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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, 2003
------------------
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.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400
PITTSBURGH, PENNSYLVANIA 15222
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
At November 14, 2003, 16,278,579 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 39 pages.
Exhibit index is on page 36.
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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. All forward-looking statements involve risks
and uncertainties which could cause the future results and shareholder values
to differ materially from those expressed in the forward-looking statements.
Although the Company believes that the assumptions underlying the
forward-looking statements contained in this report are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurances
that the forward-looking statements included or incorporated by reference in
this report will prove to be accurate. Factors that could cause actual
results to differ materially from those described in the forward-looking
statements include, without limitation, the strengths/weaknesses of the
Company's primary markets, the Company's ability to negotiate trade terms with
its vendors, the continued forbearance of the Company's creditors with respect
to indebtedness in default and the Company's ability to restructure and
renegotiate the terms of the Company's indebtedness. 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,
2003 (unaudited) and December 31, 2002 4
Condensed Consolidated Statement of Operations
and Comprehensive Operations for the three and nine
months ended September 30, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for
the nine months ended September 30, 2003
and 2002 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 33
Item 4. Controls and Procedures 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 3. Defaults Upon Senior Securities 33
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 35
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(in thousands)
At September 30, At December 31,
2003 2002
--------------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 858 $ 807
Receivables (net of allowance of
$344 and $300, respectively) 10,019 12,269
Advances to employees 102 113
Inventories, net 9,447 7,895
Other current assets 1,969 1,913
-------- --------
Total current assets 22,395 22,997
Property, plant and equipment, net 14,741 16,716
Due from related parties 1,532 1,496
Goodwill, net 11,007 11,007
Other assets, net 3,185 3,102
-------- --------
Total assets $ 52,860 $ 55,318
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Debt in default $ 37,809 $ 40,049
Current maturities of debt 62 89
Trade payables 10,799 10,961
Accrued interest 9,533 6,748
Due to related parties 3,062 2,422
Other current liabilities 8,808 11,251
Notes payable 4,161 4,661
Notes payable - related parties 5,115 4,615
-------- --------
Total current liabilities 79,349 80,796
Note payable (net of discount of $90) 2,410 -
Long-term debt 18 61
Other liabilities 5,301 5,301
-------- --------
Total liabilities 87,078 86,158
Commitments and contingent liabilities - -
Stockholders' deficit (34,218) (30,840)
-------- --------
Total liabilities and stockholders' deficit $ 52,860 $ 55,318
======== ========
See accompanying notes to condensed consolidated financial statements.
- 4 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(in thousands, except per share information)(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Sales $ 14,707 $ 15,528 $ 54,046 $ 51,829
Cost of sales 12,178 14,395 44,108 46,644
-------- -------- -------- --------
Gross profit 2,529 1,133 9,938 5,185
Selling, general & administrative 2,523 3,312 7,987 10,354
Other expense (income), net (270) (6) (331) (787)
-------- -------- -------- --------
Operating profit (loss) 276 (2,173) 2,282 (4,382)
Interest expense, net 1,737 2,151 5,158 6,053
-------- -------- -------- --------
Loss from continuing operations
before income taxes (1,461) (4,324) (2,876) (10,435)
Provision for income taxes - - - -
-------- -------- -------- --------
Loss from continuing operations (1,461) (4,324) (2,876) (10,435)
Income (loss) from discontinued
operations, net of tax of $-0- (592) 2,492 (592) 220
-------- -------- -------- --------
Net and comprehensive loss $ (2,053) $ (1,832) $ (3,468) $(10,215)
======== ======== ======== ========
Loss applicable to common
stockholders $ (2,053) $ (1,832) $ (3,468) $(10,215)
======== ======== ======== ========
Basic loss per common share:
Continuing operations $ (0.09) $ (0.28) $ (0.18) $ (0.67)
Discontinued operations (0.04) 0.16 (0.04) 0.01
-------- -------- -------- --------
Loss per common share - basic $ (0.13) $ (0.12) $ (0.22) $ (0.66)
======== ======== ======== ========
Weighted average shares
outstanding - basic 16,279 15,591 16,279 15,591
======== ======== ======== ========
Diluted loss per common share:
Continuing operations $ (0.09) $ (0.28) $ (0.18) $ (0.67)
Discontinued operations (0.04) 0.16 (0.04) 0.01
-------- -------- -------- --------
Loss per common share - diluted $ (0.13) $ (0.12) $ (0.22) $ (0.66)
======== ======== ======== ========
Weighted average shares
outstanding - diluted 16,279 15,591 16,279 15,591
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
- 5 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2003 2002
-------- --------
Cash (used in) provided by operating activities $ (237) $ 4,571
-------- --------
Cash flow from investing activities:
Proceeds from sale of assets of discontinued
materials handling systems operations - 25,000
Proceeds from sale of assets of discontinued
bridges and cranes operations - 3,058
Proceeds from sale of property 305 375
Capital expenditures (207) (414)
-------- --------
Cash provided by investing activities 98 28,019
-------- --------
Cash flow from financing activities:
Borrowings 2,500 -
Net change in revolving credit facility (204) (22,325)
Repayments of debt (2,107) (9,794)
-------- --------
Cash provided by (used in) financing activities 190 (32,119)
-------- --------
Net increase in cash and cash equivalents 51 471
Cash and cash equivalents, beginning of year 807 686
-------- --------
Cash and cash equivalents, end of period $ 858 $ 1,157
======== ========
Interest paid $ 1,026 $ 2,538
======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
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 generally accepted accounting principles
for complete financial statements. In the opinion of management, all normal
recurring adjustments considered necessary for a fair statement of the results
of operations have been included. The results of operations for the three and
nine month periods ended September 30, 2003 are not necessarily indicative of
the results of operations for the full year. When reading the financial
information contained in this Quarterly Report, reference should be made to
the financial statements, schedule and notes contained in Reunion's Annual
Report on Form 10-K for the year ended December 31, 2002, as amended by Form
10-K/A as filed on April 30, 2003.
Going Concern
These condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company's
negative working capital position of $57.0 million at September 30, 2003 and
defaults on the Bank of America (BOA) Financing and Security Agreement and the
13% senior notes raise substantial doubt about its ability to continue as a
going concern. The Company's viability as a going concern is dependent upon
its ability to achieve profitable operations through increased sales, its
ability to successfully refinance its existing indebtedness, including debt in
default, and successful outcomes on certain existing legal proceedings. These
condensed consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement
requires recognition of a liability for any legal obligations associated with
the retirement of a tangible long-lived asset. Any such liability will be
recorded at fair value when incurred and generally results in an increase to
the carrying amount of the related long-lived asset. The Company adopted SFAS
No. 143 in the first quarter of 2003. In doing so, the Company evaluated its
operating leases for property and equipment and environmental review reports
for owned property and concluded that the Company has no legal obligations for
retirement of tangible long-lived assets. Therefore, no amount has been
accrued in the financial statements at and for the period ended September 30,
2003 related to the adoption of SFAS No. 143.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement eliminates the automatic
classification of gain or loss on extinguishment of debt as an extraordinary
item of income and requires that such gain or loss be evaluated for
extraordinary classification under the criteria of Accounting Principles Board
No. 30 "Reporting Results of Operations." This statement also requires sales-
leaseback accounting for certain lease modifications that have economic
effects that are similar to sales-leaseback transactions, and makes various
other technical corrections to existing pronouncements. This statement will
be effective for us for the year ending December 31, 2003. If we were
successful in buying back the senior notes at a discount, the
- 7 -
adoption of this statement would have a material effect on our results of
operations.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a rollforward of the entity's product warranty
liabilities. Our financing agreements prohibit us from guaranteeing, either
directly or otherwise, the indebtedness of others. We complied with the
warranty rollforward provisions of FIN 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation, Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No.
