==============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 33-64325
--------
REUNION INDUSTRIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400
PITTSBURGH, PENNSYLVANIA 15222
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
At July 31, 2002, 15,590,619 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 39 pages.
Exhibit index is on page 37.
==============================================================================
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 complete the sale of
certain assets on acceptable terms, the Company's ability to realize the
benefits of its restructuring plan, 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
June 30, 2002 (unaudited) and December 31, 2001 4
Condensed Consolidated Statement of Income (Loss) and
Comprehensive Income (Loss) for the three and six
months ended June 30, 2002 and 2001 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for
the six months ended June 30, 2002 and 2001 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 36
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AT JUNE 30, 2002 AND DECEMBER 31, 2001
(in thousands)
At June 30, At December 31,
2002 2001
----------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 385 $ 686
Receivables, net 12,963 12,347
Advances to employees 213 213
Inventories, net 7,906 10,814
Other current assets 1,212 1,219
Net assets of discontinued operations, current 6,522 5,162
-------- --------
Total current assets 29,201 30,441
Property, plant and equipment, net 17,819 19,134
Due from related parties 1,511 1,488
Goodwill, net 11,443 11,443
Assets of discontinued operations, non-current 15,380 18,641
Other assets, net 3,003 3,269
-------- --------
Total assets $ 78,357 $ 84,416
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Debt in default $ 59,640 $ 64,389
Current maturities of debt 87 87
Trade payables 13,707 11,212
Due to related parties 1,839 1,107
Other current liabilities 17,438 13,825
-------- --------
Total current liabilities 92,711 90,620
Long-term debt 4,770 4,810
Long-term debt - related party 4,615 4,615
Other liabilities 1,889 1,616
-------- --------
Total liabilities 103,985 101,661
Commitments and contingent liabilities - -
Stockholders' deficit (25,628) (17,245)
-------- --------
Total liabilities and stockholders' deficit $ 78,357 $ 84,416
======== ========
See accompanying notes to condensed consolidated financial statements.
- 4 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(in thousands, except per share information)(unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Sales $ 21,457 $ 26,318 $ 36,301 $ 58,790
Cost of sales 18,107 21,542 32,249 46,614
-------- -------- -------- --------
Gross profit 3,350 4,776 4,052 12,176
Selling, general & administrative 3,373 3,972 7,042 8,399
Other expense (income), net (20) 516 (781) 985
-------- -------- -------- --------
Operating profit (loss) (3) 288 (2,209) 2,792
Interest expense, net 1,824 1,545 3,902 3,146
-------- -------- -------- --------
Loss from continuing operations
before income taxes (1,827) (1,257) (6,111) (354)
Provision for (benefit from)
income taxes - (220) - 172
-------- -------- -------- --------
Loss from continuing operations (1,827) (1,037) (6,111) (526)
Income (loss) from discontinued
operations, net of tax of $-0- (2,272) 537 (2,272) 787
-------- -------- -------- --------
Net income (loss) and
comprehensive income (loss) $ (4,099) $ (500) $ (8,383) $ 261
======== ======== ======== ========
Basic and diluted earnings
(loss) per common share:
Continuing operations $ (0.12) $ (0.07) $ (0.39) $ (0.03)
Discontinued operations (0.14) 0.04 (0.14) 0.05
-------- -------- -------- --------
Loss per common share - basic
and diluted $ (0.26) $ (0.03) $ (0.53) $ 0.02
======== ======== ======== ========
Weighted average shares
outstanding - basic 15,691 15,585 15,691 15,585
======== ======== ======== ========
Weighted average shares
outstanding - diluted 15,691 15,646 15,691 15,661
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
- 5 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(in thousands)
(unaudited)
Six Months Ended
June 30, June 30,
2002 2001
-------- --------
Cash provided by (used in) operating activities $ 995 $ (4,806)
-------- --------
Cash flow from investing activities:
Proceeds from sale of assets of discontinued
bridges and cranes operations 3,058 -
Proceeds from sale of property 375 -
Capital expenditures (286) (1,861)
Acquisition of NPSAC common stock - (10)
-------- --------
Cash provided by (used in) investing activities 3,147 (1,871)
-------- --------
Cash flow from financing activities:
Net change in revolving credit facility (48) 8,499
Repayments of debt (4,743) (3,311)
-------- --------
Cash provided by (used in) financing activities (4,791) 5,188
-------- --------
Net decrease in cash and cash equivalents (649) (1,489)
Net change in cash of discontinued operations 348 613
Cash and cash equivalents, beginning of year 686 1,826
-------- --------
Cash and cash equivalents, end of period $ 385 $ 950
======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
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
six month periods ended June 30, 2002 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, 2001.
