==============================================================================
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, 2004
--------------
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 33-64325
--------
REUNION INDUSTRIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400
PITTSBURGH, PENNSYLVANIA 15222
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
----------------------------------------------------
(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, 2004, 16,278,579 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 32 pages.
==============================================================================
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This report contains 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. The
forward-looking statements contained in this report are enclosed in brackets
[] for ease of identification. All forward-looking statements involve risks
and uncertainties 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. Factors that could cause actual
results to differ materially from those described in the forward-looking
statements include, without limitation, the strengths/weaknesses of the
Company's primary markets, the Company's ability to negotiate trade terms with
its vendors and the continued compliance of the Company's with the financial
and other covenants contained in its current financing agreements. 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, 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.
- 2 -
REUNION INDUSTRIES, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at
March 31, 2004 (unaudited) and December 31, 2003 4
Condensed Consolidated Statement of Operations and
Comprehensive Income (Loss) for the three months ended
March 31, 2004 and 2003 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for
the three months ended March 31, 2004 and 2003 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
CERTIFICATIONS 29
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AT MARCH 31, 2004 AND DECEMBER 31, 2003
(in thousands)
At March 31, At December 31,
2004 2003
----------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 1,318 $ 755
Receivables (net of allowance of
$483 and $485, respectively) 10,920 10,031
Advances to employees 48 56
Inventories, net 10,463 8,207
Other current assets 1,268 1,427
-------- --------
Total current assets 24,017 20,476
Property, plant and equipment, net 13,696 14,197
Due from related parties 1,041 1,405
Goodwill, net 11,007 11,007
Other assets, net 4,511 4,438
-------- --------
Total assets $ 54,272 $ 51,523
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current maturities of debt $ 670 $ 683
Trade payables 11,672 9,463
Accrued interest 3,002 2,119
Due to related parties 109 3,276
Other current liabilities 7,568 7,973
Notes payable 4,161 4,161
Notes payable - related parties 500 5,115
-------- --------
Total current liabilities 27,682 32,790
Long-term debt 46,496 41,129
Other liabilities 5,402 5,359
-------- --------
Total liabilities 79,580 79,278
Minority interests 98 -
Commitments and contingent liabilities - -
Stockholders' deficit (25,406) (27,755)
-------- --------
Total liabilities and stockholders' deficit $ 54,272 $ 51,523
======== ========
See accompanying notes to condensed consolidated financial statements.
- 4 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(in thousands, except per share information)(unaudited)
Three Months Ended
March 31, March 31,
2004 2003
-------- --------
Operating revenue:
Sales $ 18,847 $ 21,263
Cost of Sales 15,085 17,072
-------- --------
Gross profit 3,762 4,191
Selling, general & administrative 2,687 2,801
Gain on debt extinguishment (3,070) -
Other (income) expense, net (81) 28
-------- --------
Operating profit 4,226 1,418
Interest expense, net 1,779 1,509
-------- --------
Income (loss) from continuing operations
before minority interests and income taxes 2,447 (91)
Provision for income taxes - -
-------- --------
Income (loss) from continuing operations
before minority interests 2,447 (91)
Minority interests 98 -
-------- --------
Net and comprehensive income (loss) $ 2,349 $ (91)
======== ========
Earnings (loss) applicable to common stockholders $ 2,349 $ (91)
======== ========
Earnings (loss) per common share - basic $ 0.14 $ (0.01)
======== ========
Weighted average shares outstanding - basic 16,279 16,279
======== ========
Earnings (loss) per common share - diluted $ 0.12 $ (0.01)
======== ========
Weighted average shares outstanding - diluted 18,826 16,279
======== ========
See accompanying notes to condensed consolidated financial statements.
- 5 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(in thousands)
(unaudited)
Three Months Ended
March 31, March 31,
2004 2003
-------- --------
Cash used in operating activities $ (72) $ (384)
-------- --------
Cash flow from investing activities:
Capital expenditures (122) (133)
-------- --------
Cash used in investing activities (122) (133)
-------- --------
Cash flow from financing activities:
Net change in revolving credit facility 1,203 1,646
Repayments of debt (175) (1,146)
Payments of deferred financing costs (271) -
-------- --------
Cash provided by financing activities 757 500
-------- --------
Net increase (decrease) in cash and cash equivalents 563 (17)
Cash and cash equivalents, beginning of period 755 807
-------- --------
Cash and cash equivalents, end of period $ 1,318 $ 790
======== ========
Interest paid $ 580 $ 550
======== ========
Non-cash financing activity:
Debt extinguishment $ 3,070 -
======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States 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 accounting
principles generally accepted in the United States 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, 2004 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,
schedule and notes contained in Reunion's Annual Report on Form 10-K for the
year ended December 31, 2003, as amended by Form 10-K/A as filed on April 29,
2004.
Going Concern
These condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At March 31,
2004, the Company had a negative working capital position of $3.1 million net
of related party obligations and a deficiency in assets of $25.4 million.
These conditions raise substantial doubt about the Companys ability to
continue as a going concern. These condensed consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
We successfully refinanced our bank debt, extinguished a significant
portion of our obligations under the senior notes and removed all previously
existing defaults on our debt. These steps were taken to improve liquidity
and defer the principal maturities on a significant portion of our debt. The
Company is investigating other recapitalization scenarios in an effort to
provide additional liquidity and extinguishments or deferrals of debt
obligations. Although we believe we can accomplish these plans, no assurances
exist that we will. Failure to accomplish these plans could have an adverse
impact on the Company's liquidity, financial position and future operations.
Recent Accounting Pronouncements
On December 17, 2003, the Staff of the Securities and Exchange
Commission (SEC or the Staff) issued Staff Accounting Bulletin No. 104,
"Revenue Recognition" (SAB 104), which supercedes Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB 104
rescinds accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, superceded as a result of the issuance of Emerging
Issues Task Force Issue No. 00-21 (EITF 00-21), "Accounting for Revenue
Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the
SECs Revenue Recognition in Financial Statements Frequently Asked Questions
and Answers (the FAQ) issued with SAB 101 that had been codified in SEC
topic 13, "Revenue Recognition". While the wording of SAB 104 has changed to
reflect the issuance of EITF 00-21, the revenue recognition principles of
SAB 101 remain largely unchanged by the issuance of SAB 104. Reunion does not
expect the adoption of SAB 104 to have a material effect on its financial
condition or results of operations.
- 7 -
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock options and awards. Accordingly, no compensation costs
for stock options is included in operating results since all awards were made
at exercise prices at or above their fair value on the dates of grants. The
following table illustrates the effect on results of operations if the Company
had applied fair value recognition provisions of SFAS No. 123.
