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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 2005
Commission File Number 01-15739
--------
REUNION INDUSTRIES, INC.
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(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 15236
-------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: COMMON STOCK, $.01 par value
Name of Each Exchange on Which Registered: AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
----- -----
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes No X
----- -----
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
-----
Indicate by check mark whether the Registrant is a
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the Registrant is a shell company Yes No X
--- ---
At March 15, 2006, 16,656,519 shares of common stock were issued and
outstanding. As of June 30, 2005, the aggregate market value of the voting
stock held by non-affiliates of the registrant (computed by reference to the
average of the high and low sales prices on the American Stock Exchange) was
$1,155,333.
DOCUMENTS INCORPORATED BY REFERENCE: Part III, Items 10 through 14 of this
report are incorporated from the Registrant's definitive proxy statement to be
filed on or before May 1, 2006.
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REUNION INDUSTRIES, INC.
TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business 4
Item 2. Properties 6
Item 3. Legal Proceedings 7
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 26
Item 8. Consolidated Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 27
Item 9a. Controls and Procedures 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial
Owners and Management 28
Item 13. Certain Relationships and Related Transactions 28
Item 14. Principal Accounting Fees and Services 28
PART IV
Item 15. Exhibits, Financial Statements Schedules,
and Reports on Form 8-K 29
SIGNATURES 30
- 2 -
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act that are intended to be covered by the safe harbors created thereby. The
forward-looking statements that are contained in this report are enclosed in
brackets [ ] for ease of identification. Note that all forward-looking
statements involve risks and uncertainties. Factors which could cause the
future results and shareholder values to differ materially from those
expressed in the forward-looking statements include, but are not limited to,
the strengths of the markets which the Company serves, the Company's ability
to generate liquidity and the Company's ability to service its debts and meet
financial covenants. 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
ITEM 1. BUSINESS
GENERAL
Reunion Industries, Inc., a Delaware corporation ("Reunion Industries" or
"Reunion"), is the successor by merger, effective March 16, 2000, of Chatwins
Group, Inc. ("Chatwins Group") with and into Reunion Industries, Inc. The
terms "Company" and "We" refer to Reunion after the merger. Reunion
Industries' executive offices are located at 11 Stanwix Street, Suite 1400,
Pittsburgh, Pennsylvania 15222 and its telephone number is (412) 281-2111.
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements. Such products include large-diameter seamless pressure vessels,
hydraulic and pneumatic cylinders and metal bar grating. Until December 2005,
the Company's products included precision plastic components made by its
thermoplastics division ("Oneida"). During the year 2005, the Company decided
to exit the plastics business and, effective March 1, 2006, Oneida was sold.
See ITEM 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, SUBSEQUENT EVENTS-Sale of Oneida. Previously, during
the year 2004, the Company decided to exit the thermoset plastics portion
("Rostone") of its plastics segment. The Rostone business was sold in the
first quarter of 2005. Until December 2004, the Company's products also
included leaf springs. Such business was sold in January 2005. Prior to
2003, the Company's products also included heavy duty cranes, bridge
structures and materials handling systems. These businesses were sold during
2002. All of these sold businesses are reported as discontinued operations.
The Company's customers include original equipment manufacturers and end-
users in a variety of industries, such as transportation, power generation,
chemicals, metals and electronics. The Company's continuing operations are
comprised of the following businesses.
CPI - CPI, founded in 1897 and located in McKeesport, Pennsylvania,
specializes in manufacturing large, seamless pressure vessels for the above
ground storage and transportation of highly pressurized gases such as natural
gas, hydrogen, nitrogen, oxygen and helium. These pressure vessels are
provided to customers such as industrial gas producers and suppliers, the
alternative fueled vehicle compressed natural gas fuel industry, chemical and
petrochemical processing facilities, shipbuilders, NASA, public utilities and
gas transportation companies.
Hanna - Hanna, founded in 1901 and located in Libertyville, Illinois,
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.
Shanghai Klemp Metal Products Co., Ltd. Located in Shanghai, China, this
business was formed in 1995 when the Company entered into a joint venture
agreement with two other Chinese based affiliates. The Company has a 65%
interest in the joint venture. In 1999, the Company adopted a plan to exit
the grating manufacturing business and was able to sell all of its grating
businesses, with the exception of this business in China, in that year. This
grating business was classified as a discontinued business from that time
until the year 2004. 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 returned it to
continuing operations effective at the beginning of 2004
- 4 -
Markets and Customers. Our businesses operate in mature markets.
Except for pressure vessels, products are sold in highly competitive markets
both in the U.S. and internationally and compete with a significant number of
companies of varying sizes, including divisions or subsidiaries of larger
companies, on the basis of price, service, quality and the ability to supply
customers in a timely manner. CPI is the largest provider of pressure vessels
in the U.S. Many of our competitors have financial and other resources that
are substantially greater than ours. [Competitive pressures or other factors
could cause us to lose market share or erode prices which could negatively
impact the Company's results of operations.]
Individual customers sometimes account for more than 10% of a business
unit's sales. However, during 2005, no customer accounted for more than 10%
of consolidated sales.
Sales and Marketing. We market and distribute our products in a variety
of ways including in-house marketing and sales personnel at all of our
divisions, domestic independent and manufacturer representatives, domestic and
international agents and independent distributors that specialize in metal
products.
Raw Materials. The major raw materials used in our businesses include
welded and seamless steel tubing and pipe, steel alloy bars, steel plates,
brass tubing and bars and aluminum extrusions, all of which are supplied by
various domestic sources. Prices began to rise half way through the 2004 year
and continued to rise in 2005. [Increases in the prices of raw materials
could negatively affect our operating results if they cannot be passed on to
our customers.]
Backlog. Our U.S. backlog, which the Company believes is firm, was
$ 22.2 million at December 31, 2005 and $16.0 million at December 31, 2004.
As of February 28, 2006, such backlog continued to increase and was
approximately $28.0 million at that date.
Research and Development. Our research and development activities relate
to improving the quality and performance of our products. We also develop
ways to meet the design requirements and specifications of customers that
require customized products. To do this, there are engineering departments at
all manufacturing divisions. Products are not materially dependent on any
patents, licenses or trademarks.
REPORTABLE SEGMENT DATA - See PART IV, NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, NOTE 17 of this report for financial information about Reunion's
segments. See Item 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK, of this report for financial information about geographic areas.
Employees
At December 31, 2005, Reunion Industries employed 354 full time employees
in its continuing businesses, both in the United States and in China, of which
9 were Corporate employees. The Company believes its relations with its
employees are good. A breakdown of the Company's workforce by location and
function at December 31, 2005 is as follows.
General and
Location Manufacturing Administrative Total
-------- ----------------- ----------------- -----
Union Non-Union Union Non-Union
----- --------- ----- ---------
McKeesport, PA 86(1) 6 8(1) 12 112
Libertyville, IL 98 21 119
Shanghai, China 91 22 113
Beijing, China 1 1
Corporate:
Pittsburgh, PA 9 9
--- --- - --- -----
Totals 86 195 8 65 354
=== === = === =====
(1) United Steelworkers of America - Contract expires May 31, 2006.
- 5 -
The employee in Beijing, China is a Chinese national and relates to seamless
pressure vessel sales efforts in that region. The employees in Shanghai,
China are Chinese nationals and relate to the Company's grating subsidiary.
These Chinese nationals are not covered by a union nor are they covered by any
benefit or insurance plans sponsored by the Company.
As of December 31, 2005, approximately 27% of the Company's workforce was
covered by collective bargaining agreements, all of which expire May 1, 2006.
Available Information
Reunion's website is http://www.reunionindustries.com. Reunion makes
available free of charge, through its website, its annual, quarterly and
current reports, and any amendments to those reports, as soon as reasonably
practicable after electronically filing such reports with the Securities and
Exchange Commission. Information contained on Reunion's website is not part
of this report.
ITEM 1A. RISK FACTORS
See ITEM 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, FACTORS THAT COULD EFFECT FUTURE RESULTS, for risk
factors applicable to the Company.
ITEM 2. PROPERTIES
The Company has a total of 37.0 acres and approximately 85,500 square
feet under roof being used for ongoing operations. Except for CPI's sales
office in Beijing, China and the Company's corporate offices sites in
Pittsburgh, PA, which are administrative, all locations are both manufacturing
and administrative facilities:
Approx.
Square Land Expiration
Location Feet Acres Title Date
-------- ------- ------- ----- ----------
McKeesport, PA 603,000 37.0 Owned -
Beijing, China 1,000 - Leased 10/31/07
Shanghai, China 20,500 Leased 01/01/25
Libertyville, IL 56,000 - Leased 12/31/13
Headquarters:
Pittsburgh, PA 8,000 - Leased 4/30/07
The operations in Libertyville, IL include the operations of a business
relocated from the Company's Milwaukee, WI facility. The Company also has
land and a building in Lafayette, IN that housed the Company's Rostone
operation that was sold in 2005. Both the Milwaukee, WI and Lafayette, IN
properties are being held for sale. The land and buildings associated with
the Company's Oneida operations are treated as discontinued businesses and
were part of the Oneida sale in March 2006. The Company's owned properties are
subject to mortgages in favor of its lenders.
We also own certain oil and gas properties in Louisiana that were
retained when we disposed of our oil and gas operations in 2000. We retained
these properties because of litigation concerning environmental matters. [We
plan to operate the wells on the property for the net production revenues as
required by a litigation settlement agreement]
All of our facilities have been in operation for a sufficient period of
time to demonstrate their suitability for manufacturing and administrative
purposes. [The production capacities of our facilities are sufficient for
future needs.]
- 6 -
ITEM 3. LEGAL PROCEEDINGS
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 pending legal
proceedings follows.
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
(currently owned by Rockwell Automation), 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 this acceptance in the first lawsuit,
Allen-Bradley Company has accepted and defended all additional lawsuits, a
total of 200 separate actions, that the Company has tendered.
Asbestos (Alliance)
-------------------
The Company has been named in approximately 2,600 separate asbestos suits
filed since January 1, 2001 by various plaintiffs' law firms in Michigan,
Pennsylvania, Ohio, Illinois, Maryland, Alabama and W. Virginia. The claims
are primarily directed against over 100 defendants, including Reunion, and
allege that cranes from the Company's former crane manufacturing location in
Alliance, OH, were present in various steel mills located in those states 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 asserting all alternative defenses
permitted under the various Courts' Case Management Orders. Counsel for the
Company has successfully resolved approximately 500-600 cases with no cost to
the Company. The Company denies that it manufactured any products containing
asbestos or otherwise knew or should have known that any component part other
manufacturers provided contained any dangerous or toxic materials. It has
been further denied that the Company was otherwise advised by component part
manufacturers that component parts could be hazardous, or otherwise
constitutes a health risk. The Company intends to vigorously defend against
these lawsuits.
- 7 -
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Reunion Industries' common stock is traded on the American Stock
Exchange. As of March 15, 2006, there were 809 holders of record of Reunion
Industries' common stock with an aggregate of 16,656,519 shares outstanding.
The table below reflects the high and low sales prices for the quarterly
periods for 2005 and 2004.
QUARTER ENDED High Low
------------- ------ ------
2005
March 31.......................................$0.390 $0.250
June 30........................................$0.320 $0.150
September 30...................................$0.220 $0.150
December 31....................................$0.360 $0.200
2004
March 31.......................................$0.680 $0.320
June 30........................................$0.600 $0.310
September 30...................................$0.550 $0.250
December 31....................................$0.500 $0.220
No cash dividends have been declared or paid during the past two fiscal
years. Cash dividends are limited by the availability of funds, by
restrictions contained in our loan agreements and by statutory restrictions on
a corporation's payment of dividends when it has negative net worth. [We do
not anticipate paying cash dividends on our common stock in the foreseeable
future.]
Equity Compensation Plan Information
Securities issued, and securities available, under equity compensation
plans as of December 31, 2005 are as follows:
Equity Compensation Plans
---------------------------
Approved by Not Approved
Security by Security
Holders Holders
------------ ------------
Number of common stock shares to be issued upon
exercise of outstanding options 1,370,000 -
========= =========
Weighted-average exercise price of
outstanding options $0.25 -
========= =========
Number of common stock shares remaining available
for future issuance under equity
compensation plans (excluding outstanding
options) 354,600 -
========= =========
ITEM 6. SELECTED FINANCIAL DATA
All data is reported in thousands, except for per-share data. The data
is derived from the consolidated financial statements presented in Item 15
which also should be read. Effective January 1, 2002, we ceased amortizing
goodwill.
- 8 -
Year Ended December 31, 2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
EARNINGS DATA:
Net sales (1) $ 49,727 $ 50,715 $ 39,262 $ 35,404 $ 58,179
Cost of sales 39,848 40,914 32,032 30,969 47,713
-------- -------- -------- -------- --------
Gross profit 9,879 9,801 7,230 4,435 10,466
Selling, general and
administrative expenses 7,046 7,152 7,722 9,311 10,168
Gain on extinguishment of debt (3,450) (3,540) (10,991) - -
Provision for restructuring - - - - 6,811
Other (income) expense, net (203) (798) (293) (919) (594)
-------- -------- -------- -------- --------
Operating profit (loss) 6,486 6,987 10,792 (3,957) (5,919)
Interest expense, net(2) 8,906 7,933 6,902 8,010 7,021
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes and minority interests (2,420) (946) 3,890 (11,967) (12,940)
Provision for (benefit from)
income taxes 49 - - - 12,678
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before minority interests (2,469) (946) 3,890 (11,967) (25,618)
Less: minority interests 211 330 - - -
-------- -------- -------- -------- --------
Income (loss) from
continuing operations $ (2,680) $ (1,276) $ 3,890 $(11,967) $(25,618)
======== ======== ======== ======== ========
Income (loss) from continuing
operations applicable to
common stockholders $ (2,680) $ (1,276) $ 3,890 $(11,967) $(25,618)
======== ======== ======== ======== ========
Weighted average common shares
Outstanding - basic 16,479 16,279 16,279 15,591 15,587
======== ======== ======== ======== ========
Weighted average common shares
Outstanding - diluted 16,479 16,279 16,654 15,591 15,587
======== ======== ======== ======== ========
Income (loss) from continuing
operations per common share
- basic $ (0.16) $ (0.08)$ 0.24 $ (0.77) $ (1.64)
======== ======== ======== ======== ========
Income (loss) from continuing
operations per common share
- diluted $ (0.16) $ (0.08)$ 0.24 $ (0.77) $ (1.64)
======== ======== ======== ======== ========
OPERATING AND OTHER DATA:
Cash flow from (used in)
operating activities(3) $ 139 $ (3,323)$ (2,665) $ (979) $ 5,050
======== ======== ======== ======== ========
Cash flow from (used in)
investing activities(3) $ 3,095 $ (780)$ 173 $ 27,931 $ (2,532)
======== ======== ======== ======== ========
Cash flow from (used in)
financing activities(3) $ (2,311) $ 4,565 $ 2,440 $(27,337) $ (3,863)
======== ======== ======== ======== ========
Depreciation and
amortization(4) $ 720 $ 804 $ 949 $ 1,088 $ 3,372
======== ======== ======== ======== ========
Capital expenditures(5) $ 472 $ 546 $ 104 $ 139 $ 281
======== ======== ======== ======== ========
- 9 -
BALANCE SHEET DATA:
Total assets $ 51,260 $ 56,596 $ 51,523 $ 51,009 $ 84,416
======== ======== ======== ======== ========
Debt in default $ 43,236 $ - $ - $ 40,049 $ 64,389
======== ======== ======== ======== ========
Revolving credit facility $ - $ 14,485 $ 9,214 $ - $ -
======== ======== ======== ======== ========
Long-term debt(6) $ - $ 35,628 $ 31,915 $ 61 $ 3,793
======== ======== ======== ======== ========
Stockholders' equity
(deficit) $(27,517) $(25,583)$(27,755) $(30,840) $(17,245)
======== ======== ======== ======== ========
EBITDA(7): $ 3,756 $ 4,251 $ 750 $ (2,119) $ 1,116
======== ======== ======== ======== ========
(1) Represents sales from continuing operations. The Company has adjusted
prior year financial data for the classifications of its Oneida division as
discontinued operations.
(2) Includes amortization of debt issuance expenses and estimated warrant
value of the following amounts for the following years: 2005: $1,241; 2004:
$1,002; 2003: $87; 2002: $754; and 2001: $1,011.
(3) Not restated for discontinued operations.
(4) Excludes amortization of debt issuance expenses and depreciation and
amortization related to discontinued operations. See note (2) above.
(5) Excludes capital expenditures of discontinued operations.
(6) Excludes borrowings under revolving credit facilities.
(7) EBITDA is calculated as follows:
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before taxes $ (2,420)$ (946)$ 3,890 $(11,967) $(12,940)
Interest expense, net(2) 8,906 7,933 6,902 8,010 7,021
Depreciation and
amortization(4) 720 804 949 1,088 3,372
Gain on extinguishment of debt (3,450) (3,540) (10,991) - -
Write-off of impaired goodwill - - - - 2,946
-------- -------- -------- -------- --------
EBITDA $ 3,756 $ 4,251 $ 750 $ (2,869) $ 399
======== ======== ======== ======== ========
EBITDA is presented in the Selected Historical Financial Data, 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 and due to the close relationship it bears to
Reunion's financial covenants in its borrowing agreements. Gains on
extinguishment of debt are excluded from the current definition of EBITDA.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to assist readers in
understanding the Company's financial performance during the periods presented
and significant trends which may impact the future performance of the Company.
It should be read in conjunction with the consolidated financial statements
and accompanying notes included elsewhere in this Form 10-K.
- 10 -
GENERAL
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements. Such products include large-diameter seamless pressure vessels,
hydraulic and pneumatic cylinders and metal bar grating. Until December 2005,
the Company's products included precision plastic components made by its
thermoplastics division ("Oneida"). During the year 2005, the Company decided
to exit the plastics business and, effective March 1, 2006, Oneida was sold.
See Note 3: SUBSEQUENT EVENTS-Sale of Oneida. Previously, during the year
2004, the Company decided to exit the thermoset plastics portion ("Rostone")
of its plastics segment. The Rostone business was sold in the first quarter of
2005. Until December 2004, the Company's products also included leaf springs.
Such business was sold in January 2005. Prior to 2003, the Company's
products also included heavy duty cranes, bridge structures and materials
handling systems. These businesses were sold during 2002. All of these sold
businesses are reported as discontinued operations.
The Company's customers include original equipment manufacturers and end-
users in a variety of industries, such as transportation, power generation,
chemicals, metals and electronics. The Company's continuing operations are
comprised of the following businesses.
RECENT EVENTS
NapTech Settlement
On April 26, 2005 a judgment was entered in Louisiana in favor of Shaw
NapTech, Inc. ("NapTech") against various parties, including the Company. On
July 8, 2005, the Company entered into a Settlement Agreement with NapTech
pursuant to which the Company paid NapTech $1.65 million in settlement of the
Company's indebtedness to NapTech of approximately $5.1 million under a
promissory note and the related judgment. As a result of the NapTech
settlement, Reunion recognized a gain on debt extinguishment of approximately
$3.4 million in the third quarter of 2005.
In connection with the NapTech settlement, Wachovia Bank, National
Association ("Wachovia") made a $3.1 million supplemental loan to Reunion
under its existing $25 million loan facility, thereby increasing the total
amount of the supplemental loan portion of the facility to $6.1 million.
Reunion used $1.65 million of this additional supplemental loan to make the
Reunion settlement payment to NapTech and is using the balance of the loan
proceeds for inventory purchases and to support letters of credit that may be
issued for it under the Wachovia facility. Wachovia required, as a condition
to making the additional supplemental loan, that LC Capital Master Fund, Ltd.
("LCC") purchase an additional $3.1 million junior participation interest in
the Wachovia loan facility, and LCC did so, thereby increasing its junior
participation interest in the facility to $6.1 million. LCC in turn
simultaneously sold a 50% interest in its junior participation interest to
WebFinancial Corporation ("Web").
To induce LCC to purchase the additional junior participation interest
in the Wachovia loan facility and to induce Web to purchase a 50% interest in
such junior participation interest, Reunion issued two warrants, one to LCC
and one to Web, to purchase, in each case, 387,500 shares of the Company's
common stock at a price of $0.01 per share. These warrants are exercisable at
anytime until July 12, 2010. The value of these warrants is estimated to be
$85,000 using the Black-Scholes pricing model. The $85,000 was shown as a
discount on the debt and will be amortized as interest expense over the life
of the debt.
Reunion's indebtedness under the Wachovia loan facility, including the
supplemental loans, is secured by liens on substantially all of Reunion's
assets.
13% Senior Notes
On February 3, 2005, the Company announced that it was unable to make a
$2,928,000 interest payment by February 2, 2005 to the holders of the
- 11 -
Company's 13% Senior Notes. Holders of more than 80% of the principal amount
of such Senior Notes entered into a Standstill Agreement with the Company,
pursuant to which such holders agreed that they would not exercise and will
cause the Trustee not to exercise any remedies provided for in the Indenture
under which the Senior Notes were issued, or any other agreements related to
such notes, with respect to this payment default or with respect to a
potential event of default if the Company failed to make the next scheduled
interest payment due April 1, 2005 (which the Company did not make). In the
Standstill Agreement, such holders agreed to defer such interest payments to
December 2006.
The Company also failed to make the interest payments on the Senior Notes
that were due on July 1, October 1, 2005 and January 1, 2006, each in the
amount of $0.7 million. As a result, events of default have occurred under
the Indenture ("Indenture Default") under which the Senior Notes were issued.
With an Indenture Default, holders of more than 25% of the principal amount of
the Senior Notes may, by written notice to the Company and to the Trustee,
declare the principal of and accrued but unpaid interest on all the Senior
Notes to be immediately due and payable (the "acceleration"). However, under
an Intercreditor and Subordination Agreement entered into in December 2003
among Wachovia, the holders of the Senior Notes and certain other lenders, the
Senior Note holders cannot commence any action to enforce their liens on any
collateral for a 180 day period beginning after the date of receipt by
Wachovia, the senior secured lender, of a written notice from the Senior Note
holders informing Wachovia of such Indenture Default and demanding the
acceleration. At this date, neither the Company nor Wachovia has received
written notice of any acceleration.
