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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 33-64325
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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 15222
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
At October 31, 2001, 15,590,619 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 39 pages.
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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act which are intended to be covered by the safe harbors created thereby. The
forward-looking statements contained in this report are enclosed in brackets
[] for ease of identification. Note that all forward-looking statements
involve risks and uncertainties, including, without limitation, factors which
could cause the future results and shareholder values to differ materially
from those expressed in the forward-looking statements. Although the Company
believes that the assumptions underlying the forward-looking statements
contained in this report are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurances that the forward-looking
statements included or incorporated by reference in this report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included or incorporated by reference herein, the
inclusion of such information should not be regarded as a representation by
the Company or any other person that the Company's objectives and plans will
be achieved. In addition, the Company does not intend to, and is not
obligated to, update these forward-looking statements after filing and
distribution of this report, even if new information, future events or other
circumstances have made them incorrect or misleading as of any future date.
- 2 -
REUNION INDUSTRIES, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at
September 30, 2001 (unaudited) and December 31, 2000 4
Condensed Consolidated Statement of Income (Loss) and
Comprehensive Income (Loss) for the three and nine
months ended September 30, 2001 and 2000 (unaudited) 5
Condensed Consolidated Statement of Cash Flows
for the nine months ended September 30,
2001 and 2000 (unaudited) 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 3. Defaults Upon Senior Securities 37
Item 5. Other Information 38
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K 39
SIGNATURES 39
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(in thousands)
At September 30, At December 31,
2001 2000*
--------------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 1,284 $ 1,826
Receivables, net 33,640 31,777
Advances to employees 213 233
Inventories, net 17,549 21,781
Other current assets 2,243 3,307
-------- --------
Total current assets 54,929 58,924
Property, plant and equipment, net 30,631 31,166
Due from related parties 1,586 3,950
Goodwill, net 26,496 18,837
Deferred tax assets, net 12,678 12,678
Net assets of discontinued operations 220 9
Other assets, net 3,657 4,391
-------- --------
Total assets $130,197 $129,955
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Debt in default $ 70,252 $ -
Revolving credit facility - 19,367
Current maturities of debt 73 4,061
Trade payables 18,759 21,662
Due to related parties 798 224
Accrued interest on debt in default 1,675 -
Other current liabilities 9,562 15,133
-------- --------
Total current liabilities 101,119 60,447
Long-term debt 4,848 42,656
Long-term debt - related parties 4,615 4,015
Other liabilities 55 1,278
-------- --------
Total liabilities 110,637 108,396
Commitments and contingent liabilities - -
Stockholders' equity 19,560 21,559
-------- --------
Total liabilities and stockholders' equity $130,197 $129,955
======== ========
See accompanying notes to condensed consolidated financial statements.
* - Certain amounts have been reclassified for comparative purposes.
- 4 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(in thousands, except per share information)(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Operating revenue:
Metals Group $ 30,019 $ 35,384 $100,374 $106,634
Plastics Group 8,713 13,308 31,698 31,955
-------- -------- -------- --------
Total sales 38,732 48,692 132,072 138,589
-------- -------- -------- --------
Cost of sales:
Metals Group 26,617 28,327 81,844 84,909
Plastics Group 7,866 11,456 27,423 27,089
-------- -------- -------- --------
Total cost of sales 34,483 39,783 109,267 111,998
-------- -------- -------- --------
Gross profit 4,249 8,909 22,805 26,591
Selling, general & administrative 5,419 6,223 17,591 16,713
Other (income) expense, net 604 (4,931) 1,803 (4,310)
-------- -------- -------- --------
Operating profit (loss) (1,774) 7,617 3,411 14,188
Interest expense, net 2,253 2,886 7,005 7,930
Equity in loss of continuing
operations of affiliate - - - 296
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes (4,027) 4,731 (3,594) 5,962
Provision for (benefit from)
income taxes (1,307) 20 (1,135) (322)
-------- -------- -------- --------
Income (loss) from continuing
operations (2,720) 4,711 (2,459) 6,284
Loss from discontinued
operations, net of tax of $-0- - (337) - (767)
-------- -------- -------- --------
Income (loss) before
extraordinary items (2,720) 4,374 (2,459) 5,517
-------- -------- -------- --------
Extraordinary items, net of
tax of $-0-:
Write-off of deferred financing costs - (80) - (1,581)
Equity in loss of extraordinary
item of affiliate - - - (271)
-------- -------- -------- --------
Loss from extraordinary items - (80) - (1,852)
-------- -------- -------- --------
Net income (loss) and
comprehensive income (loss) (2,720) 4,294 (2,459) 3,665
Preferred stock dividend accretions - - - (95)
-------- -------- -------- --------
Income (loss) applicable to
common stockholders $ (2,720) $ 4,294 $ (2,459) $ 3,570
======== ======== ======== ========
- 5 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (continued)
(in thousands, except per share information)(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Basic earnings (loss)
per common share:
Continuing operations $ (0.17) $ 0.31 $ (0.16) $ 0.49
Discontinued operations - (0.02) - (0.06)
Extraordinary items - (0.01) - (0.15)
-------- -------- -------- --------
Income (loss) per common share $ (0.17) $ 0.28 $ (0.16) $ 0.28
======== ======== ======== ========
Weighted average shares outstanding 15,587 15,236 15,585 12,564
======== ======== ======== ========
Diluted earnings (loss)
per common share:
Continuing operations $ (0.17) $ 0.31 $ (0.16) $ 0.49
Discontinued operations - (0.02) - (0.06)
Extraordinary items - (0.01) - (0.15)
-------- -------- -------- --------
Income (loss) per common share $ (0.17) $ 0.28 $ (0.16) $ 0.28
======== ======== ======== ========
Weighted average shares outstanding 15,636 15,387 15,651 12,624
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2001 2000
-------- --------
Cash provided by (used in) operating activities $ (2,907) $ 2,086
-------- --------
Cash flow from investing activities:
Proceeds from sale of business - 9,990
Capital expenditures (2,517) (3,511)
Acquisition of NPSAC common stock (10) -
Acquisition of Kingway common stock - (100)
Cash acquired in merger - 2,666
-------- --------
Cash provided by (used in) investing activities (2,527) 9,045
-------- --------
Cash flow from financing activities:
Proceeds from issuance of debt - 30,800
Net change in revolving credit facilities 7,991 23,495
Borrowings 534 -
Repayments of debt (4,305) (62,323)
Repayments of debt - related party - (1,076)
Payments of deferred financing costs and closing fees - (1,404)
-------- --------
Cash provided by (used in) financing activities 4,220 (10,508)
-------- --------
Net increase (decrease) in cash and cash equivalents (1,214) 623
Change in cash of discontinued operations 672 (49)
Cash and cash equivalents, beginning of year 1,826 252
-------- --------
Cash and cash equivalents, end of period $ 1,284 $ 826
======== ========
See accompanying notes to condensed consolidated financial statements.
- 7 -
REUNION INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
NOTE 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair statement of the
results of operations have been included. The results of operations for the
three and nine month periods ended September 30, 2001 are not necessarily
indicative of the results of operations for the full year. When reading the
financial information contained in this Quarterly Report, reference should be
made to the financial statements, schedules and notes contained in Reunion's
Annual Report on Form 10-K for the year ended December 31, 2000.
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statements of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations." This statement
eliminates the pooling-of-interest method for business combinations and
changes the criteria for recognizing intangible assets apart from goodwill.
This statement is effective for purchases completed after June 30, 2001.
The Company has not engaged in any acquisitions since June 30, 2001.
Acquisitions prior to June 30, 2001 were recorded as purchases in accordance
with Accounting Principles Board Opinion No. 16.
The Financial Accounting Standards Board issued SFAS No. 142, "Goodwill
and Other Intangible Assets." This statement eliminates the amortization of
goodwill and indefinite lived intangible assets and requires such assets be
reviewed for impairment at least annually. This statement is effective for
goodwill and intangible assets acquired prior to July 1, 2001 upon adoption,
which is required for fiscal years beginning after December 15, 2001. The
Company is beginning the process of evaluating the adoption and effects of
this statement on the Company. During the three and nine month periods ended
September 30, 2001, the Company recorded goodwill amortization of $0.5 million
and $1.4 million, respectively. The effect on basic earnings per share had
the Company adopted the non-amortization of goodwill provisions of SFAS 142 at
the beginning of 2001 would be a $0.02 per share increase for the three months
ended and a $0.07 per share increase for the nine months ended September 30,
2001.
The Financial Accounting Standards Board issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" but retains many of its fundamental
provisions. SFAS 144 also supersedes Accounting Principles Board Opinion No.
30, "Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" but
retains its provision to separately report discontinued operations and extends
that reporting to a component of an entity, as defined therein, that either
has been disposed of or is classified as held for sale, thus broadening the
presentation of discontinued operations to include more disposal transactions.
This statement is effective for fiscal years beginning after December 15, 2001
but early adoption is permitted. As discussed in note 2, the Company's
management is in the early stages of developing a corporate-wide restructuring
- 8 -
plan, the elements of which will include asset dispositions and facility shut-
downs. If the restructuring plan is approved by the Company's Board of
Directors in the fourth quarter of 2001, early adoption of SFAS 144 could have
a significant impact on the classification of amounts related to the
restructuring plan included in its consolidated financial statements at and
for the year ended December 31, 2001.
NOTE 2: RECENT DEVELOPMENTS AND OTHER MATTERS
Restructuring and Other Actions
As the result of downturns in several of the markets served by the
Company and the resulting decrease in the Company's ability to absorb costs,
management of the Company has determined to develop a plan to restructure its
continuing businesses and dispose of or shut-down certain non-strategic
businesses. These actions will be designed to improve productivity and
operating performance.