Quarter Ended March 31,
2004 2003
-------- --------
Net income (loss) as reported $ 2,349 $ (91)
Deduct: Total stock-based employee compensation
determined under fair value method for
stock options, net of tax - -
-------- --------
Pro forma income (loss) applicable to
common stockholders $ 2,349 $ (91)
======== ========
Earnings (loss) per share, as reported $ 0.14 $ (0.01)
======== ========
Basic earnings (loss) per share, pro forma $ 0.14 $ (0.01)
======== ========
Diluted earnings (loss) per share, as reported $ 0.12 $ (0.01)
======== ========
Diluted earnings (loss) per share, pro forma $ 0.12 $ (0.01)
======== ========
NOTE 2: RECENT DEVELOPMENTS
SFSC Litigation Settlement
The Company had been named as one of several defendants in fifteen
consolidated lawsuits filed in December 2000 or early 2001 in the Superior
Court for Los Angeles County, California. The plaintiffs in these suits,
except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC were related parties.
The plaintiffs alleged that the Company received loans from SFSC that have not
been repaid. On May 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in
the U.S. Bankruptcy Court for the District of Connecticut.
A settlement was reached in the Superior Court action among the
plaintiffs, Bankers Trust Co. and certain other financial institution
defendants. In the settlement, Bankers Trust Co. and the other settling
financial institution defendants paid the plaintiffs an amount specified in
the settlement agreement, and Bankers Trust Co. received an assignment of the
claims of the plaintiffs and such other settling defendants against the
Company and other defendants. In the SFSC bankruptcy proceeding, the Company
and certain other defendants entered into a settlement with SFSC and Bankers
Trust Co. Under this settlement (1) the Company is obligated to pay SFSC a
settlement amount by December 31, 2006 in the sum of $4.29 million, plus
interest at the rate of 10% per annum, in full satisfaction of the Companys
indebtedness to SFSC under notes payable totaling $4.6 million, plus interest,
and for certain credit support fees payable, which settlement amount is net of
an offset against SFSCs note payable to the Company in the amount of $310,000
plus interest, and (2) provided it makes such settlement payment, the Company
is released from all claims that have been or could have been asserted against
the Company by the plaintiffs or the settling financial institution defendants
- 8 -
in the California Superior Court suits or by SFSC in the bankruptcy
proceeding. The settlement amount does not constitute a new liability of the
Company, as it relates to indebtedness and a note receivable that had
previously been recorded on the Companys balance sheet. The settlement
resulted in a $3.1 million gain on debt extinguishment.
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
At March 31, At December 31,
2004 2003
----------- --------------
(unaudited)
Congress revolving credit facility $ 10,417 $ 9,214
Congress term loan facility 3,016 3,175
Note payable due December 1, 2006 4,200 4,200
Note payable due December 5, 2006 (net of
warrant value of $75 and $83, respectively) 3,425 3,417
13% senior notes (net of warrant value
of $288 and $315, respectively) 21,777 21,750
Notes payable 8,451 4,161
Notes payable - related parties 500 5,115
Capital leases and other 41 56
-------- --------
Total long-term debt 51,827 51,088
Classified as current (5,331) (9,959)
-------- --------
Long-term debt $ 46,496 $ 41,129
======== ========
Certain notes payable - related parties totaling $4.6 million were
settled in the first quarter of 2004, offset against a related party note
receivable of $364,000 and reclassified to a note payable totaling $4.29
million. See NOTE 2: RECENT DEVELOPMENTS, "SFSC Litigation Settlement",
above.
NOTE 4: INVENTORIES
Inventories are comprised of the following (in thousands):
At March 31, At December 31,
2004 2003
----------- --------------
(unaudited)
Raw material $ 3,693 $ 3,206
Work-in-process 3,464 2,077
Finished goods 3,306 2,924
-------- --------
Inventories $ 10,463 $ 8,207
======== ========
- 9 -
NOTE 5: STOCKHOLDERS' DEFICIT AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
deficit for the three month period ended March 31, 2004 (in thousands):
Accum-
Par Capital ulated
Value in Other
of Excess Accum- Compre-
Common of Par ulated hensive
Stock Value Deficit Loss Total
------ ------- -------- -------- --------
At January 1, 2004 $163 $25,609 $(51,548) $ (1,979) $(27,755)
Activity (unaudited):
Net income - - 2,349 - 2,349
---- ------- -------- -------- --------
At March 31, 2004 $163 $25,609 $(49,199) $ (1,979) $(25,406)
==== ======= ======== ======== ========
The computations of basic and diluted earnings (loss) per common share
EPS (LPS) for the three month periods ended March 31, 2004 and 2003 are as
follows (in thousands, except per share amounts)(unaudited):
Net
Income EPS
(Loss) Shares (LPS)
-------- -------- -------
Three months ended March 31, 2004:
Income available to common stockholders,
weighted average shares outstanding
and basic EPS $ 2,349 16,279 $ 0.14
=======
Dilutive effect of stock options and warrants 2,547
-------- --------
Income available to common stockholders,
shares outstanding and diluted EPS $ 2,349 18,826 $ 0.12
======== ======== =======
Three months ended March 31, 2003:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted LPS $ (91) 16,279 $ (0.01)
======== ======== =======
At March 31, 2004, the Company's stock options outstanding totaled
614,000. Such options included a dilutive component of 198,400 shares. At
March 31, 2004, outstanding warrants to purchase the Company's common totaled
2,896,238. Such warrants included a dilutive component of 2,348,313 shares.
At March 31, 2003, the Company's stock options outstanding totaled 44,000,
none of which were at exercise prices below the average market price of the
underlying security during the first quarter 2003.
- 10 -
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
The Company is and has been involved in a number of lawsuits and
administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. A summary of such legal
proceedings follows.
Louisiana Environmental
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. No remediation was
performed in 2000, 2001 or 2002 pending the decision. However, the Company
has paid $434,000 for its share of consulting services in connection with the
hearings. Most recently, the Company's environmental consultants filed with
the LDNROC updated amendments to the prior approved plan for sampling and
remediation. If approved, the plan will be implemented. At March 31, 2004,
the balance accrued for these remediation costs is approximately $831,000.
The Company believes that future remediation costs will not exceed the amount
accrued and will be funded by net production revenues of the producing wells
on the property as part of the settlement agreement discussed below.
Litigation on this matter had been stayed pending the determination by
the LDNROC as to the extent of remediation that would be required. Such stay
was lifted and the District Court had established a jury trial for September
22, 2003 to determine the necessity for any further remediation and the extent
of damages, if any, suffered by the plaintiff owners of the property.
