diluted 292,887 292,887 292,887 292,887 ======= ======= ======= ======= See accompanying notes to condensed consolidated financial statements. 5 CHATWINS GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (in thousands) (unaudited) Six Months Ended June 30, 1999 1998 ------- ------- Cash provided by (used in) operating activities $ (38) $ 277 ------- ------- Cash flow from investing activities: Proceeds from sale of property 4,563 - Capital expenditures (1,771) (2,468) Investment in joint venture - (100) ------- ------- Cash provided by (used) in investing activities 2,792 (2,568) ------- ------- Cash flow from financing activities: Repayments of debt (48) (48) Net change in revolving credit facilities (2,792) 1,714 Increase in consolidated subsidiary indebtedness (94) 101 ------- ------- Cash provided by (used in) financing activities (2,844) 1,767 ------- ------- Net decrease in cash and cash equivalents (90) (524) Change in cash of discontinued operations (42) 34 Cash and cash equivalents, beginning of year 213 630 ------- ------- Cash and cash equivalents, end of period $ 81 $ 140 ======= ======= See accompanying notes to condensed consolidated financial statements. 6 CHATWINS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 NOTE 1: BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair statement of the results of operations have been included. The results of operations for the three and six month periods ended June 30, 1999 are not necessarily indicative of the results of operations for the full year. When reading the financial information contained in this Quarterly Report, reference should be made to the financial statements, schedules and notes contained in the Company's Annual Report on Form 10-K 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: DISCONTINUED OPERATIONS During the second quarter of 1999, the Company's management adopted a plan to exit the grating manufacturing business through the disposition of substantially all the business and assets of the Company's Klemp division (Discontinued Klemp). Upon adoption of the plan, the Company classified and began accounting for Discontinued Klemp, including its international grating subsidiaries, as discontinued operations in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB 30), which requires discontinued operations to be reported separately from continuing operations. On May 28, 1999, the Company entered into a non-binding letter of intent (LOI) with Alabama Metal Industries Corporation (AMICO), which was subsequently amended on July 12, 1999, for the sale of substantially all of the business and assets of Discontinued Klemp, excluding the Company's investment in the Chinese grating joint venture, for $32.6 million in cash and the assumption by AMICO of certain operating liabilities. 7 The assets, liabilities and equity accounts of Discontinued Klemp have been separately classified on the balance sheet as net assets of discontinued operations. A summary of these assets, liabilities and equity accounts follows (in thousands): At June 30, At December 31, 1999 1998 ----------- -------------- (unaudited) ASSETS: Cash and cash equivalents $ 170 $ 128 Receivables, net 8,390 8,644 Inventories, net 5,654 6,240 Other current assets 1,480 918 Property, plant and equipment, net 13,419 13,781 Other assets, net 1,857 2,719 -------- -------- Total assets 30,970 32,430 -------- -------- LIABILITIES AND EQUITY: Current maturities of debt 662 756 Trade payables 5,872 6,293 Other current liabilities 1,598 1,448 Other long-term debt 680 680 Other liabilities 82 79 Minority interest 951 968 Cumulative translation adjustment (1,574) (1,354) -------- -------- Total liabilities and equity 8,271 8,870 -------- -------- Net assets of discontinued operations $ 22,699 $ 23,560 ======== ======== Pursuant to APB 30, the consolidated financial statements reflect the operating results of Discontinued Klemp separately from continuing operations. Summarized results of Discontinued Klemp operations follow (in thousands) (unaudited): Three Months Ended June 30, 1999 1998 --------------------------- -------- -------- Net sales $ 13,368 $ 13,379 Loss before taxes (131) (555) Six Months Ended June 30, ------------------------- Net sales $ 26,062 $ 27,325 Loss before taxes (665) (288) The above results of Discontinued Klemp operations include allocated interest expense of $644,000 and $660,000 for the three month periods ended June 30, 1999 and 1998, respectively, and $1,302,000 and $1,296,000 for the six month periods ended June 30, 1999 and 1998, respectively. 8 NOTE 3: INVENTORIES Inventories are comprised of the following (in thousands): At June 30, At December 31, 1999 1998 ----------- -------------- (unaudited) Raw materials $ 4,947 $ 6,144 Work-in-process 4,433 4,797 Finished goods 4,126 3,632 ------- ------- Total inventories 13,506 14,573 Less: LIFO reserves (206) (67) ------- ------- Inventories, net $13,300 $14,506 ======= ======= NOTE 4: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE The following represents a reconciliation of the change in stockholders' equity for the six month period ended June 30, 1999 (in thousands): Par Capital Value in of Trea- Excess Notes Accum- Common sury of Par Receiv- ulated Stock Stock Value able Deficit Total ------ ----- ------- ------- -------- -------- At January 1, 1999 $ 3 $(500) $1,860 $(1,001) $ (8,956) $ (8,594) Activity (unaudited): Net income - - - - 381 381 Preferred stock accretions - - - - (228) (228) --- ----- ------ ------- -------- -------- At June 30, 1999 $ 3 $(500) $1,860 $(1,001) $ (8,803) $ (8,441) === ===== ====== ======= ======== ======== 9 The computations of basic and diluted earnings per common share (EPS) for the six month periods ended June 30, 1999 and 1998 are as follows (in thousands, except share and per share amounts)(unaudited): Average Income Shares EPS -------- -------- ------- Six months ended June 30, 1999: Net income $ 381 Less: Preferred stock dividend accretions (228) -------- Income available to common stockholders, shares outstanding and basic EPS 153 289,726 $ 0.53 ======= Dilutive effect of Warrants 3,161 -------- -------- Income available to common stockholders, shares outstanding and diluted EPS $ 153 292,887 $ 0.52 ======== ======== ======= Six months ended June 30, 1998: Net loss $ (1,369) Less: Preferred stock dividend accretions (228) -------- Income available to common stockholders, shares outstanding and basic EPS (1,597) 242,887 $ (6.58) ======= Dilutive effect of Warrants 50,000 -------- -------- Income available to common stockholders, shares outstanding and diluted EPS $ (1,597) 292,887 $ (5.45) ======== ======== ======= 10 NOTE 5: RELATED PARTY TRANSACTIONS SPI Consulting Agreement The Company has a consulting agreement with Stanwich Partners, Inc. under which $150,000 was expensed in each six month period ended June 30, 1999 and 1998. CPS Leasing The Company has entered into various operating lease agreements with CPS Leasing, Inc. (CPSL), a company owned 80% by Consumer Portfolio Services and 20% by Charles E. Bradley Jr., President of Consumer Portfolio Services, a director of the Company and son of Charles E. Bradley Sr., Chairman of the Board, Director and shareholder of the Company (Mr. Bradley). During the first half of 1999, the Company made lease payments totaling $211,688 to CPSL. Kingway Pursuant to a services agreement entered into between Stanwich Acquisition Corp., which is doing business as Kingway Material Handling Company (Kingway), and the Company, the Company provides Kingway with manufacturing facilities and overhead support with its surplus floor space at its Auto-Lok division in Acworth, GA. Kingway's common stock is wholly owned by directors, shareholders