2001 Covenant Compliance
For the quarter ended March 31, 2001 and for each fiscal quarter
thereafter in 2001, the Bank of America (BOA) financing and security agreement
required the Company to maintain a minimum fixed charge coverage ratio of
1.25:1 and maximum funded debt to EBITDA ratios of 3.75:1, 3.50:1, 3.25:1 and
3.00:1.
In April 2001, the Company entered into a letter agreement with Bank of
America whereby, as long as the Company maintained both a fixed charge
coverage ratio of at least 1.00:1 and had a funded debt to EBITDA ratio of no
more than 4.50:1 as of the September 30, 2001 and December 31, 2001
calculation dates, and as long as the Company was in compliance on all other
covenants, the Bank of America would not accelerate any of its loans.
For the quarter ended September 30, 2001, the Company's fixed charge
coverage ratio was 0.79:1 and the funded debt to EBITDA ratio was 5.61:1. As
a result, the Company is in default under its BOA financing and security
agreement.
The Company and Bank of America entered into various amendments to the
BOA financing and security agreement during 2000. The December 12, 2000
amendment required the Company to maintain a minimum availability under the
revolving credit facility of $1.5 million. Through the second quarter of
2001, the Company had complied with this requirement. However, due to the
downturn in several of the markets served by the Company during the third
quarter of 2001 and the resulting decrease in the quality of the Company's
borrowing base, ineligible receivables and inventory increased. Based on the
borrowing base formulas as set forth in the BOA financing and security
agreement, this increase in ineligibles resulted in a decrease in borrowing
availability under the revolving credit facility and the Company's inability
to maintain a minimum availability of $1.5 million. As a result, the Company
is in default under its BOA financing and security agreement.
Semi-Annual Interest on 13% Senior Notes due November 1, 2001
The Company was unable to fund its $1.616 million semi-annual interest
payment on its 13% senior notes as it had insufficient funds available under
its revolving credit facility. Failure to make the November 1 interest
payment is a default under the indenture which supports the 13% Senior Notes.
Under the terms of the indenture, the Company has thirty days to cure the
default.
- 9 -
Acquisition of NPS Acquisition Corp. and Note Payable Assumption
On January 17, 2001, the Company acquired NPS Acquisition Corp. (NPSAC)
(f/k/a Naptech Pressure Systems) from Charles E. Bradley, Sr. (Mr. Bradley),
the Company's chairman of the board and chief executive officer. NPSAC is
based in Clearfield, Utah and manufactures seamless steel pressure vessels, an
existing Metals Group segment.
The purchase price was $10,000 plus the non-cash assumption of $10.3
million of NPSAC's liabilities, including a 15% per annum $6.9 million note
payable to Shaw Group, the former owner of Naptech Pressure Systems and $0.6
million of notes payable to Stanwich Financial Services Corp., a related
party. Simultaneously with the acquisition, Reunion paid Shaw Group $2.0
million of the note payable in cash from funds available under its revolving
credit facility with Bank of America (BOA). The remainder of the note payable
of $4.9 million was then restructured to include quarterly principal payments
of $0.6 million for eight quarters which began on February 28, 2001. Reunion
made the first two payments from funds available under its revolving credit
facility. The Company was unable to fund the third payment due August 31,
2001 as it had insufficient funds available under its revolving credit
facility. The note is unsecured and subordinate to the BOA term loan and
revolving credit facilities.
The estimated fair value of assets acquired included approximately $1.4
million of cash, receivables, inventories and other current assets,
approximately $0.3 million of fixed assets and $1.3 million of deferred tax
assets which are fully reserved by a valuation allowance. The purchase price
in excess of net assets acquired of $8.6 million was recorded as goodwill and
is being amortized over 15 years. NPSAC's deferred tax assets are comprised
primarily of net operating losses.
Repayment of $120,000 of 13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
As such, on June 1, 2000 Reunion made the required offer to purchase
$2,525,000 of senior notes, of which holders of only $120,000 of senior notes
tendered. However, the $25.0 million of 13% senior notes repaid from the
merger proceeds was applied against Reunion's obligations for sinking fund
payments and the purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
- 10 -
Therefore, $120,000 principal amount of 13% senior notes was repaid by
the Company on May 1, 2001 from funds available under its revolving credit
facility. Of the remaining $24.855 million of senior notes, $12.5 million is
scheduled to be repaid in May 2002 and $12.355 million is scheduled to be
repaid in May 2003.
Solicitation of Consent of Senior Noteholders
The Company is required to make sinking fund payments on its $24.855
million of senior notes of $12.5 million on May 1, 2002 and $12.355 million on
May 1, 2003. On September 4, 2001, the Company solicited the consent of its
senior noteholders to extend the sinking fund payment dates by two years. The
solicitation expired on November 2, 2001. As part of the solicitation, the
Company reserved the right to terminate it if holders of less than $22.0
million principal amount of senior notes consented. The Company has exercised
its right to terminate the solicitation.
Additional Shares of Reunion Common Stock
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The merger agreement also provided that up
to an additional 500,000 shares of Reunion common stock would be issued to
former Chatwins Group common stockholders if the former Chatwins Group
businesses and the acquired Kingway business achieve specified performance
levels in 2000. A determination of the number of shares to be issued was made
by the board of directors at its meeting held on May 15, 2001. Such
additional shares totaled 348,995 and were issued on May 29, 2001. The
closing price of Reunion's common stock on that date was $1.30 per share. The
issuance of the additional shares was recorded as a merger purchase price
adjustment to goodwill.
Payment of $680,000 Industrial Revenue Development Bonds
Upon the sale of its domestic grating operations in September 1999, the
Company retained an obligation for a $680,000 note payable due May 1, 2001
related to an industrial development revenue bond issue by Orem City, Utah.
This note payable was repaid in May 2001 from funds available under the
Company's revolving credit facility.
- 11 -
NOTE 3: INVENTORIES
Inventories are comprised of the following (in thousands):
At September 30, At December 31,
2001 2000
--------------- --------------
(unaudited)
Metals Group:
Raw material $ 4,647 $ 5,933
Work-in-process 3,764 4,295
Finished goods 5,108 7,214
-------- --------
Gross inventories 13,519 17,442
Less: LIFO reserves 80 80
-------- --------
Metals Group inventories 13,599 17,522
-------- --------
Plastics Group:
Raw material 2,489 2,584
Work-in-process 235 323
Finished goods 1,226 1,352
-------- --------
Plastics Group inventories 3,950 4,259
-------- --------
Inventories $ 17,549 $ 21,781
======== ========
NOTE 4: DEBT IN DEFAULT AND LONG-TERM DEBT
Debt in default consists of the following (in thousands):
At September 30,
2001
---------------
(unaudited)
13% senior notes (net of discount of $5) $ 24,850
BOA revolving credit facility 27,358
BOA term loan A due March 16, 2007 16,993
BOA capital expenditure facility 1,051
--------
Total debt in default $ 70,252
========
Long-term debt consists of the following (in thousands):
At September 30, At December 31,
2001 2000
--------------- --------------
(unaudited)
13% senior notes (net of discount of $5) $ - $ 24,961
BOA term loan A due March 16, 2007 - 19,757
BOA capital expenditure facility - 640
Note payable due February 28, 2003 3,645 -
Other 1,276 1,359
Other - related parties 4,615 4,015
-------- --------
Total long-term debt 9,536 50,732
Current maturities (73) (4,061)
-------- --------
Total long-term debt, less current maturities $ 9,463 $ 46,671
======== ========
- 12 -
NOTE 5: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
equity for the nine month period ended September 30, 2001 (in thousands):
Par Capital
Value in
of Excess Accum-
Common of Par ulated
Stock Value Deficit Total
------ ------- -------- --------
At January 1, 2001 $152 $24,608 $ (3,201) $ 21,559
Activity (unaudited):
Net loss - - (2,459) (2,459)
Issuance of common stock (note 2) 3 451 - 454
Exercise of options 1 5 - 6
---- ------- -------- --------
At September 30, 2001 $156 $25,064 $ (5,660) $ 19,560
==== ======= ======== ========
The computations of basic and diluted earnings per common share (EPS) for
the three and nine month periods ended September 30, 2001 and 2000 are as
follows (in thousands, except per share amounts)(unaudited):
Income
(Loss) Shares EPS
-------- -------- -------
Three months ended September 30, 2001:
Net loss, weighted average shares
outstanding and basic EPS $ (2,720) 15,587 $ (0.17)
=======
Dilutive effect of stock options 49
-------- --------
Net loss, weighted average shares
outstanding and diluted EPS $ (2,720) 15,636 $ (0.17)
======== ======== =======
Three months ended September 30, 2000:
Net income, weighted average shares
outstanding and basic EPS $ 4,294 15,236 $ 0.28
=======
Dilutive effect of stock options 151
-------- --------
Net income, weighted average shares
outstanding and diluted EPS $ 4,294 15,387 $ 0.28
======== ======== =======
Nine months ended September 30, 2001:
Net loss, weighted average shares
outstanding and basic EPS $ (2,459) 15,585 $ (0.16)
=======
Dilutive effect of stock options 66
-------- --------
Net income, weighted average shares
outstanding and diluted EPS $ (2,459) 15,651 $ (0.16)
======== ======== =======
- 13 -
Nine months ended September 30, 2000:
Net income $ 3,665
Less: Preferred stock dividend accretions (95)
--------
Income applicable to common stockholders,
weighted average shares outstanding
and basic EPS 3,570 12,564 $ 0.28
=======
Dilutive effect of stock options 60
-------- --------
Income applicable to common stockholders,
weighted average shares outstanding
and diluted EPS $ 3,570 12,624 $ 0.28
======== ======== =======
At September 30, 2001, the Company's stock options outstanding totaled
1,093,500, of which 270,000 during the nine month period and 280,000 during
the three month period ended September 30, 2001 were at exercise prices below
the average market price of the underlying security. Such options include a
dilutive component of 49,174 shares for the 2001 third quarter and 65,419
shares for the 2001 year-to-date period. The remainder were at exercise
prices equal to or above the average market price of the underlying security.