However, an agreement to settle the litigation between the plaintiff owners of
the property and the other involved parties, including the Company, has been
reached and finalized. The Company's share of the settlement costs were
funded by the other defendants to the litigation. The terms of the agreement
are that the Company must reimburse the other defendants to the litigation at
least $120,000 per year for ten years, but that such amount can be paid from
net production revenues from operation of the producing wells owned by the
Company on the property. However, this is a non-recourse agreement such that,
should the wells be depleted before all such costs are reimbursed, the Company
is not required to fund the unreimbursed balance. During 2003 and 2002, net
production revenues totaled $248,000 and $181,000, respectively. Based on
past operation results of the producing well, the Company believes that future
net production revenues will be sufficient to fund the minimum required under
the settlement agreement.
Gambonini Environmental
On May 16, 2002, the Company, as the successor to Buttes Gas & Oil
Company (BGO), received from the United States Environmental Protection Agency
(USEPA) a notice of potential liability and demand for payment of
$3,909,614.37 for reimbursement of costs related to the USEPA's removal and
environmental restoration efforts at the Gambonini Mine Site (Site) initiated
in 1998 pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA).
- 11 -
BGO, predecessor by merger to the Company, leased the Site for mining
purposes and operated a mercury mine there from 1965 to 1970. BGO's mining
operations were terminated in 1970. Subsequently, under the supervision of
the environmental and planning representatives of Marin County, BGO completed
closure and environmental restoration activities at the Site, including
stabilization and re-vegetation of the Site. BGO then quitclaimed the mining
lease to the Site owners, the Gambonini's, in 1973. Because of apparent
overgrazing at the Site subsequent to BGO's restoration efforts, a storm in
1982 caused severe flooding, which resulted in the failure of a dam built to
retain mining materials. Runoff from the flood released mining materials into
the creek below and, ultimately, into the Tomales Bay, a local recreation and
fishing area.
In March 2003, the Company and the USEPA reached an agreement in
principle to settle the USEPA's claim for payment by the Company of $100,000
plus interest at the Superfund rate (which is currently 1.27%), payable in
three installments over a two-year period. On May 8, 2004, the United States
District Court for the Northern District of California entered a Consent
Decree in accordance with the settlement. The settlement amount was accrued
by The Company in 2002. This settlement agreement will resolve the USEPA's
claims for reimbursement of past environmental response costs under CERCLA,
but does not resolve all possible claims the United States may have with
respect to the Gambonini mine site, which could include, but not be limited
to, claims for future costs or natural resource damages. The United States
has given no indication as to whether or not it will pursue such claims. The
Company has agreed to toll the statute of limitations with respect to any
natural resource damages claims, if any, from August 30, 2002 to April 1,
2008.
Asbestos (Hanna)
During 2003, Reunion Industries was named as defendant in 32 actions in
the state of Georgia and one action in the state of Alabama. Such actions
claim that cylinders manufactured by the Hanna division of Reunion Industries
contained asbestos that caused severe illness. Since most of the plaintiffs
exposure occurred prior to the purchase of the assets of this business by
Reunions predecessor in 1980, and since there is no evidence that asbestos was
used in Hanna products after 1980, the Companys position is that it has no
liability in these suits. The plaintiffs attorney has tentatively agreed to
dismiss Reunion from these suits, subject to his review of certain information
we have provided to him about our predecessor and if Reunion will assist the
plaintiffs in their case against the pre-1980 owner of the business. Reunion
has agreed to and is currently providing the requested assistance to
plaintiffs attorney.
Asbestos (ORC)
Since July 10, 2001, various legal actions, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon, Washington,
New York and Mississippi, against a large number of defendants, including
Oneida Rostone Corporation (ORC), pre-merger Reunion's Plastics subsidiary and
the Company's Plastics segment. In October 2001, Allen-Bradley Company, a
former owner of the Rostone business of ORC, accepted Reunion Industries'
tender of its defense and indemnification in the first such lawsuit filed,
pursuant to a contractual obligation to do so. Subsequent to the acceptance
of the tender of defense and indemnification in the first lawsuit, Allen-
Bradley Company has accepted the Company's tender of defense and
indemnification in a total of 124 separate actions, all of which have been or
will be defended by Allen-Bradley Company.
- 12 -
SFSC Litigation
The settlement of the litigation involving or relating to Stanwich
Financial Services Corp. (SFSC) as described in Item 3 of the Companys Annual
Report on Form 10-K for the year ended December 31, 2003 as filed on March 30,
2004, has been settled as described in NOTE 2: RECENT DEVELOPMENTS, "SFSC
Litigation Settlement."
LTV Preference Claims
In connection with the Chapter 11 bankruptcies of LTV Steel Company, Inc.
(LTV), et al, pending in the United States Bankruptcy Court for the Northern
District of Ohio, Youngstown Division, LTV has filed a complaint for avoidance
and recovery of preferential transfers against Alliance Machine Division, a
former division of the Company. Pursuant to an adversary proceeding filed in
the LTV Case on December 17, 2002, LTV seeks recovery of $385,000 in alleged
preferential transfers, together with costs and attorney's fees. On April 7,
2004, the Company and LTV entered into a Stipulation and Agreed Order
resolving this matter for $1,000 and a waiver by the Company of its
administrative counterclaim of $14,200. A hearing is set for May 18, 2004 for
entry of an order approving the settlement. No amount has been accrued for
this matter in the Company's financial statements.
U.S. Customs Service
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group'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
Chatwins Group'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.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts 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 has been no activity related to this matter since 1997.
Shareholder Suit
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit remains in the initial stages of discovery. Reunion
intends to vigorously contest the suit.
Asbestos (Alliance)
The Company has been named in approximately 1,600 separate asbestos suits
filed since January 1, 2001 by three plaintiffs' law firms in Wayne County,
Michigan; Kanawah County, West Virginia; Cuyahoga County, Ohio; and Cambria
and Northhampton Counties in Pennsylvania. The claims allege that cranes from
the Company's former crane manufacturing location in Alliance, Ohio were
present in various parts of steel mills and heavy industrial sites in the
aforementioned counties, and that those cranes contained asbestos to which
plaintiffs were exposed over a 40 year span. Counsel for the Company has
filed an answer to each complaint, denying liability by the Company and
- 13 -
asserting all affirmative defenses permitted under the Court's Case Management
Order. Counsel for the Company has successfully resolved over 650 cases with
little or no cost to the Company. Cases that are not dismissed typically are
settled for modest amounts, paid in large part through applicable insurance
coverage. The Company denies that it manufactured any products containing
asbestos. It has been further denied that the Company was otherwise advised
by component part manufacturers that component parts could be hazardous, or
otherwise constitute a health risk. The Company intends to continue to
vigorously defend against these lawsuits.