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 negative
working capital position of $63.5 million at June 30, 2002, the defaults of
the Bank of America (BOA) Financing and Security Agreement and the 13% senior
notes, and the lack of borrowing capacity under its revolving credit facility
indicate that the Company may not be able to continue as a going concern for a
reasonable period of time. These condensed consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations." This statement
eliminates the pooling-of-interest method for business combinations and
changes the criteria for recognizing intangible assets apart from goodwill.
This statement is effective for purchases completed after June 30, 2001. The
Company has not engaged in any acquisitions since June 30, 2001. Acquisitions
prior to June 30, 2001 were recorded as purchases in accordance with
Accounting Principles Board Opinion No. 16.
The Financial Accounting Standards Board issued SFAS No. 142, "Goodwill
and Other Intangible Assets." This statement eliminates the amortization of
goodwill and indefinite lived intangible assets and requires such assets be
reviewed for impairment at least annually. This statement is effective for
goodwill and intangible assets acquired prior to July 1, 2001 upon adoption,
which is required for fiscal years beginning after December 15, 2001.
The Company has recorded goodwill totaling $11.4 million at both June 30,
2002 and December 31, 2001, of which $9.5 million relates to our pressure
vessel and springs segment and $1.5 million relates to our cylinders segment.
Effective January 1, 2002, we ceased amortizing goodwill. We completed
internal impairment tests of goodwill as of January 1, 2002 and intend to
engage an external valuation specialist to confirm our conclusions during the
third quarter of 2002. From the results of our internal tests, we concluded,
based primarily on the historically positive operating results and cash
generation of these reporting units, together with our forecast of future
reporting unit operating results, that our goodwill is not impaired. Had we
stopped amortizing goodwill at the beginning of 2001, the effect on net income
(loss) and diluted earnings (loss) per share for the three and six month
- 7 -
periods ended June 30, 2001 and the year ended December 31, 2001 are as
follows (in thousands, except per share information):
6 Months Ended 3 Months Ended Year Ended
June 30, 2001 June 30, 2001 December 31, 2001
----------------- ----------------- -----------------
Net Inc. EPS Net Loss LPS Net Loss LPS
-------- ------- -------- ------- -------- -------
As reported $ 261 $ 0.02 $ (500) $ (0.03) $(38,128) $ (2.45)
Add back
goodwill
amortization 936 0.06 468 0.03 1,903 0.13
-------- ------- -------- ------- -------- -------
As adjusted $ 1,197 $ 0.08 $ (32) $ - $(36,225) $ (2.32)
======== ======= ======== ======= ======== =======
In June 2001, the Financial Accounting Standards Board 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. This statement will be
effective for us for the year ending December 31, 2003. The adoption of this
statement will not have a material effect on our results of operations or
financial position.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" but retains many of its
fundamental provisions. SFAS 144 also supersedes certain provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" but retains its provision to separately
report discontinued operations and extends that reporting to a component of an
entity, as defined therein, that either has been disposed of or is classified
as held for sale, thus broadening the presentation of discontinued operations
to include more disposal transactions. Effective January 1, 2002, the Company
adopted this statement with no effect on financial position or results of
operations.
In April 2002, the Financial Accounting Standards Board 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. The adoption of
this statement will not have a material effect on our results of operations or
financial position.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement addresses accounting for and reporting of costs associated with exit
or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." This
statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Whereas, EITF
- 8 -
94-3 requires an estimated liability to be recognized for exit or disposal
activities at the date an entity commits to an exit plan. This statement will
be effective for exit or disposal activities that are initiated after December
31, 2002, with earlier application encouraged. We adopted a restructuring
plan in the fourth quarter of 2001 pursuant to the guidance of EITF 94-3.