148 also requires that disclosures of the pro forma effect of using the fair
value method of accounting for stock-based employee compensation be displayed
more prominently and in tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
transition and annual disclosure requirements are effective for our 2003
fiscal year. The interim disclosure requirements are now effective. We do
not expect the adoption of SFAS No. 148 to have an effect on our results of
operations or financial position.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." This Interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 applies to variable interest entities
created after January 31, 2003, and is effective as of July 31, 2003 for
variable interest entities created prior to February 1, 2003. Reunion does
not expect the adoption of FIN 46 to have a material effect on its financial
position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This statement amends SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," for
implementation issues related to the definition of a derivative and other FASB
projects related to financial instruments. SFAS No. 149 requires that
contracts with comparable characteristics be accounted for in a similar
fashion. SFAS No. 149 applies prospectively to contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. Reunion does not expect the adoption of SFAS No. 149 to have a
material effect on its financial position, results of operations or cash
flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that financial instruments within the scope of
SFAS No. 150 be classified as a liability or an asset. SFAS No. 150 is
effective for all financial instruments entered into after May 31, 2003 and
otherwise, the beginning of the first interim period after June 15, 2003.
Reunion does not expect the adoption of SFAS No. 150 to have a material effect
on its financial position, results of operations or cash flows.
- 8 -
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock options and awards. Accordingly, no compensation costs
for stock options is included in operating results since all awards were made
at exercise prices at or above their fair value on the dates of grants.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure, amending FASB Statement No.
123, Accounting for Stock Based Compensation." This statement amends SFAS No.
123 to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-
based employee compensation. It also amends the disclosure provisions of SFAS
No. 123 to require prominent disclosure about the effects on operating results
of an entity's accounting policy decisions with respect to stock-based
employee compensation. SFAS No. 148 also amends APB 28, "Interim Financial
Reporting" to require disclosure about those effects in interim financial
information. We adopted the disclosure provisions for the year ended December
31, 2002. The following table illustrates the effect on results of operations
if the Company had applied the fair value recognition provisions of SFAS No.
123 for the three and nine month periods ended September 30, 2003 and 2002 (in
thousands, except for per share amount)(unaudited):
3-Mos. Ended 9-Mos. Ended
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss as reported $ (2,053) $ (1,832) $ (3,468) $(10,215)
Deduct: Total stock-based employee
compensation determined
under fair value method for
stock options, net of tax - (62) - (187)
-------- -------- -------- --------
Pro forma loss applicable
to common stockholders $ (2,053) $ (1,894) $ (3,468) $(10,402)
======== ======== ======== ========
Basic loss per share, as reported $ (0.13) $ (0.12) $ (0.22) $ (0.66)
======== ======== ======== ========
Basic loss per share, pro forma $ (0.13) $ (0.12) $ (0.22) $ (0.67)
======== ======== ======== ========
Diluted loss per share, as reported $ (0.13) $ (0.12) $ (0.22) $ (0.66)
======== ======== ======== ========
Diluted loss per share, pro forma $ (0.13) $ (0.12) $ (0.22) $ (0.67)
======== ======== ======== ========
Goodwill and Impairment
The Company reviews goodwill when events or changes in circumstances
indicate that the carrying amount of goodwill may not be recoverable. We also
review goodwill as required by SFAS No. 142, "Goodwill and Other Intangible
Assets", which requires that goodwill be tested annually using a two-step
process. The first is to identify any potential impairment by comparing the
carrying value of reporting units to their fair value. If a potential
impairment is identified, the second step is to compare the implied fair value
of goodwill with its carrying amount to measure the impairment loss.
Reporting unit fair value is estimated using the income approach, which
assumes that the value of a reporting unit can be computed as the present
value of the assumed future returns of an enterprise discounted at a rate of
- 9 -
return that reflects the riskiness of an investment. A significant increase
in the rate at which the assumed future returns are discounted could result in
an unexpected impairment charge to goodwill, which could have a negative
impact on our operating results.
At September 30, 2003, the Company had $11.0 million of goodwill on its
consolidated balance sheet. Of the $11.0 million of goodwill, $9.5 million
relates to the pressure vessels and springs segment and $1.5 million relates
to the cylinders segment. We will complete our annual impairment test during
the fourth quarter of 2003. The annual impairment test completed during the
fourth quarter of 2002 indicated that our goodwill is not impaired.
NOTE 2: RECENT DEVELOPMENTS
Senior Subordinated Secured Promissory Note
On August 11, 2003, Reunion borrowed $2.5 million from a private
investment fund by executing a senior subordinated secured promissory note
payable in the amount of and with cash proceeds of $2.5 million. The note
bears interest at 10% per annum, such interest being payable on the last day
of every month in arrears commencing on August 31, 2003. The principal amount
of $2.5 million is due on August 11, 2005 with voluntary prepayments
permitted. The note is secured by a majority of the assets of Reunion,
provided that such security interest is subordinate to the security interest
of BOA. In addition to its subordinated security interest, the Fund received
a warrant to purchase 625,000 shares of the Company's common stock and
registration rights with respect to the warrant and shares issuable thereto at
a price of $0.01 per share.
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder was due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001,
2002 and 2003 and May 1, 2002 and 2003. We were also unable to make the
sinking fund payments due May 1, 2002 and 2003. This inability to fund our
obligations under the 13% senior notes is due to a lack of liquidity and
availability under our revolving credit facility with BOA.
An event of default as defined in the indenture governing the senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. Although they have not moved to do so, the
senior notes holders can demand payment of all amounts outstanding, including
accrued and unpaid interest of $8.2 million, totaling $33.1 million at
September 30, 2003. Interest accrues at approximately $0.3 million per month.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $13.0 million of senior secured revolving and term
loan credit facilities outstanding at September 30, 2003 with BOA. We have
been in default under these facilities since September 30, 2001 due to our
inability to achieve our financial ratio covenants contained in the financing
and security agreement with BOA. During the third quarter of 2001 we were
also unable to maintain the $1.5 million minimum availability under the
revolving credit facility as required by a December 2000 amendment.
- 10 -
During the late first quarter and early second quarter of 2003, we
attempted to refinance all of our BOA credit facilities with another lender.
During this time period, Reunion and BOA executed various forbearance
agreements wherein BOA agreed to standstill. However, we were not successful
in our attempt to refinance with the chosen lender. After discussions with
BOA, on July 14, 2003, Reunion and BOA agreed to and executed a Waiver and
Amendment No. 6 to the Amended and Restated Financing Agreement dated March
16, 2000. The Waiver and Amendment No. 6 dated July 14, 2003 provides that,
among other things, BOA and the other bank participants agree to waive the
existing defaults under the BOA credit facilities subject to certain
conditions including, but not limited to, no acceleration, action or
proceeding by the holders of Reunion's 13% senior notes. Reunion has also
agreed to (i) maintain a monthly minimum EBITDA, as defined, beginning in July
2003 and continuing through June 2004, (ii) attempt to sell certain real
estate, (iii) pursue credit facilities with lenders acceptable to BOA and (iv)
if unsuccessful in obtaining an acceptable commitment letter by September 30,
2003, engage an investment banker to sell assets necessary to fully repay the
BOA facilities. Through September 30, 2003, we have complied with all items
agreed to in the Waiver and Amendment No. 6.
NOTE 3: DEBT IN DEFAULT AND LONG-TERM DEBT
Debt in default consists of the following (in thousands):
At September 30, At December 31,
2003 2002
--------------- --------------
(unaudited)
13% senior notes $ 24,855 $ 24,855
BOA revolving credit facility 11,583 11,787
BOA term loan A due March 16, 2007 1,371 3,407
-------- --------
Total debt in default $ 37,809 $ 40,049
======== ========
NOTE 4: INVENTORIES
Inventories are comprised of the following (in thousands):
At September 30, At December 31,
2003 2002
--------------- --------------
(unaudited)
Raw material $ 3,158 $ 2,820
Work-in-process 3,190 2,301
Finished goods 3,099 2,801
-------- --------
Gross inventories 9,447 7,922
Less: LIFO reserves - (27)
-------- --------
Inventories $ 9,447 $ 7,895
======== ========
In the third quarter of 2003, for those locations of the company that had
been using the last-in, first-out method of inventory valuation, we changed
the method of valuing inventory to the first-in, first-out method. The effect
on the results of operations for the three- and nine-month periods ended
September 30, 2003 was inconsequential.