Putman Properties
In the 2002 fourth quarter, in the Court of Common Pleas of Stark County,
Ohio, Putman Properties, Inc. filed a complaint against the Company asserting
breach of an exclusive listing contract in connection with the sale of certain
property ancillary to the divestiture of the Company's Alliance Machine
division in Alliance, Ohio. The plaintiff is a broker who claims entitlement
to a commission in the amount of $230,000. A jury trial in this matter took
place beginning on April 1, 2004 and concluded on April 2, 2004. The jury
found in favor of Reunion. Nothing is owed to Putman Properties, Inc.
Suit Against Paquet and Paquet Counterclaim
In the 2002 fourth quarter, the Company filed suit in the District Court
for New Jersey against Paquet, a general contractor doing business in the
state of New Jersey. The Company contends that it is owed approximately $1.5
million in overdue payments and backcharges related to the supply of
structural steel for the construction of a bridge in New Jersey. The
defendant has asserted a counterclaim against the Company in the amount of
$2.5 million. Discovery is in process. The Company intends to vigorously
pursue its suit against the defendant and defend against its counterclaim. No
amount has been accrued for this matter in the Company's financial statements.
Dick Corporation
In the 2002 fourth quarter, Dick Corporation (Dick) filed an action
against the Company in the Court of Common Pleas of Allegheny County, PA.
Dick alleges that the Company breached a contract to supply it with structural
steel for use in a construction project for the PA Department of
Transportation. Dick seeks damages of approximately $351,000, representing
the extra costs allegedly incurred by Dick for Dick to secure structural steel
from another vendor. The Company has filed an answer to Dick's complaint in
which it denies any liability. Pleadings are closed and discovery has begun.
The Company believes it has meritorious defenses against Dick's suit and
intends to vigorously defend against it. No amount has been accrued for this
matter in the Company's financial statements.
NAPTech Suit
On or about March 16, 2004, Shaw NAPTech, Inc. ("NAPTech"), as successor
by merger to NAPTech, Inc. and NAPTech PS Corporation, filed a suit against
the Company in state court in Baton Rouge, Louisiana, to collect payment on a
subordinated note issued to NAPTech and assumed by the Company in a January
2001 acquisition. NAPTech claims the amounts due under this note are
$3,145,403 in principal plus $1,207,875 in unpaid interest through November
30, 2003 plus interest at 15% per annum on the unpaid principal thereafter.
Such amounts are consistent with amounts recorded as payable to NAPTech by the
Company in the accompanying consolidated balance sheet. The Company has filed
an answer to the complaint, in which the Company claims, among other things,
- 14 -
that the suit is currently barred by a subordination agreement to which
NAPTech is a party and that the Court lacks personal jurisdiction over the
Company. Also named as defendants in the suit are Charles E. Bradley, Sr., as
guarantor of the subordinated note, and KSB Acquisition Corp. and Hanna
Investment Corp. (both of whom are affiliates of Mr. Bradley), as pledgors of
certain assets securing the note.
Product Warranties
The Company provides for warranty claims at its cylinders segment.
Amounts accrued are estimates of future claims based on historical claims
experience or a management estimate related to a specifically identified
issue. The Company reevaluates its product warranty reserve quarterly and
adjusts it based on changes in historical experience and identification of new
or resolution of prior specifically identified issues. A tabular
reconciliation of the product warranty reserve for the three month periods
ended March 31, 2004 and 2003 follows (in 000's):
March 31, March 31,
Description 2004 2003
------------------------------------------ -------- --------
Beginning balance $ 211 $ 379
Add: Provision for estimated future claims 36 51
Deduct: Cost of claims (30) (90)
-------- --------
Ending balance $ 217 $ 340
======== ========
NOTE 7: OPERATING SEGMENT DISCLOSURES
The following represents the disaggregation of financial data (in
thousands)(unaudited):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended and
at March 31, 2004:
----------------------
Metals:
Pressure vessels and springs $ 5,184 $ 945 $ 8 $ 14,833
Cylinders 4,875 299 50 8,602
Grating 2,061 185 - 537
-------- -------- -------- --------
Subtotal Metals 12,120 1,429 58 23,972
Plastics 6,727 770 64 15,067
Corporate and other - (420) - 15,233
-------- -------- -------- --------
Totals $ 18,847 1,779 $ 122 $ 54,272
======== ======== ========
Gain on debt extinguishment 3,070
Depreciation (623)
Interest expense, net (1,779)
--------
Income from continuing operations before
income taxes and minority interests $ 2,447
========
- 15 -
Three months ended March 31, 2003
and at December 31, 2003:
---------------------------------
Metals:
Pressure vessels and springs $ 7,530 $ 1,763 $ - $ 13,407
Cylinders 5,590 529 57 7,877
-------- -------- -------- --------
Subtotal Metals 13,120 2,292 57 21,284
Plastics 8,143 651 75 14,516
Corporate and other - (840) - 15,723
-------- -------- -------- --------
Totals $ 21,263 2,103 $ 133 $ 51,523
======== ======== ========
Depreciation (685)
Interest expense, net (1,509)
--------
Loss from continuing operations
before income taxes $ (91)
========
(1) EBITDA is presented as it is the primary measurement used by management
in assessing segment performance and not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a
widely accepted financial indicator of a company's ability to incur and
service debt.
(2) Corporate and other assets at March 31, 2004 and December 31, 2002
includes $8.0 million of goodwill that relates to the Company's pressure
vessel and springs segment. For evaluation purposes under SFAS No. 142,
this goodwill is included in the carrying value of the pressure vessels
and springs segment. At March 31, 2004 and December 31, 2003, goodwill
of $1.5 million is recorded at each of pressure vessels and springs and
cylinders.
NOTE 8: DISCONTINUED OPERATIONS - CHANGE IN PLAN
In December 1995, the Company entered into a joint venture agreement with
China Metallurgical Import & Export Shanghai Company and Wanggang Township
Economic Development Corporation. The Company has a 65% interest in the joint
venture. During 1996, the Company capitalized its investment in the joint
venture by contributing cash of $150,000 and machinery and equipment with an
estimated fair market value of $1.9 million to the joint venture. The joint
venture manufacturers grating panels and is located in Wangang Township,
Pudong New Area, Shanghai in the Peoples Republic of China.
In 1999, the Company adopted a plan to exit the grating manufacturing
business through the disposition of its grating businesses, including its
Chinese joint venture investment. Upon adoption of the plan, the grating
businesses and assets were classified and accounted for as discontinued
operations, including a provision for estimated loss on disposal of the
Chinese joint venture of $2.0 million, and ceased consolidating the joint
venture as control of its daily operations was given to our joint venture
partners and our then expatriate management was removed.