Defaults and Waivers Under the Wachovia Loan Facility and the LCC Debt
On December 3, 2003, the Company entered into a revolving and term loan
credit facility with Wachovia (formerly, Congress Financial Corporation). The
Wachovia 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. In November 2004, Wachovia and the Company entered into an
amendment of the revolving and term loan credit facility wherein Wachovia
eliminated the fixed charge coverage ratio and reduced the monthly minimum
EBITDA covenant going forward. Under the November 2004 amendment, the Company
was required to maintain new minimum monthly amounts of EBITDA of $280,000 in
November 2004, $290,000 in December 2004, $350,000 in January 2005, $280,000
in February 2005 and $300,000 per month thereafter. In January 2005, the
Company failed to meet the minimum monthly amount, when it had an EBITDA loss
for the month of $39,000. Wachovia waived this EBITDA shortfall.
As described above under "NapTech Settlement", in April 2005, NapTech
secured a judgment against the Company. The judgment obtained by NapTech
constituted a cross default under the Wachovia Loan Agreement. Such default
was waived by Wachovia.
Through September 2005, the Company achieved the minimum monthly EBITDA
required for compliance with the Congress covenant. However, as described
above under "13% Senior Notes", the Company is in default with respect to such
notes. This default also constitutes a cross default under the Company's loan
and financing agreements with each of Wachovia and LCC and such defaults were
not waived by Wachovia or LCC and the Company was in default under the
Wachovia Loan Agreement and under its note payable to a private capital fund,
LCC.
In October and November of 2005, the Company was unable to achieve the
required minimum monthly EBITDA covenant of $300,000. As a result, in
December 2005, Congress formally declared a default under the loan and
security agreement and began charging the default interest rate at such time
on its revolving credit and term loans. The default interest rate is two
percentage points higher than the non-default rate. (See PART IV, NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, NOTE 3: SUBSEQUENT EVENTS-Default Waivers)
- 12 -
Sale of Assets
During the first quarter of 2005, the Company sold all of the assets and
liabilities of its leaf spring manufacturing segment, located in Miami, OK, to
an unrelated entity for $792,000. Of this amount, $250,000 was used to pay
down the private capital fund note payable secured by the real property,
$41,000 was used to pay down the Wachovia term loan secured by the machinery
and equipment and the remaining amount was used to reduce the borrowings under
the revolving credit facility. The Company recorded a loss of $318,000 on such
sale which was provided for in the Company's 2004 year.
Additionally, during the first quarter of 2005, the Company sold certain
of the receivables, inventory and intangibles of its thermoset plastics
operation ("Rostone") located in Lafayette, IN, along with certain of its
machinery and equipment. The sale of such assets was accomplished in two
separate transactions, with the sale of certain of the Company's compounding
operation assets being sold to one unrelated entity and the sale of certain of
the Company's molding operation assets being made to a different unrelated
entity. At the time of such sale, the Company entered into tolling or
manufacturing agreements with such buyers under which the Company agreed to
operate the compounding and molding operations at its Lafayette, IN facility
for a limited time until the buyers could move such operations to different
geographical locations. The buyers agreed to reimburse the Company for all
expenses in connection with these activities. The sale of the selected assets
noted above was for approximately $2.9 million. Of this amount, $712,000 was
used to pay down the Wachovia term loan secured by the machinery and equipment
and the remaining amount was used to reduce the borrowings under the revolving
credit facility. The Company recorded a gain of approximately $370,000 on
such sales.
SUBSEQUENT EVENTS
Sale of Oneida
During the 2005 year, the Company decided to exit the plastics business.
In early 2006, the Company signed an Asset Purchase Agreement to sell
substantially all of the assets of its Oneida business to an unrelated entity.
On March 2, 2006, effective March 1, 2006, the Company completed the sale for
a purchase price of $11,573,000 subject to a post-closing adjustment based on
a closing balance sheet. Of the net sale proceeds, $300,000 was put into a
one-year escrow as security for any claims by the buyer that may arise after
the closing, $2,000,000 was used to pay down a note payable to a private
capital fund that is secured by the real estate of the Company, $980,974 was
used to completely pay off the existing Wachovia term loan and the remaining
$7,917,405 was used to pay down the revolving credit facility.
Default Waivers
In connection with the sale of Oneida, the Company and Wachovia entered
into an amendment to the loan and security agreement wherein Wachovia waived
the October and November defaults for failure to meet the minimum monthly
EBITDA amount, waived the defaults arising from the Company's failure to make
the interest payments to the holders of the 13% Senior Notes and lowered the
monthly minimum EBITDA covenant requirement from $300,000 to $250,000
beginning in March 2006. LCC also waived such cross defaults. As a result, as
of March 2006, the Company is not currently in default on its Wachovia or LCC
debt.
Change in Officers
Effective March 2, 2006, Charles E. Bradley, Sr. resigned his
officership as Chairman of the Board of Directors and Chief Executive Officer
of the Company. However, he will continue to serve as a director. Effective
March 2, 2006, the Board of Directors elected Mr. Kimball J. Bradley Chairman
of the Board of Directors and Chief Executive Officer.
Note Payable Settlements
On March 2, 2006, the Company entered into a settlement agreement with
the holder of a $1.017 million note payable from the Company wherein the
- 13 -
Company agreed to pay the holder a total of $400,000 for such note and all
accrued interest of $308,000. Such settlement was effected on March 3, 2006
and the Company will recognize a gain from this debt settlement in the first
quarter of year 2006.
On March 21, 2006, the Company entered into a settlement agreement with
the Stanwich Financial Services Corp. Liquidating Agent ("SFSC") wherein the
Company agreed to pay SFSC $1.125 million in settlement of its existing $4.290
million judgment note and all accrued interest. Such agreement is awaiting
bankruptcy court approval in SFSC's Chapter 11 proceeding and will be paid
promptly upon such approval.
RESULTS OF OPERATIONS
Year Ended December 31, 2005 Compared to
Year Ended December 31, 2004
Continuing Operations
Net sales, gross margins and EBITDA percentages for 2005 and 2004 are as
follows. The percentages of EBITDA to net sales exclude corporate and other
EBITDA. Including corporate and other EBITDA, the percentages of consolidated
EBITDA to net sales for the years ended 2005 and 2004 are 7.6% and 8.4%.
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2005 2004 2005 2004 2005 2004
--------- --------- ------ ------ ------ ------
Pressure vessels $ 22,894 $ 22,921 21.8% 21.4% 15.9% 17.4%
Cylinders 19,611 18,488 16.8% 14.0% 7.8% 3.1%
Grating 7,222 9,306 22.3% 24.9% 9.5% 13.7% -
--------- --------- ------ ------ ------ ------
Totals $ 49,727 $ 50,715 19.9% 19.3% 11.8% 11.5%
========= ========= ====== ====== ====== ======
Net sales for the year ended December 31, 2005 were down approximately 2%
from the prior year. This decrease was net of a $1.1 million increase in
sales at our cylinder operation offset by a $2.1 decrease in grating sales at
our China joint venture. The increase in cylinders sales primarily reflects
the higher backlog at the beginning of the year over the backlog that existed
at the beginning of year 2004. Due to an improving economy, backlogs
continued to grow throughout the 2005 year at both U.S. operations, and the
U.S. backlog has continued to increase in the first two months of the 2006
year at the pressure vessel business. Pressure vessel sales were relatively
flat from year to year but would have been higher for the 2005 year were it
not for both a plant accident in January 2005 that crippled the plant's heat
treating operation, preventing this division from completing and shipping
product for a period in excess of five weeks which negatively impacted the
division's ability to take on additional new business, as well as a vendor
delay in the second half of the year in the manufacture and delivery of raw
material. Material has now been received [and the recent declining trend in
sales when compared to the prior period is expected to be reversed in the
first quarter of 2006.] The reduction in sales at the grating business
reflects increased competition in China, [a condition that is expected to
level off in 2006].
Gross margin as a percentage of sales increased from 19.3% in 2004 to
19.9% in 2005, as all U.S. operations had improving gross profit margins while
margins in China declined. The increase in gross profit margins in the U.S.
is primarily attributable to operating efficiencies from the increase in sales
in 2005 combined with overall cost reduction efforts. The pressure vessel
margin increase would have been larger were it not for the unreimbursed costs
and inefficiencies resulting from the plant accident in the first quarter of
2005 as noted above. Although approximately $714,000 was received from
business interruption insurance, the Company calculates that this amount does
not cover the costs incurred and opportunities lost. The decrease in gross
margin percentage in China is related to the reduction in sales volume in the
face of increasing competition in China.
- 14 -
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
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA as a percentage of sales increased in 2005
compared to 2004 primarily due to the same factors affecting gross profit
margin discussed above. A reconciliation of EBITDA to operating income for
2005 and 2004 by segment and corporate and other is as follows (in thousands):
Operating
Profit Deprec-
(Loss) iation EBITDA
--------- --------- ---------
2005:
-----
Pressure vessels $ 3,106 $ 534 $ 3,640
Cylinders 1,398 134 1,532
Grating 679 9 688
Corporate and other(1) (2,147) 43 (2,104)
-------- -------- --------
Totals 3,036 $ 720 $ 3,756
======== ========
Gain on debt extinguishment 3,450
--------
Operating profit $ 6,486
========
2004:
-----
Pressure vessels $ 3,395 $ 584 $ - $ 3,979
Cylinders 409 171 - 580
Grating 1,267 7 1,274
Corporate and other(2) (1,624) 42 - (1,582)
-------- -------- -------- --------
Totals 3,447 $ 804 $ - $ 4,251
======== ======== ========
Gain on debt extinguishment 3,540
--------
Operating profit $ 6,987
========
(1) Excludes gain on debt extinguishment of $3.450 million in 2005 and $3.540
million in 2004.
(2) Includes income totaling $0.6 million from reduction in environmental
reserve.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for 2005 were $7.0
million, compared to $7.2 million for 2004. This decrease in SGA primarily
reflects decreased salaries, benefits and office expenses at Corporate, while
increased commissions in the pressure vessel business were offset by reduced
volume costs in the grating business in China. SGA as a percentage of sales
decreased marginally in 2005 compared 2004.
Gains on Debt Extinguishments
As described above in this Item 7 under the caption RECENT EVENTS ?
NapTech Settlement, the settlement of the Company's obligations to NapTech
resulted in a $3.45 million gain on debt extinguishment in 2005.
Other Income
Other income from continuing businesses for 2005 was $203,000, compared
to other income of $798,000 for 2004. The components are as follows:
- 15 -
2005 2004 Change
-------- -------- --------
Costs to consolidate cylinder locations $ - $ 264 $ (264)
Adjustments of environmental reserve - (601) 601
Reduction of the lease termination reserve - (97) 97
Other income, net (203) (364) 161
-------- -------- --------
Total other income, net $ (203) $ (798) $ 595
======== ======== ========
During 2005, the Company completed the sale of an inactive subsidiary,
Reunion Potash Company (Potash). Proceeds of the sale were $150,000 and a gain
of that amount was recognized. During May 2004, we completed the
consolidation of our cylinder manufacturing operations into a single facility
in Libertyville, Illinois. Costs totaling $264,000 were incurred in 2004.
The Company finalized the settlement of a Louisiana environmental litigation
matter in 2004. Such settlement resulted in a new estimate of the required
reserve, which resulted in a $601,000 adjustment. There were no other
individually significant items of other income or expense in 2005 or 2004.
Minority Interests
Minority interests of $0.2 million in 2005 and $0.3 million in 2004
represent income 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
Interest Expense
Interest expense for 2005 was $8.9 million compared to $7.9 million for
2004. This increase is primarily attributable to two items. First, Senior
Note interest expense increased $584,000 as the Company was obliged to accrue
interest expense on the Senior Note interest that has not been paid as
discussed in Item 7 above under the caption RECENT EVENTS - 13% Senior Notes.
Second, the Company recorded $300,000 of additional financing and amortization
of warrant value expenses in 2005 over 2004. The warrant amortization is
attributable to the Junior Participations in the Wachovia revolving credit
facility in both 2004 and 2005.
Income Taxes
The tax provision in 2005 relates solely to the Company's China joint
venture. There was no U.S. tax provision from continuing operations in 2005
or 2004. At December 31, 2005, Reunion had net operating loss carryforwards
for federal tax return reporting purposes of approximately $66.5 million. The
years in which such net operating losses expire are as follows (in thousands):
Year ending December 31:
------------------------------
2007 6,067
2008 611
2009 3,235
2010 2,520
After 2010 54,067
[The Company may be able to utilize its loss carryforwards against
possible future profitability.] However, management has determined to fully
reserve for the total amount of net deferred tax assets as of December 31,
2005 [and to continue to do so during 2006 until management can conclude that
it is more likely than not that some or all of our loss carryforwards can be
utilized.]
- 16 -
Year Ended December 31, 2004 Compared to
Year Ended December 31, 2003
Continuing Operations
Net sales, gross margins and EBITDA percentages for 2004 and 2003 are as
follows. The percentages of EBITDA to net sales exclude corporate and other
EBITDA. Including corporate and other EBITDA, the percentages of consolidated
EBITDA to net sales for the years ended 2004 and 2003 are 8.4% and 1.9%.
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2004 2003 2004 2003 2004 2003
--------- --------- ------ ------ ------ ------
Pressure vessels $ 22,921 $ 21,371 21.4% 22.4% 17.4% 18.0%
Cylinders 18,488 17,891 14.0% 13.6% 3.1% 2.0%
Grating 9,306 - 24.9% - 13.7% -
--------- --------- ------ ------ ------ ------
Totals $ 50,715 $ 39,262 19.3% 18.4% 11.5% 10.7%
========= ========= ====== ====== ====== ======
Net sales for the year ended December 31, 2004 were up $11.5 million, or
29.2%, compared to the 2003 year. Sales in 2004 include $9.3 million of sales
from the consolidation of the Company's 65% owned Chinese grating
manufacturing subsidiary. Such operation had been treated as a discontinued
operation. See "Minority Interests" and "Return of Discontinued Operations to
Continuing Operations - Change in Plan" below. Excluding such grating sales,
2004 sales were up $2.1 million, or 5.2%, when compared to 2003. Such sales
increase reflects the effects of increased backlogs in all segments of the
business, which continued to grow throughout the year and produced higher
fourth quarter sales in 2004 than in 2003.
All segments of the business entered the 2004 year with historically low
backlogs and all segments of the business recorded lower sales for the first
nine months of year 2004 as compared to the comparable period in 2003.
However, all segments were able to achieve higher backlogs as the year
progressed and all segments recorded significantly higher sales in the fourth
quarter of 2004 compared to 2003. Such higher 2004 fourth quarter sales, when
added to the first nine months sales, enabled each segment to achieve higher
sales for the full year 2004 than in the full year 2003. Such improving
backlogs in all segments reflect an improving overall economic environment as
well as our ability to overcome customers' concerns over our financial
condition.
Gross margin as a percentage of sales increased by approximately one
percentage point in 2004 when compared to the 2003 percentage primarily due to
the inclusion of the Chinese grating subsidiary in 2004. Excluding the sales
and gross margin of the Chinese grating subsidiary, the U.S. operations gross
margin percentage decreased to 18.1% in 2004 from 18.4% in 2003. The
consolidation of the cylinder operations in 2004 into a single facility also
had a favorable effect on the gross profit margin of that segment. However,
that increase was more than offset by a decrease in the pressure vessel
business. This decrease was primarily attributable to production
interruptions in June 2004 caused by an electrical failure which resulted in
unanticipated costs and underabsorbed overheads.
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
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. Excluding the Chinese grating subsidiary and
corporate and other EBITDA, EBITDA and EBITDA as a percentage of sales
increased in 2004 compared to 2003 primarily due not only to the same factors
affecting gross profit margin discussed above, but also to significant
reductions in selling, general and administrative expenses as discussed below.
A reconciliation of EBITDA to operating income for 2004 and 2003 by segment
and corporate and other is as follows (in thousands):
- 17 -
Operating
Profit Deprec- Amortiz-
(Loss) iation ation EBITDA
--------- --------- --------- ---------
2004:
-----
Pressure vessels $ 3,395 $ 584 $ - $ 3,979
Cylinders 409 171 - 580
Grating 1,267 7 - 1,274
Corporate and other(1)(2) (1,624) 42 - (1,582)
-------- -------- -------- --------
Totals 3,447 $ 804 $ - $ 4,251
======== ======== ========
Gain on debt extinguishment 3,540
--------
Operating profit $ 6,987
========
2003:
-----
Pressure vessels $ 3,184 $ 653 $ - $ 3,837
Cylinders 107 246 - 353
Corporate and other(2)(3) (3,490) 50 - (3,440)
-------- -------- -------- --------
Totals (199) $ 949 $ - $ 750
======== ======== ========
Gain on debt extinguishment 10,991
--------
Operating profit $ 10,792
========
(1) Includes income totaling $0.6 million from reduction in environmental
reserve.
(2) Excludes gain on debt extinguishment of $3.540 million in 2004 and $10.991
million in 2003.
(3) Includes gains totaling $0.2 million on sales of property and equipment.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for 2004 were $7.2
million, compared to $7.7 million for the 2003. SGA in 2004 includes $1.1
million from the Chinese grating joint venture. Excluding this, SGA decreased
to $6.1 million domestically, or by $1.6 million. This decrease in SGA
occurred in all segments, as well as the corporate office, and reflects a full
year's benefit of cost cutting measures and payroll reductions implemented in
2003 as well as continuing expense reductions in 2004. Excluding the sales
and SGA of the grating subsidiary, SGA as a percentage of sales decreased to
14.7% for 2004 compared to 19.7% in 2003.
Gains on Debt Extinguishments
The settlement of the Company's obligations to SFSC resulted in a $3.32
million gain on debt extinguishment in 2004.
During 2004, an additional $52,000 of the principal and $156,000 of
accrued and unpaid interest on certain of the Company's 13% Senior Notes were
cancelled or extinguished in 2004.
Other Income
Other income for 2004 was $798,000, compared to other income of $293,000
for 2003. The components are as follows:
2004 2003 Change
-------- -------- --------
Costs to consolidate cylinder locations $ 264 $ - $ 264
Adjustments of environmental reserve (601) - (601)
Gain on sale of property - (138) 138
Reduction of the lease termination reserve (97) (117) 20
Write-off of assets - 117 (117)
Other income, net (364) (155) (209)
-------- -------- --------
Total other income, net $ (798) $ (293) $ (505)
======== ======== ========
- 18 -
During May 2004, we completed the consolidation of our cylinder
manufacturing operations into a single facility in Libertyville, Illinois.
Costs totaling $264,000 were incurred in 2004. The Company finalized the
settlement of a Louisiana environmental litigation matter in 2004. Such
settlement has resulted in a new estimate of the required reserve, which
resulted in a $601,000 adjustment. In June 2003, the Company sublet its idle
manufacturing facility in Clearfield, Utah and, therefore, has recorded rental
income in both 2004 and 2003. The Company sold idle property in the 2003
third quarter which resulted in a gain. There were no other individually
significant items of other income or expense in 2004 or 2003.
Minority Interests
Minority interests of $0.3 million represent income during 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.
Interest Expense
Interest expense for 2004 was $7.9 million compared to $6.9 million for
2003. This increase is primarily due to the higher level of amortization of
deferred financing costs and estimated warrant value as well as the accrual of
fees in connection with debt guarantees in 2004 than in 2003.
Income Taxes
There was no tax provision from continuing operations in 2004 or 2003.
The Company had net operating loss carryforwards for Federal tax return
reporting purposes totaling $64.1 million at December 31, 2004. Management
has determined to fully reserve for the total amount of net deferred tax
assets until management can conclude that it is more likely than not that some
or all of our loss carryforwards can be utilized.
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
Wachovia
In July 2005, Wachovia made an additional loan of $3.1 million to the
Company under and within the limits of the Wachovia Loan Facility. See above
in this Item 7 under the captions RECENT EVENTS ? NapTech Settlement for a
description of this Supplemental Loan. In May 2004, Wachovia had made a
similar additional loan of $3.0 million.
The Wachovia Loan Facility has a three-year term expiring in December
2006, subject to automatic renewals of one year, unless either party gives
notice of termination at least 90 days before the end of the term. On December
31, 2005, the Company had outstanding borrowings under this facility of $17.0
million, including $9.8 million under the revolving credit line, $1.1 million
under the term loan and $6.1 million under the 2005 and 2004 Supplemental
Loans.
NapTech Settlement
As described above in this Item 7 under the caption RECENT EVENTS-
NapTech Settlement, the settlement of the Company's indebtedness to NapTech in
July 2005 resulted in a debt extinguishment gain of $3.45 million.
- 19 -
13% Senior Notes
As described above in this Item 7 under the caption RECENT EVENTS - 13%
Senior Notes, the Company announced that it was unable to make a $2,928,000
interest payment by February 2, 2005 to the holders of the Company's 13%
Senior Notes and also failed to make the interest payments on the Senior Notes
that were due on July 1, October 1, 2005 and January 1, 2006, each in the
amount of $0.7 million. As a result, events of default have occurred under
the Indenture ("Indenture Default") under which the Senior Notes were issued.
With an Indenture Default, holders of more than 25% of the principal amount of
the Senior Notes may, by written notice to the Company and to the Trustee,
declare the principal of and accrued but unpaid interest on all the Senior
Notes to be immediately due and payable (the "acceleration"). However, under
an Intercreditor and Subordination Agreement entered into in December 2003
among Wachovia, the holders of the Senior Notes and certain other lenders, the
Senior Note holders can not commence any action to enforce their liens on any
collateral for a 180 day period beginning after the date of receipt by
Wachovia, the senior secured lender, of a written notice from the Senior Note
holders informing Wachovia of such Indenture Default and demanding the
acceleration. At this date, neither the Company nor Wachovia has received
written notice of any acceleration.
Sale of Assets
During 2005, as described above in this Item 7 under the caption RECENT
EVENTS- Sale of Assets, the Company sold its leaf spring business and its
Rostone business.
Subsequent Events
Sale of Oneida
During the 2005 year, the Company decided to exit the plastics business.
In early 2006, the Company signed an Asset Purchase Agreement to sell
substantially all of the assets of its Oneida business to an unrelated entity.