Should we engage in any future exit, disposal or restructuring activities, the
guidance set forth in SFAS 146 will be followed.
NOTE 2: RECENT DEVELOPMENTS
Restructuring and Other Actions
In the fourth quarter of 2001, we developed and adopted a plan to
restructure our continuing operations. The restructuring charge we recorded
in the fourth quarter of 2001 included estimated cash and non-cash components.
The cash components were comprised of reserves for lease termination costs and
employee separations. The employee separation costs recorded in the
restructuring related to the 7 employees of NPSAC, the Company's former
pressure vessel operations in Clearfield, Utah. We did not accrue for any
additional employee separations related to the restructuring, although such
separations totaled approximately 200 employees as of June 30, 2002. The
termination costs were recorded upon notification to the employees, which
occurred in the same period as the terminations. The following represents a
summary of first half 2002 cash activity for the estimated cash components of
our fourth quarter 2001 restructuring charge (in thousands).
At 2002 At
Description 12/31/01 Activity 06/30/02
--------------------------------------------- -------- -------- --------
Lease termination costs $ 1,172 $ (166) $ 1,006
Employee separations 20 (20) -
-------- -------- --------
Reserve for restructuring $ 1,192 $ (186) $ 1,006
======== ======== ========
During 2002, the Company has made significant progress towards
implementation of this plan.
On June 30, 2002, we sold the inventory and substantially all of the
property, plant and equipment of Alliance, our discontinued bridges and cranes
operations, for net cash proceeds of $3.058 million and the assumption by the
buyer of certain liabilities. We retained all receivables, trade payables and
certain other liabilities of this discontinued operation. The net cash
proceeds of $3.058 million were used to reduce borrowings under our BOA
revolving credit facility ($322,000), term loan A facility ($1.87 million) and
capital expenditure facility ($866,000).
On April 30, 2002, we entered into a non-binding letter of intent (LOI)
for the sale of substantially all of the assets and business of Kingway, our
discontinued materials handling systems operations, for a total of $34.0
million in a combination of cash and subordinated notes. Since then we have
had further negotiations with the buyer and have agreed to a purchase price of
$32.0 million, comprised of $27.5 million in cash and a $4.5 million
subordinated contingent note, the terms of which are being negotiated. The
due diligence process by the buyer is substantially complete. We are
currently negotiating a definitive asset purchase agreement. The closing of
this transaction is subject to certain conditions, including the execution of
a definitive asset purchase agreement. There are no assurances that this
transaction will close on the terms set forth in the draft asset purchase
agreement or at all.
- 9 -
During the first quarter of 2002, NPSAC, the Company's former pressure
vessel operations in Clearfield, Utah, was relocated to and combined with the
pressure vessel operations in McKeesport, PA. The cylinder operations in
Milwaukee, WI have been relocated to our leased facility in Libertyville, IL.
The land and building in Milwaukee, WI is being prepared for sale. We are
preparing to move the cylinder operations in Chicago, IL to the Libertyville
facility during the third quarter of 2002. We closed the Plastics' corporate
headquarters in Charlotte, NC and all administrative and managerial positions
were eliminated. Plastics' corporate responsibilities have been returned to
our manufacturing and administrative operations in Oneida, NY.
We reevaluated the shut-down of our Plastics operation in Siler City, NC
and have determined to maintain our presence in the southern U.S. and service
the customers of the Siler City, NC location. This reevaluation does not
change our intent to dispose of the land, building and a large portion of the
existing machinery and equipment or the fourth quarter restructuring charge
related thereto as the leased and owned machinery and equipment related to the
charge remains out of service.
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 is 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
and May 1, 2002. We were also unable to make the $12.5 million sinking fund
payment due May 1, 2002. 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 while we
execute our plan to restructure and generate liquidity through asset sales,
the senior note holders have the right to accelerate all amounts outstanding,
including accrued and unpaid interest of $4.25 million, totaling $29.1 million
at July 31, 2002. Interest continues to accrue at approximately $0.3 million
per month, including compounded interest at 13% per annum on the unpaid semi-
annual interest payments.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $34.8 million of senior secured revolving and term
loan credit facilities outstanding at June 30, 2002 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.