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
Legal Proceedings
The Company and its subsidiaries are defendants in a number of lawsuits
and administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. The Company believes that any
material liability which can result from any of such lawsuits or proceedings
has been properly reserved for in the Company's consolidated financial
statements or is covered by indemnification in favor of the Company or its
subsidiaries, and therefore the outcome of these lawsuits or proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended. There is no applicable insurance coverage.
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit is in the initial stages of discovery. Reunion
intends to vigorously contest the suit.
- 14 -
The Company has been named as a defendant in fifteen consolidated
lawsuits filed in December 2000 or early 2001 in the Superior Court for Los
Angeles County, California, three of which are purported class actions
asserted on behalf of approximately 200 payees. The plaintiffs in these suits
except one are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC are related parties.
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Bradley, the sole shareholder of SFSC's parent, several
major financial institutions and certain others. All of these suits arise out
of the inability of SFSC to make structured settlement payments when due.
Pursuant to the court's order, plaintiffs in the purported class actions and
plaintiffs in the individual cases actions filed a model complaint. Except
for the class allegations, the two model complaints are identical. The
plaintiffs seek compensatory and punitive damages, restoration of certain
alleged trust assets, restitution and attorneys' fees and costs.
The plaintiffs in one of the suits are former owners of a predecessor of
SFSC and current operators of a competing structured settlement business.
These plaintiffs claim that their business and reputations have been damaged
by SFSC's structured settlement defaults, seek damages for unfair competition
and purport to sue on behalf of the payees.
The plaintiffs allege that the Company borrowed funds from SFSC and has
not repaid these loans. The plaintiffs' theories of liability against the
Company are that it is the alter ego of SFSC and Mr. Bradley and that the
Company received fraudulent transfers of SFSC's assets. The plaintiffs also
assert direct claims against the Company for inducing breach of contract and
aiding and abetting an alleged breach of fiduciary duty by SFSC.
On May 25, 2001, SFSC filed a chapter 11 bankruptcy petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. As a result of this
restraining order of the bankruptcy court, the Company entered a standstill
agreement with the plaintiffs on August 22, 2001. Pursuant to the standstill
agreement, and the stipulation of the parties to the SFSC bankruptcy case, the
plaintiffs agreed to take no further action to prosecute any claim in the
litigation against the Company, Mr. Bradley and others to recover any
structured settlement trust assets or any derivative claims or claims based on
allegations of alter ego, fraudulent transfer or conversion. The plaintiffs
did not agree to waive or release their direct personal claims against the
Company for damages, but the plaintiffs agreed to cease and desist the
prosecution of those claims until no earlier than sixty days following service
of written notice to the Company stating that they have elected to
unilaterally terminate the standstill agreement.
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. Both model complaints allege causes of
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted cross-
complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
vigorously defend against these actions and cross-actions.
- 15 -
The Company has been named in approximately 195 separate asbestos suits
filed since January 1, 2001 by two plaintiffs' law firms in Wayne County,
Michigan. The claims allege that cranes from the Company's crane
manufacturing location in Alliance, OH were present in various parts of
McLouth Steel Mill in Wayne County, Michigan and that those cranes contained
asbestos to which plaintiffs were exposed over a 40 year span. As of the date
of this report, counsel for the Company has filed an answer to each complaint
denying liability by the Company and asserting all alternative defenses
permitted under the Court's Case Management Order. Counsel for the Company
has negotiated dismissal of 95 cases without any 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 manufacturers
provided products containing asbestos. The Company intends to vigorously
defend against these lawsuits.
On July 10, 2001, a lawsuit that alleges personal injury from asbestos
exposure was filed in the Superior Court for San Francisco County in
California against greater than fifty defendants, including Oneida Rostone
Corporation (ORC), pre-merger Reunion's Plastics subsidiary and the Company's
Plastics Group. In October 2001, Allen-Bradley Company, a former owner of the
Rostone business of ORC, agreed to defend and indemnify Reunion in this
lawsuit pursuant to a contractual obligation to do so.
Environmental Compliance
Various U.S. federal, state and local laws and regulations including,
without limitation, laws and regulations concerning the containment and
disposal of hazardous waste, oil field waste and other waste materials, the
use of storage tanks, the use of insecticides and fungicides and the use of
underground injection wells directly or indirectly affect the Company's
operations. In addition, environmental laws and regulations typically impose
"strict liability" upon the Company for certain environmental damages.
Accordingly, in some situations, the Company could be liable for clean up
costs even if the situation resulted from previous conduct of the Company that
was lawful at the time or from improper conduct of, or conditions caused by,
previous property owners, lessees or other persons not associated with the
Company or events outside the control of the Company. Such clean up costs or
costs associated with changes in environmental laws and regulations could be
substantial and could have a materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Except as described in the following paragraphs, the Company believes it
is currently in material compliance with existing environmental protection
laws and regulations and is not 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. Except as described in
the following paragraphs, the Company has not recorded any accruals for
environmental costs.
In February 1996, Reunion was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. Since then, the Company has expended $299,000 of
remediation costs and accrued an additional $60,000.
- 16 -
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. The Company's
environmental consultant is in the process of updating the estimate of the
costs to comply with this order, [but the Company does not believe that the
cost of future remediation will exceed the amount accrued]. No remediation
was performed in 2000 or to date in 2001 pending the decision. However, the
Company has paid $202,000 for its share of legal and consulting services in
connection with the hearings. At September 30, 2001, the balance accrued for
these remediation costs is approximately $1,116,000. Owners of a portion of
the property have objected to the Company's cleanup methodology and have filed
suit to require additional procedures. The Company is contesting this
litigation, and believes its proposed methodology is well within accepted
industry practice for remediation efforts of a similar nature. No accrual has
been made for costs of any alternative cleanup methodology which might be
imposed as a result of the litigation.
NOTE 7: SEGMENT DISCLOSURES
The Company owns and operates a diverse group of industrial manufacturing
operations that design and manufacture highly engineered, high-quality
products for specific customer requirements, such as large-diameter seamless
pressure vessels, hydraulic and pneumatic cylinders, precision plastic
components, heavy-duty cranes and materials handling systems. The Company's
customers include original equipment manufacturers and end-users in a variety
of industries, such as transportation, power generation, chemicals, metals,
home electronics, office equipment and consumer goods. The Company's business
units are organized into two major operating groups:
The Metals Group designs, manufactures and markets a broad range of
fabricated and machined industrial metal parts and products, including bridge
structures and cranes, materials handling systems, seamless pressure vessels,
cylinders and leaf springs. The Metals Group serves over 5,000 customers,
including original equipment manufacturers and end-users.
The Plastics Group manufactures precision molded plastic parts and
provides engineered plastics services to more than 500 original equipment
manufacturers.
Prior to the third quarter of 2001, the Company considered these groups
to be its reportable segments for financial reporting purposes. Due to the
downturns in the markets for several of the Company's Metals Group products
and the resulting significant variation in product line gross margins,
management reevaluated the definition of its segments and has concluded that,
except for the Plastics Group, which will continue to be reported as a single
segment, former Metals Group product lines are now considered to be segments
for financial reporting purposes.
- 17 -
The following represents the disaggregation of financial data by segment
(000's)(unaudited):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended and at
September 30, 2001:
Metals Group:
Bridges and cranes $ 3,247 $ (2,109) $ 194 $ 14,720
Materials handling systems 13,827 1,672 140 16,845
Seamless pressure vessels 8,042 1,431 121 19,958
Cylinders 4,246 (285) - 11,549
Leaf springs 657 (34) - 1,576
-------- -------- -------- --------
Subtotal Metals Group 30,019 675 455 64,648
Plastics Group 8,713 223 200 23,265
Corporate and other - (857) 1 42,064
Discontinued operations - - - 220
-------- -------- -------- --------
Totals $ 38,732 41 $ 656 $130,197
======== ======== ========
Depreciation and amortization(3) (1,815)
Interest expense (2,253)
--------
Loss from continuing operations
before income taxes $ (4,027)
========
Three months ended September 30, 2000
and at December 31, 2000:
Metals Group:
Bridges and cranes $ 5,802 $ (745) $ 958 $ 16,157
Materials handling systems 14,128 2,265 216 16,426
Seamless pressure vessels 7,723 1,876 19 21,320
Cylinders 6,938 920 22 14,152
Leaf springs 793 44 1 1,783
-------- -------- -------- --------
Subtotal Metals Group 35,384 4,360 1,216 69,838
Plastics Group 13,308 884 406 23,485
Corporate and other(4) - 4,187 3 36,623
Discontinued operations - - 72 9
-------- -------- -------- --------
Totals $ 48,692 9,431 $ 1,697 $129,955
======== ======== ========
Depreciation and amortization(3) (1,814)
Interest expense (2,886)
--------
Income from continuing operations
before income taxes $ 4,731
========
- 18 -
Capital
Net Sales EBITDA(1) Spending
--------- --------- ---------
Nine months ended
September 30, 2001:
Metals Group:
Bridges and cranes $ 12,625 $ (2,648) $ 797
Materials handling systems 38,999 5,499 580
Seamless pressure vessels 30,695 7,136 240
Cylinders 15,776 204 -
Leaf springs 2,279 (32) 14
-------- -------- --------
Subtotal Metals Group 100,374 10,159 1,631
Plastics Group 31,698 1,543 878
Corporate and other - (2,824) 8
-------- -------- --------
Totals $132,072 8,878 $ 2,517
======== ========
Depreciation and amortization(3) (5,467)
Interest expense (7,005)
--------
Loss from continuing operations
before income taxes $ (3,594)
========
Nine months ended
September 30, 2000:
Metals Group:
Bridges and cranes $ 18,657 $ (1,280) $ 1,369
Materials handling systems 38,614 5,873 385
Seamless pressure vessels 22,661 5,634 230
Cylinders 23,838 3,463 48
Leaf springs 2,864 280 28
-------- -------- --------
Subtotal Metals Group 106,634 13,970 2,060
Plastics Group 31,955 2,428 1,086
Corporate and other(4) - 2,560 36
Discontinued operations - - 329
-------- -------- --------
Totals $138,589 18,958 $ 3,511
======== ========
Depreciation and amortization(3) (4,770)
Interest expense (7,930)
Equity in loss of continuing
operations of affiliate (296)
--------
Income from continuing operations
before income taxes $ 5,962
========
- 19 -
(1) EBITDA (earnings before interest, taxes, depreciation and amortization)
is the primary measure used by management in assessing performance.