and/or members of the executive managements of the Company and Reunion Industries, Inc. (Reunion). During the first half of 1999, costs totaling $1,597,202 were charged to Kingway under this services agreement. At June 30, 1999, the Company had receivables totaling $1,293,430 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 half of 1999, costs totaling $387,018 were charged to NAPTech under this services agreement. At June 30, 1999, the Company had receivables totaling $534,920 from NAPTech. Oneida Rostone Corp. Oneida Rostone Corp., Reunion's plastic products segment, obtains its property, casualty, and product and general liability insurance coverage through the Company. During the first half of 1999, the rate for such insurance was $23,500 per month, which represented the approximate cost of such insurance to the Company. At June 30, 1999, the Company had notes receivable totalling $475,000 from Oneida Rostone Corp. NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES In June 1993, the U.S. Customs Service (Customs) made a demand on the Company's former industrial rubber distribution division for $612,948 in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on 11 importations of "unmarked" hose products from 1982 to 1986. Following the Company's initial response raising various arguments in defense,including expired statute of limitations, Customs responded in January 1997 by reducing its demand to $370,968 and reiterating that demand in October 1997. The Company restated its position and continues to decline payment of the claim. Should the claim not be resolved, Customs threatens suit in the International Court of Claims. The Company continues to believe, based on consultation with counsel, that there are facts which raise a number of procedural and substantive defenses to this claim, which will be vigorously defended. There is no applicable insurance coverage. The Company is involved in various other litigation matters in the ordinary course of business. In the opinion of management, settlement of these various litigation matters and other contingent matters will not have any material effect on the Company's financial position. The Company does not have any adverse commitments at June 30, 1999. NOTE 7: OPERATING SEGMENT DISCLOSURES The Company considers its separately identifiable divisions to be its operating segments pursuant to the management approach. The following represents a description of each division. Alliance - Alliance designs, engineers and manufactures cranes used in a wide range of steel and aluminum mill applications and large special purpose cranes used in marine and aerospace applications and heavy industrial plants. Alliance also manufactures lighter duty cranes for various industrial applications, coke oven machinery and other large steel-related fabrications. In recent years, Alliance has expanded and diversified its engineering and manufacturing capabilities to offer a variety of equipment and related engineering, fabrication, maintenance and repair services. Auto-Lok - Auto-Lok manufactures high quality roll formed and structural steel fabricated storage racks for industrial and commercial handling systems and general storage applications. In addition, Auto-Lok participates on larger contracts in the sale of total material handling systems through purchasing and reselling related components such as decking and carton flow devices, and subcontracting of rack erection. CPI - CPI specializes in manufacturing large, seamless pressure vessels for the above ground storage and transportation of highly pressurized gases such as natural gas, hydrogen, nitrogen, oxygen and helium. These pressure vessels are provided to customers such as industrial gas producers and suppliers, the alternative fueled vehicle compressed natural gas fuel industry, chemical and petrochemical processing facilities, shipbuilders, NASA, public utilities and gas transportation companies. Hanna - Hanna designs and manufactures a broad line of hydraulic and pneumatic cylinders, actuators, accumulators and manifolds. These products are used in a wide variety of industrial and mobile machinery and equipment requiring the application of force in a controlled and repetitive process. Hanna's specialty is custom cylinders in both small quantities packaged by its distributors with valves, pumps and controls as complete fluid power systems and large quantities sold directly to equipment manufacturers. Steelcraft - Steelcraft manufactures and sells cold-rolled steel leaf springs. Its principal customers are manufacturers of trailers for boats, small utility vehicles and golf carts and makers of recreational vehicles and agricultural trailers. 12 The following represents the disaggregation of financial data by operating segment for the six months ended June 30, 1999 and 1998 and at June 30, 1999 and December 31, 1998 (in thousands)(unaudited): Capital Total Net Sales EBITDA(1) Spending Assets(2) --------- --------- --------- --------- Six months ended and at June 30, 1999: ----------------------- Alliance $ 12,966 $ (115) $ 46 $ 13,722 Auto-Lok 16,501 1,644 167 10,122 CPI 12,641 2,168 576 18,245 Hanna 17,614 2,642 288 16,691 Steelcraft 1,891 218 73 1,600 Headquarters/Other 54 (1,152) 13 17,107 Discontinued Klemp - - 608 22,699 -------- -------- -------- -------- Totals $ 61,667 5,405 $ 1,771 $100,186 ======== ======== ======== Gain on sale of property 1,681 Depreciation and amortization (2,037) Interest expense(3) (3,228) -------- Income before income taxes $ 1,821 ======== Six months ended June 30, 1998 and at December 31, 1998: --------------------------------- Alliance $ 19,419 $ 1,571 $ 130 $ 18,111 Auto-Lok 12,010 859 243 10,645 CPI 12,662 2,496 520 20,117 Hanna 16,698 2,784 146 17,544 Steelcraft 2,215 460 5 1,651 Headquarters/Other - (1,134) 34 16,868 Discontinued Klemp - - 1,390 23,560 -------- -------- -------- -------- Totals $ 63,004 7,036 $ 2,468 $108,496 ======== ======== ======== Depreciation and amortization (1,794) Interest expense(3) (3,364) -------- Income before income taxes $ 1,878 ======== (1) EBITDA is presented due to its relationship to the Company's financial covenants benefitting the Senior Notes (as defined). (2) Headquarters total assets at June 30, 1999 and December 31, 1998 are primarily comprised of deferred tax assets and the Company's investment in Reunion common stock. (3) Excludes amortization of debt issuance expenses of $360,000 and $240,000 for the six month periods ended June 30, 1999 and 1998, respectively. 13 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL The Company's organizational structure includes divisions that design, manufacture and market metal products, two majority-owned foreign joint ventures which manufacture and fabricate metal grating, an oil and gas division and an equity investment in Reunion Industries, Inc. (Reunion). Substantially all of the Company's operations relate to metal products. During the second quarter of 1999, the Company adopted a plan to exit the grating manufacturing business through the sale of substantially all of the business and asset of its Klemp division. See "Recent Developments - Discontinued Operations." The Company's equity investment in Reunion is comprised of 1,450,000 shares of Reunion common stock constituting approximately 37% of the outstanding common stock of Reunion. Reunion is primarily engaged in the manufacture of high volume, precision plastics products, providing engineered plastics services and compounding and molding thermoset polyester resins. Reunion also has wine grape agricultural operations in Napa County, California. The Company's investment in Reunion is being accounted for under the equity method of accounting. The Company's