On March 2, 2006, effective March 1, 2006, the Company completed the sale for
a purchase price of $11,573,000 subject to a post-closing adjustment based on
a closing balance sheet. Of the net sale proceeds, $300,000 was put into a
one-year escrow as security for any claims by the buyer that may arise after
the closing, $2,000,000 was used to pay down a note payable to a private
capital fund that is secured by the real estate of the Company, $980,974 was
used to completely pay off the existing Wachovia term loan and the remaining
$7,917,405 was used to pay down the revolving credit facility.
Default Waivers
In connection with the sale of Oneida, the Company and Wachovia entered
into an amendment to the loan and security agreement wherein Wachovia waived
the October and November defaults for failure to meet the minimum monthly
EBITDA amount, waived the defaults arising from the Company's failure to make
the interest payments to the holders of the 13% Senior Notes and lowered the
monthly minimum EBITDA covenant requirement from $300,000 to $250,000
beginning in March 2006. LCC also waived such cross defaults. As a result, as
of March 2006, the Company is not currently in default on its Wachovia or LCC
debt.
Note Payable Settlements
On March 2, 2006, the Company entered into a settlement agreement with
the holder of a $1.017 million note payable from the Company wherein the
Company agreed to pay the holder a total of $400,000 for such note and all
accrued interest of $308,000. Such settlement was effected on March 3, 2006
and the Company will recognize a gain from this debt settlement in the first
quarter of year 2006.
On March 21, 2006, the Company entered into a settlement agreement with
the Stanwich Financial Services Corp. Liquidating Agent ("SFSC") wherein the
Company agreed to pay SFSC $1.125 million in settlement of its existing $4.290
million judgment against the Company and all accrued interest. Such agreement
is awaiting bankruptcy court approval in SFSC's Chapter 11 proceeding and will
be paid promptly upon such approval.
- 20 -
Summary of 2005 Activities
Cash and cash equivalents totaled $1.9 million and $1.1 million at
December 31, 2005 and 2004, respectively. For 2005, $139,000 of cash was
provided by operating activities and $3.1 million of cash was provided from
investing activities while $2.3 million was used in financing activities.
Operating Activities
Cash provided by operating activities netted to $139,000 in 2005 which
was primarily the result of a decrease in working capital, mainly as a result
of the growth in liabilities, primarily interest accruals.
Investing Activities
Cash provided by investing activities in 2005 netted to $3.1 million and
consisted of $3.7 million in cash from the sale of businesses offset by
capital expenditures of $0.6 million.
Financing Activities
Cash used for financing activities netted to $2.3 million in 2005. As
noted above, the Company arranged for a $3.1 million junior participation loan
with Wachovia. Funds for this $3.1 million of supplemental financing were
provided to Wachovia by two private capital funds as the result of the
execution of a junior participation loan transaction between Wachovia and the
two funds. Offsetting this inflow of cash were $1.9 million of repayments
under the Wachovia revolving credit facility, repayments of debt during the
year of $3.3 million, of which $0.7 million related to the scheduled debt
payments on the Wachovia term loan and the remaining amount resulted from the
sale of businesses, and a $0.2 million dividend payment by our Chinese joint
venture to the minority holders.
CONTRACTUAL OBLIGATIONS
The following represents a tabular summarization of the Company's
contractual obligations at December 31, 2005 for each of the next five years
and thereafter (in thousands):
Description Total 2006 2007 2008 2009 2010 2010+
----------------- ------- ------- ------- ------- ------- ------- -------
Wachovia revolving
credit facility $15,888 $15,888 $ - $ - $ - $ - $ -
Wachovia term loan 1,087 636 451 - - - -
Note payable 3,950 3,950 - - - - -
Note payable 3,500 3,500 - - - - -
13% senior notes 22,013 22,013 - - - - -
Note payable 4,290 4,290 - - - - -
Notes payable-
currently due 1,017 1,017 - - - - -
Note payable-
related parties 500 500 - - - - -
Noncancellable
operating lease
commitments 8,339 1,427 1,038 997 999 996 2,882
------- ------- ------- ------- ------- ------- -------
Total contractual
obligations $60,584 $53,221 $ 1,489 $ 997 $ 999 $ 996 $ 2,882
======= ======= ======= ======= ======= ======= =======
The above table shows the contractual aggregate maturities of debt,
including $15.8 million of revolving credit facility borrowings, and
commitments under noncancellable operating leases. As of December 31, 2005,
holders of $1.2 million of principal amount of 13% senior notes had not
consented to the provisions and waivers in the November 2003 solicitation.
However, since the Company succeeded in obtaining the consent of holders of
more than 90% of the principal amount of senior notes, and since such holders
have directed the trustee to refrain from exercising any remedies in respect
- 21 -
of past, present or future defaults, the $1.2 million principal amount of
senior notes held by non-consenting holders is classified as being due in
December 2006. Notes payable - currently due and notes payable - related
parties, although contractually due, may not be paid due to restrictions
imposed by the Congress loan and security agreement.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
Application of the accounting principles requires the Company's management to
make estimates about the future resolution of existing uncertainties and that
affect the reported amounts of assets, liabilities, revenues, expenses which
in the normal course of business are subsequently adjusted to actual results.
Actual results could differ from such estimates. In preparing these financial
statements, management has made its best estimates and judgments of the
amounts and disclosures included in the consolidated financial statements
giving due regard to materiality.
Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts
Sales are recorded when title and risks of ownership transfer to the
buyer. Shipping and handling fees charged to customers are recorded as
revenues and the related costs are recorded as cost of sales.
The Company markets its products to a diverse customer base in the United
States and in other countries. Credit is extended after a credit review by
management, which is based on a customer's ability to perform its obligations.
Such reviews are regularly updated. The allowance for doubtful accounts is
based upon agings of customer balances and specific account reviews by
management. Reunion Industries has no concentration of credit risks and
generally does not require collateral or other security from its customers.
Accounts receivable are presented net of a reserve for doubtful accounts
of $180,000 at December 31, 2005 and $162,000 at December 31, 2004, which
represented 2.3% and 1.7%, respectively, of gross trade receivables (excluding
other non-trade receivables). Write-offs of accounts receivable in the last
two years have been insignificant.
Inventories and Inventory Reserves
At December 31, 2005, inventories are stated at the lower of cost or
market, at costs that approximate the first-in, first-out method of inventory
valuation. During the third quarter of 2003, for those locations of the
Company that had been using the last-in, first-out method of inventory
valuation, we changed the method of valuing inventory to the first-in, first-
out method. The effect on the results of operations for the year ended
December 31, 2003 was inconsequential. Work-in-process and finished goods
include material costs, labor costs and manufacturing overhead. Reserves for
excess, slow-moving and obsolete inventories are based on reviews of inventory
usage reports for items more than one year old. The Company evaluates its
inventories on a quarterly basis to identify excess, slow-moving and obsolete
inventories and assess reserve adequacy. When this evaluation indicates such
inventories exist, the reserve is increased by a charge to operations or such
inventories are written off. Write-offs of inventory in the last two years
have been insignificant.
Goodwill and Impairment
The excess of the purchase consideration over the fair value of the net
assets of acquired businesses is considered to be goodwill. The Company
reviews goodwill when events or changes in circumstances indicate that the
carrying amount of goodwill may not be recoverable. We also review goodwill
as required by SFAS No. 142, "Goodwill and Other Intangible Assets", which
requires that goodwill be tested annually using a two-step process. The first
is to identify any potential impairment by comparing the carrying value of
reporting units to their fair value. If a potential impairment is identified,
- 22 -
the second step is to compare the implied fair value of goodwill with its
carrying amount to measure the impairment loss. Reporting unit fair value is
estimated using the income approach, which assumes that the value of a
reporting unit can be computed as the present value of the assumed future
returns of an enterprise discounted at a rate of return that reflects the risk
of an investment. A significant increase in the rate at which the assumed
future returns are discounted could result in an unexpected impairment charge
to goodwill, which could have a negative impact on our operating results.
At December 31, 2005, the Company had $11.0 million of goodwill on its
consolidated balance sheet. Of the $11.0 million of goodwill, $9.5 million
relates to the pressure vessels segment and $1.5 million relates to the
cylinders segment. We have completed all transitional and annual impairment
tests necessary to date and concluded that our goodwill is not impaired.
Pensions
The Company accounts for its defined benefit pension plans in accordance
with SFAS No. 87, "Employers' Accounting for Pensions" which requires that
amounts recognized in the consolidated financial statements be determined on
an actuarial basis. The Company makes contributions to the defined benefit
plans based on the minimum funding requirements of the Employee Retirement
Income Security Act of 1974.
The Company uses the fair value of plan assets to determine the expected
and actual returns on plan assets. The difference between the expected return
and actual return is deferred. During 2005 and 2004, the fair value of assets
increased offset somewhat by an increase in the benefit obligation. The
Company has recorded additional minimum pension liabilities in excess of
amounts previously accrued totaling $1.8 million at December 31, 2005 and $1.9
million at December 31, 2004, which is classified as accumulated comprehensive
loss within stockholders' deficit at such dates. Although management believes
the long-term rates of return used to calculate the expected returns on plan
assets are reasonable, a trend of actual returns being less than expected
returns would cause future pension costs to increase.
In determining the discount rates to be used at the end of each year to
determine plan liabilities, the Company looks at rates of return on high-
quality, fixed-income investments that receive one of the two highest ratings
given by a recognized ratings agency. Changes in discount rates over the last
three years have not materially affected pension costs and the net effect of
changes in the discount rate, as well as the net effect of other changes in
actuarial assumptions and experience, have been deferred as allowed by SFAS
87.
[The Company currently expects consolidated pension costs in 2006 will
approximate those incurred in 2005.]
Other Postretirement Benefits
The Company provides health benefits for certain retired employees at the
Company's pressure vessel operations and Plastics and of its Corporate
Executive Payroll. These plans are not funded. During 2004, management
decided to sell and close its Rostone operation. As a result, there was a
significant decrease in the expected benefit obligation of the Plastics
segment and a gain of $558,000 was recognized in 2004 and is included in
discontinued operations of Rostone. The other postretirement benefit costs
and the benefit obligation are actuarially determined based on discount rates
and expected trends in healthcare costs. Costs from continuing operations
increased slightly in 2005 over 2004 and [the Company currently expects
consolidated other postretirement benefit costs for 2006 to increase slightly
from 2005.]
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.
- 23 -
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure, amending FASB Statement No.
123, Accounting for Stock Based Compensation." This statement amends SFAS No.
123 to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-
based employee compensation. It also amends the disclosure provisions of SFAS
No. 123 to require prominent disclosure about the effects on operating results
of an entity's accounting policy decisions with respect to stock-based
employee compensation. SFAS No. 148 also amends APB 28, "Interim Financial
Reporting" to require disclosure about those effects in interim financial
information. Had the Company applied the fair value recognition provisions of
SFAS No. 123 there would have been no material effect on reported income
(loss) for years 2005, 2004 and 2003.
Environmental Contingencies
When it is probable that a liability has been incurred or an asset has
been impaired, a loss is recognized assuming the amount of the loss can be
reasonably estimated. The Company believes it is currently in material
compliance with existing environmental protection laws and regulations and is
no longer involved in any significant remediation activities or administrative
or judicial proceedings arising under federal, state or local environmental
protection laws and regulations. In addition to management personnel who are
responsible for monitoring environmental compliance and arranging for remedial
actions that may be required, the Company has also employed outside
consultants from time to time to advise and assist the Company's environmental
compliance efforts. As a result, the Company has no significant amount of
accruals for environmental costs.
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 of debt 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
As of March 2006, we are currently not in default on our bank financing.
However, our bank financing is subject to monthly financial and other
covenants, and we have failed to meet such covenants on several occasions, for
which we were able to obtain default waivers. If our operations begin to
falter during 2006, 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 additional waivers of defaults, no assurances can be given that we
would be able to do so.
Reunion's past performance could impact future prospects
Because of losses suffered by the Company over the past several years,
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 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 December 31, 2005, the
Company has a deficiency in working capital of $48.2 million, a loss from
continuing operations of $5.8 million before gain on debt extinguishment and a
- 24 -
deficiency in assets of $27.0 million. These conditions raise substantial
doubt about the Company's 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.
The Company successfully refinanced its bank debt in 2003, extinguished
a significant portion of its obligations under the senior notes in 2003 and
2004 and removed all previously existing defaults on debt at that time. These
steps were taken to improve liquidity and defer the principal maturities on a
significant portion of our debt. As noted above, during 2005, the Company
sold its leaf spring business and all of the operating assets of its Rostone
business. Additionally, as described in PART IV: Note 3 ? SUBSEQUENT EVENTS,
in March of 2006 the Company sold its Oneida business, the remaining portion
of its plastics segment. The Company is investigating other recapitalization
scenarios in an effort to provide additional liquidity and extinguishments or
deferrals of debt obligations. Although the Company believes that it can
accomplish these plans, no assurances exist that it will. Failure to
accomplish these plans could have an adverse impact on the Company's
liquidity, financial position and future operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS 123R, "Share Based Payment." SFAS
123R is a revision to SFAS 123 and supersedes APB 25, "Accounting for Stock
Issued to Employees," and amends SFAS 95, "Statement of Cash Flows." This
statement requires a public entity to expense the cost of employee services
received in exchange for an award of equity instruments. This statement also
provides guidance on valuing and expensing these awards, as well as disclosure
requirements of these equity arrangements. This statement is effective for the
first interim reporting period that begins after January 1, 2006.
SFAS 123R permits public companies to choose between the following two
adoption methods:
1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of Statement 123 for all awards granted to employees prior to
the effective date of SFAS 123R that remain unvested on the effective date, or
2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123 for purposes
of pro forma disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption
Reunion currently accounts for share-based payments to employees using
APB 25's intrinsic value method and, as such, recognizes no compensation
expense for employee stock options. The impact of the adoption of SFAS 123R on
Reunion cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. There would have been no material
impact on reported results of operations and earnings per share had the
Company applied the fair value provisions of SFAS 123 to share-based payments.
The adoption of SFAS 123R's fair value method is not anticipated to have
a material impact on Reunion's future results of operations or overall
financial position. SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation expense, if any, to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement may reduce net operating cash flows and
increase net financing cash flows in the consolidated statement of cash flows
of periods after adoption.
On March 29, 2005, the Staff of the Securities and Exchange Commission
(SEC or the Staff) issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" (SAB 107). Although not altering any conclusions reached in SFAS
123R, SAB 107 provides the views of the Staff regarding the interaction
between SFAS 123R and certain SEC rules and regulations and, among other
- 25 -
things, provide the Staff's views regarding the valuation of share-based
payment arrangements for public companies. Reunion intends to follow the
interpretative guidance on share-based payment set forth in SAB 107 during the
Company's adoption of SFAS 123R.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the operation of its business, Reunion Industries has market risk
exposure to foreign currency exchange rates, raw material prices and interest
rates. Each of these risks and Reunion Industries' strategies to manage the
exposure is discussed below.
Excluding its subsidiary in Shanghai, China, Reunion Industries
manufactures its products in the United States and sells its products in the
United States and in foreign countries. During 2005, no one customer
accounted for more than 10% of the net sales of Reunion. Of Reunion's $42.6
million, $41.4 million and $33.0 million of consolidated net sales from U.S
continuing operations for 2005, 2004 and 2003, respectively, approximately
$8.8 million, $6.4 million and $6.3 million, respectively, were export sales.
Of these export sales, $6.4 million in 2005, $4.3 million in 2004 and $5.0
million in 2003 were to customers in the Far East (principally China and
Taiwan) and $1.0 million in 2005, $1.3 in 2004 and $700,000 in 2003 were to
customers in Canada.
Export sales to foreign countries are denominated in U.S. dollars, the
Company's reporting currency. Accordingly, transaction loss exposures due to
fluctuations in the currencies of the countries to which the Company's
domestic locations export are minimal.
The major raw materials used include welded and seamless steel tubing and
pipe, steel alloy bars, steel plates, brass tubing and bars and aluminum
extrusions. These materials are generally available from a number of
suppliers. Prices for these materials are affected by changes in market
demand and prices of seamless steel tubing have risen by more than 100% over
the past year. [There can be no assurances that prices for these and other raw
materials will not increase in the future.] [A 1.00% change in raw material
prices that is not passed through to the customer would affect results of
operations by approximately $100,000.
Reunion Industries' operating results are subject to risk from interest
rate fluctuations on debt that carries variable interest rates. The variable
rate debt was approximately $10.8 million at December 31, 2005, which is
representative of balances outstanding during the year. A 1.00% change in
interest rates would affect results of operations by approximately $108,000.
- 26 -
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reunion's consolidated financial statements are set forth beginning at
Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b), Reunion's management, including the
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
Reunion's disclosure controls and procedures as defined in Exchange Act
Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that Reunion's disclosure controls and
procedures were effective as of the end of the period covered by this report.
As required by Rule 13a-15(d), Reunion's management, including the Chief
Executive Officer and Chief Financial Officer, also conducted an evaluation of
Reunion's internal control over financial reporting to determine whether any
changes occurred during the fourth fiscal quarter that have materially
affected, or are reasonably likely to materially affect, Reunion's internal
control over financial reporting. Due to additional burdens placed on
personnel at the Plastic's division leading up to the sale of such division,
internal controls at the Plastic's division showed some deterioration in the
fourth quarter of 2005. This resulted in our auditors proposing several
adjusting entries for 2005. The sale of such division occurred in the first
quarter of 2006. We have concluded that, after recording the proposed audit
adjustments, such deterioration does not materially affect the financial
statements presented for the year.
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.
- 27 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Proposal, Election of Directors" and
"Management Information; Executive Officers" is incorporated herein by
reference from the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission on or before May 1, 2006.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Management Information" and
"Proposal; Election of Directors; Director Compensation" is incorporated
herein by reference from the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission on or before May 1, 2006.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information under the caption "Ownership Information" is incorporated
herein by reference from the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission on or before May 1, 2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Ownership Information; Certain
Relationships and Related Transactions" is incorporated herein by reference
from the Company's definitive Proxy Statement to be filed with the Securities
and Exchange Commission on or before May 1, 2006.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under the caption "Fees Paid to Mahoney Cohen & Company,
CPA, P.C." is incorporated herein by reference from the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
before May 1, 2006.
- 28 -
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents included in this report:
The following consolidated financial statements and financial statement
schedules of Reunion Industries, Inc. and its subsidiaries are included in
Part II, Item 8:
1. Financial Statements (Pages F-1 through F-47)
Report of Management
Report of Independent Registered Public Accounting Firm ?
Mahoney Cohen & Company, CPA, P.C.
Consolidated Balance Sheets - December 31, 2005 and 2004
Consolidated Statements of Operations and Comprehensive
Income (Loss) - Years Ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows - Years Ended December 31, 2005,
2004 and 2003
Notes to Consolidated Financial Statements
2. Financial Statement Schedules (Page S-1)
Schedule II - Valuation and Qualifying Accounts and Reserves
Other schedules have been omitted because they are either not required,
not applicable, or the information required to be presented is included in
Reunion Industries' financial statements and related notes.
3. Exhibits
See pages E-1 to E-4 for a listing of exhibits filed with this report or
incorporated by reference herein.
(b) Current Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated and filed on January
18, 2006 under Item 1.01 to announce that we had entered into an Asset
Purchase Agreement to sell the business and substantially all of the assets of
our Plastics Segment
The Company filed a Current Report on Form 8-K dated and filed on March
8, 2006 under Items 2.01 and 5.02 to announce the completion of the sale of
the Plastics Segment business for $11,573,000 in cash plus the buyer's
assumption of accounts payable and other current liabilities, subject to a
post closing balance sheet adjustment, and to announce the resignation of
Charles E. Bradley, Sr. as Chairman of the Board of Directors and Chief
Executive Officer and to announce the election of Kimball J. Bradley as
Chairman of the Board of Directors and Chief Executive Officer.
- 29 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: April 17, 2006 REUNION INDUSTRIES, INC.
--------------
By: /s/ Kimball J. Bradley
----------------------------
Kimball J. Bradley
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on this 31st day of March, 2006.
Signature Title
--------- -----
/s/ John M. Froehlich Executive Vice President, Chief
--------------------------- Financial Officer, Treasurer and
John M. Froehlich Secretary (chief financial
and accounting officer)
/s/ Thomas N. Amonett Director
---------------------------
Thomas N. Amonett
/s/ Charles E. Bradley, Sr. Director
---------------------------
Charles E. Bradley, Sr.
/s/ Thomas L. Cassidy Director
---------------------------
Thomas L. Cassidy
/s/ David E. Jackson Director
---------------------------
David E. Jackson
/s/ Joseph C. Lawyer Vice Chairman and Director
---------------------------
Joseph C. Lawyer
/s/ John G. Poole Director
---------------------------
John G. Poole
- 30 -
REUNION INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
------------------------------------------ ----
Report of Management....................................................F-2
Report of Independent Registered Public Accounting Firm ? Mahoney
Cohen & Company, CPA, P.C.............................................F-3
Consolidated Balance Sheets.............................................F-4
Consolidated Statements of Operations and
Comprehensive Income (Loss)...........................................F-5
Consolidated Statements of Cash Flows...................................F-7
Notes to Consolidated Financial Statements..............................F-8
- F-1 -
Report of Management
Management is responsible for the preparation and integrity of the
consolidated financial statements appearing in this Annual Report on Form 10-
K. The financial statements were prepared in conformity with accounting
principles generally accepted in the United States of America appropriate
under the circumstances and, accordingly, include some amounts based on
management's best judgments and estimates. Financial information in this
Annual Report on Form 10-K is consistent with that in the financial
statements.
Management is responsible for maintaining a system of internal business
controls and procedures to provide reasonable assurance, at an appropriate
cost/benefit relationship, that assets are safeguarded and that transactions
are authorized, recorded and reported properly. The internal control system
is augmented by appropriate reviews by management, written policies and
guidelines, careful selection and training of qualified personnel and a
written code of business ethics applicable to all employees of Reunion and its
subsidiaries. Management believes that Reunion's internal controls provide
reasonable assurance that assets are safeguarded against material loss from
unauthorized use or disposition and that the financial records are reliable
for preparing financial statements and other data and maintaining
accountability for assets.