- 16 -
In the four years since adopting this plan, the Company has made several
unsuccessful attempts to dispose of its investment in the joint venture but
now perceives that a presence in China is consistent with its future plans for
certain of its continuing operations. As a result and in connection with our
Chinese partners expressed desire to return control of the business to the
Company for various reasons, the Company has decided to retain its investment
in the Chinese joint venture and return it to continuing operations resulting
in consolidation of the joint ventures results of operations beginning on
January 1, 2004. As a result of the assumption of control, the Company will
continue to consolidate the joint venture's results of operations. Certain
information related to the joint ventures results of operations for the three
month period ended March 31, 2004 is as follows (in 000s):
Three months ended March 31, 2004
----------------------------------
Net sales $ 2,061
Income before taxes 182
EBITDA 185
NOTE 9: RESTRUCTURING
In the fourth quarter of 2001, we developed and adopted a restructure
plan for our continuing businesses and certain other businesses were
identified for disposal. By the end of 2002, this plan was substantially
completed except for continuing commitments under leases for two idle
facilities and certain equipment. The Company recorded restructuring costs,
including lease termination costs, related to the plan. The following
represents a summary of first quarter 2004 cash activity of the remaining
lease termination reserves (in thousands):
At Cash At
Description 12/31/03 Activity 03/31/04
--------------------------------------------- -------- -------- --------
Lease termination costs $ 474 $ (73) $ 396
======== ======== ========
Of the remaining lease termination costs, $382 relates to idle
manufacturing facilities in Milwaukee, Wisconsin and Clearfield, Utah. The
remainder relates to lease commitments under idle machinery in the Plastics
Group.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis is provided to assist readers in
understanding financial performance during the periods presented and
significant trends which may impact future performance. It should be read in
conjunction with the consolidated financial statements and accompanying notes
included elsewhere in this Form 10-Q and in conjunction with our annual report
on Form 10-K for the year ended December 31, 2003, as amended by Form 10-K/A
as filed on April 29, 2004.
GENERAL
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements, such as large-diameter seamless pressure vessels, hydraulic and
pneumatic cylinders, grating, leaf springs and precision plastic components.
- 17 -
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004 Compared to
Three Months Ended March 31, 2003
Net sales, gross margins and EBITDA percentages for the three months
ended 2004 and 2003 are as follows:
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2004 2003 2004 2003 2004 2003
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 5,184 $ 7,530 23.4% 28.3% 18.2% 23.4%
Cylinders 4,875 5,590 18.4% 18.7% 6.1% 9.5%
Grating 2,061 - 25.3% - 9.0% -
Plastics 6,727 8,143 16.8% 12.4% 11.4% 8.0%
--------- --------- ------ ------ ------ ------
Totals $ 18,847 $ 21,263 20.0% 19.7% 11.7% 13.8%
========= ========= ====== ====== ====== ======
Net sales for the first quarter of 2004 were down 11.4% from the first
quarter of 2003, and were down 21.1% for the U.S. operations only, due
primarily to low order levels in later 2003 and early 2004. Such low orders
were partially attributable to the Companys liquidity difficulties prior to
its refinancing in December 2003 and partially attributable to the general
economy and year-end holiday shut-downs at our customers. However, order
levels have increased from a backlog of $17.2 million for the U.S. operations
at the end of 2003 to a backlog of $23.4 million as of March 31, 2004, an
increase of 36%. The inclusion of the Grating sales in the first quarter of
2004 reflects the operations of the Companys 65% owned Chinese subsidiary.
Such operation had been treated as a discontinued operation. See "Minority
Interests" and "Discontinued Operations - Change in Plan" below.
Pressure vessels and springs sales and Cylinder sales were lower in the
first quarter of 2004 compared to the first quarter of 2003 due primarily to
the lower backlog at year-end 2003 compared to year-end 2002. The decrease in
Plastics revenues in 2004 compared to 2003 is a continuation of a trend that
began several years ago and is primarily the result of a continued reluctance
and lag in customers' decisions on newly quoted programs due to the
uncertainty surrounding our financial condition. Although the Plastics
segment has recently been awarded some new customer programs, [this segment
may continue to be affected by an overall lag in new program starts.]
The increase in gross margin as a percentage of sales in the first
quarter of 2004 compared to 2003 is attributable to the inclusion of the
Grating sales and margin in 2004. Excluding such sales and margin, the U.S.
operations gross margin percentage decreased from 19.7% in the first quarter
of 2003 to 19.3% in the first quarter of 2004. Both the Pressure vessels and
springs and Cylinders segments had lower gross margin percentages in 2004
compared to 2003 and this decrease is primarily attributable to the decrease
in sales as discussed above. The Plastics segment increased its gross profit
margin percentage even with reduced sales as a result of increased
productivity and a lower cost structure resulting from prior year cost
reduction efforts.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
- 18 -
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales
decreased during the first quarter of 2004 compared to 2003 primarily due to
the same factors affecting gross profit margin discussed above. A
reconciliation of EBITDA to operating income for the three months ended March
31, 2004 and 2003 by segment and corporate and other is as follows (000's):
Operating Deprec- Amortiz-
Profit iation ation EBITDA
--------- --------- --------- ---------
2004:
-----
Pressure vessels and springs $ 789 $ 156 $ - $ 945
Cylinders 250 49 - 299
Grating 185 - - 185
Plastics 363 407 - 770
Corporate and other(1) (431) 11 - (420)
-------- -------- -------- --------
Totals $ 1,156 $ 623 $ - $ 1,779
======== ======== ======== ========
2003:
-----
Pressure vessels and springs $ 1,584 $ 179 $ - $ 1,763
Cylinders 458 71 - 529
Plastics 234 417 - 651
Corporate and other (858) 18 - (840)
-------- -------- -------- --------
Totals $ 1,418 $ 685 $ - $ 2,103
======== ======== ======== ========
(1) - Excludes gain on debt extinguishment of $3,070,000. See "Gain on Debt
Extinguishment" below.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first quarter
of 2004 were $2.7 million, compared to $2.8 million for the 2003 first
quarter. This decrease in SGA is due to continued cost cutting measures and
payroll reductions due to voluntary departures of personnel not being
replaced. SGA as a percentage of sales increased to 14.3% for the first
quarter of 2004 compared to 13.2% in the 2003 first quarter primarily due to
the effects of the decrease in sales.
Gain on Debt Extinguishment
The Company had been named as one of several defendants in fifteen
consolidated lawsuits filed in December 2000 or early 2001 in the Superior
Court for Los Angeles County, California. The plaintiffs in these suits,
except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC were related parties.
The plaintiffs alleged that the Company received loans from SFSC that have not
been repaid. On May 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in
the U.S. Bankruptcy Court for the District of Connecticut.