In November 2001, BOA informed us that a borrowing base deficiency
existed. Since that time, the Company and BOA have entered into six side
letter agreements wherein BOA and the other lenders that participated in the
BOA refinancing of the Company in March 2000 agreed to provide monthly
advances in excess of our calculated borrowing base for working capital needs
while we execute our plan to restructure and generate liquidity by selling
assets. The sixth side letter agreement, dated April 1, 2002, provides
overadvance approval on a day-to-day basis whereby the overadvance may not
exceed $3.5 million. As of August 19, 2002, we have not exceeded the $3.5
million overadvance availability. However, nothing in these six side letter
agreements waives or otherwise alters BOA's already existing remedies under
- 10 -
the BOA financing and security agreement including acceleration of all amounts
outstanding under the BOA financing and security agreement.
In consideration of providing its approval of overadvance availability,
we had been paying to BOA through direct charges to our revolving credit
facility a weekly fee of $25,000 or $50,000, depending on the amount of the
overadvance. Since entering into the side letter agreements beginning in
November 2001, the Company has paid BOA a total of $800,000 in such fees. In
the last week of April 2002, BOA agreed to not directly charge our revolving
credit facility for these overadvance fees but, instead, permit us to accrue
such fees to be paid upon the sale of our discontinued materials handling
systems operations. As of June 30, 2002, we had accrued $500,000 of such
fees, which continue to accrue at either $25,000 or $50,000 per week,
depending on the amount of the overadvance.
NOTE 3: DEBT IN DEFAULT AND LONG-TERM DEBT
Debt in default consists of the following (in thousands):
At June 30, At December 31,
2002 2001
----------- --------------
(unaudited)
13% senior notes (net of unamortized
discount of $0 and $2) $ 24,855 $ 24,853
BOA revolving credit facility 22,427 22,475
BOA term loan A due March 16, 2007 12,358 16,071
BOA capital expenditure facility - 990
-------- --------
Total debt in default $ 59,640 $ 64,389
======== ========
Long-term debt consists of the following (in thousands):
At June 30, At December 31,
2002 2001
----------- --------------
(unaudited)
Note payable due February 28, 2003 $ 3,644 $ 3,644
Other 1,213 1,253
Other - related parties 4,615 4,615
-------- --------
Total long-term debt 9,472 9,512
Current maturities (87) (87)
-------- --------
Total long-term debt, less current maturities $ 9,385 $ 9,425
======== ========
- 11 -
NOTE 4: INVENTORIES
Inventories are comprised of the following (in thousands):
At June 30, At December 31,
2002 2001
----------- --------------
(unaudited)
Raw material $ 3,001 $ 5,012
Work-in-process 2,198 2,329
Finished goods 2,576 3,342
-------- --------
Gross inventories 7,775 10,683
Plus: LIFO adjustment 131 131
-------- --------
Inventories $ 7,906 $ 10,814
======== ========
NOTE 5: STOCKHOLDERS' DEFICIT AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
deficit for the six month period ended June 30, 2002 (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, 2002 $156 $25,064 $(41,329) $ (1,136) $(17,245)
Activity (unaudited):
Net loss - - (8,383) - (8,383)
---- ------- -------- -------- --------
At June 30, 2002 $156 $25,064 $(49,712) $ (1,136) $(25,628)
==== ======= ======== ======== ========
The computations of basic and diluted earnings (loss) per common share
[E(L)PS] for the three and six month periods ended June 30, 2002 and 2001 are
as follows (in thousands, except per share amounts)(unaudited):
Net
Income
(Loss) Shares E(L)PS
-------- -------- -------
Three months ended June 30, 2002:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted LPS $ (4,099) 15,691 (0.26)
======== ======== =======
Three months ended June 30, 2001:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic LPS $ (500) 15,585 $ (0.03)
=======
Dilutive effect of stock options 61
-------- --------
Loss applicable to common stockholders,
shares outstanding and diluted LPS $ (500) 15,646 $ (0.03)
======== ======== =======
- 12 -
Six months ended June 30, 2002:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted LPS $ (8,383) 15,691 (0.53)
======== ======== =======
Six months ended June 30, 2001:
Income applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ 261 15,585 $ 0.02
=======
Dilutive effect of stock options 76
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted EPS $ 261 15,661 $ 0.02
======== ======== =======
At June 30, 2002, the Company's stock options outstanding totaled
1,089,000, none of which were at exercise prices below the average market
price of the underlying security during the first half 2002. Therefore, basic
and diluted LPS are equal.