The Audit Committee of the Board of Directors, composed solely of
Directors who are not employees or officers of Reunion, meets on a regular
periodic basis with the independent auditors and management to discuss
internal business controls, auditing and financial reporting matters. The
Committee reviews with the independent auditors the scope and results of the
audit effort. The Committee also meets with the independent auditors without
management present to ensure that the independent auditors have free access to
the Audit Committee.
The independent registered Public Accounting Firm, Mahoney Cohen &
Company, CPA, P.C., are engaged to audit the consolidated financial statements
of Reunion and to conduct such tests and related procedures as they deem
necessary in accordance with auditing standards promulgated by the Public
Company Accounting Oversight Board (United States). The opinion of the
independent registered Public Accounting Firm, based upon their audits of the
consolidated financial statements, is contained in this Annual Report on
Form 10-K.
Date: April 17, 2006
--------------
/s/ Kimball J. Bradley /s/ John M. Froehlich
------------------------------------ --------------------------------------
Kimball J. Bradley, Sr. John M. Froehlich
Chairman and Chief Executive Officer Executive Vice President and
Chief Financial Officer
- F-2 -
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Reunion Industries, Inc.
We have audited the accompanying consolidated balance sheets of Reunion
Industries, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations and comprehensive income (loss)
and cash flows for the years then ended. Our audits also included the
financial statement schedule listed in the Index at Item 15. These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Reunion Industries, Inc. and Subsidiaries at December 31, 2005 and 2004,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
The accompanying financial statements have been prepared assuming that Reunion
Industries, Inc. and Subsidiaries will continue as a going concern. As more
fully described in Note 1, at December 31, 2005, the Company has a deficiency
in working capital of $48.7 million, a loss from continuing operations of $6.1
million before gain on debt extinguishment and a deficiency in assets of $27.5
million. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. 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 classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
March 17, 2006, except for Footnote 3, the second paragraph of note payable
settlements which is dated March 21, 2006.
- F-3 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
At December 31, At December 31,
2005 2004
-------------- --------------
ASSETS:
Cash and cash equivalents $ 1,923 $ 1,146
Receivables, net 7,386 9,833
Inventories, net 8,606 7,497
Other current assets 1,306 1,661
Assets of discontinued operations, current 6,237 8,151
--------- --------
Total current assets 25,458 28,288
Property, plant and equipment, net 4,594 6,047
Property, plant and equipment, held for sale 6,050 6,238
Due from related parties 891 919
Goodwill, net 10,994 10,994
Other assets, net 3,273 4,110
--------- --------
Total assets $ 51,260 $ 56,596
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Debt in default $ 43,236 $ -
Current maturities of debt - 636
Revolving credit facilities - 14,485
Trade payables 6,129 7,299
Accrued salaries and benefits 1,082 1,184
Accrued interest 8,052 5,663
Due to related party 140 285
Other current liabilities 4,182 3,696
Notes payable 8,240 4,161
Note payable - related parties 500 500
Current liabilities of discontinued
operations 2,641 3,637
--------- --------
Total current liabilities 74,202 41,546
Long-term debt - 35,628
Other liabilities 3,465 3,735
Non-current liabilities of
discontinued operations 781 940
--------- --------
Total liabilities 78,448 81,849
Minority interests 329 330
Commitments and contingent liabilities - -
Stockholders' deficit:
Common stock ($.01 par value, 30,000,000 shares
authorized, 16,656,519 shares issued
and outstanding at December 31, 2005 and
16,278,519 shares issued and outstanding
at December 31, 2004) 167 163
Capital in excess of par value 28,325 27,866
Accumulated other comprehensive loss (1,879) (1,902)
Accumulated deficit (54,130) (51,710)
--------- --------
Stockholders' deficit (27,517) (25,583)
--------- --------
Total liabilities and stockholders' deficit $ 51,260 $ 56,596
========= ========
See accompanying notes to consolidated financial statements.
- F-4 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share information)
Year Ended December 31,
2005 2004 2003
-------- -------- --------
Net Sales $ 49,727 $ 50,715 $ 39,262
Total cost of sales 39,848 40,914 32,032
-------- -------- --------
Gross profit 9,879 9,801 7,230
Selling, general & administrative 7,046 7,152 7,722
Gain on debt extinguishment (3,450) (3,540) (10,991)
Other (income) expense, net (203) (798) (293)
-------- -------- --------
Operating profit 6,486 6,987 10,792
Interest expense, net 8,906 7,933 6,902
-------- -------- --------
Income (loss) from continuing operations
before income taxes and
minority interests (2,420) (946) 3,890
Provision for income taxes 49 - -
-------- -------- --------
Income (loss) from continuing operations
Before minority interests (2,469) (946) 3,890
Less: Minority interests 211 330 -
-------- -------- --------
Income (loss) from continuing operations (2,680) (1,276) 3,890
Discontinued operations, net of tax:
Income from discontinued Oneida operations,
less applicable income taxes of $-0- 1,355 1,343 279
Loss from discontinued Rostone operations,
less applicable income taxes of $-0- (849) (87) (389)
Gain on disposal of Rostone operations,
less applicable income taxes of $-0- 370 - -
Loss on prior disposal of discontinued
materials handling operations, less
applicable income taxes of $-0- (119) - -
Loss on prior disposal of discontinued
bridges and cranes operations, less
applicable income taxes of $-0- (465) - (942)
Income(loss)from discontinued springs
operations, less applicable income
taxes of $-0- (32) 176 (198)
Loss on disposal of springs operations,
less applicable income taxes of $-0- - (318) -
-------- -------- --------
Income(loss) from discontinued operations 260 1,114 (1,250)
-------- -------- --------
- F-5-
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(continued)(in thousands, except per share information)
Year Ended December 31,
2005 2004 2003
-------- -------- --------
Net income (loss) (2,420) (162) 2,640
Other comprehensive income (loss),
net of $-0- tax:
Reduction in (additional) pension
liability in excess of unrecognized
prior service cost 23 77 31
-------- -------- --------
Comprehensive income (loss) $ (2,397) $ (85) $ 2,671
======== ======== ========
Earnings (loss) applicable to common
stockholders $ (2,420) $ (162) $ 2,640
======== ======== ========
Earnings (loss) per common share-basic:
Continuing operations $ (0.16) $ (0.08) $ 0.24
Discontinued operations 0.01 0.07 (0.08)
-------- -------- --------
Income (loss) per common share-basic $ (0.15) $ (0.01) $ 0.16
======== ======== ========
Earnings (loss) per common share-diluted:
- basic and diluted:
Continuing operations $ (0.16) $ (0.08) $ 0.24
Discontinued operations 0.01 0.07 (0.08)
-------- -------- --------
Income (loss) per common share
- basic and diluted $ (0.15) $ (0.01) $ 0.16
======== ======== ========
Weighted average shares outstanding - basic 16,479 16,279 16,279
======== ======== ========
Weighted average shares outstanding - diluted 16,479 16,279 16,654
======== ======== ========
See accompanying notes to consolidated financial statements.
- F-6 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2005 2004 2003
-------- -------- --------
Cash flow from operating activities:
Net income (loss) $ (2,420) $ (162) $ 2,640
Adjustments to reconcile net (loss) income to
net cash provided by(used in)
operating activities:
Depreciation 1,651 2,480 2,582
Amortization of deferred financing fees 869 864 71
Amortization of estimated warrant value 259 138 16
Gain on extinguishment of debt (3,450) (3,540) (10,991)
Gain on sale of property and equipment (360) - (226)
Provision for bad debt - - 130
Write-off of impaired assets - - 117
Increase in minority interest 211 330 -
Changes in assets and liabilities:
(Increase)decrease in receivables 2,277 (4,014) 2,165
(Increase)decrease in inventories (948) (2,819) (312)
(Increase) decrease in other current assets (288) 517 486
Increase (decrease) in trade payables
and other current liabilities 2,552 1,076 (150)
Net change in other assets and liabilities (214) (267) 807
Capitalization from China joint venture - 2,074 -
-------- -------- --------
Cash provided by(used in) operating activities 139 (3,323) (2,665)
-------- -------- --------
Cash flow from investing activities:
Proceeds from sale of discontinued
operations 3,680 - -
Proceeds from sale of property - - 455
Capital expenditures (585) (780) (282)
-------- -------- --------
Cash provided by(used in) investing activities 3,095 (780) 173
-------- -------- --------
Cash flow from financing activities:
Proceeds from issuance of debt 3,100 3,000 11,375
Repayments of debt (3,352) (682) (4,001)
China dividend paid to minority interest (212) - -
Revolving credit facilities borrowings 67,964 70,774 67,105
Revolving credit facilities repayments (69,826) (68,340) (69,678)
Payments of deferred financing costs (7) (431) (2,161)
Net increase(decrease) in outstanding checks 22 244 (200)
-------- -------- --------
Cash provided by (used in) financing activities (2,311) 4,565 2,440
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 923 462 (52)
Less: Change in cash of discontinued operations (146) 28 29
Cash and cash equivalents, beginning of year 1,146 656 679
-------- -------- --------
Cash and cash equivalents, end of year $ 1,923 $ 1,146 $ 656
======== ======== ========
Supplemental cash flow information:
Interest paid $ 3,156 $ 2,642 $ 2,304
======== ======== ========
Income taxes paid $ - $ 6 $ 5
======== ======== ========
Non-cash financing and investing activities:
Conversion of fees/interest $ 378 $ - $ -
======== ======== ========
See accompanying notes to consolidated financial statements.
- F-7 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1: ACCOUNTING POLICIES
Nature of Business
Reunion Industries, Inc. (the Company) owns and operates industrial
manufacturing operations that design and manufacture engineered, high-quality
products for specific customer requirements. Such products include large-
diameter seamless pressure vessels, hydraulic and pneumatic cylinders and
metal bar grating. Until December 2005, the Company's products included
precision plastic components made by its thermoplastics division ("Oneida").
During the year 2005, the Company decided to exit the plastics business and,
effective March 1, 2006, Oneida was sold. See Note 3: SUBSEQUENT EVENTS-Sale
of Oneida. Previously, during the year 2004, the Company decided to exit the
thermoset plastics portion ("Rostone") of its plastics segment. The Rostone
business was sold in the first quarter of 2005. Until December 2004, the
Company's products also included leaf springs. Such business was sold in
January 2005. Prior to 2003, the Company's products also included heavy duty
cranes, bridge structures and materials handling systems. These businesses
were sold during 2002. All of these sold businesses are reported as
discontinued operations.
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 Wanggang Township,
Pudong New Area, Shanghai in the People's 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 returned it to continuing operations
effective at the beginning of 2004.
The Consolidated Statement of Operations for 2005 and 2004 includes the
sales of this grating subsidiary for both years along with the Company's
ownership share of the profits for the same periods. The Consolidated Balance
Sheet at December 31, 2004 reflects the change in assets and liabilities from
the beginning of the 2004 year. Since such assets and liabilities turnover
more than once a year, the balance sheets at December 31, 2005 and 2004
include the existing assets and liabilities of this subsidiary, excluding
those assets that were previously written down in 1999. The minority interest
in this subsidiary was calculated for the 35% ownership and the remaining
amount was treated as additional capital of the Company.
Going Concern
The financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
- F-8 -
liabilities in the normal course of business. At December 31, 2005, the
Company has a deficiency in working capital of $48.7 million, a loss from
continuing operations of $6.1 million before gain on debt extinguishment and a
deficiency in assets of $27.5 million. Additionally, at December 31, 2005,
the Company was in default on substantially all of its debt. (However, see
below NOTE 3: SUBSEQUENT EVENTS - Default Waivers.) These conditions raise
substantial doubt about the Company's 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.
The Company successfully refinanced its bank debt in 2003, extinguished
a significant portion of its obligations under the senior notes in 2003 and
2004 and removed all previously existing defaults on debt at that time. These
steps were taken to improve liquidity and defer the principal maturities on a
significant portion of our debt. As noted above, during 2005, the Company
sold its leaf spring business and all of the operating assets of its Rostone
business. Additionally, as described in Note 2: Recent Events, in March of
2006 the Company sold its Oneida business, the remaining portion of its
plastics segment. The Company is investigating other recapitalization
scenarios in an effort to provide additional liquidity and extinguishments or
deferrals of debt obligations. Although the Company believes that it can
accomplish these plans, no assurances exist that it will. Failure to
accomplish these plans could have an adverse impact on the Company's
liquidity, financial position and future operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Reunion
Industries and its subsidiaries. All significant intercompany transactions
and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates that affect the reported amounts of assets, liabilities, revenues,
expenses, and disclosures of contingencies during the reporting period.
Actual results could differ from management's estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposit accounts and other
cash equivalents with original maturities of 3 months or less.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are net of $211,000 and $162,000 in allowance for
doubtful accounts at December 31, 2005 and 2004, respectively. Credit is
extended after a credit review by management that is based on a customer's
ability to perform its obligations. Such reviews are regularly updated. The
allowance for doubtful accounts is based upon agings of customer balances and
specific account reviews by management. The Company has no concentration of
credit risks and generally does not require collateral or other security from
its customers.
Inventories and Reserves for Obsolescence
At December 31, 2005, inventories are stated at the lower of cost or
market, at costs that approximate the first-in, first-out method of inventory
valuation. During the third quarter of 2003, for those locations of the
Company that had been using the last-in, first-out method of inventory
valuation, the Company changed the method of valuing inventory to the first-
in, first-out method. Work-in-process and finished goods include material
costs, labor costs and manufacturing overhead. Reserves for excess, slow-
moving and obsolete inventories are based on reviews of inventory usage
reports for items more than one year old.
- F-9 -
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including costs as
determined by the allocation of the purchase price in business acquisitions
accounted for using the purchase method, and depreciated over their estimated
useful lives using the straight-line method for financial statement purposes.
Estimated useful lives in years for depreciation are as follows: 25 to 40 for
buildings and improvements; 7 to 12 for machinery and equipment; 5 to 8 for
computer systems; 7 to 10 for furniture and fixtures. Additions, betterments
and replacements are capitalized, while expenditures for repairs and
maintenance are charged to operations when incurred. As units of property are
sold or retired, the related cost and accumulated depreciation are removed
from the accounts, and any resulting gain or loss is recognized in income.
Goodwill
The Company has recorded goodwill totaling $11.0 million at December 31,
2005, of which $9.5 million relates to our pressure vessels and $1.5 million
relates to our cylinders segment. Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets" and ceased amortizing goodwill. The Company
completed internal impairment tests of goodwill as of January 1, 2002 and
engaged an independent valuation consultant to confirm our conclusions. The
Company completed additional impairment tests of goodwill as of December 31,
2005, 2004, 2003 and 2002. The Company concluded that goodwill is not
impaired.
Long-Lived Assets and Impairment
The Company reviews long-lived assets for impairment whenever
circumstances indicate that the carrying amount of the asset may not be
recoverable, and recognizes an impairment loss when the undiscounted future
cash flows expected to be generated by the asset are less than the carrying
amount of the asset. Long-lived assets held for sale, other than assets to be
disposed of in connection with disposal of a discontinued business segment,
are reported at the lower of carrying amount or fair value less cost to sell.
Revenue Recognition
Sales are recorded when shipped and title and risks of ownership transfer
to the buyer. Shipping and handling fees charged to customers are recorded as
revenues and the related costs are recorded as cost of sales.
Environmental Policies
Environmental expenditures that relate to current operations are either
expensed or capitalized depending on the nature of the expenditure.
Expenditures relating to conditions caused by past operations that do not
contribute to current or future revenue generation are expensed. Liabilities
are recorded when environmental assessments and/or remediation actions are
probable, and the costs can be reasonably estimated.
Income Taxes
The Company provides deferred income taxes for all temporary differences
between financial and income tax reporting using the liability method.
Deferred taxes are determined based on the estimated future tax effect of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of enacted tax laws. A valuation allowance
is recorded for net deferred tax assets if it is more likely than not that
such assets will not be realized. The Company has significant net operating
loss and investment tax credit carryforwards for tax purposes, portions of
which may expire unutilized.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period. Diluted earnings per share
gives effect to all dilutive potential common shares outstanding during this
period. Potential common shares include shares issuable upon exercise of the
Company's stock options and issuable upon exercise of warrants.
- F-10 -
Potential common shares relating to warrants and options to purchase
common stock aggregating approximately 3,765,803, 2,533,000 and 375,000 are
included in the weighted average number of shares for the years ended December
31, 2005, 2004 and 2003, respectively. When the Company has losses from
continuing operations, such shares are anti-dilutive and are not considered in
earnings per share calculations for those years.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R, "Share Based Payment." SFAS
123R is a revision to SFAS 123 and supersedes APB 25, "Accounting for Stock
Issued to Employees," and amends SFAS 95, "Statement of Cash Flows." This
statement requires a public entity to expense the cost of employee services
received in exchange for an award of equity instruments. This statement also
provides guidance on valuing and expensing these awards, as well as disclosure
requirements of these equity arrangements. This statement is effective for the
first interim reporting period that begins after January 1, 2006.
SFAS 123R permits public companies to choose between the following two
adoption methods:
1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of Statement 123 for all awards granted to employees prior to
the effective date of SFAS 123R that remain unvested on the effective date, or
2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123 for purposes
of pro forma disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption
Reunion currently accounts for share-based payments to employees using
APB 25's intrinsic value method and, as such, recognizes no compensation
expense for employee stock options. There would have been no material impact
on reported results of operations and earnings per share had the Company
applied the fair value provisions of SFAS 123 to share-based payments.
The adoption of SFAS 123R's fair value method is not anticipated to have
a material impact on Reunion's future results of operations or overall
financial position. SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation expense, if any, to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement may reduce net operating cash flows and
increase net financing cash flows in the consolidated statement of cash flows
of periods after adoption.
On March 29, 2005, the Staff of the Securities and Exchange Commission
(SEC or the Staff) issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" (SAB 107). Although not altering any conclusions reached in SFAS
123R, SAB 107 provides the views of the Staff regarding the interaction
between SFAS 123R and certain SEC rules and regulations and, among other
things, provide the Staff's views regarding the valuation of share-based
payment arrangements for public companies. Reunion intends to follow the
interpretative guidance on share-based payment set forth in SAB 107 during the
Company's adoption of SFAS 123R.
Reclassifications
Certain reclassifications of prior year amounts may have been made to
conform to 2005 classifications.
NOTE 2: RECENT EVENTS
NapTech Settlement
On April 26, 2005 a judgment was entered in Louisiana in favor of Shaw
NapTech, Inc. ("NapTech") against various parties, including the Company. On
July 8, 2005, the Company entered into a Settlement Agreement with NapTech
pursuant to which the Company paid NapTech $1.65 million in settlement of the
- F-11 -
Company's indebtedness to NapTech of approximately $5.1 million under a
promissory note and the related judgment. As a result of the NapTech
settlement, Reunion recognized a gain on debt extinguishment of approximately
$3.4 million in the third quarter of 2005.
In connection with the NapTech settlement, Wachovia Bank, National
Association ("Wachovia") made a $3.1 million supplemental loan to Reunion
under its existing $25 million loan facility, thereby increasing the total
amount of the supplemental loan portion of the facility to $6.1 million.
Reunion used $1.65 million of this additional supplemental loan to make the
Reunion settlement payment to NapTech and used the balance of the loan
proceeds for inventory purchases and other working capital needs. Wachovia
required, as a condition to making the additional supplemental loan, that LC
Capital Master Fund, Ltd. ("LCC") purchase an additional $3.1 million junior
participation interest in the Wachovia loan facility, and LCC did so, thereby
increasing its junior participation interest in the facility to $6.1 million.
LCC in turn simultaneously sold a 50% interest in its junior participation
interest to WebFinancial Corporation ("Web").
To induce LCC to purchase the additional junior participation interest
in the Wachovia loan facility and to induce Web to purchase a 50% interest in
such junior participation interest, Reunion issued two warrants, one to LCC
and one to Web, to purchase, in each case, 387,500 shares of the Company's
common stock at a price of $0.01 per share. These warrants are exercisable at
anytime until July 12, 2010. The value of these warrants is estimated to be
$85,000 using the Black-Scholes pricing model. The $85,000 was shown as a
discount on the debt and will be amortized as interest expense over the life
of the debt
Reunion's indebtedness under the Wachovia loan facility, including the
supplemental loans, is secured by liens on substantially all of Reunion's
assets.
13% Senior Notes
On February 3, 2005, the Company announced that it was unable to make a
$2,928,000 interest payment by February 2, 2005 to the holders of the
Company's 13% Senior Notes. Holders of more than 80% of the principal amount
of such Senior Notes entered into a Standstill Agreement with the Company,
pursuant to which such holders agreed that they would not exercise and will
cause the Trustee not to exercise any remedies provided for in the Indenture
under which the Senior Notes were issued, or any other agreements related to
such notes, with respect to this payment default or with respect to a
potential event of default if the Company failed to make the next scheduled
interest payment due April 1, 2005 (which the Company did not make). In the
Standstill Agreement, such holders agreed to defer such interest payments to
December 2006.
The Company also failed to make the interest payments on the Senior Notes
that were due on July 1, October 1, 2005 and January 1, 2006, each in the
amount of $0.7 million. As a result, events of default have occurred under
the Indenture ("Indenture Default") under which the Senior Notes were issued.
With an Indenture Default, holders of more than 25% of the principal amount of
the Senior Notes may, by written notice to the Company and to the Trustee,
declare the principal of and accrued but unpaid interest on all the Senior
Notes to be immediately due and payable (the "acceleration"). However, under
an Intercreditor and Subordination Agreement entered into in December 2003
among Wachovia, the holders of the Senior Notes and certain other lenders, the
holders of approximately 95% of the Senior Note holders can not commence any
action to enforce their liens on any collateral for a 180 day period beginning
after the date of receipt by Wachovia, the senior secured lender, of a written
notice from the Senior Note holders informing Wachovia of such Indenture
Default and demanding the acceleration. At this date, neither the Company nor
Wachovia has received written notice of any acceleration.