A settlement was reached in the Superior Court action among the
plaintiffs, Bankers Trust Co. and certain other financial institution
defendants. In the settlement, Bankers Trust Co. and the other settling
financial institution defendants paid the plaintiffs an amount specified in
the settlement agreement, and Bankers Trust Co. received an assignment of the
- 19 -
claims of the plaintiffs and such other settling defendants against the
Company and other defendants. In the SFSC bankruptcy proceeding, the Company
and certain other defendants entered into a settlement with SFSC and Bankers
Trust Co. Under this settlement (1) the Company is obligated to pay SFSC a
settlement amount by December 31, 2006 in the sum of $4.29 million, plus
interest at the rate of 10% per annum, in full satisfaction of the Companys
indebtedness to SFSC under notes payable totaling $4.6 million, plus interest,
and for certain credit support fees payable, which settlement amount is net of
an offset against SFSCs note payable to the Company in the amount of $310,000
plus interest, and (2) provided it makes such settlement payment, the Company
is released from all claims that have been or could have been asserted against
the Company by the plaintiffs or the settling financial institution defendants
in the California Superior Court suits or by SFSC in the bankruptcy
proceeding. The settlement amount does not constitute a new liability of the
Company, as it relates to indebtedness and a note receivable that had
previously been recorded on the Companys balance sheet. The settlement
resulted in a $3.1 million gain on debt extinguishment.
[The Company is currently investigating other recapitalization scenarios
that include, among other things, the use of additional private capital fund
financing to repurchase at discounts some portion or all of our senior and
unsecured subordinated notes payable.]
Other Income
Other income for the first quarter of 2004 was $81,000, compared to other
expense of $28,000 for the first quarter of 2003. There were no significant
offsetting items of other income and expenses in either period.
Minority Interests
Minority interests of $0.1 million represents income during the first
quarter of 2004 allocated to the minority ownerships of the Company's
consolidated foreign grating joint venture. Minority interests are calculated
based on the percentage of minority ownership. See "Discontinued Operations"
below.
Interest Expense
Interest expense for the first quarter of 2004 was $1.8 million compared
to $1.5 million for the first quarter of 2003. This increase is primarily due
to the higher level of amortization of deferred financing costs and estimated
warrant value in the 2004 first quarter than the 2003 first quarter.
Income Taxes
There was no tax provision from continuing operations in the first
quarters of 2004 or 2003. The Company has net operating loss carryforwards
for Federal tax return reporting purposes totaling $115.2 million at December
31, 2003, $53.1 million of which expire by the end of 2004. [The Company may
be able to utilize its loss carryforwards against possible increased future
profitability.] However, management has determined to fully reserve for the
total amount of net deferred tax assets as of December 31, 2003 [and to
continue to do so during 2004 until management can conclude that it is more
likely than not that some or all of our loss carryforwards can be utilized.]
- 20 -
Discontinued Operations - Change in Plan
In December 1995, the Company entered into a joint venture agreement with
China Metallurgical Import & Export Shanghai Company and Wanggang Township
Economic Development Corporation. The Company has a 65% interest in the joint
venture. During 1996, the Company capitalized its investment in the joint
venture by contributing cash of $150,000 and machinery and equipment with an
estimated fair market value of $1.9 million to the joint venture. The joint
venture manufacturers grating panels and is located in Wangang Township,
Pudong New Area, Shanghai in the Peoples Republic of China.
In 1999, the Company adopted a plan to exit the grating manufacturing
business through the disposition of its grating businesses, including its
Chinese joint venture investment. Upon adoption of the plan, the grating
businesses and assets were classified and accounted for as discontinued
operations, including a provision for estimated loss on disposal of the
Chinese joint venture of $2.0 million, and ceased consolidating the joint
venture as control of its daily operations was given to our joint venture
partners and our then expatriate management was removed.
In the four years since adopting this plan, the Company has made several
unsuccessful attempts to dispose of its investment in the joint venture and
now perceives that a presence in China is consistent with its future plans for
certain of its continuing operations. As a result and in connection with our
Chinese partners expressed desire to return control of the business to the
Company for various reasons, the Company has decided to retain its investment
in the Chinese joint venture and return it to continuing operations resulting
in consolidation of the joint ventures results of operations for the quarter
ended March 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company manages its liquidity as a consolidated enterprise. The
operating groups of the Company carry minimal cash balances. Cash generated
from group 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 group operating activities generally is provided from funds
available under the same revolving credit arrangements.
Recent Events
Refinancing
On December 3, 2003, the Company comlpeted the refinancing its bank loan
facilities and restructuring its 13% senior notes. On that date, the Company
entered into a new $25.0 million revolving and term loan bank credit facility
with Congress Financial Corporation (Congress) that replaced its then existing
revolving and term loan facility with Bank of America (BOA). At the same
time, the Company also entered into $5.2 million of new loan facilities with
two private capital funds through a $4.2 million secured term loan and a $1.0
million increase in a then existing subordinated note payable. Proceeds from
these refinancing activities totaled $13.0 million, including $4.6 million
under the revolving credit facility, $3.2 million under the term loan facility
and $5.2 million of financing from the private capital funds. At the time of
the refinancing, the Companys indebtedness to BOA totaled $11.7 million,
including $10.8 million of revolving credit debt and a term loan of $0.9
million. Proceeds from the refinancing were used to repay our then existing
- 21 -
BOA facilities, fund $0.7 million of consent fees payable to our 13% senior
noteholders and pay $0.6 million of transaction related fees and expense to
our new lenders. All defaults that existed under the BOA facilities at the
time of the refinancing were removed as the result of the full repayment of
amounts then outstanding.
Congress Financial Corporation Revolving and Term Loan Credit Facility
On December 3, 2003, the Company entered into a new revolving and term
loan bank credit facility with Congress Financial Corporation. This credit
facility consists of revolving credit, term loan and letter of credit
accommodations up to a maximum credit of $25.0 million. At December 31, 2003,
the Company had outstanding borrowings under this facility totaling $12.4
million, including $9.2 million of revolving credit and a term loan of $3.2
million. The $3.2 million term loan amortizes to the revolving credit
availability at a rate of $53,000 per month beginning on January 31, 2004
until fully paid. This facility has a three-year initial term and
automatically renews for additional one-year increments unless either party
gives the other notice of termination at least 90 days prior to the beginning
of the next one-year term.
Interest on loans outstanding under the Congress facility is payable
monthly at a variable rate tied to the prime rate publicly announced from time
to time by Wachovia Bank, National Association, plus 2.50%. The facility also
provides for a default interest rate of the prime rate plus 4.50%.
The Congress facility is collateralized by a continuing security interest
and lien on substantially all of the current and after-acquired assets of
Reunion including, without limitation, all accounts receivable, inventory,
real property, equipment, chattel paper, documents, instruments, deposit
accounts, contract rights and general intangibles.