(2) Corporate and other total assets at September 30, 2001 and December 31,
2000 are primarily comprised of goodwill of $23.5 million and $15.7 million,
respectively, and deferred tax assets of $12.7 million at each date.
(3) Excludes amortization of debt issuance expenses of $60,000 and $469,000
for the three month periods ended September 30, 2001 and 2000, respectively,
and $408,000 and $1,126,000 for the nine month periods ended September 30,
2001 and 2000, respectively, which are included in interest expense.
(4) Corporate and other EBITDA for the three and nine month periods ended
September 30, 2000 include a $4.9 million gain on the sale of the Company's
Irish plastics line of business.
NOTE 8: DISCONTINUED OPERATIONS
In October 2000, the Company sold substantially all of its wine grape
agricultural operations and real estate holdings and classified and began
accounting for the agricultural operations as discontinued operations.
During 1999, Chatwins Group's management adopted plans to exit the
grating manufacturing business and oil and gas business through the
disposition of all of its grating and oil and gas related assets. Upon
adoption of the plans, Chatwins Group classified and began accounting for such
businesses as discontinued operations.
At September 30, 2001 and December 31, 2000, the assets and liabilities
of discontinued operations are comprised primarily of the assets and
liabilities of the discontinued wine grape agricultural business. The
liabilities of discontinued operations at December 31, 2000 also included a
$680,000 note payable due May 1, 2001 related to an industrial development
revenue bond issue by Orem City, Utah, retained by the Company upon the sale
of its domestic grating operations. This note payable was repaid in May 2001.
The assets and liabilities have been separately classified on the balance
sheet as net assets of discontinued operations.
For 2001, there are no results from discontinued operations. For 2000,
results of discontinued operations relate to the Company's discontinued wine
grape agricultural operations. Summarized results of discontinued operations
for the three and nine month periods ended September 30, 2000 follow (in
thousands):
3-Mos. 9-Mos.
-------- --------
Net sales $ 462 $ 1,609
Loss before taxes (157) (513)
The above results of discontinued operations include actual and allocated
interest expense totaling $352,000 and $760,000 for the three and nine month
periods ended September 30, 2000, respectively.
- 20 -
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
The Company owns and operates a diverse group of industrial manufacturing
operations that design and manufacture highly engineered, high-quality
products for specific customer requirements, such as large-diameter seamless
pressure vessels, hydraulic and pneumatic cylinders, precision plastic
components, heavy-duty cranes, bridge structures and materials handling
systems. The Company's customers include original equipment manufacturers and
end-users in a variety of industries, such as transportation, power
generation, chemicals, metals, home electronics, office equipment and consumer
goods. The Company's business units are organized into two operating groups:
The Metals Group designs, manufactures and markets a broad range of
fabricated and machined industrial metal parts and products, including bridge
structures and cranes, materials handling systems, seamless pressure vessels,
cylinders and leaf springs. The Metals Group serves over 5,000 customers,
including original equipment manufacturers and end-users.
The Plastics Group manufactures precision molded plastic parts and
provides engineered plastics services to more than 500 original equipment
manufacturers.
Prior to the third quarter of 2001, the Company considered these groups
to be its reportable segments for financial reporting purposes. Due to the
downturns in the markets for several of the Company's Metals Group product
lines and the resulting significant variation in product line gross margins,
management reevaluated the definition of its segments and has concluded that,
except for the Plastics Group, which will continue to be reported as a single
segment, former Metals Group product lines are now considered to be segments
for financial reporting purposes.
RECENT DEVELOPMENTS AND OTHER MATTERS
Restructuring and Other Actions
As the result of downturns in several of the markets served by the
Company and the resulting decrease in the Company's ability to absorb costs,
management of the Company has determined to develop a plan to restructure its
continuing businesses and dispose of or shut-down certain non-strategic
businesses. These actions will be designed to improve productivity and
operating performance.
[Development of the plan and its approval by the Company's board of
directors is anticipated to be completed by the end of 2001. Once approved,
management of the Company expects to record a charge for restructuring costs
including employee separation costs, facility shut-down and rationalization
costs and asset writedowns.] At this time, a reasonably dependable estimate
of the total amount of the restructuring charge does not exist. [However,
management anticipates that the charge will have a significant impact on the
Company's results of operations for the year and quarter ended December 31,
2001.]
- 21 -
2001 Covenant Compliance
For the quarter ended March 31, 2001 and for each fiscal quarter
thereafter in 2001, the Bank of America (BOA) financing and security agreement
required the Company to maintain a minimum fixed charge coverage ratio of
1.25:1 and maximum funded debt to EBITDA ratios of 3.75:1, 3.50:1, 3.25:1 and
3.00:1.
In April 2001, the Company entered into a letter agreement with Bank of
America whereby, as long as the Company maintained both a fixed charge
coverage ratio of at least 1.00:1 and had a funded debt to EBITDA ratio of no
more than 4.50:1 as of the September 30, 2001 and December 31, 2001
calculation dates, and as long as the Company was in compliance on all other
covenants, the Bank of America would not accelerate any of its loans.
Due to the rate and level of the downturns in several of the markets
served by the Company and the resulting decrease in the Company's ability to
absorb costs, cost cutting and capital expenditure restriction measures taken
by management during the third quarter of 2001 were not enough to achieve
ratio compliance. For the quarter ended September 30, 2001, the Company's
fixed charge coverage ratio was 0.79:1 and the funded debt to EBITDA ratio was
5.61:1. As a result, the Company is in default under its BOA Financing and
Security Agreement.
The Company and Bank of America entered into various amendments to the
BOA financing and security agreement during 2000. The December 12, 2000
amendment required the Company to maintain a minimum availability under the
revolving credit facility of $1.5 million. Through the second quarter of
2001, the Company had complied with this requirement. However, due to the
downturn in several of the markets served by the Company during the third
quarter of 2001 and the resulting decrease in the quality of the Company's
borrowing base, ineligible receivables and inventory increased. Based on the
borrowing base formulas as set forth in the BOA financing and security
agreement, this increase in ineligibles resulted in a decrease in borrowing
availability under the revolving credit facility and the Company's inability
to maintain a minimum availability of $1.5 million. As a result, the Company
is in default under its BOA financing and security agreement.
[The Company is seeking to renegotiate or obtain waivers of its financial
and minimum availability covenants. Although management believes it is
unlikely, in the event that the Company is not able to successfully
renegotiate its covenants or obtain the necessary waivers, the lenders have
various remedies available to them including, but not limited to, acceleration
of all amounts outstanding under the term and revolving credit facilities and
a liquidation of their collateral.]
Semi-Annual Interest on 13% Senior Notes due November 1, 2001
The Company was unable to fund its $1.616 million semi-annual interest
payment on its 13% senior notes as it had insufficient funds available under
its revolving credit facility. Failure to make the November 1 interest
payment is a default under the indenture which supports the 13% senior notes.
Under the terms of the indenture, the Company has thirty days to cure the
default.
Management of the Company has been in contact with certain of the Note
Holders and holders representing approximately ninety percent of the principal
amount of senior notes outstanding have expressed their support of the
Company. [Management of the Company is continuing to work with its secured
lenders as well as other alternative financing sources in an effort to pay the
$1.616 million interest by November 30. Management of the Company currently
- 22 -
believes that it will be able to obtain the necessary funds. However, there
can be no assurance that management will be successful in its efforts.]
Acquisition of NPS Acquisition Corp. and Note Payable Assumption
On January 17, 2001, the Company acquired NPS Acquisition Corp. (f/k/a
Naptech Pressure Systems) from Charles E. Bradley, Sr. (Mr. Bradley), the
Company's chairman of the board and chief executive officer. NPSAC is based
in Clearfield, Utah and manufactures seamless steel pressure vessels, an
existing Metals Group segment.