Defaults and Waivers Under the Wachovia Loan Facility and the LCC Debt
On December 3, 2003, the Company entered into a revolving and term loan
credit facility with Wachovia (formerly, Congress Financial Corporation). The
- F-12 -
Wachovia 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. In November 2004, Wachovia and the Company entered into an
amendment of the revolving and term loan credit facility wherein Wachovia
eliminated the fixed charge coverage ratio and reduced the monthly minimum
EBITDA covenant going forward. Under the November 2004 amendment, the Company
was required to maintain new minimum monthly amounts of EBITDA of $280,000 in
November 2004, $290,000 in December 2004, $350,000 in January 2005, $280,000
in February 2005 and $300,000 per month thereafter. In January 2005, the
Company failed to meet the minimum monthly amount, when it had an EBITDA loss
for the month of $39,000. Wachovia waived this EBITDA shortfall.
As described above under "NapTech Settlement", in April 2005, NapTech
secured a judgment against the Company. The judgment obtained by NapTech
constituted a cross default under the Wachovia Loan Agreement. Such default
was waived by Wachovia.
Through September 2005, the Company achieved the minimum monthly EBITDA
required for compliance with the Wachovia covenant. However, as described
above under "13% Senior Notes", the Company is in default with respect to such
notes. This default also constitutes a cross default under the Company's loan
and financing agreements with each of Wachovia and LCC and such defaults were
not waived by Wachovia or LCC and the Company was in default under the
Wachovia Loan Agreement and under its note payable to a private capital fund,
LCC. (However, see below NOTE 3: SUBSEQUENT EVENTS - Default Waivers.)
In October and November of 2005, the Company was unable to achieve the
required minimum monthly EBITDA covenant of $300,000. As a result, in
December 2005, Congress formally declared a default under the loan and
security agreement and began charging the default interest rate at such time
on its revolving credit and term loans. The default interest rate is two
percentage points higher than the non-default rate. (However, see below NOTE
3: SUBSEQUENT EVENTS-Default Waivers)
Sale of Assets
The Company's management, having reevaluated the Company's ability to
service its debt and meet future obligations, is investigating the sale of
certain assets in order to generate liquidity. These asset sales may take one
or more forms including, but not limited to, piecemeal sales of assets
including real estate, buildings, machinery and equipment and/or intangibles.
The Company's management cannot provide any assurances that any asset sales
will occur or, if asset sales do occur, that such sales will generate
sufficient liquidity for the Company.
During the first quarter of 2005, the Company did sell all of the assets
and liabilities of its leaf spring manufacturing segment, located in Miami,
OK, to an unrelated entity for $792,000. Of this amount, $250,000 was used to
pay down the private capital fund note payable secured by the real property,
$41,000 was used to pay down the Wachovia term loan secured by the machinery
and equipment and the remaining amount was used to reduce the borrowings under
the revolving credit facility. The Company recorded a loss of $318,000 on such
sale which was provided for in the Company's 2004 year.
Additionally, during the first quarter of 2005, the Company sold certain
of the receivables, inventory and intangibles of its thermoset plastics
operation ("Rostone") located in Lafayette, IN, along with certain of its
machinery and equipment. The sale of such assets was accomplished in two
separate transactions, with the sale of certain of the Company's compounding
operation assets being sold to one unrelated entity and the sale of certain of
the Company's molding operation assets being made to a different unrelated
entity. At the time of such sale, the Company entered into tolling or
manufacturing agreements with such buyers under which the Company agreed to
operate the compounding and molding operations at its Lafayette, IN facility
for a limited time until the buyers could move such operations to different
geographical locations. Such agreements expired in June 2005 and the buyers
reimbursed the Company for all expenses in connection with these activities.
The sale of the selected assets noted above was for approximately $2.9
- F-13 -
million. Of this amount, $712,000 was used to pay down the Wachovia term loan
secured by the machinery and equipment and the remaining amount was used to
reduce the borrowings under the revolving credit facility. The Company
recorded a gain of approximately $370,000 on such sales.
Insurance Receipt
During the second quarter of 2005, the Company received a business
interruption insurance payment of approximately $600,000 related to a plant
accident at the pressure vessel segment plant in the first quarter of 2005
which was classified to cost of sales. An additional $114,000 was received in
the third quarter of 2005 which was also classified to cost of sales.
NOTE 3: SUBSEQUENT EVENTS
Sale of Oneida
During the 2005 year, the Company decided to exit the plastics business.
In early 2006, the Company signed an Asset Purchase Agreement to sell
substantially all of the assets of its Oneida business to an unrelated entity.
On March 2, 2006, effective March 1, 2006, the Company completed the sale for
a purchase price of $11,573,000 subject to a post-closing adjustment based on
a closing balance sheet. Of the net sale proceeds, $300,000 was put into a
one-year escrow as security for any claims by the buyer that may arise after
the closing, $2,000,000 was used to pay down a note payable to a private
capital fund that is secured by the real estate of the Company, $980,974 was
used to completely pay off the existing Wachovia term loan and the remaining
$7,917,405 was used to pay down the revolving credit facility.
Default Waivers
In connection with the sale of Oneida, the Company and Wachovia entered
into an amendment to the loan and security agreement wherein Wachovia waived
the October and November defaults for failure to meet the minimum monthly
EBITDA amount, waived the defaults arising from the Company's failure to make
the interest payments to the holders of the 13% Senior Notes and lowered the
monthly minimum EBITDA covenant requirement from $300,000 to $250,000
beginning in March 2006. LCC also waived such cross defaults. As a result, as
of March 2006, the Company is not currently in default on its Wachovia or LCC
debt.
Change in Officers
Effective March 2, 2006, Charles E. Bradley, Sr. resigned his
officership as Chairman of the Board of Directors and Chief Executive Officer
of the Company. However, he will continue to serve as a director. Effective
March 2, 2006, the Board of Directors elected Mr. Kimball J. Bradley Chairman
of the Board of Directors and Chief Executive Officer.
Note Payable Settlements
On March 2, 2006, the Company entered into a settlement agreement with
the holder of a $1.017 million note payable from the Company wherein the
Company agreed to pay the holder a total of $400,000 for such note and all
accrued interest of $308,000. Such settlement was effected on March 3, 2006
and the Company will recognize a gain from this debt settlement in the first
quarter of year 2006.
On March 21, 2006, the Company entered into a settlement agreement with
the Stanwich Financial Services Corp. Liquidating Agent ("SFSC") wherein the
Company agreed to pay SFSC $1.125 million in settlement of its existing $4.290
million judgment note and all accrued interest. Such agreement is awaiting
bankruptcy court approval in SFSC's Chapter 11 proceeding and will be paid
promptly upon such approval.
- F-14 -
NOTE 4: INVENTORIES
Inventories of continuing operations are comprised of the following (in
thousands):
At December 31,
2005 2004
-------- --------
Raw material $ 2,732 $ 2,589
Work-in-process 2,997 2,363
Finished goods 2,877 2,545
-------- --------
Inventories $ 8,606 $ 7,497
======== ========
Inventories are valued at the lower of cost or market, cost being
determined on the first-in, first-out method. In the third quarter of 2003,
for those locations of the company that had been using the last-in, first-out
method of inventory valuation, the Company changed the method of valuing
inventory to the first-in, first-out method. The effect on the results of
operations for the year ended December 31, 2003 was inconsequential. The
above amounts are net of inventory reserves of $328 and $320 at December 31,
2005 and 2004, respectively.
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (PP&E) of continuing operations is comprised of
the following (in thousands):
At December 31,
2005 2004
-------- --------
Land $ 309 $ 309
Buildings and improvements 3,405 5,126
Machinery and equipment 13,114 12,489
Computer systems 2,233 2,199
Furniture and fixtures 426 432
Construction-in-progress 147 15
-------- --------
Property, plant and equipment 19,634 20,570
Less: Accumulated depreciation (15,040) (14,523)
-------- --------
Property, plant and equipment, net $ 4,594 $ 6,047
======== ========
NOTE 5: OTHER ASSETS
Other assets are comprised of the following (in thousands):
At December 31,
2005 2004
-------- --------
Deferred financing costs (net of accumulated
amortization of $1,733 and $864) $ 866 $ 1,728
Other 2,407 2,382
-------- --------
Total other assets $ 3,273 $ 4,110
======== ========
The Company refinanced its bank debt in 2003 and solicited the consent of
its senior noteholders to certain provisions and waivers of defaults under the
indenture governing the 13% senior notes. The Company has paid or accrued
$2.6 million of financing related costs, which have been deferred and are
being amortized over a three-year period using a straight line amortization
method which approximates the effective interest method of amortization.
The remainder of other assets is composed primarily of the cash surrender
value of life insurance policies of approximately $2.4 million on key
employees of the Company. Portions of cash surrender values of these policies
totaling $1.75 million secure borrowings under the Congress revolving credit
loan.
- F-15 -
NOTE 6: OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
At December 31,
2005 2004
-------- --------
Customer deposits $ 1,222 $ 137
Accrued liabilities - legacy costs 708 656
Accrued health self-insurance liability 451 888
Accrued liabilities - Shanghai China 393 333
Other 1,408 1,682
-------- --------
Total other current liabilities $ 4,182 $ 3,696
======== ========
Customer deposits represent advances received from customers to purchase
raw material for the pressure vessel business. Accrued liabilities - legacy
costs primarily represents the remaining estimated liabilities of our
discontinued bridges and cranes operations and includes trade payables,
employee-related legacy costs such as deferred and workers compensation costs
and legal/settlement costs associated with asbestos claims. The increase in
accrued legacy costs is the net change resulting from additional year 2005
expense of $465,000 less payments made. Accrued liabilities - Shanghai China
represent that subsidiary's accrued liabilities in China.
NOTE 7: DEBT IN DEFAULT AND LONG-TERM DEBT
At December 31, 2005, the Company was in default on its Wachovia bank
financing (including the junior participation portion thereof), its note
payable to a private capital fund and its 13% senior notes.
Debt in default consists of the following (in thousands):
At December 31,
2005
----------------
Wachovia revolving credit facility $ 9,788
Junior participation portion of the
revolving credit facility (net of
warrant value of $139) 5,961
Wachovia term loan 1,087
Note payable due December 5, 2006 (net of
warrant value of $31) 3,469
13% senior notes (net of warrant value
of $99) 21,914
Note payable 1,017
--------
Total debt in default $ 43,236
========
Long-term debt consists of the following (in thousands):
At December 31,
2005 2004
-------- --------
Wachovia revolving credit facility $ - $ 11,650
Junior participation portion of the
revolving credit facility (net of
warrant value of $165) - 2,835
Wachovia term loan - 2,539
Note payable due December 1, 2006 3,950 4,200
Note payable due December 5, 2006 (net of
warrant value of $71) - 3,429
13% senior notes (net of warrant value
of $207) - 21,806
Notes payable 4,290 8,451
Note payable - related party 500 500
-------- --------
Total long-term debt 8,740 55,410
Classified as current (8,740) (19,782)
-------- --------
Long-term debt $ - $ 35,628
======== ========
- F-16 -
In 2004, pursuant to EITF 95-22, "Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements that Include both a
Subjective Acceleration Clause and a Lock-Box Arrangement are Deemed to be
Current", the Company has classified its Wachovia revolving credit
obligations, including the junior participation, within current liabilities as
the Wachovia agreement contains language that implies that Wachovia has a
subjective acceleration clause that it could invoke at any time to accelerate
the debt and includes a required lock-box arrangement. At December 31, 2005,
such debt is shown as current due to its default status at that time.
Wachovia Revolving and Term Loan Credit Facility
On December 3, 2003, the Company entered into a new revolving and term
loan bank credit facility with Wachovia Bank (formerly, Congress Financial
Corporation) (the "Wachovia Loan Facility"). The Wachovia Loan Facility
consists of revolving credit, term loan and letter of credit accommodations up
to a maximum credit of $25.0 million. The 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. The Wachovia Loan Facility is collateralized by a
continuing security interest and lien on substantially all of the Company's
assets.
Interest on loans outstanding under the Wachovia facility (other than the
Wachovia Supplemental Loan described in the next paragraph) 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
interest rate at December 31,2005 was 11.75%.
In May 2004, the Company and Wachovia entered an amendment to the loan
and security agreement whereby Wachovia provided an additional $3.0 million
Supplemental Loan to the Company. Proceeds from the loan were used to pay
trade payables and for other corporate purposes. Funds for the additional
$3.0 million of supplemental financing were provided to Wachovia by two
private capital funds as the result of the execution of a junior participation
loan transaction between Wachovia and the two funds. Each fund participated
in the supplemental financing at a ratio of 50% each. In addition to their
junior participation loan having the same collateral security as Wachovia as
described below, each private equity fund received, subject to shareholder
approval, a warrant to purchase 375,000 shares of the Company's common stock
at an initial exercise price of $0.01 per share, together with registration
rights. The warrants were issued in January 2005, following the approval by
the Company's stockholders to amend the Company's Articles of Incorporation to
increase the authorized number of shares of common stock of the Company by
10,000,000. The value of the warrants was estimated to be $165,000 at
December 31, 2004 using the Black-Scholes pricing model. This amount was
recorded as an original issue discount with an increase to paid-in capital and
will be amortized to interest expense using the effective interest method of
amortization.
In July 2005, the Company and Wachovia entered into an amendment to the
loan and security agreement whereby Wachovia provided an additional $3.1
million of supplemental revolving credit financing to the Company. Proceeds
from the loan were used to pay the NapTech settlement, as described more fully
in Note 2: Recent Events, and to fund inventory purchases. Funds for the
additional $3.1 million of supplemental financing were provided to Wachovia by
two private capital funds as the result of the execution of a junior
participation loan transaction between Wachovia and the two funds. Each fund
participated in the supplemental financing at a ratio of 50% each. In
addition to their junior participation loan having the same level of
collateral security as Wachovia as described below, each private equity fund
received a warrant to purchase 375,000 shares of the Company's common stock at
an initial exercise price of $0.01 per share, together with registration
rights. The warrants were issued in July 2005. The value of the warrants was
estimated to be $85,000 at July 1, 2005 using the Black-Scholes pricing model.
This amount was recorded as an original issue discount with an increase to
paid-in capital and will be amortized to interest expense using the effective
interest method of amortization.
- F-17 -
Interest on the Wachovia Supplemental Loans is payable monthly at a fixed
rate of 15% per annum. The Wachovia Supplemental Loans are 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 Wachovia Supplemental Loans are subject to the same financial
covenants and other covenants as the revolving credit and term loan
facilities, including the minimum amount of earnings before interest, taxes,
depreciation and amortization (EBITDA).
Through August 2004, the Company achieved the minimum monthly EBITDA
required for compliance with the Wachovia covenant. However, the Company was
unable to achieve the required minimum monthly covenant of $650,000 for
September 2004, having generated only $604,000 as calculated under the terms
of the facility. In November 2004, Wachovia and the Company entered into an
amendment of the loan and security agreement wherein Wachovia waived the
minimum EBITDA covenant for September 2004, eliminated the minimum EBITDA
covenant for October 2004 and significantly reduced the monthly minimum EBITDA
covenant going forward. The Company was in compliance with all other
financial, affirmative and negative covenants in September 2004, including the
required minimum fixed charge coverage ratio of 0.77:1 for the third quarter
of 2004, having achieved a third quarter 2004 ratio of 1.17:1. However, as
part of this amendment, Wachovia eliminated the minimum fixed charge coverage
ratio in all future quarters. Under this November 2004 amendment, the Company
was required to maintain new minimum monthly amounts of EBITDA of $280,000 in
November 2004, $290,000 in December 2004, $350,000 in January 2005, $280,000
in February 2005 and $300,000 per month thereafter. In January 2005, the
Company failed to meet the minimum monthly amount when it had an EBITDA loss
for the month of $39,000. Wachovia waived this failure.
Through September 2005, the Company achieved the minimum monthly EBITDA
required for compliance with the Wachovia covenant. However, the Company was
unable to achieve the required minimum monthly EBITDA covenant of $300,000 for
October or November 2005. As a result, in December 2005, Wachovia declared a
default under the loan and security agreement and began charging the default
interest rate at such time on its revolving credit and term loans. The default
interest rate is 2% higher than the non-default rate. As more fully described
in Note 3: SUBSEQUENT EVENTS, with the sale of Oneida, the Company and
Wachovia entered into an amendment to the loan and security agreement wherein
Wachovia waived the October and November defaults for failure to meet the
minimum monthly EBITDA amount, waived the defaults arising from the Company's
failure to make the required interest payments to the holders of the 13%
Senior Notes and lowered the monthly minimum EBITDA covenant requirement from
$300,000 to $250,000 beginning in March 2006. As a result, as of March 2006,
the Company is not currently in default on its Wachovia debt.
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 Wachovia. In addition to its
subordinated security interest, the fund received a warrant to purchase
625,000 shares of the Company's common stock and registration rights with
respect to the warrant and shares issuable thereto at a price of $0.01 per
share. The value of the warrants was estimated to be $90,000 at the time of
their issuance using the Black-Scholes pricing model. This amount was
recorded as an original issue discount with an increase to paid-in capital and
is being amortized to interest expense using the effective interest method of
amortization. The cash proceeds were used for working capital and other
general corporate purposes.
- F-18 -
In connection with the Wachovia refinancing on December 3, 2003, this
same private capital fund amended and restated its senior subordinated secured
promissory note to provide an additional $1.0 million of financing to the
Company at the same interest rate but changed the maturity date from August
11, 2005 to December 5, 2006. Additional warrants to purchase 325,000 shares
were eventually issued to the fund in January 2005, following the approval by
the Company's stockholders to amend the Company's Articles of Incorporation to
increase the authorized number of shares of common stock of the Company by
10,000,000. The value of these warrants was estimated to be $18,000 at the
time of their issuance using the Black-Scholes pricing model. This amount was
recorded as an original issue discount with an increase to paid-in capital and
is being amortized to interest expense using the effective interest method of
amortization.
In connection with the Wachovia 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 bore interest
at the rate of 12% until December 2005 when the rate increased to the prime
rate as published in the Wall Street Journal plus 8%. This rate is now 15%.
Interest is payable on the first day of every month. 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 connection with the sale of
the leaf spring segment as described in Note 2: Sale of Assets, a prepayment
of $250,000 was made on this note, bring the December 31, 2005 remaining
balance to $3.95 million. (See also Note 2: Sale of Assets for an additional
prepayment in year 2006.) 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. The warrants were estimated to have no
value at the time of their issuance using the Black-Scholes pricing model.
13% Senior Notes
Prior to December 2003,the Company 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, the Company was 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 the Company was 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, the Company 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 Wachovia 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, the Company 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.
Accordingly, 12% of the $23,250,700 principal amount of senior notes of
noteholders that had consented to the various provisions and waivers, or $2.8
million, was extinguished pursuant to the provisions of the consent.
In January 2004, the Company solicited our noteholders for the second
time to consent to certain provisions and waivers of the indenture governing
the 13% senior notes. In the first consent in November 2003, $23,250,700 of
the $24,855,000 principal amount of senior notes, or 93.55%, had consented.
The second consent solicitation period ended on April 28, 2004 at which time
holders of an additional $434,300 principal amount of senior notes had
consented. The significant provisions of the solicitation requested that the
- F-19 -
noteholders consent to 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.
Accordingly, 12% of the $434,300 principal amount of senior notes of
noteholders that had consented to the various provisions and waivers in the
second solicitation, or $52,000, was extinguished pursuant to the provisions
of the consent.
In exchange for their consent, each consenting noteholder received a
consent fee of $27.625, warrants to purchase 76.18 shares of the Company's
common stock at $0.01 per share for each $1,000 of principal amount of notes
owned and a junior priority lien on the Company's assets. In the refinancing
that took place on December 3, 2003, the Company 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 Company's common stock totaling 1,771,217 have been
reserved for future issuance to consenting noteholders. The value of the
warrants was estimated to be $324,000 at the time of their issuance using the
Black-Scholes pricing model. This amount was recorded as an original issue
discount with an increase to paid-in capital and is being amortized to
interest expense using the effective interest method of amortization.
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.
On February 3, 2005, the Company announced that it was unable to make a
$2,928,000 interest payment by February 2, 2005 to the holders of the
Company's 13% Senior Notes. Holders of more than 80% of the principal amount
of such Senior Notes entered into a Standstill Agreement with the Company,
pursuant to which such holders agreed that they would not exercise and will
cause the Trustee not to exercise any remedies provided for in the Indenture
under which the Senior Notes were issued, or any other agreements related to
such notes, with respect to this payment default or with respect to a
potential event of default if the Company failed to make the next scheduled
interest payment due April 1, 2005 (which the Company did not make). In the
Standstill Agreement, such holders agreed to defer such interest payments to
December 2006.
The Company also failed to make the interest payments on the Senior Notes
that were due on July 1, October 1, 2005 and January 1, 2006, each in the
amount of $0.7 million. As a result, events of default have occurred under
the Indenture ("Indenture Default") under which the Senior Notes were issued.
With an Indenture Default, holders of more than 25% of the principal amount of
the Senior Notes may, by written notice to the Company and to the Trustee,
declare the principal of and accrued but unpaid interest on all the Senior
Notes to be immediately due and payable (the "acceleration"). However, under
an Intercreditor and Subordination Agreement entered into in December 2003
among Wachovia, the holders of the Senior Notes and certain other lenders, the
Senior Note holders can not commence any action to enforce their liens on any
collateral for a 180 day period beginning after the date of receipt by
Wachovia, the senior secured lender, of a written notice from the Senior Note
holders informing Wachovia of such Indenture Default and demanding the
acceleration. At this date, neither the Company nor Wachovia has received
written notice of any acceleration.
SFSC Judgment
Effective May 10, 2004, the Company's indebtedness to and from Stanwich
Financial Services Corp. ("SFSC") was settled on the following terms: (1)
pursuant to the judgment referred to below, the Company is obligated to pay
SFSC the sum of $4.29 million on or before December 31, 2006, plus interest on
such sum at the rate of 10% per annum from such effective date, in
satisfaction of the Company's indebtedness to SFSC, (2) SFSC's indebtedness to
the Company in the amount of $310,000 plus interest was cancelled and (3)
provided it performs its obligations under the settlement and the judgment,
the Company will be released from the claims of SFSC's creditors. As
contemplated by the settlement agreement, a judgment has been entered against
the Company for the settlement amount by the United States Bankruptcy Court
for the District of Connecticut, in SFSC's pending Chapter 11 Bankruptcy
- F-20 -
proceeding. The settlement amount did not constitute a new liability of the
Company, as it relates to indebtedness and a note receivable that had
previously been recorded on the Company's balance sheet. The settlement
resulted in a $3.3 million gain on debt extinguishment in year 2004. At
December 31, 2005 such amount is included in Notes payable. At December 31,
2004, such amount is included in Long-term debt. (See also, NOTE 3: SUBSEQUENT
EVENTS - Note Payable Settlements.)