share of Reunion's operating results is included in the accompanying condensed consolidated statement of income for the three and six month periods ended June 30, 1999 and 1998 as equity income (loss) from operations of affiliate. See "Possible Merger with Reunion" below. RECENT DEVELOPMENTS Senior Note Purchase Offer The Company has $50 million of 13% Senior Notes due May 1, 2003 (Senior Notes) outstanding for which State Street Bank and Trust Company is trustee (Trustee). When the Company acquired the Reunion common stock on June 20, 1995, it executed with the Trustee a first supplemental indenture of the Indenture pursuant to which the Company issued the Senior Notes (Indenture). Pursuant to this supplemental indenture, the Company agreed to offer to purchase up to $25 million, or half, of the outstanding Senior Notes from note holders on each of June 1, 1999 (Purchase Offer) and 2000 at par value plus unpaid interest to the purchase date. Pursuant to its obligations under the Indenture, on May 12, 1999, the Company issued a notice offering to purchase up to $25.0 million of Senior Notes on June 1, 1999. The Company further notified Senior Note holders and the Trustee that the Company did not expect to have sufficient liquidity on June 1, 1999 to consummate the Purchase Offer if more than $2 million worth of Senior Notes were tendered. As of 5:00 p.m. Eastern Daylight time on June 1, 1999, the expiration of the Purchase Offer, holders of $24,121,000 principal amount of Senior Notes had accepted the Purchase Offer. On June 2, 1999, the Company sent a notice to holders of the $24,121,000 principal amount of tendered Senior Notes requesting that their tender be withdrawn in exchange for a withdrawal fee of 14 2% of principal amount of Senior Notes tendered (Withdrawal Notice). The Withdrawal Notice also informed the tendering Senior Note holders of a: * Third Party Purchase Offer - pursuant to an agreement dated May 28, 1999, between the Company and Contrarian Capital, LLC (Contrarian), Contrarian agreed to purchase Senior Notes from all tendering holders for the same price payable by the Company in the Purchase Offer and Contrarian had already elected to withdraw the tender of all Senior Notes it acquired, if any, in exchange for the same 2% fee withdrawal, and * Possible Asset Sale - the Company had executed a non-binding letter of intent (LOI) to sell substantially all of the assets of its Klemp division. See "Discontinued Operations." The Withdrawal Notice further informed tendering Senior Note holders that if the Company did not receive withdrawal elections for the full $24,121,000 of principal amount of tendered Senior Note, either from tendering Senior Notes holders or Contrarian, the Company did not expect to consummate any of the purchases contemplated by the Purchase Offer, whereupon an Event of Default would arise under the Indenture. The Withdrawal Notice was to expire at 9:30 a.m. Eastern Daylight time on June 7, 1999. However, on June 8, 1999, the Company sent notice to tendering Senior Note holders that the request to withdraw tendered Senior Notes was being extended indefinitely but could be terminated by the Company without prior notice (Withdrawal Extension). The Withdrawal Extension also informed the tendering Senior Note holders that: * holders of $7,100,000 principal amount of tendered Senior Notes had withdrawn their tenders in exchange for the 2% withdrawal fee, * Contrarian had purchased or agreed to purchase from tendering Senior Note holders and withdraw the tender for $16,186,000 principal amount of Senior Notes, and * $835,000 principal amount of tendered Senior Notes remained outstanding under the Purchase Offer. Because the Company was not able to deposit with the Trustee or the Paying Agent for the tendered Senior Notes an amount equal to 100% of the aggregate principal amount, plus any accrued and unpaid interest, of tendered Senior Notes by 12:30 p.m. Eastern Daylight time on June 7, 1999 as required by the Indenture, on June 8, 1999, the Company delivered notice to the Trustee of an Event of Default. Ultimately, $7,125,000 principal amount of tendered Senior Notes withdrew their tenders directly, $16,971,000 principal amount of tendered Senior Notes were purchased and tenders withdrawn by Contrarian and $25,000 principal amount of tendered Senior Notes were purchased and retired by the Company. In exchange for its purchases of tendered Senior Notes on behalf of the Company, the Company paid Contrarian a $375,000 stand-by fee in addition to the 2% withdrawal fee which totalled $339,420. Holders of the $7,125,000 principal amount of Senior Notes that withdrew their tenders received withdrawal fees 15 totalling $142,500. As the result of the tender withdrawals totalling $24,096,000 principal amount of Senior Notes, either by tendering Senior Note holders or Contrarian, the repayment by the Company of $25,000 principal amount of tendered Senior Notes not withdrawn or sold to Contrarian and the payment by the Company of all withdrawal and stand-by fees, the Event of Default was cured. On June 23, 1999, the Company sent notice to all tendering Senior Note holders of the termination of the Withdrawal Extension and notice to the Trustee of the cure of the Event of Default. The full principal amount of the $25,000,000 of Senior Notes the Company is required to offer to purchase on June 1, 2000 is classified as current maturities of long-term debt in the Company's consolidated balance sheet at June 30, 1999. See "Possible Merger with Reunion." Discontinued Operations On May 28, 1999, the Company entered into a non-binding LOI with AMICO, which was subsequently amended on July 12, 1999, for the sale of Discontinued Klemp excluding the Company's investment in the Chinese grating joint venture for $32.6 million in cash and the assumption by AMICO of certain liabilities. Accordingly, the net assets of Discontinued Klemp have been classified in the accompanying consolidated balance sheets at June 30, 1999 and December 31, 1998 as net assets of discontinued operations. Discontinued Klemp's results of operations for the three and six month periods ended June 30, 1999 and 1998 are classified in the accompanying consolidated statements of income and comprehensive income as loss from discontinued operations, net of tax effects. There can be no assurances that Discontinued Klemp will be sold or, if sold, that it will be sold for $32.6 million in cash and the assumption of certain operating liabilities. See "Results of Discontinued Operations." 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 (Refinancing). On April 1, 1999, the Company further announced that it had entered into a Merger Agreement, dated as of March 30, 1999, with Reunion pursuant to which the Company would merge with and into Reunion, with Reunion being the surviving corporation (Merger). The Merger was to have been consummated on the earliest practicable date after all of the conditions thereto had been waived or satisfied, including, among others, the Refinancing and approval of the Merger by Reunion's stockholders. Subsequent to executing the Merger Agreement, the Company and Reunion were informed by Reunion's investment banker that market conditions for high yield debt offerings for companies like Reunion (after giving effect to the Merger) were not favorable at that time, thereby delaying consummation of the Refinancing and the Merger. On August 6, 1999, the Company announced that Reunion and the Company are pursuing a revised strategy for the Refinancing and that it had entered into an amended merger agreement with Reunion. The Company further announced that the possible sale of Discontinued Klemp for $32.6 million in cash and the assumption of certain operating liabilities will strengthen the Company's financial condition and should enable the Company and Reunion to consummate 16 the Refinancing through private senior and subordinated debt. The Merger is scheduled to close on September 30, 1999. The Merger is also conditioned upon no more than 5% of the Company's common stockholders exercising their appraisal rights under Delaware law. There can be no assurances as to whether or when all conditions to the Merger will be satified or when the Merger will be consummated, if at all. 