- 11 -
NOTE 5: STOCKHOLDERS' DEFICIT AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
deficit for the nine month period ended September 30, 2003 (in thousands):
Accum-
Par Capital ulated
Value in Other
of Excess Accum- Compre-
Common of Par ulated hensive
Stock Value Deficit Loss Total
------ ------- -------- -------- --------
At January 1, 2003 $163 $25,195 $(54,188) $ (2,010) $(30,840)
Activity (unaudited):
Net loss - - (3,468) - (3,468)
Warrant to purchase stock - 90 - - 90
---- ------- -------- -------- --------
At September 30, 2003 $163 $25,285 $(57,656) $ (2,010) $(34,218)
==== ======= ======== ======== ========
The computations of basic and diluted loss per common share [LPS] for the
three and nine month periods ended September 30, 2003 and 2002 are as follows
(in thousands, except per share amounts)(unaudited):
Net Loss Shares LPS
-------- -------- -------
Three months ended September 30, 2003:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted LPS $ (2,053) 16,279 $ (0.13)
======== ======== =======
Three months ended September 30, 2002:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted LPS $ (1,832) 15,591 $ (0.12)
======== ======== =======
Nine months ended September 30, 2003:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted LPS $ (3,468) 16,279 $ (0.22)
======== ======== =======
Nine months ended September 30, 2002:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted LPS $(10,215) 15,591 $ (0.66)
======== ======== =======
At September 30, 2003, the Company's stock options outstanding totaled
214,000, of which 70,000 were at exercise prices below the average market
price of the underlying security during the third quarter of 2003. At
September 30, 2002, the Company's stock options outstanding totaled 959,700,
none of which were at exercise prices below the average market price of the
underlying security during the first nine months of 2002. Therefore, basic
and diluted LPS are equal in both the three- and nine-month periods ended
September 30, 2002.
- 12 -
At its meeting held June 26, 2003, the Company's board of directors
approved the issuance of 170,000 options to purchase the Company's common
stock to two members of the Company's board of directors and one non-board
member of the Company's executive management. The effective date of the
issuance was July 1, 2003. The potentially dilutive effect of the 70,000 of
such options for which the exercise prices were below the average market price
of the Company's common stock was 2,328 shares in the three months ended and
785 shares in the nine months ended September 30, 2003. However, because
including such potentially dilutive shares in the calculation of LPS for the
three- and nine-month periods ended September 30, 2003 is anti-dilutive, basic
and diluted LPS are equal.
On August 11, 2003, Reunion borrowed $2.5 million from a private
investment fund by executing a senior subordinated secured promissory note
payable in the amount of and with cash proceeds of $2.5 million. In addition
to its subordinated security interest, the Fund received a warrant to purchase
625,000 shares of the Company's common stock and registration rights with
respect to the warrant and shares issuable thereto at a price of $0.01 per
share. The potentially dilutive effect of such warrant was 333,069 shares in
the three months ended and 112,432 shares in the nine months ended September
30, 2003. However, because including such potentially dilutive shares in the
calculation of LPS for the three- and nine-month periods ended September 30,
2003 is anti-dilutive, basic and diluted LPS are equal. The estimated fair
value of the warrant of $90,000 at September 30, 2003 has been recorded as a
original issue discount on the $2.5 million note payable and an increase to
paid-in capital. We estimated the fair value of the warrant using the one-
year average market value of the Company's common stock less the proceeds to
be received upon exercise. This value was then adjusted for an assumed
dilution in the market value of the Company's stock resulting from its
issuance.
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.
- 13 -
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit remains in the initial stages of discovery. Reunion
intends to vigorously contest the suit.
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. Charles E. Bradley, Sr., Chairman of the Board, Chief
Executive Officer and a director of the Company (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.
- 14 -
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. The court granted plaintiffs' motion for
class certification on February 13, 2002 and certified a class consisting of
unpaid structured settlement payees. 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.
A settlement has been reached among the plaintiffs and the following
defendants (collectively, the "Financial Institution Defendants") in the state
court action: Bankers Trust Co., U.S. Trust Co., Wells Fargo Bank, Bank of
America, Bear Stearns and Settlement Services, Inc. Under the settlement, the
Financial Institution Defendants would pay the plaintiffs $90,630,969 and
Bankers Trust would receive an assignment of the claims of the plaintiffs and
the other Financial Institution Defendants against the Company and certain
other defendants. The settlement is subject to final court approval, which
will be considered at a hearing scheduled for December 3, 2003.
In the SFSC bankruptcy, the Company and certain others have reached a
tentative settlement with SFSC and Bankers Trust (for itself and as expected
assignee of the claims of the state court plaintiffs and the other Financial
Institution Defendants), subject to completion of definitive documentation and
Bankruptcy Court approval. Under this settlement, the Company (1) would
reaffirm its obligation to pay to SFSC $4.6 million (less a setoff of
approximately $310,000) by a date to be determined (but no earlier than
December 31, 2004), plus interest at 10% per annum from the date on which
SFSC's Plan of Reorganization becomes effective and (2) would be released from
all claims that have been made or could have been made by the plaintiffs and
the Financial Institution Defendants in the state court action and by SFSC in
its bankruptcy proceeding. The settlement amount would not constitute a new
liability of the Company, as the settlement relates to indebtedness which is,
and has been for some time, included as a liability on the Company's balance
sheet.
The Company has been named in approximately 1,250 separate asbestos suits
filed since January 1, 2001 by three 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 and Great Lakes Steel Mills in Wayne County, Michigan and that those
cranes contained asbestos to which plaintiffs were exposed over a 40 year
span. Counsel for the Company has filed an answer to each complaint denying
liability by the Company and asserting all alternative defenses permitted
under the Court's Case Management Order. Counsel for the Company has
successfully resolved 401 cases with little or no cost to the Company. The
Company denies that it manufactured any products containing asbestos or
otherwise knew or should have known that any component part manufacturers
provided products containing asbestos. It has been further denied that the
Company was otherwise advised by component part manufacturers that component
parts could be hazardous, or otherwise constitute a health risk. The Company
intends to vigorously defend against these lawsuits.
- 15 -
Since July 10, 2001, various legal actions, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon, Washington,
New York and Mississippi, against a large number of defendants, including
Oneida Rostone Corporation (ORC), pre-merger Reunion's Plastics subsidiary and
the Company's Plastics segment. In October 2001, Allen-Bradley Company, a
former owner of the Rostone business of ORC, accepted Reunion Industries'
tender of its defense and indemnification in the first such lawsuit filed
pursuant to a contractual obligation to do so. Subsequent to the acceptance
of the tender of defense and indemnification in the first lawsuit, Allen-
Bradley Company has accepted the Company's tender of defense and
indemnification in a total of 101 separate actions, all of which have been
defended by Allen-Bradley Company.
In the 2002 fourth quarter, in the Court of Common Pleas of Stark County,
Ohio, Putman Properties, Inc. filed a complaint against the Company asserting
breach of an exclusive listing contract in connection with the sale of certain
property ancillary to the divestiture of the Company's Alliance Machine
division in Alliance, Ohio. The plaintiff is a broker who claims entitlement
to a commission in the amount of $230,000. The Company has answered the
complaint, denies any liability and intends to vigorously defend against this
lawsuit. Discovery is ongoing with a trial date of December 8, 2003. No
amount has been accrued for this matter in the Company's financial statements.
In the 2002 fourth quarter, the Company filed suit in the District Court
for New Jersey against Paquet, a general contractor doing business in the
state of New Jersey. The Company contends that it is owed approximately $1.5
million in overdue payments and backcharges related to the supply of
structural steel for the construction of a bridge in New Jersey. The
defendant has asserted a counterclaim against the Company in the amount of
$2.5 million. Discovery is in process. The Company intends to vigorously
pursue its suit against the defendant and defend against its counterclaim. No
amount has been accrued for this matter in the Company's financial statements.
In the 2002 fourth quarter, Wheeling-Pittsburgh Steel Corporation
(debtor) filed suit against the Company in U.S. Bankruptcy Court for the
Northern District of Ohio, seeking to compel the return of certain
preferential transfers pursuant to 11 U.S.C 547. The debtor seeks a judgment
in the amount of $2,705,541. The Company filed an answer alleging that such
payments are not avoidable because (a) the transfers were made by the Debtor
in the ordinary course of business and (b) the Company extended new value to
the Debtor after the transfers were made in an amount exceeding the original
payments. A status conference was held before the court on April 21, 2003.
The parties agreed to stay discovery pending settlement discussions. No trial
dates have been established. Absent a resolution of this matter through
settlement discussions, the Company intends to vigorously defend against this
lawsuit. No amount has been accrued for this matter in the Company's
financial statements.