The Congress facility requires Reunion to comply with financial covenants
and other covenants, including a minimum amount of earnings before interest,
taxes, depreciation and amortization (EBITDA) and a minimum fixed charge
coverage ratio. The minimum EBITDA covenant began in 2004 and requires the
Company to maintain minimum monthly amounts of EBITDA ranging from $450,000 in
January 2004 to $600,000 in December 2004 with $50,000 to $100,000 increments
or decrements occurring during the year. There are also minimum monthly
EBITDA amounts required during 2005 and 2006. Through March 2004, the Company
achieved the minimum monthly EBITDA required for compliance with this
covenant. The minimum fixed charge coverage ratio covenant requires the
Company to maintain a minimum fixed charge coverage ratio to be tested as of
the last day of each fiscal quarter beginning with the quarter ended March 31,
2004, for the year-to-date period starting on January 1, 2004. For quarters
ended on and after December 31, 2004, the components of the calculation are on
a rolling, twelve-month basis. The ratio is defined as EBITDA divided by
fixed charges (defined as interest expense, capital expenditures, regularly
scheduled or required principal payments on debt and taxes paid). For the
ratio calculation period ended March 31, 2004 and for each year-to-date period
during 2004 ended on quarters thereafter, the required minimum fixed charge
coverage ratio is 0.65:1, 0.77:1, 0.77:1 and 0.80:1, respectively. There are
also minimum fixed charge coverage ratio amounts required during 2005 and
2006. The Company was in compliance with the minimum fixed charge coverage
ratio covenant for the period ended March 31, 2004.
In addition, the facilities contain various other affirmative and
negative covenants. As of the date of this report, the Company was in
compliance with all other covenants. The facilities require Reunion to pay
the reasonable expenses incurred by Congress in connection with the
facilities. Available borrowings under the revolving credit portion are based
upon a percentage of eligible receivables and inventories.
- 22 -
Private Capital Fund Financing
On August 11, 2003, Reunion borrowed $2.5 million from a private capital
fund by executing a senior subordinated secured promissory note payable in the
amount of and with cash proceeds of $2.5 million. The note bears interest at
10% per annum, such interest being payable on the last day of every month in
arrears commencing on August 31, 2003. The principal amount of $2.5 million
was due on August 11, 2005 with voluntary prepayments permitted but was
extended to December 5, 2006 as discussed below. The note is secured by a
majority of the assets of Reunion, provided that such security interest is
subordinate to the security interest of Congress. In addition to its
subordinated security interest, the fund received a warrant to purchase
625,000 shares of the Company's common stock, together with related
registration rights. The cash proceeds were used for working capital and
other general corporate purposes.
In connection with the refinancing on December 3, 2003, this same private
capital fund amended and restated its senior subordinated secured promissory
note to evidence an additional $1.0 million of financing provided to the
Company at the same interest rate but with the maturity date extended from
August 11, 2005 to December 5, 2006.
In connection with the refinancing on December 3, 2003, a separate
private capital fund provided the Company with a $4.2 million loan evidenced
by a senior subordinated secured promissory note payable with net cash
proceeds of $4.0 million after fees and expenses. The note bears interest at
a rate of the greater of 12%, or the prime rate as published in the Wall
Street Journal plus 8%. Interest is payable on the first day of every month
and commenced on January 1, 2004. The principal amount of $4.2 million is due
on December 1, 2006. Prepayments in whole or in part are permitted without
penalty commencing in May 2004. The note is secured by mortgage liens and/or
deed of trust security interests totaling $4.2 million encumbering all
premises owned by the Company. In addition to its security interest, the fund
received a warrant to purchase 500,000 shares of the Company's common stock
and registration rights with respect to the warrant and shares issuable
thereto at a price of $0.50 per share.
13% Senior Notes
We had a total of $24.855 million of 13% senior notes outstanding. The
senior notes required semi-annual interest payments every November 1st and May
1st and sinking fund payments of $12.5 million on May 1, 2002 and $12.355
million on May 1, 2003. Since November 1, 2001, we were unable to make the
required semi-annual interest payments or the sinking fund payments due May 1,
2002 and 2003. As a result, an event of default, as defined in the indenture
governing the 13% senior notes, had existed since December 1, 2001 as we were
not able to make the November 1, 2001 semi-annual interest payment within the
30-day cure period provided for in the indenture.
In November 2003, we solicited the consent of our noteholders to certain
provisions and waivers of the indenture governing the 13% senior notes in an
effort to facilitate the refinancing. The significant provisions of the
solicitation requested that the noteholders consent to permanently waive all
then existing defaults under the indenture, cancel all accrued and unpaid
interest, cancel 12% of the principal amount of senior notes and extend the
maturity of the notes to December 2006. In order for the consent to be
effective, we needed noteholders comprising at least 90% of the principal
amount of outstanding senior notes to consent. As of December 1, 2003, the
end of the consent period, $23,250,700 of the $24,855,000 principal amount of
senior notes, or 93.55%, had consented.
- 23 -
In exchange for their consent, each consenting noteholder received a
consent fee of $27.625 per $1,000 principal amount of senior notes owned,
warrants to purchase 76.18 shares of the Companys common stock at $0.01 per
share for each $1,000 principal amount of notes owned and a junior priority
lien on the Companys assets. In the refinancing that took place on December
3, we placed in escrow with the trustee of the senior notes, $686,619 for
payment of consent fees, of which $642,301 has been or will be disbursed to
consenting senior noteholders. Warrants to purchase the Companys common stock
totaling 1,771,217 have been reserved for future issuance to consenting
noteholders. Effective with having obtained the consents of holders of at
least 90% of the principal amount of outstanding senior notes, all previously
existing defaults under the indenture for the 13% senior notes have been
permanently waived.
SUMMARY OF 2004 ACTIVITIES
Cash and cash equivalents totaled $1.3 million at March 31, 2004,
compared to $0.8 million at December 31, 2003, an increase of $0.5 million.
This resulted from $0.1 million of cash used in operating activities and $0.1
million used in investing activities being more than offset by almost $0.8
million provided by financing activities. Cash and cash equivalents at the
end of a period generally represents lockbox receipts from customers to be
applied to our Congress revolving credit facility in the following one to two
business days.
Operating Activities
Operating activities used only $0.1 million in cash in the first quarter
of 2004 as an increase in inventories excluding the consolidated foreign joint
venture were partially funded by an increase in trade payables.
Investing Activities
Capital expenditures were $0.1 million.
Financing Activities
The Company made scheduled repayments of the Congress term loan totaling
$159,000 and paid an additional $271,000 in costs related to the December 2003
refinancing. Revolving credit facility borrowings increased $1.2 million
during the first quarter of 2004. Other debt repayments totaling $16,000
represent payments on capital lease obligations and other debt.