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 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 17 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 to third-party liability in a timely and cost-effective manner. 18 RESULTS OF CONTINUING OPERATIONS Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Net sales for the second quarter of 1999 totaled $28.0 million, compared to $33.2 million for the second quarter of 1998. Sales for the second quarter of 1999 decreased $5.2 million, or almost 16%, compared to the second quarter of 1998. The decrease in sales was primarily at Alliance and CPI, partially offset by increases at Auto-Lok and Hanna. Sales decreased $5.1 million at Alliance due primarily to a decrease in order levels which have been negatively impacted by a downturn in large capital projects in the steel industry due to strong foreign competition. Sales decreased $1.6 million at CPI due primarily to a decrease in order levels in the first third of 1999 and a change in the mix of CPI's backlog to a higher percentage of items with longer delivery schedules. Sales increased $1.0 million at Auto-Lok due to increased product demand as well as the completion of a large contract for one customer. Hanna's sales increase of $0.6 million was primarily due to increased demand in their mobile cylinder product lines manufactured in Milwaukee, WI. Steelcraft's second quarter 1999 volume was down $0.2 million compared to 1998 primarily due to softening demand. Gross profit for the second quarter of 1999 was almost $4.5 million, compared to $6.9 million of gross profit for the second quarter of 1998, a decrease of $2.4 million. Second quarter 1999 gross profit margin was 15.9%, compared to 20.7% in the second quarter of 1998. Gross profit during the second quarter of 1999 compared to the second quarter of 1998 decreased $1.4 million at Alliance, $0.6 million at CPI, $0.3 million at Hanna and $0.2 million at Steelcraft, all primarily due to the inefficiencies of lower volume levels compared to the second quarter of 1998 except for Hanna, which was due to a change in product mix to the lower margin mobile cylinder product lines. Auto-Lok's gross profit was up $0.1 million compared to last year's second quarter due to its higher volume level. Second quarter gross profit margins for 1999 compared to second quarter margins for 1998 decreased at all divisions except for Auto-Lok, which remained flat, the decreases reflecting lower volume levels and a change in product mix at Hanna. Selling, general and administrative (SGA) expenses for the second quarter of 1999 were $3.5 million, compared to $3.7 million for the second quarter of 1998, a decrease of $0.2 million. SGA expenses as a percentage of sales increased to 12.5% for 1999 compared to 11.3% in 1998. The decrease in SGA was due to an overall effort to contain and reduce such costs. The increase in SGA as a percent of sales was due primarily to the lower volume levels in 1999. Other income for the second quarter of 1999 was $1.5 million, compared to other income of $0.1 million for the second quarter of 1998, a net increase of $1.4 million. Other income for the second quarter of 1999 includes a gain of $1.7 million related to the sale of the land and building which comprised the former Chicago, Illinois location of Klemp. See "Recent Developments - Sale of Property." Excluding the gain, there were no individually significant or offsetting items in either 1999 or 1998. Interest expense, net, for the second quarters of 1999 and 1998 was $1.8 million. A decrease in the effective borrowing rate on the Company's debt for the second quarter of 1999, due to the revolving credit facility entered into with NationsBank in October 1998, was offset by higher average borrowing 19 levels in 1999 and an increase in the amortization of deferred financing costs. There was a tax provision of $0.3 million for the second quarter of 1999 and $0.5 million for the second quarter of 1998. The tax provision for both years is directly related to pre-tax income. The equity income from operations of affiliate in the second quarter of 1999 of $0.3 million, and the equity loss from operations of affiliate of $2.4 million in the second quarter of 1998, represents the Company's share of Reunion's results for each quarter. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Net sales for the first half of 1999 totaled $61.7 million, compared to $63.0 million for the first half of 1998. Sales for the first half of 1999 decreased $1.3 million, or 2%, from the first half of 1998. The decrease in sales was primarily at Alliance, partially offset by increases at Auto-Lok and Hanna. Sales decreased $6.5 million at Alliance due primarily to a decrease in order levels which have been negatively impacted by a downturn in large capital projects in the steel industry due to strong foreign competition. Auto-Lok's sales increase of $4.5 million was due to increased product demand as well as the completion of a large contract for one customer. Sales increased $0.9 million at Hanna primarily due to increase demand in their mobile cylinder product lines manufactured in Milwaukee, WI. Steelcraft's sales were down $0.3 million compared to last year's first half. Gross profit for the first half of 1999 was $10.8 million, compared to $13.0 million of gross profit for the first half of 1998, a decrease of $2.2 million. First half 1999 gross profit margin was 17.5%, compared to 20.6% in the first half of 1998. Gross profit during the first half of 1999 compared to the first half of 1998 decreased $2.0 million at Alliance, $0.4 million at Hanna and $0.3 million at both CPI and Steelcraft, partially offset by a $0.7 million increase at Auto-Lok. First half gross profit margins for 1999 compared to first half margins for 1998 increased only at Auto-Lok and decreased at all other divisions. The increase in gross profit and margin at Auto-Lok is due primarily to the division's increased volume. The decreases in gross profits and margins at the remaining divisions are due to decreases in volume noted above and a change in product mix at Hanna. Selling, general and administrative (SGA) expenses for the first half of 1999 were $6.8 million, compared to $7.4 million for the first half of 1998, a decrease of $0.6 million. SGA expenses as a percentage of sales decreased to 11.0% for the first half of 1999 compared to 11.7% in 1998's first half. The decreases in SGA and SGA as a percentage of sales were due to an overall effort to contain and reduce such costs. Other income for the first half of 1999 was $1.4 million, compared to other expense of $0.1 million for the first half of 1998, a net increase in income of $1.5 million. Other income for the first half of 1999 includes a gain of $1.7 million recorded in the second quarter related to the sale of the land and building which comprised the former Chicago, Illinois location of Klemp. See "Recent Developments - Sale of Property." Excluding the gain, there were no individually significant or offsetting items in either of the first halves of 1999 or 1998. 