In connection with the Chapter 11 bankruptcies of LTV Steel Company, Inc.
(LTV), et al, pending in the United States Bankruptcy Court for the Northern
District of Ohio, Youngstown Division, LTV has filed a complaint for avoidance
and recovery of preferential transfers against Alliance Machine Division, a
former division of the Company. Pursuant to an adversary proceeding filed in
the LTV Case on December 17, 2002, LTV seeks recovery of $385,000 in alleged
- 16 -
preferential transfers, together with costs and attorney's fees. Prosecution
of preference actions has been stayed through December 31, 2003 by order of
the bankruptcy court. The Company believes it has adequate defenses and
intends to vigorously defend against this complaint. No amount has been
accrued for this matter in the Company's financial statements.
In the 2002 fourth quarter, Dick Corporation (Dick) filed an action
against the Company in the Court of Common Pleas of Allegheny County, PA.
Dick alleges that the Company breached a contract to supply it with structural
steel for use in a construction project for the PA Department of
Transportation. Dick seeks damages of approximately $351,000, representing
the extra costs allegedly incurred by Dick for Dick to secure structural steel
from another vendor. The Company has filed an answer to Dick's complaint in
which it denies any liability. Pleading are closed and discovery has begun.
The Company believes it has meritorious defenses against Dick's suit and
intends to vigorously defend against it. No amount has been accrued for this
matter in the Company's financial statements.
The Company has been named in 32 separate asbestos suits filed in August
2003 by three plaintiffs' law firms in the State Court of Fulton County,
Georgia. The claims allege that cylinders from the Company's cylinder
manufacturing location in Chicago, IL were present in various parts of
Marathon Oil Corporation's (f/k/a USX Corporation) and United States Steel
Corporation's manufacturing facilities in or around Birmingham, Alabama from
1950 to 1970 and that asbestos containing materials were used in those
facilities to which plaintiffs were exposed. 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 believes it has meritorious defenses against these
allegations and intends to vigorously defend against these lawsuits.
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.
- 17 -
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 $419,275 of
remediation costs. The Company estimates completion of this remediation
effort to be $15,000.
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. No remediation was
performed in 2000, 2001 or 2002 pending the decision. However, the Company
has paid $434,000 for its share of consulting services in connection with the
hearings. Most recently, the Company's environmental consultants filed with
the LDNROC updated amendments to the prior approved plan for sampling and
remediation. If approved, the plan will be implemented. At September 30,
2003, after accruing an additional $40,000 in December 2002, the balance
accrued for these remediation costs is approximately $912,000. The Company
believes that future remediation costs will not exceed the amount accrued.
Litigation on this matter had been stayed pending the determination by
the LDNROC as to the extent of remediation that would be required. Such stay
was lifted and the District Court had established a jury trial for September
22, 2003 to determine the necessity for any further remediation and the extent
of damages, if any, suffered by the plaintiff owners of the property.
However, an agreement to settle the litigation between the plaintiff owners of
the property the other involved parties, including the Company, has been
reached and finalized. The Company's share of the settlement costs was funded
by the other defendants to the litigation and the Company has agreed to
reimburse such parties with net production revenues from operation of the
producing wells. However, this is a non-recourse agreement such that, should
the wells be depleted before all such costs are reimbursed, the Company is not
required to fund the unreimbursed balance.
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site (Site) outside Petaluma, Marin County, California. The
Company gathered and forwarded the information the USEPA requested. On May
16, 2002, the Company, as the successor to Buttes Gas & Oil Company (BGO),
received from the USEPA a notice of potential liability and demand for payment
of $3,909,614.37 for reimbursement of costs related to the USEPA's removal and
environmental restoration efforts at the Site initiated in 1998 pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA).
BGO, predecessor by merger to the Company, leased the site for mining
purposes and operated a mercury mine there from 1965 to 1970. BGO's mining
operations were terminated in 1970. Subsequently, under the supervision of
the environmental and planning representatives of Marin County, BGO completed
closure and environmental restoration activities at the site, including
stabilization and re-vegetation of the site. BGO then quitclaimed the mining
lease to the Site owners, the Gambonini's, in 1973. Because of apparent
overgrazing at the Site subsequent to BGO's restoration efforts, a storm in
1982 caused severe flooding, which resulted in the failure of a dam built to
- 18 -
retain mining materials. Runoff from the flood released mining materials into
the creek below and, ultimately, into the Tomales Bay, a local recreation and
fishing area.
In March 2003, the Company and the USEPA reached an agreement in
principle to settle the USEPA's demand for payment for $100,000 plus interest
at the Superfund rate (which is currently 1.27%), payable in three
installments over a two-year period. This amount has been accrued as of
December 31, 2002. This settlement agreement will resolve the USEPA's claims
for reimbursement of past environmental response costs under CERCLA, but does
not resolve all possible claims the United States may have with respect to the
Gambonini mine site which could include, but not be limited to, claims for
natural resource damages. The United States has given no indication as to
whether or not it will pursue such claims. The Company has agreed to toll the
statute of limitations with respect to any natural resource damages claims, if
any, from August 30, 2002 to April 1, 2008.
Product Warranties
The Company provides for warranty claims at its cylinders segment.
Amounts accrued are estimates of future claims based on historical claims
experience or a management estimate related to a specifically identified
issue. The Company reevaluates its product warranty reserve quarterly and
adjusts it based on changes in historical experience and identification of new
or resolution of prior specifically identified issues. A tabular
reconciliation of the product warranty reserve follows (in 000's):
Description Total
--------------------------------------------- --------
Balance at December 31, 2002 $ 379
Add: Provision for estimated future claims 47
Deduct: Cost of claims (227)
--------
Balance at September 30, 2003 $ 199
========
NOTE 7: OPERATING SEGMENT DISCLOSURES
The following represents segment financial data (in thousands)(unaudited):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended and
at September 30, 2003:
------------------------
Metals:
Pressure vessels and springs $ 4,933 $ 719 $ - $ 14,403
Cylinders 3,779 238 7 7,893
-------- -------- -------- --------
Subtotal Metals 8,712 957 7 22,296
Plastics 5,995 620 35 15,394
Corporate and other(4) - (643) - 15,170
-------- -------- -------- --------
Totals $ 14,707 934 $ 42 $ 52,860
======== ======== ========
Depreciation and amortization(3) (658)
Interest expense (1,737)
--------
Loss from continuing operations
before income taxes $ (1,461)
========
- 19 -
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended September 30, 2002
and at December 31, 2002:
-------------------------------------
Metals:
Pressure vessels and springs $ 4,313 $ (41) $ 2 $ 13,725
Cylinders 3,572 (579) - 9,700
-------- -------- -------- --------
Subtotal Metals 7,885 (620) 2 23,425
Plastics 7,643 303 26 16,536
Corporate and other - (1,163) 2 15,357
Discontinued operations - - 98 -
-------- -------- -------- --------
Totals $ 15,528 (1,480) $ 128 $ 55,318
======== ======== ========
Depreciation and amortization(3) (693)
Interest expense (2,151)
--------
Loss from continuing operations
before income taxes $ (4,324)
========
Nine months ended
September, 2003:
------------------
Metals:
Pressure vessels and springs $ 18,713 $ 3,842 $ -
Cylinders 14,087 835 69
-------- -------- --------
Subtotal Metals 32,800 4,677 69
Plastics 21,246 1,917 137
Corporate and other(4) - (2,296) 1
-------- -------- --------
Totals $ 54,046 4,298 $ 207
======== ========
Depreciation and amortization(3) (2,016)
Interest expense (5,158)
--------
Loss from continuing operations
before income taxes $ (2,876)
========
Nine months ended
September 30, 2002:
---------------------
Metals:
Pressure vessels and springs $ 14,913 $ 310 $ 48
Cylinders 12,690 (750) 25
-------- -------- --------
Subtotal Metals 27,603 (432) 73
Plastics 24,226 1,015 109
Corporate and other(5) - (2,800) 2
Discontinued operations - - 230
-------- -------- --------
Totals $ 51,829 (2,217) $ 414
======== ========
Depreciation and amortization(3) (2,165)
Interest expense (6,053)
--------
Loss from continuing operations
before income taxes $(10,435)
========
- 20 -
(1) EBITDA is presented as it is the primary measurement used by management
in assessing segment performance and not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a
widely accepted financial indicator of a company's ability to incur and
service debt.