Notes Payable
At December 31, 2005, included in Debt in default is a $1,017,000 note
payable assumed by Reunion in a previous year acquisition of a plastics
operation. Such note, together with a $3,144,000 15% note payable assumed by
Reunion in connection with the acquisition by merger of NPS Acquisition Corp
("NPSAC ") in January, 2001 ( the "NapTech Note"), was included in Notes
payable at December 31, 2004.
To facilitate the Wachovia refinancing, in November 2003, Reunion and the
holder of the $1,017,000 note payable entered into a replacement promissory
note payable with an annual interest rate of the prime rate, as published by
Bank One, National Association, plus 8% with a maturity date of December 8,
2004. The Company was unable to make this payment and the note remains
currently due. The Company made no payments of interest on this note in 2004
and $74,180 of interest payments during 2003. (See NOTE 3: SUBSEQUENT EVENTS-
Note Payable Settlements.)
The original principal balance of the NapTech Note, which is unsecured,
was $4.9 million. This Note bears interest at 15% per annum. In 2001 the
Company made $1.2 million in principal payments and seven monthly interest
payments under this Note from funds available under its revolving credit
facility. In January 2003, the Company made a principal payment of $500,000
with the proceeds of a subordinated loan from Charles E. Bradley, Sr., the
Chairman of our Board of Directors. On December 31, 2004, the principal
balance of the NapTech Note was $3.1 million and accrued and unpaid interest
thereunder was $1.7 million. On April 26, 2005 a judgment was entered in
Louisiana in favor of Shaw NapTech, Inc. ("NapTech") against various parties,
including the Company. On July 8, 2005, the Company entered into a Settlement
Agreement with NapTech pursuant to which the Company paid NapTech $1.65
million in settlement of the Company's indebtedness to NapTech of
approximately $5.1 million under a promissory note and the related judgment.
As a result of the NapTech settlement, Reunion recognized a gain on debt
extinguishment of approximately $3.4 million in the third quarter of 2005.
Notes Payable - Related Parties
Note payable to related parties consists only of a December 31, 2002
note payable to Mr. Charles E. Bradley, Sr. of $500,000 with interest at 10%
per annum, which note was issued to evidence a loan from him. Such note was
due on October 31, 2004. The proceeds of this loan were used to partially pay
the NapTech Note. This note is subordinated to the Company's indebtedness to
Wachovia. No cash payments of principal or interest have been made on this
note. See NOTE 8 regarding interest on this note that was converted to
equity.
NOTE 8: STOCKHOLDERS' DEFICIT
The Company's Certificate of Incorporation was amended by vote of the
stockholders in 2005 to increase the authorized common stock from 20,000,000
shares to 30,000,000 shares and to eliminate the 10,000,000 shares of "blank
check" preferred stock of the Company. The common stock retained its par
value $.01 per share
No dividends have been declared or paid during the year with respect to
the common stock of the Company. Cash dividends are limited by the
availability of funds and by restrictions in the Company's debt agreements.
The following represents stockholders' equity (deficit) activity for each
year in the 3-year period ended December 31, 2005 (in thousands):
- F-21 -
2005 2004 2003
-------- -------- --------
Par value of common stock, January 1 $ 163 $ 163 $ 163
Stock issuance 4 - -
-------- -------- --------
Par value of common stock, December 31 $ 167 $ 163 $ 163
======== ======== ========
Capital in excess of par value, January 1 $ 27,866 $ 25,609 $ 25,195
Stock issuance 374 - -
Warrant issuances 85 183 414
Capitalization from China Joint Venture (NOTE 1) - 2,074 -
-------- -------- --------
Capital in excess of par value, December 31 $ 28,325 $ 27,866 $ 25,609
======== ======== ========
Accumulated other comprehensive
loss, January 1 $ (1,902) $ (1,979) $ (2,010)
Additional pension liability in excess of
unrecognized prior service cost 23 77 31
-------- -------- --------
Accumulated other comprehensive
loss, December 31 $ (1,879) $ (1,902) $ (1,979)
======== ======== ========
Accumulated deficit, January 1 $(51,710) $(51,548) $(54,188)
Net income (loss) (2,420) (162) 2,640
-------- -------- --------
Accumulated deficit, December 31 $(54,130) $(51,710) $(51,548)
======== ======== ========
Total stockholders' equity
(deficit), January 1 $(25,583) $(27,755) $(30,840)
Conversion of debt 378 - -
Warrant issuances 85 183 414
Capitalization from China Joint Venture (NOTE 1) - 2,074 -
Other comprehensive income (loss) 23 77 31
Net income (loss) (2,420) (162) 2,640
-------- -------- --------
Total stockholders' deficit,
December 31 $(27,517) $(25,583) $(27,755)
======== ======== ========
In 2005, 2004 and 2003, the Company issued to certain of its lenders
warrants to purchase an aggregate of 2.4 million shares of its common stock,
in each case at a price of $0.01 per share. The warrants and the transactions
in connection with which they were issued are described above in NOTE 7 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The values of the warrants issued
in 2005, 2004 and 2003 were estimated to be, respectively, $85,000, $183,000
and $414,000 at the times of their issuance, in all cases using the Black-
Scholes pricing model. These amounts were recorded as original issue
discounts with an increase to paid-in-capital and are being amortized to
interest expense using the effective interest method of amortization
The following represents common stock activity for the 3-year period
ended December 31, 2005(in thousands of shares):
Year Ended December 31,
2005 2004 2003
-------- -------- --------
Outstanding common stock, January 1 16,278 16,278 16,278
Stock issuance 378 - -
-------- -------- --------
Outstanding common stock, December 31 16,656 16,278 16,278
======== ======== ========
At the June 21, 2005 Board of Directors meeting, approval was granted
for the Company to enter into settlement agreements with Kimball J. Bradley
and Charles E. Bradley, Sr., two officers of the Company. Under such
agreements, the officers agreed to forgive $309,960 of guarantee fees and
interest owed to them by the Company and to convert an additional $68,040 of
such fees and interest into 378,000 shares of common stock of the Company.
Such conversion added $378,000 to the Company's equity, $4,000 to common stock
and $374,000 to capital in excess of par value.
- F-22 -
NOTE 9: STOCK OPTIONS
At December 31, 2005, the Company had two stock option plans. They are
described below. The Company accounts for its plans using APB Opinion 25 and
related interpretations. Stock option grants during the periods presented
were all at exercise prices equal to or above the then current market price,
and, accordingly, no compensation expense has been recognized for the
Company's stock option plans. At December 31, 2005, 354,600 shares of common
stock were reserved for issuance under these plans.
Had compensation cost for the Company's stock option plans been
determined based on the fair value recognition provisions of SFAS No. 123 for
the periods presented, pro forma earnings and per share amounts would have
been as follows (in thousands, except for per share amounts):
2005 2004 2003
----- ----- -----
Net income (loss) as reported $(2,420) $ (162) $ 2,640
Deduct: Total stock-based employee
compensation determined under
fair value method for stock
options, net of tax (30) - -
------ ----- ------
Pro forma income (loss) applicable
to common stockholders $(2,450) $ (162) $ 2,640
====== ===== ======
Basic income (loss) per
share, as reported $ (0.15) $(0.01) $ 0.16
====== ===== ======
Basic income (loss) per
share, pro forma $ (0.15) $(0.01) $ 0.16
===== ===== ======
Diluted income (loss) per
share, as reported $ (0.15) $(0.01) $ 0.16
====== ===== ======
Diluted income (loss) per
share, pro forma $ (0.15) $(0.01) $ 0.16
====== ===== ======
The fair value of the option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
for 2005: risk free discount rate of 6%, no dividend yield, expected
volatility of 99% and an expected option life of 3 years.
1998 Option Plan
On August 4, 1998, the Company's stockholders ratified the adoption by
the Board of Directors, on June 1, 1998, of the 1998 Stock Option Plan (the
1998 Option Plan). The Compensation Committee of the Board of Directors is
authorized to grant incentive options and nonqualified options covering up to
600,000 shares of the Company's common stock to officers and other key
employees. At the Company's annual meeting of stockholders in May 2001, the
Company's stockholders approved a proposal to reserve an additional 600,000
shares of the Company's common stock for issuance under the 1998 Stock Option
Plan.
At its meeting on June 26, 2003, the Board of Directors approved the
issuance of a total of 170,000 options to two directors and one non-director
executive of the Company. The per-share closing price on the AMEX of the
Company's common stock on June 25, 2003 was $0.25. Kimball Bradley received
100,000 options at an exercise price of $0.275 per share of Company's common
stock. These options have a 5-year term and vest in one-third increments on
the first, second and third anniversaries of their issuance. Mr. David E.
Jackson, director, received 20,000 options and a non-director executive
received 50,000 options at an exercise price of $0.25 per share. These
options have a 10-year term and vest in one-third increments on the first,
second and third anniversaries of their issuance. By written unanimous
consent in lieu of a meeting dated December 1, 2003, the Board of Directors
- F-23 -
approved the issuance of a total of 400,000 options to two directors of the
Company. The per-share closing price on the AMEX of the Company's common
stock on November 30, 2003 was $0.32. Kimball Bradley received 300,000
options and Charles E. Bradley, Sr. received 100,000 options at an exercise
price of $0.352 per share of Company's common stock. These options have a 5-
year term and vest in one-third increments on the first, second and third
anniversaries of their issuance. On June 21, 2005, the Compensation Committee
of the Board of Directors approved the issuance of a total of 800,000 options,
100,000 of which came out of the 1998 Plan and were issued to Kimball Bradley
at an exercise price of $0.20 per share of the Company's common stock. The
per-share closing price on the AMEX of the Company's stock on June 21, 2005
was $0.18. These options have a 5-year term and vest one-third immediately and
one-third on the first and second anniversaries of their issuance. At
December 31, 2005, 54,600 options were available for issuance under the 1998
Option Plan.
2004 Option Plan
Effective December 15, 2004, the Board of Directors and stockholders of
the Company approved the adoption of the 2004 Stock Option Plan (the "2004
Option Plan"). The 2004 Option Plan authorizes the grant of options and sale
of 1,000,000 shares of common stock of the Company to key employees, directors
and consultants. On June 21, 2005, the Compensation Committee of the Board of
Directors approved the issuance of a total of 800,000 options, 700,000 of
which came out of the 2004 Plan. Of these options, 200,000 were issued to
Kimball Bradley, 100,000 were issued to Charles E. Bradley, Sr., 50,000 were
issued to Board members other than Charles E. and Kimball Bradley, 100,000
were issued to an officer of the Company and the remaining 250,000 options
were issued to other employees of the Company. The options issued to both
Kimball Bradley and Charles E. Bradley, Sr. were issued at an exercise price
of $0.20 per share of the Company's common stock. The per-share closing price
on the AMEX of the Company's common stock on June 21, 2005 was $0.18. These
options have a 5-year term and vest one-third immediately and one-third on the
first and second anniversaries of their issuance. The options issued to the
other Board of Director members and to the employees were issued at $0.18 per
share of the Company's common stock and are ten year term options. The
options issued to the other Board of Director members vest immediately. The
options issued to the other employees vest one-third immediately and one-third
on the first and second anniversaries of their issuance. At December 31,
2005, 300,000 options were available for issuance under the 2004 Stock Option
Plan.
A summary of the status of the Company's stock options and warrants as of
December 31, 2005, 2004 and 2003 and changes during the year is presented
below:
2005 2004 2003
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
------------- --------- -------- --------- -------- --------- --------
Outstanding at
beginning of year 614,000 0.51 614,000 $0.51 44,000 $2.94
Granted 800,000 0.19 - - 570,000 0.33
Exercised - - - - - -
Forfeited/expired (44,000) 2.94 - - - -
--------- --------- ---------
Outstanding at
end of year 1,370,000 0.25 614,000 0.51 614,000 $0.51
========= ========= =========
Options exercisable
at end of year 679,999 0.27 234,000 0.82 40,667 3.06
========= ========= =========
- F-24 -
Weighted-average fair value of options granted:
Exercise price equal
to market price
on grant date $ 0.18 $ - $ 0.25
========= ========= =========
Exercise price greater
than market price
on grant date $ 0.20 $ - $ 0.34
========= ========= =========
The following table summarizes information about stock options and
warrants outstanding at December 31, 2005:
Remaining Number Number
Exercise Contractual Outstanding Exercisable
Price Life at 12/31/05 at 12/31/05
--------- ----------- ----------- -----------
$0.1800 9.50 years 400,000 166,666
$0.2000 4.50 years 400,000 133,333
$0.2500 7.50 years 70,000 46,666
$0.2750 2.50 years 100,000 66,667
$0.3520 3.00 years 400,000 266,667
--------- ---------
1,370,000 679,999
========= =========
Had the Company used FASB Statement 123 to account for our stock options,
our operating results would not have been materially different from our
reported results.
NOTE 10: EMPLOYEE BENEFIT PLANS
The Company sponsors defined benefit plans and other postretirement
benefit plans for certain employees in its pressure vessel business and on its
Corporate Executive Payroll (as defined in the plan document). The Company
also sponsors a frozen defined benefit plan and provides a postretirement
benefit plan for certain employees in its recently sold plastics divisions.
Such benefit plans were not included in the sale of these divisions and
continue to be an obligation of the Company.
Continuing Operations
Reunion sponsors a defined benefit pension plan which covers
substantially all of its employees at its McKeesport, PA pressure vessel
manufacturing location. This plan is the defined benefit plan from former
Chatwins Group. Benefits under this plan are based solely on continuous years
of service and are not affected by changes in compensation rates.
The Company's funding policy with respect to this plan provides that
payments to the pension trusts be at least equal to the minimum funding
requirements of the Employee Retirement Income Security Act of 1974. Assets
of the plan are invested principally in fixed income and equity securities.
Reunion maintains various postretirement healthcare and life insurance
benefit plans for certain active and retired employees. Covered active and
retired employees include those of the Company's McKeesport, PA pressure
vessel manufacturing location, pursuant to a November 1997 plan amendment
which became effective January 1, 1998 and employees of Reunion's Corporate
Executive Payroll.
Eligible active and retired employees of the pressure vessel division for
which postretirement benefits are provided include both union and nonunion
employees. Healthcare benefits for both union and nonunion retirees are
provided for the most part through comprehensive major medical and other
health benefit provisions subject to various retiree cost-sharing features.
The majority of employees eligible for healthcare benefits upon retirement are
former employees of USX Corporation (USX). A significant portion of
postretirement healthcare earned by such employees prior to 1987 is the
- F-25 -
responsibility of USX. Life insurance benefits provided to eligible union
retirees are based on fixed amounts negotiated in labor agreements. Life
insurance benefits provided to eligible nonunion retirees are based on the
employee's annual base salary at retirement subject to a maximum benefit.
Postretirement healthcare benefits for eligible active and retired
employees of Reunion's Corporate Executive Payroll are paid for by Reunion and
subject to various retiree cost-sharing features. Postretirement healthcare
benefits for Corporate Executive Payroll employees terminate when the retiree
becomes Medicare eligible. Postretirement life insurance benefits for
eligible active and retired employees of Reunion's Corporate Payroll are paid
for by Reunion and are based on the employee's annual base salary at
retirement. Except for certain life insurance benefits paid from reserves
held by insurance carriers, benefits have not been funded. Contributions to
the plans by Reunion equal benefits paid.
The following table sets forth the changes in the benefit obligations and
plan assets for the years ended December 31, 2005 and 2004 and the funded
status at December 31, 2005 and 2004 of the pension plan and the other
postretirement benefits plans (in thousands). The accrued benefit cost is
included in other liabilities in the accompanying consolidated balance sheet:
Pension Other Postretirement
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
Change in benefit obligation:
Benefit obligation, beginning $ 4,016 $ 3,578 $ 2,060 $ 1,965
Service cost 212 139 109 93
Interest cost 226 214 114 116
Actuarial loss (gain) 203 242 355 (25)
Benefits paid (185) (157) (93) (89)
-------- -------- -------- --------
Benefit obligation, ending $ 4,472 $ 4,016 $ 2,545 $ 2,060
======== ======== ======== ========
Change in plan assets:
Fair value, beginning $ 2,689 $ 2,201 $ - $ -
Actual return 702 248 - -
Company contribution 384 397 93 89
Benefits paid (185) (157) (93) (89)
-------- -------- -------- --------
Fair value, ending $ 3,590 $ 2,689 $ - $ -
======== ======== ======== ========
Funded status:
Net obligation, ending $ 882 $ 1,327 $ 2,545 $ 2,060
Unrecognized costs:
Additional minimum pension
Liability 997 1,359 - -
Prior service costs (140) (159) 4 4
Net loss (857) (1,200) (739) (456)
Transition obligation - - (295) (343)
-------- -------- -------- --------
Accrued benefit costs $ 882 $ 1,327 $ 1,515 $ 1,265
======== ======== ======== ========
In addition to accrued benefit costs, amounts recognized in the
consolidated balance sheet include an intangible asset of $140,000 and
$159,000 and other comprehensive losses of $796,000 and $1,139,000 at December
31, 2005 and 2004, respectively.
Net periodic pension and other postretirement benefits costs for the
following years for pension and other postretirement benefits plans ended
December 31 are as follows (in thousands):
- F-26 -
Pension Other Postretirement
---------------------- ----------------------
2005 2004 2003 2005 2004 2003
------ ------ ------ ------ ------ ------
Benefits earned during year $ 212 $ 139 $ 140 $ 109 $ 93 $ 75
Interest cost 226 214 207 115 116 104
Early retirement incentive - - - - - -
Amortization of:
Prior service cost 19 21 20 (1) (1) (1)
Unrecognized net loss (gain) 63 54 46 71 75 24
Unrecognized net obligation - - - 48 48 49
Expected return on plan assets (219) (195) (183) - - -
----- ----- ----- ----- ----- -----
Defined benefit pension and
total other postretirement
benefits costs $ 301 $ 233 $ 230 $ 342 $ 331 $ 251
===== ===== ===== ====== ===== =====
Assumptions used to develop pension cost and projected benefit
obligations for the pressure vessels' defined benefit pension plan for the
following years ended December 31 are as follows:
2005 2004 2003
-------- -------- --------
Discount rate 5.75% 6.00% 6.25%
======== ======== ========
Expected rate of return on plan assets 7.75% 7.75% 7.75%
======== ======== ========
The details of the pressure vessels' pension plan assets by asset
category are as follows:
2005 2004
----------------- -----------------
Assets Percent Assets Percent
-------- -------- -------- --------
Equity securities $ 3,009 84% $ 2,020 75%
Corporate bonds 408 11 406 15
Government obligations 145 4 164 6
Cash and other 28 1 99 4
-------- -------- -------- --------
Total $ 3,590 100% $ 2,689 100%
======== ======== ======== ========
The Company's investment strategy for pension funds is to maintain at
least 50% of such funds in equity securities with the balance invested
primarily in bonds and other fixed income securities. The Company believes
that the returns on common stock over the long term will be higher than
returns from fixed income securities. Both equity and fixed income
investments are made across a wide range of industries and companies in order
to provide protection against the impact of volatility in any single industry
or company. The Company is currently using an expected rate of return of
7.75% on our assets and a 2.5% anticipated inflation rate which produces an
expected real rate of return of 5.25%. This rate was chosen by taking into
account our intended asset mix and the historical returns of the plan since
its inception. The Company expects to contribute $446,000 to the plan in
2006.
Expected benefit payments under the pension plan, which reflect expected
future service, as appropriate, are as follows for the years indicated (in
thousands):
Benefits
--------
2006 $ 305
2007 261
2008 285
2009 347
2010 340
2011-2015 1,766
- F-27 -
Assumptions used to develop the net periodic postretirement benefit costs
and accumulated postretirement benefit obligations for the following years
ended December 31 are as follows:
2005 2004 2003
-------- -------- --------
Discount rate 5.75% 6.25% 6.25%
======== ======== ========
Healthcare cost trend rate (USX eligible) 2.0% 2.0% 2.0%
======== ======== ========
Healthcare cost trend rate (All others) 7.0% 7.0% 7.0%
======== ======== ========
Rate of compensation increase 2.0% 2.0% 2.0%
======== ======== ========
USX administers the postretirement healthcare plans for the eligible
employees of the McKeesport, PA location previously owned by USX and bills
Reunion for its share of the postretirement costs related to Reunion's
retirees covered by the plans. During 1997, Chatwins Group's actuary reviewed
several years of rates charged to Chatwins Group by USX for retiree medical
coverage and, as a result, elected to reduce the applicable healthcare cost
trend rate for all years subsequent to 1997 to 3%. Such rate was reduced to
2% in 2003 after further review. For all others, the 7.0% is a weighted-
average based on an assumed rate of increase in per capita healthcare costs of
10% for 2005 with a gradual decrease to 5% and remaining at that level
thereafter. A one percentage point increase in the assumed healthcare cost
trend rate would increase the benefit obligation at December 31, 2005 by
approximately $360,000 and increase the total of the service and interest cost
components by approximately $43,000. Conversely, a one percentage point
decrease in the assumed healthcare cost trend rate would result in approximate
decreases in each by $291,000 and $34,000, respectively.
Discontinued Plastics Operations
Reunion sponsors a defined benefit pension plan which covered
substantially all of its employees at its New York facilities. Effective June
15, 1999, benefits were frozen. These New York facilities were sold in
connection with the Oneida sale discussed in NOTE 3: SUBSEQUENT EVENTS-Sale of
Oneida. However, the defined benefit pension plan was not part of the sale
and was retained by the Company.
Reunion maintains a postretirement healthcare plan for certain salaried
and union retirees and their dependents of the discontinued plastics segment.
Covered employees were eligible to participate in the medical benefit plan if,
at the time they retire, they had at least 10 years of service and had
attained 62 years of age. This plan is contributory via employee
contributions, deductibles and co-payments and are subject to certain annual,
lifetime and benefit-specific maximum amounts. The liabilities associated with
this plan were not assumed in the sale of the plastics segment and continue to
be retained by the Company.