20 Interest expense, net, in each of the first halves of 1999 and 1998 was $3.6 million. A decrease in the effective borrowing rate on the Company's debt for the first half of 1999, due to the revolving credit facility entered into with NationsBank in October 1998, was offset by higher average borrowing levels in 1999 and an increase in the level of amortization of deferred financing costs. There was a tax provision of $0.7 million for the first halves of both 1999 and 1998. The tax provision for both periods is directly related to the level of pre-tax income. The equity loss from operations of affiliate in the first half of 1999 of $0.1 million and of $2.3 million in the first half of 1998 represents the Company's share of Reunion's results for each period. Effective January 1, 1999, the Company adopted the AICPA's Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." Such adoption is reported as the cumulative effect of a change in accounting principle and resulted in the write-off of $176,000 of start-up costs, net of taxes of $91,000. Such start-up costs primarily related to the Company's international subsidiaries. RESULTS OF DISCONTINUED OPERATIONS Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Discontinued Klemp operations generated net sales during the three month periods ended June 30, 1999 and 1998 of $13.4 million in each period and losses before taxes of $131,000 and $555,000, respectively. The losses before taxes include allocated interest expense of $644,000 for the three months ended June 30, 1999 and $660,000 for the three months ended June 30, 1998. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Discontinued Klemp operations generated net sales during the six month periods ended June 30, 1999 and 1998 of $26.1 million and $27.3 million, respectively, and losses before taxes of $665,000 and $288,000, respectively. The losses before taxes include allocated interest expense of $1,302,000 for the six months ended June 30, 1999 and $1,296,000 for the six months ended June 30, 1998. LIQUIDITY AND CAPITAL RESOURCES General Except for its foreign subsidiaries, which are classified as part of Discontinued Klemp, 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 21 credit arrangements. The Company's foreign subsidiaries are self-sustaining and operate almost exclusively within the countries they are located. Their cash flows are devoted to and obligations paid by their own operations. The Company does not provide day-to-day operating funds to the foreign operations nor does the Company guarantee any foreign indebtedness. Although the Company operates in relatively mature markets, it intends to continue to invest in and grow its businesses through selected capital expenditures as cash generation permits. See "Recent Developements - Discontinued Operations." On October 30, 1998, the Company and NationsBank executed the Financing Agreement wherein NationsBank has provided the Company with the NationsBank Facility of up to a maximum principal amount of $40.0 million, including a letter of credit facility of up to $5.0 million. 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 without NationsBank's consent. 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 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 June 30, 1999 such ratios were 1.4:1 and 4.8:1, respectively, and complied with the Financing Agreement. Borrowings outstanding under the 22 NationsBank Facility at June 30, 1999 totaled $31.2 million and the weighted average rate for borrowing was 7.5%. On July 23, 1999, the Company and NationsBank executed an amendment and waiver to the NationsBank Facility. In general, the amendment and waiver fixed the special availability amount at $3.47 million, an increase of $1 million in the then existing special availability amount. Additionally, the amendment provides that the special availability amount would start to be reduced in weekly amounts of at least $270,000 beginning August 16, 1999 only if the Company failed to deliver certain documents related to the potential sale of a division or failed to deliver additional collateral for the special availability amount. The amendment and waiver also waived two instances of noncompliance by the Company in June and July 1999 of the covenant that requires the Company to maintain a minimum average daily availability of no less than $1.0 million. In exchange for providing the Company with the amendment and waiver, NationsBank received $100,000 in fees, additional collateral for the special availability amount and potential fees of $50,000 on September 1, 1999 and October 1, 1999 dependent on certain circumstances related to the potential sale of a division or other additional collateral. Except for the instances of noncompliance waived above, the Company was in compliance with all representations, warranties and covenants at June 30, 1999. 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." Based on its own liquidity, the Company was unable to consummate the Purchase Offer on June 1, 1999, resulting in an Event of Default under the Indenture. Such Event of Default was subsequently cured by the Company. See "Recent Developments - Senior Note Purchase Offer." The Company is required to offer to purchase up to $25,000,000 principal amount of Senior Notes, plus accrued and unpaid interest through the purchase date, on June 1, 2000. The full principal amount of this $25,000,000 of Senior Notes is classified as current maturities of long-term debt in the Company's consolidated balance sheet at June 30, 1999. See "Possible Merger with Reunion." At December 31, 1998, the Company had net operating loss carryforwards for tax return reporting purposes of approximately $5.8 million, of which $1.4 million expires in 2008, $1.2 million expires in 2011 and $3.2 million expires in 2018. The availability of these carryforwards may be subject to limitations imposed by the Internal Revenue Code. A U.S. federal corporate income tax return examination has been completed for the Company's 1995 tax year. The Company believes adequate provisions for income taxes have been recorded for all years. SFAS 109 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company periodically reviews the adequacy of the valuation allowance as a result of changes in its profitability and other factors. The valuation allowance was not changed 23 during 1998. Operating Activities Operating activities used less than $0.1 million of cash during the first half of 1999, compared to cash provided of $0.3 million in the first half of 1998, a decrease of $0.4 million. This decrease in cash provided from operating activities was due primarily to chages in the levels of working capital in each period. Investing Activities Investing activities provided $2.8 million of cash during the first half of 1999, compared to cash used of $2.6 million during the first half of 1998, an increase in cash provided of $5.4 million. The increase in cash provided from investing activities was due to the $4.6 million of cash received from the sale of property in the second quarter of 1999 (see "Recent Developments - Sale of Property) and a $0.7 million decrease in the level of capital expenditures in the first half of 1999 compared to 1998. Financing Activities Financing activities during the first half of 1999 used almost $2.9 million in cash, compared to $1.8 million of cash provided during the first half of 1998, an increase in cash used of $4.6 million. This increase in cash used is the result of a decrease of $2.8 million in the level of net borrowings under revolving credit facilities during the first half of 1999 compared to an increase of $1.7 million in the first half of 1998. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes in the market risk factors which affect the Company since the end of the preceding fiscal year. 24 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed herewith in accordance with Item 601 of Regulation S-K: Exhibit No. Exhibit Description ----------- ------------------- 4.46 Amendment No. 1 to Financing and Security Agreement and Waiver between Chatwins Group, Inc. and Bank of America (formerly NationsBank) dated July 23, 1999. 27 Financial Data Schedule (electronically filed report only). (b) Reports on Form 8-K On June 3, 1999, the Company filed a Current Report on Form 8-K dated June 2, 1999, to report under Item 5 that it had given notice to tendering Senior Note holders of its request to withdraw tendered Senior Notes, of a third-party Senior Note purchase offer and of the possible sale of Klemp, and to file such notice as an exhibit under Item 7. On June 9, 1999, the Company filed a Current Report on Form 8-K dated June 7, 1999, to report under Item 5 that it had given notice to tendering Senior Note holders of its extension of request to withdraw tendered Senior Notes and had given notice to the Trustee of an Event of Default under the Indenture, and to file such notices as exhibits under Item 7. On June 25, 1999, the Company filed a Current Report on Form 8-K dated June 23, 1999, to report under Item 5 that it had given notice to tendering Senior Note holders of its termination of extension of request to withdraw tendered Senior Notes and had given notice to the Trustee of the cure of the Event of Default, and to file such notices as exhibits under Item 7. 25 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: August 16, 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) 26 EXHIBIT INDEX Exhibit No. Exhibit Description Page No. ----------- ------------------- -------- 4.46 Amendment No. 1 to Financing and Security Agreement and Waiver between Chatwins Group, Inc. and Bank of America (formerly NationsBank) dated July 23, 1999. 27 27 Financial Data Schedule 34 EX-4.46 2 EXHIBIT 4.46 27 EXECUTION COPY AMENDMENT NO. 1 TO FINANCING AND SECURITY AGREEMENT AND WAIVER This AMENDMENT NO. 1 TO FINANCING AND SECURITY AGREEMENT AND WAIVER (this "Amendment"), made as of this 23rd day of July, 1999, between CHATWINS GROUP, INC. ("Borrower") and BANK OF AMERICA, NATIONAL ASSOCIATION, formerly NationsBank, N.A. ("Lender"), W I T N E S S E T H : WHEREAS, the Borrower and the Lender entered into a certain Financing and Security Agreement, dated as of October 30, 1998 (the "Financing Agreement"), pursuant to which certain loans and other financial accommodations have been made available to Borrower; WHEREAS, effective February 22, 1999, the Lender notified the Borrower that, pursuant to clause (b)(ii)(z) of the first paragraph of Section 2.1.3 of the Financing Agreement, the Borrowing Base (as defined in the Financing Agreement) would include, until further notice from the Lender and subject to the limitations set forth in Section 2.1.3 of the Financing Agreement (including the overall limit on availability against Eligible Inventory set forth in clause (b)(i) of the first paragraph of Section 2.1.3), up to the lesser of (a) 40% of the amount of Eligible Inventory consisting work in process of the Borrower's Hanna and CPI divisions, and (b) $1,500,000; WHEREAS, effective April 22, 1999, the Lender and the Borrower agreed that the amortization of the Special Availability Amount (as defined in the Financing Agreement), as set forth in the definition of "Special Availability Amount," would be accelerated from a quarterly to a monthly basis; WHEREAS, the Borrower has failed to comply with certain provisions of the Financing Agreement and desires that the Lender waive such noncompliance; and WHEREAS, the Borrower and the Lender desire to amend the Financing Agreement as hereinafter set forth; NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Borrower and the Lender do hereby agree as follows: 1. DEFINED TERMS. Each defined term used herein and not otherwise defined herein shall have the meaning ascribed to such term in the Financing Agreement. 2. AMENDMENTS TO THE FINANCING AGREEMENT. 2.1 Amendment to Section 1.1. Section 1.1 is amended by deleting therefrom the definition of "Guarantor Pledge Amount." 2.2 Amendment to Section 1.1. Section 1.1 is amended by deleting the definitions of "Adjusted Special Availability Amount," "Applicable Base 28 Rate Margin," "Applicable LIBOR Margin," "Fees," "Guarantor Policy" and "Special Availability Amount" and replacing them with the following: "Adjusted Special Availability Amount" means, as at any time, an amount equal to (x) the Special Availability Amount then in effect minus (y) the aggregate amount of Special Availability Loan Mandatory Prepayments made or required to be made through such time minus (z) the proceeds of the asset sales contemplated by clauses (a) and (b) of the definition of Special Availability Loan Reduction Event. "Applicable Base Rate Margin" means (i) with respect to Base Rate Loans consisting of Special Availability Loans, 1.00% per annum, and (ii) with respect to all other Base Rate Loans, 0.00% per annum, provided, however, that if the Bank has not received, by the close of business on August 16, 1999, a Collateral Assignment of Life Insurance Policy with respect to one or more Guarantor Policies issued in amounts equal to, together with all other Guarantor Policies pledged to the Lender, the Special Availability Amount then in effect, then Applicable Base Rate Margin shall mean, effective as of August 1, 1999, and until either such Collateral Assignment of Life Insurance Policy is received or the Special Availability Amount is reduced to zero, (x) with respect to Base Rate Loans consisting of Special Availability Loans, 3.00% per annum, and (y) with respect to all other Base Rate Loans, 2.00% per annum. "Applicable LIBOR Margin" means (i) with respect to LIBOR Loans consisting of Special Availability Loans, 3.25% per annum, and (ii) with respect to all other LIBOR Loans, 2.00% per annum, provided, however, that if the Bank has not received, by the close of business on August 16, 1999, a Collateral Assignment of Life Insurance Policy with respect to one or more Guarantor Policies issued in amounts equal to, together with all other Guarantor Policies pledged to the Lender, the Special Availability Amount then in effect, then Applicable LIBOR Margin shall mean, effective as of August 1, 1999, and until either such Collateral Assignment of Life Insurance Policy is received or the Special Availability Amount is reduced to zero, (x) with respect to LIBOR Loans consisting of Special Availability Loans, 5.25% per annum, and (y) with respect to all other Base Rate Loans, 4.00% per annum.. "Fees" means the collective reference to each fee payable to the Lender, under the terms of this Agreement or under the terms of any of the other Financing Documents, including, without limitation, the Revolving Credit Unused Line Fees, the Letter of Credit Fees, the Early Termination Fee, the Closing Fee, the Special Availability Loan Fees and the Field Examination Fees. "Guarantor Policy" shall mean one or more policies of insurance on the life of the Charles E. Bradley, Sr., each issued in an amount and form and by an insurer acceptable to the Lender, in its reasonable discretion. "Special Availability Amount" means an amount equal to (i) from the Amendment No. 1 Effective Date through October 31, 1999, $2,470,000, plus (a) upon receipt by the Lender of each of (I) the Guaranty Agreement, (II) a Collateral Assignment of Life Insurance Policy with respect to one or more Guarantor Policies in amounts totaling no less than $878,000, and (III) the Missouri Deed of Trust, and so long as no Event of Default has occurred or is then continuing, $500,000, plus (b) upon receipt