(2) Headquarters total assets at September 30, 2003 and December 31, 2002
includes $8.0 million of goodwill. This goodwill relates to the Company's
pressure vessel and springs segment. For evaluation purposes under SFAS
No. 142, this goodwill is included in the carrying value of the pressure
vessels and springs segment.
(3) Excludes amortization of debt issuance expenses and fees of and $186,000
for the three month period ended September 30, 2002 and $71,000 and
$510,000 for the nine month periods ended September 30, 2003 and 2002,
respectively, which is included in interest expense.
(4) Includes a $138,000 gain on sale of property in September 2003.
(5) Includes a $375,000 gain on sale of property in January 2002.
NOTE 8: RESTRUCTURING AND DISCONTINUED OPERATIONS
In the fourth quarter of 2001, we developed and adopted a restructure
plan for our continuing businesses and certain other businesses were
identified for disposal. By the end of 2002, this plan was substantially
completed except for continuing commitments under leases for two idle
facilities and certain equipment. The Company recorded restructuring costs,
including lease termination costs, related to the plan. The lease termintaion
reserve was reduced as the result of the execution of a sublease agreement
with another party resulting in a new estimate of future lease termination
costs. The following represents a summary of 2003 cash activity of the
remaining lease termination reserves (in thousands):
2003
At Cash Reserve At
Description 12/31/02 Activity Adjmt. 09/30/03
----------------------------------- -------- -------- -------- --------
Lease termination costs $ 861 $ (225) $ (117) $ 519
======== ======== ======== ========
The remaining lease termination costs relate to idle manufacturing
facilities in Milwaukee, Wisconsin and Clearfield, Utah.
- 21 -
Discontinued operations includes the discontinued bridges and cranes and
material handling systems businesses. Summarized results of discontinued
operations for the three and nine month periods ended September 30, 2002
follows (in thousands):
Three months ended September 30, 2003 2002
-------------------------------- -------- --------
Net sales $ - $ 7,442
Income (loss) before taxes (592) 2,492
Nine months ended September 30, 2003 2002
-------------------------------- -------- --------
Net sales $ - $ 33,624
Income (loss) before taxes (592) 220
The above results of discontinued operations includes actual and
allocated interest expense for the three and nine month periods ended
September 30, 2002 totaling $637,000 and $2,457,000, respectively.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis is provided to assist readers in
understanding financial performance during the periods presented and
significant trends which may impact future performance. It should be read in
conjunction with the consolidated financial statements and accompanying notes
included elsewhere in this Form 10-Q and in conjunction with our annual report
on Form 10-K for the year ended December 31, 2002, as amended by Form 10-K/A
as filed on April 30, 2003.
GENERAL
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements, such as large-diameter seamless pressure vessels, hydraulic and
pneumatic cylinders, leaf springs and precision plastic components.
- 22 -
RESULTS OF OPERATIONS
Three Months Ended September 30, 2003 Compared to
Three Months Ended September 30, 2002
Continuing Operations
Sales, gross margins and EBITDA percentages for the three months ended
September 30, 2003 and 2002 are as follows:
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2003 2002 2003 2002 2003 2002
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 4,933 $ 4,313 18.7% 8.3% 14.6% (0.1%)
Cylinders 3,779 3,572 18.9% (1.4%) 6.3% (16.2%)
Plastics 5,995 7,643 14.9% 10.8% 10.3% 4.0%
--------- --------- ------ ------ ------ ------
Totals $ 14,707 $ 15,528 17.2% 7.3% 10.7% (2.0%)
========= ========= ====== ====== ====== ======
Pressure vessels and springs sales increased in the third quarter of 2003
compared to the same period in 2002. This increase is general in nature and
not identifiable to any specific trend. However, 2002 third quarter sales
were affected by management's decision to scale-back production at that time
to reduce spending and conserve cash. On a quarter-to-quarter basis in 2003,
this segment has experienced a slow-down in sales as access to raw materials
is again being affected by tight liquidity. Also, foreign shipments,
primarily to China, have been negatively affected due to the overall adverse
impact on the Asian economy caused by SARS. Although the SARS crisis in Asia
has ended, uncertainty exists as to if or by how much the foreign shipments of
this segment might rebound.
Sales of cylinders in the third quarter of 2003 was slightly more than
the third quarter of 2002 as the improvement in order levels during the 2003
first quarter has leveled-off. This segment continues to be affected by a
softness in its markets, [a trend which the Company believes will remain the
same or lessen during 2003.]
The decrease in Plastics revenues is the result of several reasons
including our reduced ability to access raw materials, which is again being
affected by tight liquidity, and a continued lag in certain customers'
decisions on newly quoted programs which are intended to replace finished
programs caused by the uncertainty surrounding our current financial
condition.
The increase in gross margin as a percentage of sales in the third
quarter of 2003 compared to the third quarter of 2002 in the pressure vessels
and springs segment is the result of the increase in sales from period-to-
period and the significantly reduced production activity for the third quarter
2002, resulting underabsorption of overheads and lower gross margin as a
percentage of sales than would normally be expected. The increase in gross
margin as a percentage of sales at both cylinders and plastics is primarily
the result of actions to reduce costs through workforce reductions taken
during the 2002 third quarter to better match production resources with volume
levels, the benefit of which is evident in the 2003 third quarter.
- 23 -
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales
increased during the third quarter of 2003 compared to the 2002 third quarter
primarily due to the same factors affecting gross profit margin discussed
above and our continued focus on reducing selling, general and administrative
costs in Plastics. A reconciliation of EBITDA to operating income (loss) in
the third quarters of 2003 and 2002 by segment and corporate and other is as
follows (000's):
Operating
Income Deprec- Amortiz-
(Loss) iation ation EBITDA
--------- --------- --------- ---------
2003:
-----
Pressure vessels and springs $ 546 $ 173 $ - $ 719
Cylinders 167 71 - 238
Plastics 224 396 - 620
Corporate and other(1) (661) 18 - (643)
-------- -------- -------- --------
Totals $ 276 $ 658 $ - $ 934
======== ======== ======== ========
2002:
-----
Pressure vessels and springs $ (219) $ 178 $ - $ (41)
Cylinders (682) 103 - (579)
Plastics (91) 394 - 303
Corporate and other (1,181) 18 - (1,163)
-------- -------- -------- --------
Totals $ (2,173) $ 693 $ - $ (1,480)
======== ======== ======== ========
(1) - Operating results for corporate and other for the quarter ended
September 30, 2003 includes a $138,000 gain on sale of property.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the third quarter
of 2003 were $2.5 million, compared to $3.3 million for the third quarter of
2002. This decrease in SGA is due to the 2002 third quarter including
approximately $250,000 of incremental legal, audit and consultant costs
related to the default on our bank financing that did not recur in the third
quarter of 2003. The remaining decrease is related to cost cutting measures
taken during 2002, including trimming the executive payroll and reductions in
administrative positions, the benefits of which are materializing. SGA as a
percentage of sales decreased to 17.2% for the 2003 third quarter compared to
21.3% in the 2002 third quarter. SGA as a percentage of sales was lower in
2003 third quarter compared to the third quarter of 2002 due to lower
incremental bank-induced costs and previously described cost-cutting measures.
- 24 -
Other Income
Other income for the third quarter of 2003 was $270,000, compared to
other income of $6,000 for the third quarter of 2002. The components are as
follows:
2003 2002 Change
-------- -------- --------
Gain on sale of property $ (138) $ - $ (138)
Reduction of the lease termination reserve (117) - (117)
Other income, net (15) (6) (9)
-------- -------- --------
Total other income, net $ (270) $ (6) $ (264)
======== ======== ========
Other income in the third quarter of 2003 includes a gain on sale of idle
farm land in Boone County, IL of $138,000 and a reduction to the lease
termination reserve of $117,000. The lease termintaion reserve was reduced as
the result of the execution of a sublease agreement with another party
resulting in a new estimate of future lease termination costs. There were no
other significant offsetting items netted into other income in either of the
three month periods ended September 30, 2003 and 2002.