The purchase price was $10,000 plus the non-cash assumption of $10.3
million of NPSAC's liabilities, including a 15% per annum $6.9 million note
payable to Shaw Group, the former owner of Naptech Pressure Systems and $0.6
million of notes payable to Stanwich Financial Services Corp., a related
party. Simultaneously with the acquisition, Reunion paid Shaw Group $2.0
million of the note payable in cash from funds available under its revolving
credit facility with Bank of America (BOA). The remainder of the note payable
of $4.9 million was then restructured to include quarterly principal payments
of $0.6 million for eight quarters which began on February 28, 2001. Reunion
made the first two payments from funds available under its revolving credit
facility. The Company was unable to fund the third payment due August 31,
2001 as it had insufficient funds available under its revolving credit
facility. The note is unsecured and subordinate to the BOA term loan and
revolving credit facilities.
The estimated fair value of assets acquired included approximately $1.4
million of cash, receivables, inventories and other current assets,
approximately $0.3 million of fixed assets and $1.3 million of deferred tax
assets which are fully reserved by a valuation allowance. The purchase price
in excess of net assets acquired of $8.6 million was recorded as goodwill and
is being amortized over 15 years. NPSAC's deferred tax assets are comprised
primarily of net operating losses.
Repayment of $120,000 of 13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
As such, on June 1, 2000 Reunion made the required offer to purchase
$2,525,000 of senior notes, of which holders of only $120,000 of senior notes
tendered. However, the $25.0 million of 13% senior notes repaid from the
merger proceeds was applied against Reunion's obligations for sinking fund
payments and the purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
- 23 -
Therefore, $120,000 principal amount of 13% senior notes was repaid by
the Company on May 1, 2001 from funds available under its revolving credit
facility.
Of the remaining $24.855 million of senior notes, $12.5 million is
scheduled to be repaid in May 2002 and $12.355 million is scheduled to be
repaid in May 2003. [Management does not expect to have the internally
generated liquidity necessary to fund the May 1, 2002 sinking fund payment and
is in the process of investigating various refinancing and repayment
scenarios. Such scenarios involve not only mezzanine or additional term debt,
which could potentially include warrants, but also involve other
considerations such as a sale of assets. If the Company is unable to make its
May 2002 sinking fund payment, the Company will be in default under the
indenture for the senior notes which could result in the acceleration of all
amounts due under the senior notes, including all principal and accrued but
unpaid interest.]
Solicitation of Consent of Senior Noteholders
The Company is required to make sinking fund payments on its $24.855
million of senior notes of $12.5 million on May 1, 2002 and $12.355 million on
May 1, 2003. On September 4, 2001, the Company solicited the consent of its
senior noteholders to extend the sinking fund payment dates by two years. The
solicitation expired on November 2, 2001. As part of the solicitation, the
Company reserved the right to terminate it if holders of less than $22.0
million principal amount of senior notes consented. The Company has exercised
its right to terminate the solicitation.
Additional Shares of Reunion Common Stock
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The merger agreement also provided that up
to an additional 500,000 shares of Reunion common stock would be issued to
former Chatwins Group common stockholders if the former Chatwins Group
businesses and the acquired Kingway business achieve specified performance
levels in 2000. A determination of the number of shares to be issued was made
by the board of directors at its meeting held on May 15, 2001. Such
additional shares totaled 348,995 and were issued on May 29, 2001. The
closing price of Reunion's common stock on that date was $1.30 per share. The
issuance of the additional shares was recorded as a merger purchase price
adjustment to goodwill.
Payment of $680,000 Industrial Revenue Development Bonds
Upon the sale of its domestic grating operations in September 1999, the
Company retained an obligation for a $680,000 note payable due May 1, 2001
related to an industrial development revenue bond issue by Orem City, Utah.
This note payable was repaid in May 2001 from funds available under the
Company's revolving credit facility.
- 24 -
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 Compared to
Three Months Ended September 30, 2000
Metals Group
Metals Group net sales and gross margins for the third quarters of 2001
and 2000 are as follows. Third quarter 2000 seamless pressure vessels sales
and margins are pro forma as though the acquisition of NPSAC occurred at the
beginning of 2000.
Net Sales Gross Margin
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Bridges and cranes $ 3,247 $ 5,802 (51.8%) (6.2%)
Materials handling systems 13,827 14,128 19.9% 24.4%
Seamless pressure vessels 8,042 8,648 25.1% 28.1%
Cylinders 4,246 6,938 6.1% 22.9%
Leaf springs 657 793 8.2% 17.7%
--------- --------- --------- ---------
Metals Group totals $ 30,019 $ 36,309 11.3% 20.0%
========= ========= ========= =========
Order levels in the bridges and cranes segment have dropped off
significantly as the steel industry continues to respond to foreign steel
imports by reducing large capital project spending. The resulting decrease in
sales, coupled with losses on existing bridge contracts due to back-charges
stemming from product quality issues and late deliveries, have had a
significant negative impact on gross margin. Materials handling systems sales
are only slightly below last year's third quarter. However, a shift in
product mix towards lower margin structural racking resulted in a decrease in
gross margin. Seamless pressure vessel sales are down 7% from the year-ago
third quarter due to the softness in the microchip and computer industry.
Gross margin has been affected by the decrease in volume and a change in
product mix. Sales of cylinders continues to be affected by a downturn in
this market, [a trend which the Company believes will continue into 2002.]
Gross margin has been affected accordingly as the decreased volume has
significantly impact this segment's ability to absorb costs. Sales of leaf
springs in the third quarter 2001 continued to be impacted by the economic
downturn as consumers decreased spending on recreational items, particularly
in the marine market, [a trend management anticipates will continue into
2002].
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation. EBITDA and EBITDA as a percentage of sales decreased
significantly during the 2001 third quarter compared to the pro forma 2000
third quarter primarily due to the same factors affecting gross profit margin
discussed above.
Plastics Group
Plastics Group sales for the third quarter of 2001 totaled $8.7 million,
compared to $13.3 million in the third quarter of 2000, a decrease of $4.6
million. Third quarter 2000 Plastics Group sales included $1.8 million from
its former Irish plastics subsidiary which the Company sold in the 2000 third
quarter. On a proforma basis, Plastic Group 2000 sales excluding sales of the
Irish business would be $11.5 million, indicating a $2.8 million decrease
quarter-to-quarter. This decrease in revenues is the continuation into 2001
of a trend which began in 1999 and resulted from several factors, including
certain customers relocating manufacturing operations to Mexico and Asia,
reduced customer orders for continuing programs, end of product cycles and
- 25 -
delays in new program starts, which affected all Plastics Group facilities.
[This trend in Plastics Group revenue could continue into 2002.]
Plastics Group gross profit for the third quarter of 2001 was $847,000,
or 9.7%, compared to $1.9 million, or 13.9%, for the third quarter of 2000.
Third quarter 2000 Plastics Group gross profit included $205,000 from its
former Irish plastics subsidiary which the Company sold in the 2000 third
quarter. On a proforma basis, Plastic Group third quarter 2000 gross profit
excluding the gross profit of the Irish business would be $1.6 million,
indicating a $0.8 million decrease quarter-to-quarter. This decrease in gross
profit is directly related to the decreasing trend in sales, resulting in
inefficiencies and the inability to absorb fixed overheads. [Depending on
future sales volumes, the declining trend in gross margin could continue.]
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation. EBITDA and EBITDA as a percentage of sales decreased during
the 2001 third quarter compared to the pro forma 2000 third quarter primarily
due to the same factors affecting gross profit margin discussed above.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the third quarter
of 2001 were $5.4 million, compared to $6.2 million for the third quarter of
2000, a decrease of $0.8 million. Third quarter 2000 proforma SGA as if the
Irish plastics business was sold and NPSAC was acquired at the beginning of
2000 would be $6.1 million, a $0.7 million decrease quarter-to-quarter. This
decrease in SGA is directly related to the decreasing trend in sales,
resulting in lower commissions expense, and cost cutting measures taken during
June 2001, which included personnel reductions in sales and administration.
The cost of these reductions was inconsequential as the Company paid no
severance packages and retained no post-severance obligations related to these
reductions. [Management estimates the savings from these reductions to be
approximately $1.0 million annually.] However, the benefits of these cost
cutting measures are being offset by the continuation of the negative trend in
sales and the resulting effect on the Company's ability to absorb costs. SGA
expenses as a percentage of sales increased to 14.0% for the 2001 third
quarter compared to 12.4% on a proforma basis in the 2000 third quarter. SGA
as a percentage of sales was higher in the 2001 third quarter compared to 2000
due to the faster rate at which volume has decreased compared to decreases in
fixed administrative costs.
Other Expense
Other expense for the third quarter of 2001 was $0.6 million, compared to
other income of $4.9 million for the third quarter of 2000. The third quarter
2000 includes a gain of $4.9 million from the sale of the Irish plastics
business. Excluding this gain, other expenses increased $0.6 million. The
increase in other expense in the third quarter of 2001 compared to 2000 is the
result of an increase in goodwill amortization as the result of the $8.6
million of goodwill created in the NPSAC acquisition in January 2001 compared
to no such amortization in the 2000 third quarter and a higher level of other
income in the 2000 third quarter, primarily from scrap sales. There were no
other individually significant or offsetting items in either of the third
quarters of 2001 or 2000.
Interest Expense
Interest expense, net, for the third quarter of 2001 was $2.3 million,
compared to $2.9 million for the third quarter of 2000, a decrease of $0.6
million. The decrease in interest expense reflects the lower level of debt of
the Company as the result of the $29.5 million of cash proceeds generated
through asset sales during the second half of 2000 partially offset by the
- 26 -
debt assumed in the NPSAC acquisition. The decrease in interest expense is
also the result of the lower interest rates on the Company's Bank of America
facilities due to the many rate reductions by the Federal Reserve after June
2000. [The Company anticipates that interest expense for 2001 will continue
to decrease compared to 2000 due to the lower debt level as the result of the
$29.5 million of cash proceeds generated through asset sales during the second
half of 2000 and the decrease in prime lending rates during 2001.] However,
during the third quarter the rate paid by the Company under its revolving
credit facility with BOA increased 200 basis points due to the Company's
default status under the BOA financing and security agreement.