by the Lender of any of: (I) a lender's title insurance policy on the Missouri Real Property, issued by a title company and in form and substance reasonably satisfactory to the 29 Lender, (II) a pledge of additional assets as collateral for the Obligations of quality and in an amount acceptable to the Lender, in its sole discretion, and pursuant to documentation acceptable to the Lender, in its sole discretion, together with evidence satisfactory to the Lender, in its sole discretion, and the Lender's counsel, that the pledge of such additional assets will not violate or result in a default under the provisions of the Indenture, or (III) a copy of one or more executed asset purchase agreements with respect to assets of the Borrower, each in form and substance satisfactory to the Lender, in its sole discretion, and the Lender's counsel, which contemplate, in the aggregate, a purchase price sufficient to pay the Special Availability Loans in full (including those made pursuant to availability provided under this clause (i)(b)), together with evidence satisfactory to the Lender, in its sole discretion, and the Lender's counsel, that the proceeds of such sale may be applied to the Special Availability Loans without violating or resulting in a default under the provisions of the Indenture, and, in each event, so long as no Event of Default has occurred or is then continuing, $500,000 (ii) at all times after October 31, 1999, zero; provided that it is understood that such amount may be greater than zero, in the Lender's sole and absolute discretion. 2.3 Amendment to Section 1.1. Section 1.1 is amended by adding the following new definitions thereto, each in appropriate alphabetical order: "Amendment No. 1 Effective Date" means July 23, 1999. "Missouri Deed of Trust" means a Deed of Trust (With Power of Sale, Assignment of Rents and Security Agreement) executed by the Borrower in favor of the Lender with respect to the Missouri Real Property, as the same may from time to time be amended, restated or otherwise modified or supplemented. "Missouri Real Property" means the real property of the Borrower located at 1100 Brown Street, Liberty, Clay County, Missouri. "Special Availability Amortization Period" means a period which shall arise on August 16, 1999, only if no Special Availability Loan Reduction Event has occurred by such date, and which, to the extent it arises, shall terminate on the date on which all Special Availability Loans have been paid in full and the Special Availability Amount has been reduced to zero. "Special Availability Loan Mandatory Prepayment" has the meaning described in Section 2.1.6 (Mandatory Prepayments of Revolving Loan). "Special Availability Loan Fees" has the meaning described in Section 2.4.10 (Special Availability Loan Fees). "Special Availability Loan Reduction Event" means the occurrence of any of the following events: (a) receipt by the Lender of an executed copy of an asset purchase agreement, in form and substance satisfactory to the Lender, in its sole discretion, and the Lender's counsel, with respect to the sale of all or substantially all of the assets of the Borrower's Klemp division; (b) receipt by the Lender of an executed copy of a letter of intent for the purchase of all or substantially all of the assets of one or more divisions of the Borrower, each in form and substance satisfactory to the Lender, in its sole discretion, and the Lender's counsel, which contemplate, 30 in the aggregate, a purchase price in an amount at least equal to the sum of (i) the Adjusted Special Availability Amount then in effect (without, however, taking into account Special Availability Loan Mandatory Prepayments required to have been paid but not yet actually paid under clause (y) of the definition of Adjusted Special Availability Amount) plus (ii) an amount equal to Borrower's aggregate debt service requirements from the date of such letter of intent through December 31, 1999; or (c) a pledge of additional assets as collateral for the Obligations of quality and in an amount acceptable to the Lender, in its sole discretion, and pursuant to documentation acceptable to the Lender, in its sole discretion, together with evidence satisfactory to the Lender, in its sole discretion, and the Lender's counsel, that the pledge of such additional assets will not violate or result in a default under the provisions of the Indenture. 2.4 Amendment to Section 2.1.6. Section 2.1.6 is amended in its entirety to read as follows: 2.1.6 Mandatory Prepayments of Revolving Loan. The Borrower shall make the mandatory prepayments (each a "Revolving Loan Mandatory Prepayment" and collectively, the "Revolving Loan Mandatory Prepayments") of the Revolving Loan as follows: (a) the Borrower shall make Revolving Loan Mandatory Prepayments at any time and from time to time in such amounts requested by the Lender pursuant to Section 2.1.3 (Borrowing Base) of this Agreement in order to cover any Borrowing Base Deficiency and in order to cover any deficiency under Section 2.1.12 (Required Availability under the Revolving Credit Facility), and (b) during the Special Availability Amortization Period, the Borrower shall make weekly Revolving Loan Mandatory Prepayments (each a "Special Availability Loan Mandatory Prepayment"), at such times and in such manner as the Lender, in its sole discretion, shall determine, each of which Special Availability Loan Mandatory Prepayments shall be applied to the payment of Special Availability Loans and each of which Special Availability Loan Mandatory Prepayments shall be in an amount equal to the greater of (i) ten percent (10%) of the amount of the Borrower's Eligible Receivables as at the end of any week that have arisen during the Special Availability Amortization Period, and (ii) Two Hundred Seventy Thousand Dollars ($270,000). 2.5 Amendment to Section 2.4. Section 2.4 is amended by adding the following Section 2.4.10 at the end thereof: 2.4.10 Special Availability Loan Fees. The Borrower shall pay, in addition to all other Fees, the following fees (collectively, the "Special Availability Loan Fees"): (a) The Borrower shall pay on or before the Amendment No. 1 Effective Date to the Lender a fee in the amount of Fifty Thousand Dollars ($50,000). (b) If no Special Availability Loan Reduction Event has occurred by August 1, 1999, the Borrower shall pay on such date to the Lender an additional fee in the amount of Fifty Thousand Dollars ($50,000). (c) If on September 1, 1999, the Adjusted Special Availability Amount is greater than $1,720,000, the Borrower shall pay on such 31 date to the Lender an additional fee in the amount of Fifty Thousand Dollars ($50,000). (d) If on October 1, 1999, the Adjusted Special Availability Amount is greater than $1,470,000, the Borrower shall pay on such date to the Lender an additional fee in the amount of Fifty Thousand Dollars ($50,000). 