Interest Expense
Interest expense, net, for the third quarter of 2003 was $1.7 million
compared to $2.2 million for the third quarter of 2002. For the third quarter
of 2002, a total of $0.6 million of interest expense has been allocated to or
actually incurred in discontinued operations. On a combined basis interest
expense was $2.8 million in the third quarter of 2002. Debt has decreased
significantly from 2002 levels due to pay-downs with proceeds from asset sales
in June 2002 and September 2002. Also, in the third quarter of 2002 compared
to the 2003 third quarter, the Company was paying a higher default rate on the
BOA revolving credit and term loan facilities and we accrued $550,000 in
amendment and overadvance fees to BOA in the third quarter of 2002. These
decreases from the third quarter 2002 were partially offset by approximately
$200,000 in fees and costs charged to interest expense incurred during our
continuing refinancing efforts during the third quarter 2003 with other
lenders.
Income Taxes
There was no tax provision from continuing operations in the third
quarters of 2003 or 2002. The Company has net operating loss carryforwards
for Federal tax return reporting purposes totaling $119.9 million at December
31, 2002, $57.2 million of which expire by the end of 2004. [The Company may
be able to utilize its loss carryforwards against possible increased future
profitability.] However, management has determined to fully reserve for the
total amount of net deferred tax assets as of December 31, 2002 [and to
continue to do so during 2003 until management can conclude that it is more
likely than not that some or all of our loss carryforwards can be utilized.]
Discontinued Operations
There was a loss from discontinued operations for the third quarter of
2003 of $0.6 million compared to income from discontinued operations of $2.5
million in the third quarter of 2002. The loss from discontinued operations
of $0.6 million in the third quarter of 2003 relates to an evaluation of
legacy healthcare costs related to the discontinued bridges and cranes
operations, which increased substantially in the third quarter of 2003. The
- 25 -
adjustment in the third quarter of 2003 is to recognize these unanticipated
healthcare costs which significantly exceeded the accrual for such costs
established at year-end 2002. [Such costs should decrease significantly as
the healthcare coverage benefit period provided by law in the Consolidated
Omnibus Budget Reconciliation Act of 1985 comes to an ended on or about year-
end 2003.] The income from discontinued operations of $2.5 million in the
third quarter of 2002 realtes to a $3.4 million gain from the sale of the
discontinued materials handling systems operations in September 2002,
partially offset by allocated interest expense.
Nine Months Ended September 30, 2003 Compared to
Nine Months Ended September 30, 2002
Continuing Operations
Sales, gross margins and EBITDA percentages for the nine months ended
September 30, 2003 and 2002 are as follows:
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2003 2002 2003 2002 2003 2002
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 18,713 $ 14,913 25.2% 11.3% 20.5% 2.1%
Cylinders 14,087 12,690 16.8% 6.2% 5.9% (5.9%)
Plastics 21,246 24,226 13.5% 11.2% 9.0% 4.2%
--------- --------- ------ ------ ------ ------
Totals $ 54,046 $ 51,829 18.4% 10.0% 12.2% 1.1%
========= ========= ====== ====== ====== ======
Pressure vessels and springs sales were up in the first nine months of
2003 compared to the same period in 2002. This increase is due to this
segment's return to almost normal production and shipment levels during the
first half of 2003 compared to management's decision to shut-down our pressure
vessels facility for the first two months of 2002 with a limited production
schedule. We made this decision in 2002 to reduce spending due to our
liquidity problems and to lessen the strain on this segment's raw material
vendors.
Sales of cylinders was up for the first nine months of 2003 compared to
2002 due to an improvement in order levels during the 2003 first quarter.
However, this segment continues to be affected by a softness in its markets,
[a trend which the Company believes will remain the same or lessen during
2003.]
The decrease in Plastics revenues occurred in the second and third
quarters of 2003 and is the result of several reasons including our reduced
ability to access raw materials, which is again being affected by tight
liquidity, and a continued lag in certain customers' decisions on newly quoted
programs which are intended to replace finished programs caused by the
uncertainty surrounding our current financial condition.
The increase in gross margin as a percentage of sales in the pressure
vessel and springs segment in the first nine months of 2003 compared to the
first nine months of 2002 is primarily due to management's decision to shut-
down our pressure vessels facility for the first two months of 2002 as
- 26 -
discussed above and the resulting reduction in production activity for the
second quarter 2002 resulting in underabsorption of overheads and a lower
gross margin as a percentage of sales than would normally be expected. The
increase in gross margin as a percentage of sales at both cylinders and
plastics is the result of actions to reduce costs through workforce reductions
taken in the 2002 third quarter to better match production resources with
volume levels.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales
increased significantly during the first nine months of 2003 compared to the
2002 first nine months primarily due to the same factors affecting gross
profit margin discussed above and our continued focus on reducing selling,
general and administrative costs in Plastics. A reconciliation of EBITDA to
operating income (loss) in the first nine months of 2003 and 2002 by segment
and corporate and other is as follows (000's):
Operating
Income Deprec- Amortiz-
(Loss) iation ation EBITDA
--------- --------- --------- ---------
2003:
-----
Pressure vessels and springs $ 3,316 $ 526 $ - $ 3,842
Cylinders 620 215 - 835
Plastics 695 1,222 - 1,917
Corporate and other(1) (2,349) 53 - (2,296)
-------- -------- -------- --------
Totals $ 2,282 $ 2,016 $ - $ 4,298
======== ======== ======== ========
2002:
-----
Pressure vessels and springs $ (239) $ 557 $ - $ 318
Cylinders (1,052) 302 - (750)
Plastics (237) 1,252 - 1,015
Corporate and other(2) (2,854) 54 - (2,800)
-------- -------- -------- --------
Totals $ (4,382) $ 2,165 $ - $ (2,217)
======== ======== ======== ========
(1) - Operating results for corporate and other for the nine-months ended
September 30, 2003 includes a $138,000 gain on sale of property.
(2) - Operating results for corporate and other for the nine-months ended
September 30, 2002 includes a $375,000 gain on sale of property.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first nine
months of 2003 were $8.0 million, compared to almost $10.4 million for the
first nine months of 2002. This decrease in SGA is due to the 2002 first nine
months including approximately $900,000 of incremental legal, audit and
- 27 -
consultant costs related to the default on our bank financing that did not
recur in the first nine months of 2003. The remaining decrease is related to
cost cutting measures taken during 2002, including trimming the executive
payroll and reductions in administrative positions, the benefits of which are
materializing. SGA as a percentage of sales decreased to 14.8% for the 2003
first nine months compared to 20.0% in the 2002 first nine months. SGA as a
percentage of sales was lower in 2003 first nine months compared to the first
nine months of 2002 due to increased sales volumes, lower incremental bank-
induced costs and previously described cost-cutting measures.
Other Income
Other income for the first nine months of 2003 was $331,000, compared to
other income of $0.8 million for the first nine months of 2002. The
components are as follows:
2003 2002 Change
-------- -------- --------
Gain on sale of property $ (138) $ - $ (138)
Reduction of the lease termination reserve (117) - (117)
Gain on sale of equipment with zero book value - (375) 375
Other income, net (76) (412) 336
-------- -------- --------
Total other income, net $ (331) $ (787) $ 456
======== ======== ========
Other income in the third quarter of 2003 includes a gain on sale of idle
farm land in Boone County, IL of $138,000 and a reduction to the lease
termination reserve of $117,000. The lease termintaion reserve was reduced as
the result of the execution of a sublease agreement with another party
resulting in a new estimate of future lease termination costs. In January
2002, we sold equipment that had no book value. The decrease in the remaining
other income is primarily due to higher levels of sales of scrap and
miscellaneous parts in 2002 due to cleaning out idled facilities.
Interest Expense
Interest expense, net, for the first nine months of 2003 was $5.2 million
compared to $6.1 million for the first nine months of 2002. For the first
nine months of 2002, a total of $2.5 million of interest expense has been
allocated to or actually incurred in discontinued operations. On a combined
basis interest expense was $8.6 million in the first nine months of 2002.
Debt has decreased significantly from 2002 levels due to pay-downs with
proceeds from asset sales in June 2002 and September 2002. Also, in the first
nine months of 2002 compared to the 2003 first nine months, the Company was
paying a higher default rate on the BOA revolving credit and term loan
facilities and we paid and/or accrued $1,675,000 in amendment and overadvance
fees to BOA in the first nine months of 2002. These decreases from 2002 were
partially offset by more than $600,000 in fees and costs charged to interest
expense incurred during our continuing refinancing efforts during 2003 with
other lenders.