Income Taxes
There was a tax benefit from continuing operations of $1.3 million for
the third quarter of 2001 compared to a nominal tax provision for the third
quarter of 2000. The effective tax rate of just over 32% in the 2001 third
quarter is lower than the statutory rate due to permanent differences between
book and tax operating results, primarily non-deductible goodwill. The
effective tax rate in the 2000 third quarter is significantly lower than the
statutory rate as the valuation allowance against deferred tax assets related
to the Company's net operating loss carryforwards was reduced for the tax
effect of the $4.9 million gain on sale of the Irish plastics business.
Discontinued Operations
There was a loss from discontinued operations during the third quarter of
2000 of $337,000 related to the discontinued wine grape agricultural
operations.
Extraordinary Items
The loss from extraordinary items in the 2000 third quarter of $80,000,
net of $-0- taxes, represents the write-offs of deferred financing costs
related to the early repayment of the Company's term loan B with BOA in August
2000 with the proceeds form the sale of the Company's Irish plastics business.
Nine Months Ended September 30, 2001 Compared to
Nine Months Ended September 30, 2000
Metals Group
Metals Group net sales and gross margins for the third quarters of 2001
and 2000 are as follows. Year 2000 materials handling systems sales and
margins are pro forma as though the acquisition of Kingway occurred at the
beginning of 2000. Year 2000 seamless pressure vessels sales and margins are
pro forma as though the acquisition of NPSAC occurred at the beginning of
2000.
Net Sales Gross Margin
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Bridges and cranes $ 12,625 $ 18,657 (11.5%) 0.5%
Materials handling systems 38,999 42,268 22.8% 23.9%
Seamless pressure vessels 30,695 25,033 28.7% 29.8%
Cylinders 15,776 23,838 12.9% 22.9%
Leaf springs 2,279 2,864 10.0% 20.8%
--------- --------- --------- ---------
Metals Group totals $ 100,374 $ 112,660 18.5% 20.0%
========= ========= ========= =========
Order levels in the bridges and cranes segment have dropped off
significantly as the steel industry continues to respond to foreign steel
- 27 -
imports by reducing large capital project spending. The resulting decrease in
sales, coupled with losses on existing bridge contracts due to back-charges
stemming from product quality issues and late deliveries, have had a
significant negative impact on gross margin. Materials handling systems sales
are below last year's first three quarters as large retailers have held back
on large warehouse and distribution center projects due to a softening in
retail spending by consumers. Also, competitive pressures in the material
handling systems segment have resulted in a decrease in cents per pound sales
prices. A shift in product mix towards lower margin structural racking
resulted in a decrease in gross margin. The increase in pressure vessel sales
in the first nine months of 2001 compared to 2000 was due to a strong order
levels in that product line towards the end of 2000, the backlog for which at
the end of 2000 was $8.6 million higher than at the end of 1999, and the
recognition of $2.8 million of revenues on a large NASA contract relating to
pressure vessels produced in the fourth quarter of 2000 but not received by
NASA until the first quarter of 2001. Gross margin has been affected by a
change in product mix. Sales of cylinders continues to be affected by a
downturn in this market, [a trend which the Company believes will continue
into 2002.] Gross margin has been affected accordingly as the decreased
volume has significantly impact this segment's ability to absorb costs. Sales
of leaf springs in the first nine months of 2001 continued to be impacted by
the economic downturn as consumers decreased spending on recreational items,
particularly in the marine market, [a trend management anticipates will
continue into 2002].
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation. EBITDA and EBITDA as a percentage of sales decreased
significantly during the first nine months of 2001 compared to the pro forma
2000 primarily due to the same factors affecting gross profit margin discussed
above.
Plastics Group
Plastics Group sales for the first nine months of 2001 totaled $31.7
million, compared to $32.0 million in the first nine months of 2000. Year-to-
date 2000 Plastics Group sales included $5.0 million from its former Irish
plastics subsidiary which the Company sold in the 2000 third quarter but
excluded $11.3 million of sales from the pre-March 16, 2000 merger period. On
a proforma basis assuming these events occurred at the beginning of 2000,
Plastic Group 2000 sales would be $38.3 million, indicating a $6.6 million
decrease year-to-year. This decrease in revenues is the continuation into
2001 of a trend which began in 1999 and resulted from several factors,
including certain customers relocating manufacturing operations to Mexico and
Asia, reduced customer orders for continuing programs, end of product cycles
and delays in new program starts, which affected all Plastics Group
facilities. [This trend in Plastics Group revenue could continue into 2002.]
Plastics Group gross profit for the first nine months of 2001 was $4.3
million, or 13.5%, compared to $4.9 million, or 15.2%, for the first nine
months of 2000. On a proforma basis for the events described above Plastics
Group gross profit and margin would be $5.9 million, or 15.5%. The decrease
in gross profit is directly related to the decreasing trend in sales,
resulting in inefficiencies and the inability to absorb fixed overheads.
[Depending on future sales volumes, the declining trend in gross margin could
continue.]
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation. EBITDA and EBITDA as a percentage of sales decreased
significantly during the first nine months of 2001 compared to the pro forma
2000 primarily due to the same factors affecting gross profit margin discussed
above.
- 28 -
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first nine
months of 2001 were $17.6 million, compared to $16.7 million for the first
nine months of 2000. Had the merger, the acquisitions of Kingway and NPSAC
and the sale of the Company's Irish plastics business occurred at the
beginning of 2000, SGA for the first nine months of 2000 would have been $18.0
million, indicating a pro forma decrease of $0.4 million. This decrease in
SGA is directly related to the decreasing trend in sales, resulting in lower
commissions expense, and cost cutting measures taken during June 2001, which
included personnel reductions in sales and administration. The cost of these
reductions was inconsequential as the Company paid no severance packages and
retained no post-severance obligations related to these reductions.
[Management estimates the savings from these reductions to be approximately
$1.0 million annually.] However, the benefits of these cost cutting measures
are being offset by the continuation of the negative trend in sales and the
resulting effect on the Company's ability to absorb costs. SGA expenses as a
percentage of sales increased to 13.3% for the first nine months of 2001
compared to 11.9% on a proforma basis in the 2000 period. SGA as a percentage
of sales was higher in the 2001 period compared to 2000 due to the faster rate
at which volume has decreased compared to decreases in fixed administrative
costs.
Other Expense
Other expense for the first nine months of 2001 was $1.8 million,
compared to other income of $4.3 million for the first nine months of 2000.
Excluding the $4.9 million gain on sale of the Irish plastics business, other
expenses would be 0.6 million, a net increase of $1.2 million. The increase
in other expense in the first nine months of 2001 compared to 2000 is the
result of an increase in goodwill amortization. The first nine months of 2001
includes a full three quarters of goodwill amortization related to the merger,
Kingway acquisition and NPSAC acquisition compared to the approximate six-and-
one-half month post-merger and Kingway acquisition period in the 2000 first
nine months and no goodwill amortization related to the NPSAC goodwill.
Except for goodwill amortization, there were no individually significant or
offsetting items in either of the first nine months of 2001 or 2000.
Interest Expense
Interest expense, net, for the first nine months of 2001 was $7.0
million, compared to $7.9 million for the first nine months of 2000, a
decrease of $0.9 million. The decrease in interest expense reflects the lower
level of debt of the Company as the result of the $29.5 million of cash
proceeds generated through asset sales during the second half of 2000
partially offset by the debt assumed in the NPSAC acquisition. The decrease
in interest expense is also the result of the lower interest rates on the
Company's Bank of America facilities due to the many rate reductions by the
Federal Reserve after June 2000. [The Company anticipates that interest
expense for 2001 will continue to decrease compared to 2000 due to the lower
debt level as the result of the $29.5 million of cash proceeds generated
through asset sales during the second half of 2000 and the decrease in prime
lending rates during 2001]. However, during the third quarter the rate paid
by the Company under its revolving credit facility with BOA increased 200
basis points due to the Company's default status under the BOA financing and
security agreement.
Equity Results
Equity in loss of continuing operations of affiliate in the first nine
months of 2000 represents Chatwins Group's pre-merger share of Reunion's loss
from continuing operations in that period.
- 29 -
Income Taxes
There was a tax benefit from continuing operations of $1.1 million for
the first nine months of 2001 compared to a tax benefit of $0.3 million for
the first nine months of 2000. The effective tax rate of almost 32% in the
2001 first nine months is lower than the statutory rate due to permanent
differences between book and tax operating results, primarily non-deductible
goodwill. The effective tax rate in the 2000 third quarter is significantly
lower than the statutory rate as the valuation allowance against deferred tax
assets related to the Company's net operating loss carryforwards was reduced
for the tax effects of the $4.9 million gain on sale of the Irish plastics
business and the extraordinary items discussed below.
Discontinued Operations
There was a loss from discontinued operations during the first nine
months of 2000 of $0.8 million related to the discontinued wine grape
agricultural operations.
Extraordinary Items
The losses from extraordinary items in the first nine months of 2000 of
$1.9 million, net of $-0- taxes, represents the pre-merger write-offs of
deferred financing costs at both Chatwins Group and pre-merger Reunion and
fees related to the early repayment of the Company's term loan B with BOA in
August 2000 with the proceeds form the sale of the Company's Irish plastics
business.