Lease Termination Reserves
In the fourth quarter of 2001, we developed and adopted a restructure
plan for our continuing businesses and certain other businesses were
identified for disposal. By the end of 2002, this plan was substantially
completed except for continuing commitments under leases for two idle
facilities and certain equipment. The Company recorded restructuring costs,
including lease termination costs, related to the plan. The following
represents a summary of first quarter 2004 cash activity of the remaining
lease termination reserves (in thousands):
At Cash At
Description 12/31/03 Activity 03/31/04
--------------------------------------------- -------- -------- --------
Lease termination costs $ 474 $ (73) $ 396
======== ======== ========
- 24 -
Of the remaining lease termination costs, $382 relates to idle
manufacturing facilities in Milwaukee, Wisconsin and Clearfield, Utah. The
remainder relates to lease commitments under idle machinery in the Plastics
Group.
FACTORS THAT COULD AFFECT FUTURE RESULTS
Reunion's vendors may restrict credit terms
We have corrected many vendor-related problems with liquidity generated
from the refinancing and from asset sales. However, another period of tight
liquidity could result in key vendors restricting or eliminating the extension
of credit terms to us. If this would happen, our ability to obtain raw
materials would be strained significantly and our ability to manufacture
products would be reduced.
Reunion's bank financing is subject to financial covenants
We have removed all defaults on our bank financing and senior notes.
However, our new bank financing is subject to monthly financial and other
covenants. If our operations do not improve during 2004, we may fail to meet
one or more financial or other covenants. If this would happen, we would be
in default on our bank obligations and, subject to the terms of the loan and
security agreement, all of our bank loans would be due and payable. Although
it may be possible to negotiate waivers of defaults, no assurances can be
given that we would be able to do so.
Reunion is exposed to the risks of litigation and environmental matters
We have made significant progress in settling major exposures to
litigation and environmental claims during 2003 and in the first quarter of
2004. However, we are still exposed to certain undecided litigation and
environmental matters. An adverse outcome in one or more of these matters
could have a significant negative effect on our financial position and results
of operations.
Reunion operates in highly competitive mature, niche markets
Our products are sold in highly competitive mature, niche markets and we
compete with companies of varying size, including divisions and subsidiaries
of larger companies that have financial resources that exceed ours. This
combination of competitive and financial pressures could cause us to lose
market share or erode prices, which could negatively impact our financial
position and results of operations.
Reunions past performance could impact future prospects
Our past performance has been poor. Because of this, potential or
current customers may decide not to do business with us. If this were to
happen, our sales may not increase or may decline. If sales do not increase
or we experience a further decline in sales, our ability to cover costs would
be further reduced, which could negatively impact our financial position and
results of operations.
Reunion is a going concern
The financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At March 31, 2004, the Company
has a deficiency in working capital of $3.1 million net of related party
- 25 -
obligations and a deficiency in assets of $25.4 million. These conditions
raise substantial doubt about the Companys ability to continue as a going
concern. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result from the
outcome of this uncertainty.
We successfully refinanced our bank debt, extinguished a significant
portion of our obligations under the senior notes and removed all previously
existing defaults on our debt. These steps were taken to improve liquidity
and defer the principal maturities on a significant portion of our debt. The
Company is investigating other recapitalization scenarios in an effort to
provide additional liquidity and extinguishments or deferrals of debt
obligations. Although we believe we can accomplish these plans, no assurances
exist that we will. Failure to accomplish these plans could have an adverse
impact on the Company's liquidity, financial position and future operations.
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.
Item 4. Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as
amended, Reunions management, including its Chief Executive Officer and Chief
Financial Officer, conducted an evaluation as of the end of the period covered
by this report, of the effectiveness of Reunions disclosure controls and
procedures as defined in Rule 13a-15(e). Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that Reunions
disclosure controls and procedures were effective as of the end of the period
covered by this report. As required by Rule 13a-15(d), Reunions management,
including its Chief Executive Officer and Chief Financial Officer, also
conducted an evaluation of Reunions internal control over financial reporting
to determine whether any changes occurred during the quarter that have
materially affected, or are reasonably likely to materially affect, Reunions
internal control over financial reporting. Based on that evaluation, there has
been no such change during the quarter.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that
the objectives of the system will be met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood
of future events.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company in involved in various legal proceedings and environmental
matters. See "Item 1. Financial Statements, Note 6: Commitments and
Contingent Liabilities."
- 26 -
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
-------------------
The Company filed a Current Report on Form 8-K dated
May 4, 2004 on May 5, 2004 to set the record date of
those shareholders entitled to vote at and to announce the
time and place of the Company's 2004 annual meeting of the
Company's stockholders.
(c) Exhibits
--------
Exhibit No. Exhibit Description
----------- -------------------
31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- 27 -
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 17, 2004 REUNION INDUSTRIES, INC.
------------ (Registrant)
By: /s/ Charles E. Bradley, Sr.
-------------------------------
Charles E. Bradley, Sr.
Chairman and Chief
Executive Officer
By: /s/ John M. Froehlich
-------------------------------
John M. Froehlich
Executive Vice President, Finance
and Chief Financial Officer
(chief financial and accounting officer)
- 28 -
EXHIBIT 31.1
CERTIFICATION
I, Charles E. Bradley, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reunion Industries,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 17, 2004
/s/ Charles E. Bradley, Sr.
-------------------------------------
Chief Executive Officer
- 29 -
EXHIBIT 31.2
CERTIFICATION
I, John M. Froehlich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reunion Industries,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 17, 2004
/s/ John M. Froehlich
-------------------------------------
Chief Financial Officer
- 30 -
EXHIBIT 32.1
REUNION INDUSTRIES, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
In connection with this quarterly report on Form 10-Q of Reunion Industries,
Inc. for the quarter ended March 31, 2004, I, Charles E. Bradley, Sr., Chief
Executive Officer of Reunion Industries, Inc., hereby certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley
Act of 2002, that:
1. this Form 10-Q for the quarter ended March 31, 2004 fully complies
with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. the information contained in this Form 10-Q for the quarter ended
March 31, 2004 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: May 17, 2004
/s/ Charles E. Bradley, Sr.
---------------------------
Chief Executive Officer
- 31 -
EXHIBIT 32.2
REUNION INDUSTRIES, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
In connection with this quarterly report on Form 10-Q of Reunion Industries,
Inc. for the quarter ended March 31, 2004, I, John M. Froehlich, Chief
Financial Officer of Reunion Industries, Inc., hereby certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley
Act of 2002, that:
1. this Form 10-Q for the quarter ended March 31, 2004 fully complies
with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. the information contained in this Form 10-Q for the quarter ended
March 31, 2004 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: May 17, 2004
/s/ John M. Froehlich
---------------------------
Chief Financial Officer
- 32 -