- 28 -
Income Taxes
There was no tax provision from continuing operations in the first six
months of 2003 or 2002. The Company has net operating loss carryforwards for
Federal tax return reporting purposes totaling $119.9 million at December 31,
2002, $57.2 million of which expire by the end of 2004. [The Company may be
able to utilize its loss carryforwards against possible increased future
profitability.] However, management has determined to fully reserve for the
total amount of net deferred tax assets as of December 31, 2002 [and to
continue to do so during 2003 until management can conclude that it is more
likely than not that some or all of our loss carryforwards can be utilized.]
Discontinued Operations
There was a loss from discontinued operations for the first nine months
of 2003 of $0.6 million compared to income from discontinued operations of
$0.2 million in the first nine months of 2002. The loss from discontinued
operations of $0.6 million in 2003 relates to an evaluation of legacy
healthcare costs related to the discontinued bridges and cranes operations,
which increased substantially in the third quarter of 2003. The adjustment in
the 2003 is to recognize these unanticipated healthcare costs which
significantly exceeded the accrual for such costs established at year-end
2002. [Such costs should decrease significantly as the healthcare coverage
benefit period provided by law in the Consolidated Omnibus Budget
Reconciliation Act of 1985 comes to an ended on or about year-end 2003.] The
income from discontinued operations of $0.2 million in the first nine months
of 2002 realtes to a $3.4 million gain from the sale of the discontinued
materials handling systems operations in September 2002, partially offset by
allocated interest expense.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company manages its liquidity as a consolidated enterprise. The
operating groups of the Company carry minimal cash balances. Cash generated
from group operating activities generally is used to repay borrowings under
revolving credit arrangements, as well as other uses (e.g. corporate
headquarters expenses, debt service, capital expenditures, etc.). Conversely,
cash required for group operating activities generally is provided from funds
available under the same revolving credit arrangements.
Senior Subordinated Secured Promissory Note
On August 11, 2003, Reunion borrowed $2.5 million from a private
investment fund by executing a senior subordinated secured promissory note
payable in the amount of and with cash proceeds of $2.5 million. The note
bears interest at 10% per annum, such interest being payable on the last day
of every month in arrears commencing on August 31, 2003. The principal amount
of $2.5 million is due on August 11, 2005 with voluntary prepayments
permitted. The note is secured by a majority of the assets of Reunion,
provided that such security interest is subordinate to the security interest
of BOA. In addition to its subordinated security interest, the Fund received
a warrant to purchase 625,000 shares of the Company's common stock and
registration rights with respect to the warrant and shares issuable thereto at
a price of $0.01 per share. The cash proceeds were used for working capital
and other general corporate purposes.
- 29 -
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder was due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001,
2002 and 2003 and May 1, 2002 and 2003. We were also unable to make the
sinking fund payments due May 1, 2002 and 2003. This inability to fund our
obligations under the 13% senior notes is due to a lack of liquidity and
availability under our revolving credit facility with BOA.
An event of default as defined in the indenture governing the 13% senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. Although they have not moved to do so, the
senior notes holders can demand payment of all amounts outstanding, including
accrued and unpaid interest of $8.2 million, totaling $33.1 million at
September 30, 2003. We are currently discussing with holders of a majority
ofprincipal amount of senior notes scenarios that would involve suspending
their currently existing right to demand payment for some period of time.
[Although possible, no assurances exist that we will be successful in this
pursuit.]
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $13.0 million of senior secured revolving and term
loan credit facilities outstanding at September 30, 2003 with BOA. We have
been in default under these facilities since September 30, 2001 due to our
inability to achieve our financial ratio covenants contained in the financing
and security agreement with BOA. During the third quarter of 2001 we were
also unable to maintain the $1.5 million minimum availability under the
revolving credit facility as required by a December 2000 amendment.
During the late first quarter and early second quarter of 2003, we
attempted to refinance all of our BOA credit facilities with another lender.
During this time period, Reunion and BOA executed various forbearance
agreements wherein BOA agreed to standstill. However, we were not successful
in our attempt to refinance with the chosen lender. After discussions with
BOA, on July 14, 2003, Reunion and BOA agreed to and executed a Waiver and
Amendment No. 6 to the Amended and Restated Financing Agreement dated March
16, 2000. The Waiver and Amendment No. 6 dated July 14, 2003 provides that,
among other things, BOA and the other bank participants agree to waive the
existing defaults under the BOA credit facilities subject to certain
conditions including, but not limited to, no acceleration, action or
proceeding by the holders of Reunion's 13% senior notes. Reunion has also
agreed to (i) maintain a monthly minimum EBITDA, as defined, beginning in July
2003 and continuing through June 2004, (ii) attempt to sell certain real
estate, (iii) pursue credit facilities with lenders acceptable to BOA and (iv)
if unsuccessful in obtaining an acceptable commitment letter by September 30,
2003, engage an investment banker to sell assets necessary to fully repay the
BOA facilities. Through September 30, 2003, we have complied with all items
agreed to in the Waiver and Amendment No. 6. [Although possible, no
assurances exist that we will be able to maintain the monthly minimum EBITDA
contained in or be successful in the pursuits as required by the Waiver and
Amendment No. 6.]
- 30 -
[Since we could not repay our senior noteholders or bank lenders if the
senior noteholders exercised their existing rights to demand payment of what
we owe them or if we were not able to maintain the covenants or were not
successful in the requirements of the Waiver and Amendment No. 6, each or both
parties could pursue all remedies available to creditors in the normal course
of business, including filing of involuntary bankruptcy petitions.]
SUMMARY OF 2003 ACTIVITIES
Cash and cash equivalents totaled $0.9 million at September 30, 2003,
compared with $0.8 million at December 31, 2002. This resulted from $0.2
million of cash used in operations being offset by $0.1 million of cash
provided by investing activities and $0.2 million provided by financing
activities. Cash and cash equivalents at the end of a period generally
represents lockbox receipts from customers to be applied to our BOA revolving
credit facility the following business day.
Operating Activities
Cash used in operating activities of $0.2 million in the first nine
months of 2003 was the result of a decrease in net working capital as the
collection of the higher level of receivables created in the first quarter of
2003 due to the higher volume levels were more than offset by payments of
liabilities.
Investing Activities
In September 2003, we sold a parcel of idle farm land we owned in Boone
County, IL to a private investor for cash proceeds of $305,000. Capital
expenditures were $0.2 million.
Financing Activities
In August 2003, Reunion and a private investment fund executed a senior
subordinated secured promissory note payable in the amount of and with cash
proceeds of $2.5 million. The Company made scheduled repayments of term loan
A totaling $1.8 million and paid an additional $200,000 on term loan A in
connection with a forbearance agreement from BOA for the month of February
2003. Revolving credit facility borrowings decreased $0.2 million during the
first nine months of 2003. Other debt repayments totaling $70,000 represent
payments on capital lease obligations and other debt.
Lease Termination Reserves
In the fourth quarter of 2001, we developed and adopted a restructure
plan for our continuing businesses and certain other businesses were
identified for disposal. By the end of 2002, this plan was substantially
completed except for continuing commitments under leases for two idle
facilities and certain equipment. The Company recorded restructuring costs,
including lease termination costs, related to the plan. The lease termintaion
reserve was reduced as the result of the execution of a sublease agreement
with another party resulting in a new estimate of future lease termination
costs. The following represents a summary of 2003 cash activity of the
remaining lease termination reserves (in thousands):
- 31 -
2003
At Cash Reserve At
Description 12/31/02 Activity Adjmt. 09/30/03
----------------------------------- -------- -------- -------- --------
Lease termination costs $ 861 $ (225) $ (117) $ 519
======== ======== ======== ========
The remaining lease termination costs relate to idle manufacturing
facilities in Milwaukee, Wisconsin and Clearfield, Utah.