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 arrangement. Although the Company
operates in relatively mature markets, [it intends to continue to invest in
and grow its businesses through selected capital expenditures as cash
generation permits.]
RECENT DEVELOPMENTS AND OTHER MATTERS
Restructuring and Other Actions
As the result of downturns in several of the markets served by the
Company and the resulting decrease in the Company's ability to absorb costs,
management of the Company has determined to develop a plan to restructure its
continuing businesses and dispose of or shut-down certain non-strategic
businesses. These actions will be designed to improve productivity and
operating performance.
[Development of the plan and its approval by the Company's board of
directors is anticipated to be completed by the end of 2001. Once approved,
management of the Company expects to record a charge for restructuring costs
including employee separation costs, facility shut-down and rationalization
costs and asset writedowns.] At this time, a reasonably dependable estimate
of the total amount of the restructuring charge does not exist. [However,
- 30 -
management anticipates that the charge will have a significant impact on the
Company's results of operations for the year and quarter ended December 31,
2001.]
2001 Covenant Compliance
For the quarter ended March 31, 2001 and for each fiscal quarter
thereafter in 2001, the BOA financing and security agreement required the
Company to maintain a minimum fixed charge coverage ratio of 1.25:1 and
maximum funded debt to EBITDA ratios of 3.75:1, 3.50:1, 3.25:1 and 3.00:1.
In April 2001, the Company entered into a letter agreement with Bank of
America whereby, as long as the Company maintained both a fixed charge
coverage ratio of at least 1.00:1 and had a funded debt to EBITDA ratio of no
more than 4.50:1 as of the September 30, 2001 and December 31, 2001
calculation dates, and as long as the Company was in compliance on all other
covenants, the Bank of America would not accelerate any of its loans.
Due to the rate and level of the downturns in several of the markets
served by the Company and the resulting decrease in the Company's ability to
absorb costs, cost cutting and capital expenditure restriction measures taken
by management during the third quarter of 2001 were not enough to achieve
ratio compliance. For the quarter ended September 30, 2001, the Company's
fixed charge coverage ratio was 0.79:1 and the funded debt to EBITDA ratio was
5.61:1. As a result, the Company is in default under its BOA Financing and
Security Agreement.
The Company and Bank of America entered into various amendments to the
BOA financing and security agreement during 2000. The December 12, 2000
amendment required the Company to maintain a minimum availability under the
revolving credit facility of $1.5 million. Through the second quarter of
2001, the Company had complied with this requirement. However, due to the
downturn in several of the markets served by the Company during the third
quarter of 2001 and the resulting decrease in the quality of the Company's
borrowing base, ineligible receivables and inventory increased. Based on the
borrowing base formulas as set forth in the BOA financing and security
agreement, this increase in ineligibles resulted in a decrease in borrowing
availability under the revolving credit facility and the Company's inability
to maintain a minimum availability of $1.5 million. As a result, the Company
is in default under its BOA financing and security agreement.
[The Company is seeking to renegotiate or obtain waivers of its financial
and minimum availability covenants. Although management believes it is
unlikely, in the event that the Company is not able to successfully
renegotiate its covenants or obtain the necessary waivers, the lenders have
various remedies available to them including, but not limited to, acceleration
of all amounts outstanding under the term and revolving credit facilities and
a liquidation of its collateral.]
Semi-Annual Interest on 13% Senior Notes due November 1, 2001
The Company was unable to fund its $1.623 million semi-annual interest
payment on its 13% senior notes as it had insufficient funds available under
its revolving credit facility. Failure to make the November 1 interest
payment is a default under the indenture which supports the 13% senior notes.
Under the terms of the indenture, the Company has thirty days to cure the
default.
- 31 -
Management of the Company has been in contact with certain of the Note
Holders and holders representing approximately ninety percent of the principal
amount of senior notes outstanding have expressed their support of the
Company. [Management of the Company is continuing to work with its secured
lenders as well as other alternative financing sources in an effort to pay the
$1.616 million interest by November 30. Management of the Company currently
believes that it will be able to obtain the necessary funds. However, there
can be no assurance that management will be successful in its efforts.]
Acquisition of NPS Acquisition Corp. and Note Payable Assumption
On January 17, 2001, the Company acquired NPS Acquisition Corp. (f/k/a
Naptech Pressure Systems) from Charles E. Bradley, Sr. (Mr. Bradley), the
Company's chairman of the board and chief executive officer. NPSAC is based
in Clearfield, Utah and manufactures seamless steel pressure vessels, an
existing Metals Group segment.
The purchase price was $10,000 plus the non-cash assumption of $10.3
million of NPSAC's liabilities, including a 15% per annum $6.9 million note
payable to Shaw Group, the former owner of Naptech Pressure Systems and $0.6
million of notes payable to Stanwich Financial Services Corp., a related
party. Simultaneously with the acquisition, Reunion paid Shaw Group $2.0
million of the note payable in cash from funds available under its revolving
credit facility with Bank of America (BOA). The remainder of the note payable
of $4.9 million was then restructured to include quarterly principal payments
of $0.6 million for eight quarters which began on February 28, 2001. Reunion
made the first two payments from funds available under its revolving credit
facility. The Company was unable to fund the third payment due August 31,
2001 as it had insufficient funds available under its revolving credit
facility. The note is unsecured and subordinate to the BOA term loan and
revolving credit facilities.
The estimated fair value of assets acquired included approximately $1.4
million of cash, receivables, inventories and other current assets,
approximately $0.3 million of fixed assets and $1.3 million of deferred tax
assets which are fully reserved by a valuation allowance. The purchase price
in excess of net assets acquired of $8.6 million was recorded as goodwill and
is being amortized over 15 years. NPSAC's deferred tax assets are comprised
primarily of net operating losses.
Repayment of $120,000 of 13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
As such, on June 1, 2000 Reunion made the required offer to purchase
$2,525,000 of senior notes, of which holders of only $120,000 of senior notes
tendered. However, the $25.0 million of 13% senior notes repaid from the
- 32 -
merger proceeds was applied against Reunion's obligations for sinking fund
payments and the purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
Therefore, $120,000 principal amount of 13% senior notes was repaid by
the Company on May 1, 2001 from funds available under its revolving credit
facility.
Of the remaining $24.855 million of senior notes, $12.5 million is
scheduled to be repaid in May 2002 and $12.355 million is scheduled to be
repaid in May 2003. [Management does not expect to have the internally
generated liquidity necessary to fund the May 1, 2002 sinking fund payment and
is in the process of investigating various refinancing and repayment
scenarios. Such scenarios involve not only mezzanine or additional term debt,
which could potentially include warrants, but also involves other
considerations such as a sale of assets. If the Company is unable to make its
May 2002 sinking fund payment obligation, the Company will be in default under
the indenture for the senior notes which could result in the acceleration of
all amounts due under the senior notes, including all principal and accrued
but unpaid interest.]
Solicitation of Consent of Senior Noteholders
The Company is required to make sinking fund payments on its $24.855
million of senior notes of $12.5 million on May 1, 2002 and $12.355 million on
May 1, 2003. On September 4, 2001, the Company solicited the consent of its
senior noteholders to extend the sinking fund payment dates by two years. The
solicitation expired on November 2, 2001. As part of the solicitation, the
Company reserved the right to terminate it if holders of less than $22.0
million principal amount of senior notes consented. The Company has exercised
its right to terminate the solicitation.
Additional Shares of Reunion Common Stock
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The merger agreement also provided that up
to an additional 500,000 shares of Reunion common stock would be issued to
former Chatwins Group common stockholders if the former Chatwins Group
businesses and the acquired Kingway business achieve specified performance
levels in 2000. A determination of the number of shares to be issued was made
by the board of directors at its meeting held on May 15, 2001. Such
additional shares totaled 348,995 and were issued on May 29, 2001. The
closing price of Reunion's common stock on that date was $1.30 per share. The
issuance of the additional shares was recorded as a merger purchase price
adjustment to goodwill.
Payment of $680,000 Industrial Revenue Development Bonds
Upon the sale of its domestic grating operations in September 1999, the
Company retained an obligation for a $680,000 note payable due May 1, 2001
related to an industrial development revenue bond issue by Orem City, Utah.
This note payable was repaid in May 2001 from funds available under the
- 33 -
Company's revolving credit facility.
SUMMARY OF 2001 ACTIVITIES
Cash and cash equivalents totaled $1.3 million at September 30, 2001.
During the first nine months of 2001, cash and cash equivalents decreased $1.2
million, with $2.9 million used in operations, $2.5 million used in investing
activities and $4.2 million provided by financing activities.
Operating Activities
Cash used of $2.9 million for operating activities in the first nine
months of 2001 was the result of an increase in net working capital, primarily
reductions in trade payables and other current liabilities, and the funding of
operating losses.
Investing Activities
Capital expenditures were $2.5 million, including $1.6 million in the
Metals Group and $0.9 million in the Plastics Group.
Financing Activities
To fund capital expenditures, operating losses, the decreases in trade
payables and other current liabilities, the $2.0 million payment to Shaw Group
at the date of the NPSAC acquisition and principal payments on debt, the
Company made a net increase in borrowings under its revolving credit facility
of $8.0 million and $0.5 million under its capital expenditure facility.
Principal payments on debt totaled $4.3 million including $2.8 million of term
loan A, $1.2 million of the Shaw Group note payable and $0.3 million of other
debt, primarily $120,000 of senior notes, $123,000 of capital expenditure
facility repayments, a $48,000 final payment on a note payable related to the
Metals Group and various capital lease and small business loan obligations.