The following table sets forth the changes in the benefit obligations and
plan assets for the years ended December 31, 2005 and 2004 and the funded
status at December 31, 2005 and 2004 for the discontinued plastics segment
pension and other postretirement benefits plans (in thousands). The accrued
pension benefit cost is included in Assets of discontinued operations, current
in the accompanying consolidated balance sheet and the accrued other
postretirement cost is included in Non-current liabilities of discontinued
operations:
- F-28 -
Pension Other Postretirement
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
Change in benefit obligation:
Benefit obligation, beginning $ 3,896 $ 3,711 $ 915 $ 2,395
Service cost - - - 55
Interest cost 224 224 46 139
Plan curtailment - - - (1,480)
Actuarial loss (gain) 63 98 (81) (97)
Benefits paid (213) (137) (176) (97)
-------- -------- -------- --------
Benefit obligation, ending $ 3,970 $ 3,896 $ 704 $ 915
======== ======== ======== ========
Change in plan assets:
Fair value, beginning $ 3,133 $ 2,464 $ - $ -
Actual return 227 308 - -
Company contribution 363 498 176 97
Benefits paid (213) (137) (176) (97)
-------- -------- -------- --------
Fair value, ending $ 3,510 $ 3,133 $ - $ -
======== ======== ======== ========
Funded status:
Net obligation, ending $ 460 $ 763 $ 709 $ 915
Unrecognized costs:
Additional minimum pension
Liability 1,525 1,436 - -
Net loss (1,525) (1,436) 77 1
-------- -------- -------- --------
Accrued benefit costs $ 460 $ 763 $ 786 $ 916
======== ======== ======== ========
In addition to accrued benefit costs, amounts recognized in the
consolidated balance sheet include other comprehensive losses of $1,036,000
and $763,000 at December 31, 2005 and 2004, respectively.
Net periodic pension and other postretirement benefits costs for the
following years for Plastics pension and other postretirement benefits plan
ended December 31 are as follows (in thousands):
Pension Other Postretirement
---------------------- ----------------------
2005 2004 2003 2005 2004 2003
------ ------ ------ ------ ------ ------
Benefits earned during year $ - $ - $ - $ - $ 56 $ 54
Interest cost 224 224 220 31 138 119
Unrecognized net loss (gain) 62 62 64 (1) 52 16
Plan curtailment - - - (804) -
Expected return on plan assets (315) (237) (173) - - -
------ ------ ------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs (income) $ (29) $ 49 $ 111 $ 30 $ (558) $ 189
====== ====== ====== ====== ====== ======
Assumptions used to develop the pension cost and projected benefit
obligation for the discontinued operations' defined benefit pension plan for
the following years ended December 31, 2005, 2004 and 2003 are as follows:
2005 2004 2003
-------- -------- --------
Discount rate 5.75% 6.00% 6.25%
======== ======== ========
Expected rate of return on plan assets 7.75% 7.75% 7.75%
======== ======== ========
- F-29 -
The details of the pension plan assets by asset category are as follows:
2005 2004
----------------- -----------------
Assets Percent Assets Percent
-------- -------- -------- --------
Equity securities $ 2,470 70% $ 2,207 70%
Fixed income/bond funds 1,021 29 906 29
Cash and other 19 1 20 1
-------- -------- -------- --------
Total $ 3,510 100% $ 3,133 100%
======== ======== ======== ========
The Company's investment strategy for pension funds is to maintain at
least 50% of such funds in equity securities with the balance invested
primarily in bonds and other fixed income securities. The Company believes
that the returns on common stock over the long term will be higher than
returns from fixed income securities. Both equity and fixed income
investments are made across a wide range of industries and companies in order
to provide protection against the impact of volatility in any single industry
or company. The Company is currently using an expected rate of return of
7.75% on our assets and a 2.5% anticipated inflation rate which produces an
expected real rate of return of 5.25%. This rate was chosen by taking into
account our intended asset mix and the historical returns of the plan since
its inception. The Company expects that it will not be required to contribute
to the plan in 2006.
Expected benefit payments under the Plastic's pension plan, which reflect
expected future service, as appropriate, are as follows for the years
indicated (in thousands):
Benefits
--------
2006 $ 167
2007 168
2008 174
2009 177
2010 187
2011-2015 1,068
Assumptions used to develop the net periodic postretirement benefit costs
and accumulated postretirement benefit obligations for the following years
ended December 31 are as follows:
2005 2004 2003
-------- -------- --------
Discount rate 5.75% 6.25% 6.25%
======== ======== ========
Healthcare cost trend rate 7.00% 7.00% 7.00%
======== ======== ========
For measurement purposes, an assumed rate of increase in per capita
healthcare costs of 10% was used for 2005 with a gradual decrease to 5% and
remaining at that level thereafter. A one percentage point increase in the
assumed healthcare cost trend rate would increase the benefit obligation at
December 31, 2005 by approximately $27,000 and increase the total of the
service and interest cost components by approximately $2,000. Conversely, a
one percentage point decrease in the assumed healthcare cost trend rate would
result in approximate decreases in each by $33,000 and $3,000, respectively.
Other Employee Benefit Plans
The Company also sponsors qualified contributory 401(k) plans covering
substantially all employees. For those employees electing to participate in
the 401(k) plans, employees can contribute up to an annually determined
maximum amount permitted by law and the Company makes matching contributions
up to specified limits. Effective December 31, 2002, the Company suspended
its matching contributions to the 401(k) plans.
- F-30 -
The Company does not provide any other postemployment benefits to former
or inactive employees except for unemployment compensation benefits required
by law.
NOTE 11: EARNINGS PER COMMON SHARE
The computations of basic and diluted earnings per common share (EPS) for
the years ended December 31, 2005, 2004 and 2003 are as follows (in thousands,
except per share amounts):
Income Shares EPS
-------- -------- -------
Year ended December 31, 2005:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ (2,420) 16,479 $ (0.15)
=======
Dilutive effect of stock options - -
-------- --------
Loss applicable to common stockholders,
shares outstanding and diluted EPS $ (2,420) 16,479 $ (0.15)
======== ======== =======
Year ended December 31, 2004:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ (162) 16,279 $ (0.01)
-
=======
Dilutive effect of stock options and warrants - -
-------- --------
Loss applicable to common stockholders,
shares outstanding and diluted EPS $ (162) 16,279 $ (0.01)
======== ======== =======
Year ended December 31, 2003:
Income available to common stockholders,
weighted average shares outstanding
and basic EPS $ 2,640 16,279 $ 0.16
=======
Dilutive effect of stock options 375
-------- --------
Income available to common stockholders,
shares outstanding and diluted EPS $ 2,640 16,654 $ 0.16
======== ======== =======
At December 31, 2005, 2004 and 2003, the Company's stock options
outstanding totaled 1,370,000, 614,000 and 614,000, respectively. Such
options included a dilutive component of 182,588, 128,711 and 112 shares,
respectively. At December 31, 2005, 2004 and 2003, outstanding warrants to
purchase the Company's common stock totaled 5,009,477, 3,476,585 and
2,896,238, respectively. Such warrants included a dilutive component of
3,583,215, 2,404,000 and 374,876 shares, respectively.
NOTE 12: INCOME TAXES
Due to the existence and use of the Company's net operating loss
carryforwards, there was no United States tax provision recorded for the years
ending December 31, 2005, 2004 and 2003. The Company's majority owned joint
venture in China operates in a special economic zone. Prior to 2005, this
entity enjoyed a tax holiday. Beginning in 2005 and lasting through 2007,
this China entity will enjoy a reduced tax rate of 7.5% of net income.
Subsequent to 2007, the rate will go to the full income tax rate, which is
currently 15%. As a result, the 2005 current year provision relates solely to
the China entity.
- F-31 -
The Company's effective income tax rate from continuing operations,
reflected in the accompanying consolidated statement of income, differs from
the statutory rate due to the following (in thousands):
Year Ended December 31,
2005 2004 2003
-------- -------- --------
Computed amount at statutory rate (34%) $ (823) $ 43 $ 897
Net change in valuation allowance 921 (17,794) (2,335)
Section 108 cancellation of indebtedness
income exclusion 1,173 3,558 (3,737)
Section 108 reduction of loss carryforwards
from cancellation of indebtedness
income exclusion (1,173) (3,558) 3,737
Goodwill amortization (140) (140) (140)
Foreign sales exclusions (45) (40) (57)
Expiration of loss carryforwards - 18,054 1,396
Chinese income tax exclusion (158) (336) -
Federal return to prior year's
provision adjustments - 33 142
Foreign income tax 49 - -
Non-deductible expenses 138 84 78
Other - net 107 96 19
-------- -------- --------
Total tax provision from continuing
operations $ 49 $ - $ -
======== ======== ========
Temporary differences and carryforwards that gave rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
At December 31,
2005 2004
-------- --------
Depreciation $ - $ (127)
Historical goodwill (650) (218)
Other (179) (139)
-------- --------
Deferred tax liabilities (829) (484)
-------- --------
Loss carryforwards (NOLs) 22,555 21,793
Book reserves 2,376 2,470
Deferred compensation 281 493
Tax credit carryforwards 851 851
Unicap adjustments 336 167
Depreciation 436 -
Other 1,741 1,536
-------- --------
Deferred tax assets 28,576 27,310
Less: Valuation allowance (27,747) (26,826)
-------- --------
Deferred tax assets, net 829 484
-------- --------
Deferred taxes, net $ - $ -
======== ========
At December 31, 2005, Reunion had net operating loss carryforwards for
federal tax return reporting purposes of approximately $66.5 million, of which
$6.1 million will expire by the end of 2007. Management has concluded that it
is more likely than not that the Company's loss carryforwards will expire
unutilized and has determined to continue to fully reserve for the total
amount of net deferred tax assets as of December 31, 2005.
- F-32 -
The current and noncurrent classifications of the deferred tax balances
are as follows (in thousands):
At December 31,
2005 2004
-------- --------
Current:
Deferred tax assets $ 3,565 $ 2,363
Deferred tax liabilities (97) (24)
Less: Valuation allowance (3,462) (2,231)
-------- --------
Current deferred, net asset 6 108
-------- --------
Noncurrent:
Deferred tax assets 25,010 24,947
Deferred tax liabilities (732) (460)
Less: Valuation allowance (24,284) (24,595)
-------- --------
Noncurrent deferred, net (liability) (6) (108)
-------- --------
Deferred taxes, net $ - $ -
======== ========
No U.S. federal or state corporate income tax return examinations are
currently in process. The Company believes adequate provisions for income
taxes have been recorded for all years.
NOTE 13: RELATED PARTIES, TRANSACTIONS AND BALANCES
Related Parties
Reunion Industries, Inc. - Reunion is a publicly traded Delaware
corporation headquartered in Pittsburgh, Pennsylvania. Charles E. Bradley,
Sr. (Mr. C. Bradley) was chairman of the board and Chief Executive Officer of
Reunion until March 2, 2006. Kimball Bradley (Mr. K. Bradley)was President,
Chief Operating Officer, a director of Reunion and son of Mr. Bradley until
March 2, 2006. As described in Note 2: Recent Events, on March 2, 2006, Mr. C.
Bradley resigned as chairman of the board and CEO and Mr. K. Bradley was
elected chairman of the board and CEO. Mr. K. Bradley also retained his office
of President.
Stanwich Financial Services Corp. - SFSC is a privately held, currently
inactive, corporation that was formerly in the structured settlement business.
SFSC is owned 100% by Mr. C. Bradley. Prior to May 10, 2004, this company was
a related party to Reunion. On that date, management control of SFSC was
vested in a liquidating trustee and an executive committee, of which Mr.
Bradley is not a member, in accordance with SFSC's plan of reorganization in
its proceeding under Chapter 11 of the Bankruptcy Code. Accordingly, SFSC is
no longer a related party. See also "SFSC Settlement" in NOTE 2 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
Transactions and Balances
SFSC Indebtedness
Pursuant to a settlement that became effective on May 10, 2004 (the "SFSC
Settlement"), the Company is indebted in the amount of $4.29 million, plus
interest that accrues on that amount after May 10, 2004 at the rate of 10% per
annum. The settlement, which represents a compromise of the Company's
indebtedness to SFSC and SFSC's indebtedness to the Company, resulted in a
gain on debt extinguishment of $3.3 million for the Company in 2004. This
settlement amount is payable on December 31, 2006, but may be prepaid without
penalty. It is unsecured and is subordinate to the Company's indebtedness to
Wachovia. For a description of the settlement agreement and the indebtedness
to which the SFSC Settlement relates, see NOTES 2 AND 7 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS above under the captions "SFSC Settlement"
and "Notes Payable ? SFSC and Related Parties," respectively. The Company has
made no payments of principal or interest to SFSC on the restructured note
payable.
- F-33 -
Cash Surrender Value of Life Insurance Policies
The Company pays the premiums on life insurance policies covering Mr. C.
Bradley and two directors, Mr. Joseph C. Lawyer (Mr. Lawyer) and Mr. John G.
Poole (Mr. Poole). Pursuant to these arrangements, the Company will be
reimbursed for the premiums it pays for such policies from either the death
benefit of the policy or their cash surrender value. The covered individuals
have agreed with the Company that if the policy proceeds are insufficient to
reimburse the Company for the full amount of the premiums paid, they will
cover the shortfall. As of December 31, 2005 and 2004, premiums paid by the
Company in excess of the cash surrender values of the policies totaled
$891,000 and $919,000, respectively, and are included in due from related
parties in the accompanying consolidated balance sheets.
Mr. C. Bradley Note Payable
In January 2003, Mr. C. Bradley made a $500,000 payment on behalf of the
Company to Shaw NapTech, Inc. This payment was applied to reduce by $500,000
the Company's indebtedness to Shaw NapTech, Inc. To evidence this loan by Mr.
C. Bradley, the Company issued to him its unsecured $500,000 10% note payable.
The note payable became due on October 31, 2004. No principal or interest
payments have been made on this note. In June 2005, as described in Note 8:
Stockholders' Deficit, Mr. C. Bradley agreed to forgive $98,400 of the
interest payable to him and to convert an additional $21,600 of such interest
payable to him into 120,000 shares of the Company's common stock. At December
31, 2005 and 2004, accrued and unpaid interest related to this note totaled
$30,000 and $100,000, respectively, and is included in due to related parties
in the accompanying consolidated balance sheet. Mr. C. Bradley's rights under
this note are subordinate to the Company's indebtedness to Wachovia Financial.
Mr. C. Bradley Guarantees
To facilitate the closing of the Wachovia refinancing in December 2003,
Mr. C. Bradley provided a personal guarantee of $1.5 million of the revolving
credit portion of the Wachovia Loan Facility. In exchange for his guarantee,
the Board of Directors approved a 2% per annum guarantee fee to be paid to Mr.
C. Bradley during the time period such guarantee is in place. Amounts payable
under this arrangement are being offset against an employee advance previously
received by Mr. C. Bradley and owed to the Company. Such advance totaled
$58,000 at the time of the refinancing, which advance has now been fully
recovered by offsets of $25,699, $29,917 and $2,384 in years ended December
31, 2005, 2004 and 2003, respectively. As of December 31, 2005, $4,219 is
included in Due to related party in the accompanying balance sheet.
Mr. K. Bradley Guarantees
To facilitate obtaining new financing with two private investment funds
and the closing of the refinancing of the Company's bank debt with Wachovia in
December 2003, Mr. K. Bradley provided personal guarantees totaling $9.2
million, including guarantees of two notes payable totaling $7.7 million and
$1.5 of the revolving credit portion of the new Wachovia facilities. In
exchange for his guarantees, the Board of Directors approved 2% per annum
guarantee fees to be paid to Mr. K. Bradley during the time period such
guarantees are in place. In June 2005, as described in Note 8: Stockholders'
Deficit, Mr. K. Bradley agreed to forgive $211,560 of the guarantee fees
payable to him and to convert an additional $46,440 of such guarantee fees
payable to him into 278,000 shares of the Company's common stock. At December
31, 2005 and 2004, $105,351 and $184,841, respectively, of such fees are
included in Due to related parties in the accompanying consolidated balance
sheet.
NOTE 14: COMMITMENTS AND CONTINGENCIES
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.
- F-34 -
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
(currently owned by Rockwell Automation), 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 this acceptance in the first lawsuit,
Allen-Bradley Company has accepted and defended all additional lawsuits, a
total of 200 separate actions, that the Company has tendered.
Asbestos (Alliance)
------------------
The Company has been named in approximately 2,600 separate asbestos suits
filed since January 1, 2001 by various plaintiffs' law firms in Michigan,
Pennsylvania, Ohio, Illinois, Maryland, Alabama and W. Virginia. The claims
are primarily directed against over 100 defendants, including Reunion, and
allege that cranes from the Company's former crane manufacturing location in
Alliance, OH were present in various steel mills located in those states 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 asserting all alternative defenses
permitted under the various Courts' Case Management Orders. Counsel for the
Company has successfully resolved approximately 500-600 cases with little or
no cost to the Company. The Company denies that it manufactured any products
containing asbestos or otherwise knew or should have known that any component
part other manufacturers provided contained any dangerous or toxic materials.
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 vigorously defend
against these lawsuits.
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 follows (in thousands):
Description 2005 2004
--------------------------------------------- -------- --------
Beginning balance $ 100 $ 211
Add: Provision for estimated future claims 168 (2)
Deduct: Cost of claims (135) (109)
-------- --------
Ending balance $ 133 $ 100
======== ========
Operating leases
Minimum rental commitments under all noncancellable operating leases in
effect for continuing operations at December 31, 2005, were as follows (in
thousands):
Year ended December 31,
Total 2006 2007 2008 2009 2010 After 2010
------- ------ ------ ------ ------ ------ ----------
$ 8,339 $1,427 $1,038 $ 997 $ 999 $ 996 $2,882
======= ====== ====== ====== ====== ====== ======
Operating lease rental expense related to continuing operations for the
years ended December 31, 2005, 2004 and 2003, amounted to $1,494,267,
$1,633,000, and $2,390,000, respectively.
- F-35 -
NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents, accounts receivable and accounts payable - The
carrying amounts approximate fair value because of the short maturities of
these instruments.
Debt - $16.8 million of the Company's debt has variable rates of interest
and $35.2 million bears interest at fixed rates. Management estimates the
carrying value of variable-rate debt to approximate its fair value as its
stated rate of interest changes with changes in market rates of interest. Of
the $35.2 million of fixed-rate debt, $22.0 million represents the 13% senior
note obligation. Such notes were restructured in 2003 and there was little
trading activity until the last half of 2005. Recent trading activity has
primarily centered on only large holders disposing of their entire positions
at a discount. Based on this, the fair value of such notes is not readily
determinable. Of the remaining fixed-rate debt, $0.5 million is to a related
party, for which comparable instruments do not exist, and $12.7 million
relates to debt that bears interest at rates ranging between 10% and 15.25%.
Given our financial condition, the fair value of such debt is not readily
determinable.
NOTE 16: DISCONTINUED OPERATIONS
In December 2001, the Company classified and began accounting for its
bridges and cranes and materials handling systems businesses 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).
On September 24, 2002, the Company sold Kingway, our discontinued
materials handling systems operations, for cash proceeds of $25.0 million and
a $7.0 million note receivable in amounts of up to $2.333 million in each of
2003, 2004 and 2005. Future proceeds under the note receivable were
contingent upon the combined operations of the buyer's material handling
businesses exceeding certain specified EBITDA amounts. Such amounts were not
achieved. The net cash proceeds of $24.12 million after transaction-related
expenses were used to reduce borrowings under our BOA revolving credit
facility of $15.96 million, term loan A facility of $7.11 million and pay
overadvance fees of $1.05 million. The Company realized a net gain of $3.1
million, classified within discontinued operations, on this transaction.
Finalization of this sale was subject to a post-closing working capital
adjustment. The buyer alleged it was owed approximately $905,000 based on its
calculation of working capital on the closing date. Pursuant to the asset
purchase agreement, the Company submitted this dispute to a mutually agreed-
upon independent accounting firm for resolution in arbitration. The
arbitrator for the dispute determined that, of the $905,000 working capital
deficiency claimed by the buyer, $705,000 was not valid. The Company paid the
additional $200,000. The additional loss in year 2005 reflects mainly legacy
insurance expenses in both the casualty and healthcare areas.
On June 30, 2002, the Company sold the inventory and substantially all of
the property, plant and equipment of Alliance, our discontinued bridges and
cranes operations, for cash proceeds of $3.058 million and the assumption by
the buyer of $242,000 of accrued liabilities. The Company retained all
receivables, trade payables and certain other liabilities of this discontinued
operation. The net cash proceeds of $3.058 million were used to reduce
borrowings under our then existing Bank of America revolving credit facility
($322,000), term loan A facility ($1.87 million) and capital expenditure
facility ($866,000). The Company realized a loss of $3.9 million, classified
within discontinued operations, on this transaction. Additional losses in
the years ended December 31, 2003 and 2005 reflect higher than estimated on-
going legacy costs related mainly to health benefits and legal fees and
settlements associated with asbestos cases.
- F-36 -
In January, 2005, the Company sold its springs division operations for
cash proceeds of $792,000. Net cash proceeds of $775,000 after transaction
related expenses were received on January 4, 2005, of which $250,000 was used
to reduce borrowings under the term loan from a private capital fund that is
secured by the real property, $41,000 was used to reduce borrowings under the
term loan portion of the Wachovia Loan Facility and the remaining balance of
$484,000 was used to reduce borrowings under the Wachovia revolving credit
facility. The Company recorded a loss of $318,000 on such sale which was
provided for in the Company's 2004 year.