2.6 Amendment to Section 6.2.8. Section 6.2.8 is amended in its entirety to read as follows: 6.2.8 Disposition of Assets. The Borrower will not sell, discount, allow credits or allowances, transfer, assign, extend the time for payment on, convey, lease, assign, transfer or otherwise dispose of its Assets (including without limitation the Collateral) other than in accordance with its credit collection policies, except, (a) prior to an Event of Default which is continuing and, thereafter until the Lender has notified (which notice may be limited to certain assets or categories of assets) the Borrower not to sell or make dispositions of Inventory or other assets, dispositions that are not Asset Dispositions, (b) the sale of unnecessary or obsolete Equipment, (c) the sale of the real property owned by the Klemp Division of the Borrower and located in Chicago, Illinois and Liberty, Missouri, (d) the Services Agreement between the Auto-Lok division of the Borrower and Stanwich Acquisition Corp., and (e) such asset sales, including without limitation the sale of all or substantially all of the assets of the Klemp Division of the Borrower, as are necessary for the Borrower to pay in full the Special Availability Loans as required by the terms hereof, each such sale to be on terms satisfactory to the Lender, in its sole discretion, and the Lender's counsel, and provided that (i) the proceeds of each such sale shall be applied first to repay the Special Availability Loans and reduce the Adjusted Special Availability Amount, until the Adjusted Special Availability Amount is zero, and then to the remaining Obligations, in the order required under the terms of this Agreement, and (ii) prior to making any Asset Sale Offer (as defined in the Indenture) with the proceeds of any such sales, the Revolving Credit Committed Amount shall be reduced, and the Borrower shall make such payments as are necessary to reduce the Revolving Credit Committed Amount, by an amount at least equal to $10,000,000. 3. WAIVER OF NON-COMPLIANCE. 3.1 Waiver. Subject to and conditioned on the effectiveness of this Amendment, the Lender hereby waives, as of and through the date of this Amendment and solely to the extent disclosed to the Lender in writing prior to the Amendment No. 1 Effective Date, the Borrower's failure, for the months of June 1999 and July 1999, to comply with the requirement set forth in Section 7.1.18 (Required Availability) of the Financing Agreement that the Borrower not permit the average daily Revolving Credit Availability for any calendar month to be less than $1,000,000. 3.2 Limitation on Waivers. The waiver granted herein is limited strictly to its terms, applies only to the specific waiver described herein, does not extend to or affect any of the Borrower's other obligations contained in the Financing Agreement or any other related documents and does not impair any rights consequent thereon. Except as expressly set forth herein, nothing contained herein will be deemed to be a waiver of, or will in any way impair 32 or prejudice, any rights of the Lender under the Financing Agreement. The Lender has no obligation to issue any other or further waiver with respect to the subject matter hereof or of any other matter, and, except as expressly provided herein, the Financing Agreement and all documents, instruments and agreements related thereto are ratified and confirmed in all respects and will continue in full force and effect. 4. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants as follows: 4.1 The Amendment. This Amendment has been duly and validly executed by an authorized representative of Borrower and constitutes the legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms. 4.2 Claims and Defenses. As of the date of this Amendment, neither the Borrower nor any of its Affiliates has any defenses, claims, counterclaims or setoffs with respect to the Financing Agreement, the Financing Documents or any Obligations thereunder or with respect to any actions of the Lender, any participant in the Loans or any of their respective officers, directors, shareholders, employees, agents or attorneys, and the Borrower irrevocably and absolutely waives any such defenses, claims, counterclaims and setoffs and releases the Lender, each participant in the Loans and each of their respective officers, directors, shareholders, employees, agents and attorneys, from the same. 4.3 Financing Agreement. The Financing Agreement, as previously amended and as further amended by this Amendment, remains in full force and effect and remains the valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms. 4.4 Nonwaiver. Except as set forth in Section 3 of this Amendment, the execution, delivery, performance and effectiveness of this Amendment shall not operate nor be deemed to be nor construed as a waiver (i) of any right, power or remedy of the Lender under the Financing Agreement, nor (ii) of any term, provision, representation, warranty or covenant contained in the Financing Agreement or any other documentation executed in connection therewith. Further, except as set forth in Section 3 of this Amendment, none of the provisions of this Amendment shall constitute, be deemed to be or construed as, a waiver of any Default or Event of Default under the Financing Agreement, as previously amended and as further amended by this Amendment. 4.5 Reference to and Effect on the Financing Agreement. Upon the effectiveness of this Amendment, each reference in the Financing Agreement to "this Agreement", "hereunder", "hereof", "herein", or words of like import shall mean and be a reference to the Financing Agreement, as previously amended and as further amended hereby, and each reference to the Financing Agreement in any other document, instrument or agreement executed and/or delivered in connection with the Financing Agreement shall mean and be a reference to the Financing Agreement, as previously amended and as further amended hereby. 5. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT NO. 1. In addition to all of the other conditions and agreements set forth herein, the effectiveness of this Amendment is subject to the fulfillment of each of 33 the following conditions precedent: 5.1 Amendment No. 1 to Financing and Security Agreement and Waiver. The Lender shall have received an original counterpart of this Amendment No. 1 to Financing and Security Agreement and Waiver, executed and delivered by a duly authorized officer of Borrower and the Lender. 5.2 Payment of Fees. The Lender shall have received payment of any Fees due on or before the Amendment No. 1 Effective Date, including without limitation the Special Availability Loan Fee due under Section 2.4.10(a) of the Financing Agreement (as amended hereby). 6. MISCELLANEOUS. 6.1 Governing Law. This Amendment has been delivered and accepted at and shall be deemed to have been made at Cleveland, Ohio. This Amendment shall be interpreted and the rights and liabilities of the parties hereto determined in accordance with the laws of the State of Ohio, without regard to principles of conflict of law, and all other laws of mandatory application. 6.2 Severability. Each provision of this Amendment shall be interpreted in such manner as to be valid under applicable law, but if any provision hereof shall be invalid under applicable law, such provision shall be ineffective to the extent of such invalidity, without invalidating the remainder of such provision or the remaining provisions hereof. 6.3 Counterparts. This Amendment may be executed in one or more counterparts, each of which, when taken together, shall constitute but one and the same agreement. IN WITNESS WHEREOF, Borrower has caused this Amendment No. 1 to Financing and Security Agreement and Waiver to be duly executed and delivered by its duly authorized officer as of the date first above written. BANK OF AMERICA, NATIONAL ASSOCIATION, formerly NationsBank, N.A. _____________________________________ By:__________________________________ Its:_________________________________ CHATWINS GROUP, INC. _____________________________________ By:__________________________________ Its:_________________________________ 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 JUN-30-1999 81 0 25,195 244 13,300 64,571 37,090 19,346 100,186 17,316 49,911 0 8,710 3 (8,444) 100,186 61,667 61,667 50,866 50,866 5,392 0 3,588 1,821 728 1,093 0 0 0 381 (0.53) (0.52) Excludes revolving credit facility borrowings of $31,213 and current maturities of Senior Notes of $24,968 at 6/30/99.
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