FACTORS AFFECTING CURRENT AND FUTURE LIQUIDITY
During the third quarter of 2001, the Company experienced downturns in
several of the markets it serves resulting in a decrease in the Company's
ability to absorb costs and a decrease in the quality of its borrowing base
due to an increase in ineligible receivables and inventory. Based on the
borrowing base formulas as set forth in the BOA financing and security
agreement, this increase in ineligibles resulted in a decrease in borrowing
availability under the revolving credit facility. These events have had a
significant adverse effect on the Company's ability to meet its obligations.
Although management of the Company is currently in the process of
developing a restructuring plan, including the disposition of non-strategic
businesses, which will be designed to improve productivity and operating
performance, [the benefits of its implementation may not materialize for
several quarters]. At the same time, the Company has immediate and near-term
obligations.
[Management of the Company is currently pursuing several scenarios in
order to alleviate the current and future strain on liquidity, including a
sale of assets and/or new financing. However, no assurances can be given that
such pursuits will be successful and that, if unsuccessful, the Company may
not be able to meet its immediate and near-term obligations.]
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risk factors which
affect the Company since the end of the preceding fiscal year.
- 34 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are defendants in a number of lawsuits
and administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. The Company believes that any
material liability which can result from any of such lawsuits or proceedings
has been properly reserved for in the Company's consolidated financial
statements or is covered by indemnification in favor of the Company or its
subsidiaries, and therefore the outcome of these lawsuits or proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended. There is no applicable insurance coverage.
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit is in the initial stages of discovery. Reunion
intends to vigorously contest the suit.
The Company has been named as a defendant in fifteen consolidated
lawsuits filed in December 2000 or early 2001 in the Superior Court for Los
Angeles County, California, three of which are purported class actions
asserted on behalf of approximately 200 payees. The plaintiffs in these suits
except one are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC are related parties.
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Bradley, the sole shareholder of SFSC's parent, several
major financial institutions and certain others. All of these suits arise out
of the inability of SFSC to make structured settlement payments when due.
Pursuant to the court's order, plaintiffs in the purported class actions and
plaintiffs in the individual cases actions filed a model complaint. Except
for the class allegations, the two model complaints are identical. The
plaintiffs seek compensatory and punitive damages, restoration of certain
alleged trust assets, restitution and attorneys' fees and costs.
The plaintiffs in one of the suits are former owners of a predecessor of
SFSC and current operators of a competing structured settlement business.
These plaintiffs claim that their business and reputations have been damaged
by SFSC's structured settlement defaults, seek damages for unfair competition
and purport to sue on behalf of the payees.
The plaintiffs allege that the Company borrowed funds from SFSC and has
not repaid these loans. The plaintiffs' theories of liability against the
Company are that it is the alter ego of SFSC and Mr. Bradley and that the
- 35 -
Company received fraudulent transfers of SFSC's assets. The plaintiffs also
assert direct claims against the Company for inducing breach of contract and
aiding and abetting an alleged breach of fiduciary duty by SFSC.
On May 25, 2001, SFSC filed a chapter 11 bankruptcy petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. As a result of this
restraining order of the bankruptcy court, the Company entered a standstill
agreement with the plaintiffs on August 22, 2001. Pursuant to the standstill
agreement, and the stipulation of the parties to the SFSC bankruptcy case, the
plaintiffs agreed to take no further action to prosecute any claim in the
litigation against the Company, Mr. Bradley and others to recover any
structured settlement trust assets or any derivative claims or claims based on
allegations of alter ego, fraudulent transfer or conversion. The plaintiffs
did not agree to waive or release their direct personal claims against the
Company for damages, but the plaintiffs agreed to cease and desist the
prosecution of those claims until no earlier than sixty days following service
of written notice to the Company stating that they have elected to
unilaterally terminate the standstill agreement.
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. Both model complaints allege causes of
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted cross-
complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
vigorously defend against these actions and cross-actions.
The Company has been named in approximately 195 separate asbestos suits
filed since January 1, 2001 by two plaintiffs' law firms in Wayne County,
Michigan. The claims allege that cranes from the Company's crane
manufacturing location in Alliance, OH were present in various parts of
McLouth Steel Mill in Wayne County, Michigan and that those cranes contained
asbestos to which plaintiffs were exposed over a 40 year span. As of the date
of this report, counsel for the Company has filed an answer to each complaint
denying liability by the Company and asserting all alternative defenses
permitted under the Court's Case Management Order. Counsel for the Company
has negotiated dismissal of 95 cases without any 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 manufacturers
provided products containing asbestos. The Company intends to vigorously
defend against these lawsuits.
On July 10, 2001, a lawsuit that alleges personal injury from asbestos
exposure was filed in the Superior Court for San Francisco County in
California against greater than fifty defendants, including Oneida Rostone
Corporation (ORC), pre-merger Reunion's Plastics subsidiary and the Company's
Plastics Group. In October 2001, Allen-Bradley Company, a former owner of the
Rostone business of ORC, agreed to defend and indemnify Reunion in this
lawsuit pursuant to a contractual obligation to do so.
- 36 -
Item 3. Defaults Upon Senior Securities
Debt in default consists of the following (in thousands):
At September 30,
2001
----------------
(unaudited)
13% senior notes (net of unamortized
discount of $5) $ 24,850
BOA revolving credit facility 27,358
BOA term loan A due March 16, 2007 16,993
BOA capital expenditure facility 1,051
--------
Total debt in default $ 70,252
========
13% Senior Notes
The Company was unable to make its November 1, 2001 semi-annual interest
payment of $1.616 million on its 13% Senior Notes due 2003 due to lack of
available funds under its revolving credit facility.
Failure to make the November 1 interest payment is a default under the
indenture which supports the 13% Senior Notes. Under the terms of the
indenture, the Company has thirty days to cure the default.
BOA Financing and Security Agreement
In April 2001, the Company entered into a letter agreement with Bank of
America whereby the Company was required to maintain both a fixed charge
coverage ratio of at least 1.00:1 and a funded debt to EBITDA ratio of no more
than 4.50:1 as of the September 30, 2001 and December 31, 2001 calculation
dates. For the quarter ended September 30, 2001, the Company's fixed charge
coverage ratio was 0.79:1 and the funded debt to EBITDA ratio was 5.61:1. As
a result, the Company is in default under its BOA financing and security
agreement.
The Company and Bank of America entered into various amendments to the
BOA financing and security agreement during 2000. The December 12, 2000
amendment required the Company to maintain a minimum availability under the
revolving credit facility of $1.5 million. Due to the downturn in several of
the markets served by the Company during the third quarter of 2001 and the
resulting decrease in the quality of the Company's borrowing base, the Company
was unable to maintain a minimum availability of $1.5 million. As a result,
the Company is in default under its BOA financing and security agreement.
- 37 -
Item 5. Other Information
On June 14, 2000, the Company's Board of Directors approved the exchange
of its Series A and Series B preferred stocks for 3,245,515 shares of the
Company's common stock at an exchange price of $5.00 per share. The Series A
and Series B preferred stocks were issued in connection with the March 16,
2000 merger with Chatwins Group and acquisition of Kingway, and had an
aggregate liquidation value of $16.2 million. The closing market price of
Reunion's common stock was $1.00 on that date.
The Series A preferred stock was issued to holders of Chatwins Group's
Class D, Series A, B and C preferred stock in exchange for their shares.
Since its incorporation on May 12, 1988, Chatwins Group has had several
classes of preferred stock outstanding. Since that time, Chatwins Group made
liquidation value and dividend accretions totaling $15.0 million recorded as
charges to retained earnings. Of the $15.0 million of such charges, $12.5
million related to its Class D, Series A, B and C preferred stock. Since May
12, 1988, Chatwins Group made payments for redemptions and dividends totaling
$3.5 million related to such preferred stock. Accordingly, $9.0 million of
such charges on its Class D, Series A, B and C preferred stock remained
unpaid.
Because Chatwins Group was considered the acquirer in the merger, Reunion
Industries' accumulated deficit at September 30, 2001 is primarily comprised
of the historical activity of Chatwins Group which includes its historical
results of operations, dividends declared and paid and the $9.0 million of
unpaid liquidation value and dividend accretions. As such, the merged
Reunion's accumulated deficit is largely a legacy of the former Chatwins
Group's preferred stock accretions. The following supplemental disclosure of
the components of the $5.7 million accumulated deficit at September 30, 2001
separates operating results from preferred stock accretions and dividends paid
(in 000's):
Components
of Reunion's
Accumulated
Deficit
------------
Accumulated deficit on May 12, 1988 (date of
incorporation of Chatwins Group) $ (13)
Cumulative net income 9,809
Preferred stock liquidation accretions, all classes (7,728)
Preferred stock dividend accretions, all classes (7,293)
Dividends paid (435)
--------
Accumulated deficit at September 30, 2001 $ (5,660)
========
- 38 -
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
Third Quarter 2001:
-------------------
None.
Fourth Quarter 2001:
--------------------
On November 8, 2001, the Company filed a Current Report
on Form 8-K dated November 1, 2001 to report under Items 5
and 7 that the Company delayed payment of its semi-annual
interest payment on its senior notes of $1.616 million due
November 1, 2001 and to file the related press release as
an exhibit.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Date: November 14, 2001 REUNION INDUSTRIES, INC.
----------------- (Registrant)
By: /s/ Kimball J. Bradley
-------------------------------
Kimball J. Bradley
President and Chief
Operating Officer
By: /s/ John M. Froehlich
-------------------------------
John M. Froehlich
Executive Vice President, Finance
and Chief Financial Officer
(chief financial and accounting officer)
- 39 -