In December 2004, the Company classified and began accounting for its
Rostone business, located in Lafayette, IN, as discontinued operations in
accordance with FAS 144. During the first quarter of 2005, the Company sold
certain of the receivables, inventory and intangibles of Rostone along with
certain of its machinery and equipment. The sale of such assets was
accomplished in two separate transactions, with the sale of certain of the
Rostone's compounding operation assets being sold to one unrelated entity and
the sale of certain of Rostone's molding operation assets being made to a
different unrelated entity. At the time of such sale, the Company entered into
tolling or manufacturing agreements with such buyers under which the Company
agreed to operate the compounding and molding operations at its Lafayette, IN
facility for a limited time until the buyers could move such operations to
different geographical locations. The buyers agreed to reimburse the Company
for all expenses in connection with these activities. The sale of the
selected assets noted above was for approximately $2.9 million. Of this
amount, $712,000 was used to pay down the Wachovia term loan secured by the
machinery and equipment and the remaining amount was used to reduce the
borrowings under the revolving credit facility. The Company recorded a gain
of approximately $370,000 on such sales.
During the 2005 year, the Company reclassified its land and building in
Milwaukee, WI to property held for sale.
During the fourth quarter of 2005, the Company classified and began
accounting for its Oneida business as discontinued operations in accordance
with FAS 144. As described in Note 2: Recent Events, Oneida was ultimately
sold in March 2006. The Company anticipates reporting a gain of approximately
$4 million on such sale.
At December 31, 2005, the assets and liabilities of discontinued
operations are comprised of the assets and liabilities of the Oneida business,
the remaining Rostone assets and the Company's land and building in Milwaukee,
WI that is held for sale. At December 31, 2004, the assets and liabilities of
discontinued operations are comprised of the assets and liabilities of the
springs and Rostone businesses. Such assets and liabilities are as follows
(in thousands):
At December 31,
2005 2004
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 217 $ 71
Receivables, net 3,236 4,268
Inventories, net 1,878 3,529
Other current assets 906 283
-------- --------
Total current assets $ 6,237 $ 8,151
======== ========
CURRENT LIABILITIES:
Trade payables $ 1,964 $ 2,828
Other current liabilities 677 809
-------- --------
Total current liabilities $ 2,641 $ 3,637
======== ========
OTHER ASSETS:
Property, plant and equipment, held for sale $ 6,050 $ 6,238
======== ========
OTHER LIABILITIES:
Other liabilities $ 781 $ 940
======== ========
- F-37 -
Summarized results of discontinued operations for the years ended
December 31, 2005, 2004 and 2003 follow (in thousands):
2005 2004 2003
-------- -------- --------
Net sales $ 22,914 $ 30,334 $ 29,247
Income (loss) before taxes 227 1,114 (1,250)
The income from discontinued operations in 2005 includes a gain on
disposal of Rostone of $0.37 million. The gain from discontinued operations
in 2004 includes a loss on disposal of our springs operation of $0.3 million.
The loss from discontinued operations in 2003 includes $0.9 million related to
an evaluation of legacy healthcare costs and litigation in the discontinued
bridges and crane operation.
NOTE 17: SEGMENT DISCLOSURES AND RELATED INFORMATION
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 and metal bar grating.
The Company's customers include original equipment manufacturers and end-
users in a variety of industries, such as transportation, power generation,
chemicals, metals and electronics.
Excluding its subsidiary in Shanghai, China, Reunion Industries
manufactures its products in the United States and sells its products in the
United States and in foreign countries. During 2005, 2004 and 2003, no one
customer accounted for more than 10% of the net sales of Reunion. Of Reunion's
$42.6 million, $41.4 million and $33.0 million of consolidated net sales from
U.S continuing operations for 2005, 2004 and 2003, respectively, approximately
$8.8 million, $6.4 million and $6.3 million, respectively, were export sales.
Of these export sales, $6.4 million in 2005, $4.3 million in 2004 and $5.0
million in 2003 were to customers in the Far East (principally China and
Taiwan) and $1.0 million in 2005, $1.3 in 2004 and $700,000 in 2003 were to
customers in Canada.
- F-38 -
Segment data, including earnings before interest, taxes, depreciation
and amortization (EBITDA) (in thousands except for related notes):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
2005:
-----
Operating Businesses:
Pressure vessels $ 22,894 $ 3,640 $ 298 $ 14,114
Cylinders 19,611 1,532 144 7,082
Grating 7,222 688 25 4,158
-------- -------- -------- --------
Subtotal 49,727 5,860 467 25,354
Corporate and other - (2,104) 5 13,619
Discontinued Operations - - 113 12,287
-------- -------- -------- --------
Totals $ 49,727 3,756 $ 585 $ 51,260
======== ======== ========
Gain on extinguishment of debt 3,450
Depreciation (720)
Interest expense (8,906)
--------
Loss from continuing operations
before income taxes and minority
interests $ (2,420)
========
2004:
-----
Operating Businesses:
Pressure vessels $ 22,921 $ 3,979 $ 218 $ 15,403
Cylinders 18,488 580 202 8,452
Grating 9,306 1,274 70 4,013
-------- -------- -------- --------
Subtotal 50,715 5,833 490 27,868
Corporate and other (3) - (1,582) 56 14,601
Discontinued Operations - - 234 14,127
-------- -------- -------- --------
Totals $ 50,715 4,251 $ 780 $ 56,596
======== ======== ========
Gain on extinguishment of debt 3,540
Depreciation ( 804)
Interest expense (7,933)
--------
Loss from continuing operations
before income taxes and minority
interests $ (946)
========
2003:
-----
Operating Businesses:
Pressure vessels $ 21,371 $ 3,837 $ - $ 12,351
Cylinders 17,891 353 101 7,877
-------- -------- -------- --------
Subtotal 39,262 4,190 101 20,228
Corporate and other (4) - (3,440) 3 15,723
Discontinued Operations - - 178 15,572
-------- -------- -------- --------
Totals $ 39,262 750 $ 282 $ 51,523
======== ======== ========
Gain on extinguishment of debt 10,991
Depreciation (949)
Interest expense (6,902)
--------
Income from continuing operations
before income taxes $ 3,890
========
- F-39 -
(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 December 31, 2005, 2004 and 2003 includes
$8.0 million of goodwill that relates to the Company's pressure vessel
business. For evaluation purposes under SFAS No. 142, this
goodwill is included in the carrying value of pressure vessels.
(3) Includes income totaling $0.6 million from reduction in environmental
reserve.
(4) Includes gain of $0.2 million on sale of equipment with no carrying value.
- F-40 -
NOTE 18: QUARTERLY DATA (unaudited)
Results by quarter for 2005 and 2004 follow:
2005 Quarter Ended
--------------------------------------
March 31 June 30 Sept 30 Dec 31
-------- -------- -------- --------
Operating revenue $ 12,365 $ 14,163 $ 12,429 $ 10,770
Operating costs and expenses 12,172 12,163 9,751 9,155
-------- -------- -------- --------
Operating income $ 193 $ 2,000 $ 2,678 $ 1,615
======== ======== ======== ========
Income (loss) from continuing
operations $ (1,999) $ (227) $ 1,641 $ (2,095)
Income (loss) from discontinued
operations 293 - (130) 97
-------- -------- -------- --------
Net income (loss) $ (1,706) $ (227) $ 1,511 $ (1,998)
======== ======== ======== ========
Income (loss) from continuing
operations per common share:
Basic $ (0.10) $ 0.02 $ 0.09 $ (0.12)
======== ======== ======== ========
Diluted $ (0.10) $ 0.01 $ 0.07 $ (0.12)
======== ======== ======== ========
Significant item included in results
of continuing operations which might
affect comparability:
Gain on extinguishment of debt $ - $ - $ 3,450 $ -
======== ======== ======== ========
2004 Quarter Ended
--------------------------------------
March 31 June 30 Sept 30 Dec 31
-------- -------- -------- --------
Operating revenue $ 11,436 $ 12,856 $ 12,699 $ 13,724
Operating costs and expenses 7,640 11,398 11,763 12,927
-------- -------- -------- --------
Operating income $ 3,796 $ 1,458 $ 936 $ 797
======== ======== ======== ========
Income (loss) from continuing
operations $ 1,919 $ (630) $ (1,212) $ (1,353)
Income from discontinued
operations 430 228 279 177
-------- -------- -------- --------
Net income (loss) $ 2,349 $ (402) $ ( 933) $ (1,176)
======== ======== ======== ========
Income (loss) from continuing
operations per common share:
Basic $ 0.12 $ (0.04) $ (0.07) $ (0.09)
======== ======== ======== ========
Diluted $ 0.10 $ (0.04) $ (0.07) $ (0.09)
======== ======== ======== ========
Significant item included in results
of continuing operations which might
affect comparability:
Gain on extinguishment of debt $ 3,070 $ 470 $ - $ -
======== ======== ======== ========
- F-41 -
REUNION INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(dollars in thousands)
Charged to
Beginning Costs and Ending
Year ended: Balance Expenses Other Deductions Balance
----------- --------- ---------- ------- ---------- -------
December 31, 2005:
Allowance for doubtful
accounts $ 202 $ 60 $ (40)(1) $ 11 (2) $ 211
Inventory obsolescence
reserve 682 96 (362)(1) 88 (3) 328
Deferred tax valuation
allowance 26,826 921 - 27,747
Reserve for
restructuring 240 206 192 (4) 125 307
Product warranty
reserve 100 168 - 135(5) 133
December 31, 2004:
Allowance for doubtful
accounts $ 485 $ (36) $ (151)(1) $ 96(2) $ 202
Inventory obsolescence
reserve 560 229 (7)(1) 100(3) 682
Deferred tax valuation
allowance 44,620 - - 17,794(6) 26,826
Reserve for
restructuring 474 - - 234 240
Product warranty
reserve 211 (2) - 109(5) 100
December 31, 2003:
Allowance for doubtful
accounts $ 300 $ 205 $ - $ 20(2) $ 485
Inventory obsolescence
reserve 1,056 147 (166) 477(3) 560
Deferred tax valuation
allowance 46,955 - - 2,335(6) 44,620
Reserve for
restructuring 861 - (117) 270 474
Product warranty
reserve 379 83 - 251(5) 211
_________________________
(1) Reduction to beginning balance due to businesses classified as
discontinued operations during the year.
(2) Uncollectible accounts written off, net of recoveries.
(3) Inventory written off.
(4) Primarily a reclassification from trade payables.
(5) Cost of claims.
(6) Primarily related to reduction in expired net operating losses.
- S-1 -
EXHIBIT INDEX
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 to Registration Statement on Form S-4
filed on March 4, 1996 (File No. 33-64325).
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2
to Registration Statement on Form S-4 filed on March 4, 1996 (File
No. 33-64325).
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company, dated December 17, 2004. (2)
4.1 Specimen Stock Certificate evidencing the Common Stock, par value
$.01 per share, of Reunion Industries, Inc. Incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-4
filed on March 4, 1996 (File No. 33-64325).
10.1 -
10.4 Not used.
10.5* The 1998 Stock Option Plan of the Company. Incorporated by
reference to Exhibit 2.2 to Registration Statement on Form S-4
filed on June 26, 1998 (File No. 333-56153).
10.6* Form of Stock Option Agreement for options issued pursuant to the
1998 Stock Option Plan of the Company. Incorporated by reference
to Exhibit 10.7 to Reunion Industries' Annual Report on Form 10-K
for the year ended December 31, 1998 (File No. 33-64325).
10.7 -
10.15 Not used.
10.16 Indenture (the "Indenture"), dated as of May 1, 1993, by and
between Chatwins Group, Inc. and The First National Bank of
Boston, as trustee. Incorporated by reference to Exhibit 4.4 to
Chatwins Group, Inc.'s Registration Statement on Form S-1 filed on
July 30, 1993 (File No. 33-63274).
10.17 First Supplemental Indenture and Wavier of Covenants of Indenture
between The First National Bank of Boston, as trustee, and
Chatwins Group, Inc. Incorporated by reference to Exhibit 4.32 to
Chatwins Group, Inc.'s Current Report on Form 8-K dated June 30,
1995 and filed with the Commission on July 3, 1995 (File No. 33-
63274).
10.18 Second Supplemental Indenture between The First National Bank of
Boston, as trustee, and Chatwins Group, Inc. Incorporated by
reference to Exhibit 4.33 to Chatwins Group, Inc.'s Current Report
on Form 8-K dated June 30, 1995 and filed with the Commission July
3, 1995 (File No. 33-63274).
10.19 Third Supplemental Indenture, dated as of May 28, 1999, between
Chatwins Group, Inc. and State Street Bank and Trust company, as
successor Trustee to The First National Bank of Boston.
Incorporated by reference to exhibit 10.19 in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 (File No.
33-64325).
10.20 Fourth Supplemental Indenture, dated as of March 8, 2000, between
Chatwins Group, Inc. and State Street Bank and Trust Company, as
successor Trustee to The First National Bank of Boston.
Incorporated by reference to exhibit 10.20 in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 (File No.
33-64325).
- E-1 -
10.21 Fifth Supplemental Indenture, dated as of March 16, 2000, between
Chatwins Group, Inc., the Company and State Street Bank and Trust
Company, as successor Trustee to The First National Bank of
Boston. Incorporated by reference to Exhibit 10.21 in the
Company's Annual Report on Form 10-K for the year ended December
31, 1999 (File No. 33-64325).
10.22 Memorandum regarding Notice of Consent Solicitation dated November
26, 2003 from the Company to the holders of the Company's 13%
Senior Notes (the "Consent Solicitation"). (2)
10.23 Security Agreement dated December 2, 2003 between the Company and
U.S. Bank, N.A., as successor trustee under the Indenture ("U.S.
Bank, as trustee") for the holders of the Company's 13% Senior
Notes. (2)
10.24 Form of Warrant issued by the Company to the holders of its 13%
Senior Notes who provided consents to its Consent Solicitation.
The Company has reserved a total of 1,771,217 shares of its common
stock for issuance upon exercise of these Warrants. Each such
Warrant is identical to all such other Warrants issued to such
holders, except as to the name of the holder and the number of
shares covered thereby. (2)
10.25 Not used.
10.26 Standstill Agreement regarding Default in Payment of Interest
dated as of February 2, 2005 among Reunion and certain holders of
its 13% Senior Notes. (2)
10.27 Loan and Security Agreement dated as of December 3, 2003 between
the Company and Wachovia Bank, N.A.("Wachovia"), successor to
Congress Financial Corporation ("Congress Financial").
Incorporated by reference to Exhibit 10.46 in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003. (File
No. 01-15739)
10.28 Amendment No. 1 to Loan and Security Agreement dated May 19, 2004
between the Company and Wachovia, successor to Congress Financial.
(2)
10.29 Amendment No. 2 to Loan and Security Agreement dated October 18,
2004 between the Company and Wachovia, successor to Congress
Financial. (2)
10.30 Amendment No. 3 to Loan and Security Agreement dated November 22,
2004 between the Company and Wachovia, successor to Congress
Financial. (2)
10.31 Amendment No.4 to Loan and Security Agreement dated July 12, 2005
between Wachovia, successor to Congress Financial, and the
Company. (2)
10.32 Intercreditor and Subordination Agreement dated December 3, 2003
among Wachovia (successor to Congress Financial), Mercury Capital
Corporation ("Mercury Capital"), LC Capital Master Fund, Ltd. ("LC
Capital") and U.S. Bank, N.A., as trustee ("U.S. Bank"), and
acknowledged and agreed to by the Company. (2)
10.33 Amendment No.5 to Loan and Security Agreement dated February 28,
2006 between Wachovia, successor to Congress Financial, and the
Company. (2)
10.34 Stipulation and Agreement between Stanwich Financial Services
Corp. and the Company regarding Judgment dated March 21, 2006. (2)
- E-2 -
10.35 Asset Purchase Agreement dated January 13, 2006 between Oneida
Molded Plastics, LLC and the Company (without Exhibits and
Schedules). (2)
10.36 Amendment No.1 to Asset Purchase Agreement dated February 14, 2006
between Oneida Molded Plastics, LLC and the Company (without
Exhibits and Schedules). (2)
10.37 ?
10.45 Not used.
10.46 Promissory Note dated November 25, 2003 in the original principal
amount of $4,200,000 issued by the Company to Mercury Capital. (2)
10.47 Option to Purchase dated November 25, 2003 issued by the Company
to Mercury Capital. (2)
10.48 Open-End Mortgage, Assignment of Leases and Rents, Fixture Filing
and Security Agreement dated November 25, 2003 granted by the
Company to Mercury Capital with respect to Reunion's real property
located in Pennsylvania. In November and December 2003, the
Company also granted mortgages to the Other Mortgagees (as defined
below) on this property and to Mercury Capital and the Other
Mortgagees on the Company's other real properties. Such other
mortgages are not being filed as exhibits to this report, because
they are similar to this Exhibit in all material respects, except
as to the location and description of the mortgaged properties,
the names of the mortgagees and/or the debt secured thereby. As
used in this paragraph the term "Other Mortgagees" means Wachovia
(as successor to Congress Financial), LC Capital and U.S. Bank.
(2)
10.49 Amended and Restated Senior Subordinated Secured Promissory Note
dated December 3, 2003 in the original principal amount of $3.5
million issued by the Company to LC Capital. (2)
10.50 Amended and Restated Security Agreement dated December 3, 2003
between the Company and LC Capital. (2)
10.51 Not used.
10.52 Warrant dated August 11, 2003 issued by the Company to LC Capital.
(2)
10.53 Amendment to Warrant dated December 3, 2003 between the Company
and LC Capital. (2)
10.54 Amendment No. 2 to Warrant dated May 19, 2004 between the Company
and LC Capital. (2)
10.55 Registration Rights Agreement dated August 11, 2003 between the
Company and LC Capital. (2)
10.56 Amendment to Registration Rights Agreement dated December 3, 2003
between the Company and LC Capital. (2)
10.57 Letter Agreement dated May 19, 2004 among the Company, LC Capital
and WebFinancial Corporation ("WebFinancial"). (2)
10.58 Letter Agreement dated December 14, 2004 among the Company, LC
Capital and WebFinancial. (2)
10.59 Warrant dated January 14, 2005 issued by the Company to LC
Capital. (2)
10.60 Warrant dated January 14, 2005 issued by the Company to
WebFinancial. (2)
- E-3 -
10.61 Chapter 11 Settlement Agreement dated as of December 1, 2003 among
Stanwich Financial Services Corp., the Other Released Parties, the
Further Released Parties and Bankers Trust. (2)
10.62 Warrant dated July 12, 2005 issued by the Company to LC Capital.
(2)
10.63 Warrant dated July 12, 2005 issued by the Company to WebFinancial.
(2)
10.64 Chapter 11 Settlement Agreement dated July 8, 2005 among Stanwich
Financial Services Corp., Shaw NapTech, Inc. and the Company. (2)
21.1 List of subsidiaries and jurisdictions of organization.(1)
23.1 Consent of Independent Registered Public Accounting Firm ? Mahoney
Cohen & Company, CPA, P.C.(1)
31.2 Not used.
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.(1)
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.(1)
32.1 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(1)
32.2 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(1)
(1) - Filed herewith.
(2) - To be filed as an Amendment to this Form 10-K.
* - Compensatory plan or arrangement.
- E-4 -
Exhibit 21.1
REUNION INDUSTRIES, INC.
SUBSIDIARIES AS OF DECEMBER 31, 2005
Company Incorporated Parent
------- ------------ ------
1 Reunion Industries, Inc. Delaware
2 Buttes Drilling-C Company Texas 1
3 Reunion Titan, Inc. Texas 2
4 Shanghai Klemp Metals Products Company Peoples Republic
of China 1 (65.0%)
Inactive Companies
------------------
6 Ocean Phoenix Transport, Inc. District of Columbia 1
7 Reunion Sub I, Inc. Delaware 1
8 Reunion Sub II, Inc. Delaware 1
9 Reunion Sub III, Inc. Delaware 1
10 Asie-Dolphin Drilling SDN BHD Malaysia 2 (49%)
11 Buttes Gas & Oil do Brasil, Ltda. Brazil 1 (49%)
12 Dolphin Titan do Brazil Servicos
de Perfuracoes, Ltd. Brazil 2
13 Monaco Corporation British Virgin Is. 2
14 Ocean Phoenix Holdings, N. V. Netherlands Antilles 1
15 Progress Drilling International, Inc. Panama 2
16 Progress Perfuracoes do Brasil, Ltd. Brazil 15
- E-5 -
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-37702) pertaining to the 1998 Stock Option Plan, the
Registration Statement (Form S-8 No. 333-62074) pertaining to the 1998 Stock
Option Plan, the Registration Statement (Form S-8 No. 33-77232) pertaining to
the 1993 Stock Option Plan, the Registration Statement (Form S-3 No. 33-77566)
pertaining to the registration of 248,500 shares of common stock, the
Registration Statement (Form S-3 No. 333-37368) pertaining to the registration
of 8,269,479 shares of common stock and the Registration Statement (Form S-3
No. 333-41842) pertaining to the registration of 3,245,515 shares of common
stock of Reunion Industries, Inc. and Subsidiaries of our report dated March
17, 2006, with respect to the consolidated financial statements and schedule of
Reunion Industries, Inc. and Subsidiaries included in the Annual Report (Form
10-K) for the year ended December 31, 2005.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
April 17, 2006
- E-6 -
EXHIBIT 31.1
CERTIFICATION
I, Kimball J. Bradley, Sr., certify that:
1. I have reviewed this annual report on Form 10-K 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: April 17, 2006
/s/ Kimball J. Bradley
-------------------------------------
Chief Executive Officer
- E-7 -
EXHIBIT 31.2
CERTIFICATION
I, John M. Froehlich, certify that:
1. I have reviewed this annual report on Form 10-K 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: April 17, 2006
/s/ John M. Froehlich
-------------------------------------
Chief Financial Officer
- E-8 -
EXHIBIT 32.1
REUNION INDUSTRIES, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
In connection with this annual report on Form 10-K of Reunion Industries, Inc.
for the fiscal year ended December 31, 2005, I, Kimball J. Bradley, 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-K for the fiscal year ended December 31, 2005 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-K for the fiscal year ended
December 31, 2005 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: April 17, 2006
/s/ Kimball J. Bradley
---------------------------
Chief Executive Officer
- E-9 -
EXHIBIT 32.2
REUNION INDUSTRIES, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
In connection with this annual report on Form 10-K of Reunion Industries, Inc.
for the fiscal year ended December 31, 2005, 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-K for the fiscal year ended December 31, 2005 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-K for the fiscal year ended
December 31, 2005 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: April 17, 2006
/s/ John M. Froehlich
---------------------------
Chief Financial Officer
- E-10 -