FACTORS THAT COULD AFFECT FUTURE RESULTS
Reunion is a Going Concern
The financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company's negative working
capital position of $57.0 million at September 30, 2003 and defaults on the
BOA Financing and Security Agreement and the 13% senior notes raise
substantial doubt about its ability to continue as a going concern. The
Company's viability as a going concern is dependent upon its ability to
achieve profitable operations through increased sales, its ability to
successfully refinance its existing indebtedness, including debt in default,
and successful outcomes on certain existing legal proceedings. These
condensed consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Reunion's vendors may restrict credit terms
We have corrected many vendor-related problems with liquidity generated
from asset sales. However, another period of tight liquidity could result in
key vendors restricting or eliminating the extension of credit terms to us.
If this would happen, our ability to obtain raw materials would be strained
significantly and our ability to manufacture products would be reduced.
Reunion may not be able to maintain the required monthly minimum EBITDA, as
defined, required by the Waiver and Amendment No. 6
We executed a Waiver and Amendment No. 6 with BOA which requires us to
maintain a monthly minimum EBITDA, as defined therein, beginning in July 2003.
Through September 30, 2003, we have complied with all items agreed to in the
Waiver and Amendment No. 6. If we are unable to continue to meet the minimum
monthly required EBITDA in any month, they may move to take advantage of all
remedies available to them including, but not limited to, acceleration of all
amounts currently due and a liquidation of their collateral.
Reunion's senior noteholders may demand payment
Although our senior note obligations are in default, the senior
noteholders have stood still as we continue to work through the refinancing of
our BOA credit facilities. However, it is not a certainty that they will
continue to stand still and they may move to take advantage of all remedies
available to them including, but not limited to, demanding payment of all
amount currently due.
- 32 -
Reunion's current bank lender may require us to pay exorbitant fees and cause
us to incur significant incremental costs again
Since entering into the BOA facilities, we have incurred significant
incremental costs related to our bank financing. Through the end of 2002,
these costs total $4.3 million, including $2.6 million paid to BOA relating to
amendment and overadvance fees and approximately $0.6 million in default
interest. The additional incremental costs included legal fees, audit and
consultant fees and reappraisal costs. These costs have negatively affected
our liquidity. If we do not refinance our BOA credit facilities, they could
continue to strain our liquidity with incremental fees and costs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risk factors which
affect the Company since the end of the preceding fiscal year.
Item 4. Controls and Procedures
As of March 31, 2003, an evaluation was performed under the supervision
of and with the participation of the Company's management, including the
Company's principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the Company's principal executive officer and principal financial officer,
concluded that Reunion's disclosure controls and procedures were effective as
of March 31, 2003. There were no significant changes in Reunion's internal
controls or in other factors that could significantly affect these controls
subsequent to March 31, 2003.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company in involved in various legal proceedings and environmental
matters. See "Item 1. Financial Statements, Note 6: Commitments and
Contingent Liabilities."
Item 3. Defaults Upon Senior Securities
Debt in default consists of the following (in thousands):
At September 30, At December 31,
2003 2002
--------------- --------------
(unaudited)
13% senior notes $ 24,855 $ 24,855
BOA revolving credit facility 11,583 11,787
BOA term loan A due March 16, 2007 1,371 3,407
-------- --------
Total debt in default $ 37,809 $ 40,049
======== ========
- 33 -
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder was due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001,
2002 and 2003 and May 1, 2002 and 2003. We were also unable to make the
sinking fund payments due May 1, 2002 and 2003. This inability to fund our
obligations under the 13% senior notes is due to a lack of liquidity and
availability under our revolving credit facility with BOA.
An event of default as defined in the indenture governing the senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. Although they have not moved to do so, the
senior notes holders can demand payment of all amounts outstanding, including
accrued and unpaid interest of $8.2 million, totaling $33.1 million at
September 30, 2003. Interest accrues at approximately $0.3 million per month.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $13.0 million of senior secured revolving and term
loan credit facilities outstanding at September 30, 2003 with BOA. We have
been in default under these facilities since September 30, 2001 due to our
inability to achieve our financial ratio covenants contained in the financing
and security agreement with BOA. During the third quarter of 2001 we were
also unable to maintain the $1.5 million minimum availability under the
revolving credit facility as required by a December 2000 amendment.
During the late first quarter and early second quarter of 2003, we
attempted to refinance all of our BOA credit facilities with another lender.
During this time period, Reunion and BOA executed various forbearance
agreements wherein BOA agreed to standstill. However, we were not successful
in our attempt to refinance with the chosen lender. After discussions with
BOA, on July 14, 2003, Reunion and BOA agreed to and executed a Waiver and
Amendment No. 6 to the Amended and Restated Financing Agreement dated March
16, 2000. The Waiver and Amendment No. 6 dated July 14, 2003 provides that,
among other things, BOA and the other bank participants agree to waive the
existing defaults under the BOA credit facilities subject to certain
conditions including, but not limited to, no acceleration, action or
proceeding by the holders of Reunion's 13% senior notes. Reunion has also
agreed to (i) maintain a monthly minimum EBITDA, as defined, beginning in July
2003 and continuing through June 2004, (ii) attempt to sell certain real
estate, (iii) pursue credit facilities with lenders acceptable to BOA and (iv)
if unsuccessful in obtaining an acceptable commitment letter by September 30,
2003, engage an investment banker to sell assets necessary to fully repay the
BOA facilities. Through September 30, 2003, we have complied with all items
agreed to in the Waiver and Amendment No. 6.
- 34 -
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
-------------------
The Company filed a Current Report on Form 8-K dated
and filed on Onctober 29, 2003 under Items 4 and 7 to
announce a change in certifying accountants and to file
the predecessor auditor's letter to the United States
Securities and Exchange Commission pursuant to Item
304(a)(3) of Regulation S-K as an exhibit.
(c) Exhibits
--------
Exhibit No. Exhibit Description
----------- -------------------
31.1 Certification of Chief Executive 37
Officer Pursuant to Form of Rule 13a-14(a)
as adopted pursuant to Section 302(a) of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial 38
Officer Pursuant to Form of Rule 13a-14(a)
as adopted pursuant to Section 302(a) of
the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive 39
Officer and Principal Financial Officer
Pursuant to U.S.C. 18 Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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, 2003 REUNION INDUSTRIES, INC.
----------------- (Registrant)
By: /s/ Charles E. Bradley, Sr.
-------------------------------
Charles E. Bradley, Sr.
Chairman and Chief
Executive Officer
By: /s/ John M. Froehlich
-------------------------------
John M. Froehlich
Executive Vice President, Finance
and Chief Financial Officer
(chief financial and accounting officer)
- 35 -
EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
----------- ------------------- --------
31.1 Certification of Chief Executive 37
Officer Pursuant to Form of Rule 13a-14(a)
as adopted pursuant to Section 302(a) of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial 38
Officer Pursuant to Form of Rule 13a-14(a)
as adopted pursuant to Section 302(a) of
the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive 39
Officer and Principal Financial Officer
Pursuant to U.S.C. 18 Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- 36 -
CERTIFICATION EXHIBIT 31.1
I, Charles E. Bradley, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended
September 30, 2003 of Reunion Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) designed such internal control over financial reporting, or caused
such control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing equivalent functions):
a) all significant deficiencies and internal weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
By /s/ Charles E. Bradley, Sr., C.E.O.
-----------------------------------------------
Charles E. Bradley, Sr., C.E.O.
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CERTIFICATION EXHIBIT 31.2
I, John M. Froehlich, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended
September 30, 2003 of Reunion Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) designed such internal control over financial reporting, or caused
such control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing equivalent functions):
a) all significant deficiencies and internal weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
By /s/ John M. Froehlich, C.F.O.
-----------------------------------------------
John M. Froehlich, C.F.O.
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EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Reunion Industries, Inc. (the
Company) on Form 10-Q for the third quarter ended September 30, 2003 as filed
with the Securities and Exchange Commission on the date therein specified (the
Report), the undersigned, Charles E. Bradley, Sr., Chairman and Chief
Executive Officer of the Company, and John M. Froehlich, Chief Financial
Officer and principal financial officer of the Company, each certify pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) of
the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of Reunion Industries, Inc.
Date: November 14, 2003 By /s/ Charles E. Bradley, Sr.
----------------- ------------------------------
Charles E. Bradley, Sr.
Chairman and Chief Executive
Officer (principal executive officer)
Date: November 14, 2003 By /s/ John M. Froehlich
----------------- ------------------------------
John M. Froehlich
Chief Financial Officer
(principal financial officer)
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