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
Legal Proceedings
The Company and its subsidiaries are defendants in a number of lawsuits
and administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. The Company believes that any
material liability which can result from any of such lawsuits or proceedings
has been properly reserved for in the Company's consolidated financial
statements or is covered by indemnification in favor of the Company or its
subsidiaries, and therefore the outcome of these lawsuits or proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended. There is no applicable insurance coverage.
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. In August 2002, the plaintiff stockholders filed a first request
for the production of documents in Delaware Chancery Court. Reunion is in the
initial stages of reviewing the document production request and 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
- 13 -
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 June 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.
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. Both model complaints allege causes of
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted cross-
complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
vigorously defend against these actions and cross-actions.
- 14 -
The Company has been named in approximately 350 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
negotiated dismissal of 95 cases without any cost to the Company. The Company
denies that it manufactured any products containing asbestos or otherwise knew
or should have known that any component part manufacturers provided products
containing asbestos. The Company intends to vigorously defend against these
lawsuits.
Since July 10, 2001, various lawsuits, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon 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 73
separate actions, all of which are being defended by Allen-Bradley Company.
Environmental Compliance
Various U.S. federal, state and local laws and regulations including,
without limitation, laws and regulations concerning the containment and
disposal of hazardous waste, oil field waste and other waste materials, the
use of storage tanks, the use of insecticides and fungicides and the use of
underground injection wells directly or indirectly affect the Company's
operations. In addition, environmental laws and regulations typically impose
"strict liability" upon the Company for certain environmental damages.
Accordingly, in some situations, the Company could be liable for clean up
costs even if the situation resulted from previous conduct of the Company that
was lawful at the time or from improper conduct of, or conditions caused by,
previous property owners, lessees or other persons not associated with the
Company or events outside the control of the Company. Such clean up costs or
costs associated with changes in environmental laws and regulations could be
substantial and could have a materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Except as described in the following paragraphs, the Company believes it
is currently in material compliance with existing environmental protection
laws and regulations and is not involved in any significant remediation
activities or administrative or judicial proceedings arising under federal,
state or local environmental protection laws and regulations. In addition to
management personnel who are responsible for monitoring environmental
compliance and arranging for remedial actions that may be required, the
Company has also employed outside consultants from time to time to advise and
assist the Company's environmental compliance efforts. Except as described in
the following paragraphs, the Company has not recorded any accruals for
environmental costs.
In February 1996, Reunion was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. Since then, the Company has expended $376,000 of
remediation costs and accrued an additional $20,000.
- 15 -
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. The Company's
environmental consultant is in the process of updating the estimate of the
costs to comply with this order, but the Company does not believe that the
cost of future remediation will exceed the amount accrued. No remediation was
performed in 2000 or 2001 pending the decision. However, the Company has paid
$247,000 for its share of consulting services in connection with the hearings.
At June 30, 2002, the balance accrued for these remediation costs is
approximately $1,061,000. Owners of a portion of the property have objected
to the Company's cleanup methodology and have filed suit to require additional
procedures. The Company is contesting this litigation, and believes its
proposed methodology is well within accepted industry practice for remediation
efforts of a similar nature. No accrual has been made for costs of any
alternative cleanup methodology which might be imposed as a result of the
litigation.
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site outside Petaluma, Marin County, California. The Company
gathered and forwarded to the USEPA the information it 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 its removal and
disposal efforts 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 on this site 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 back to 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 resulting in the failure of the dam built to
retain mining materials. Runoff from the flood released mining materials into
the creek below and, ultimately, into the Tomales Bay, a local recreation and
fishing area.
In 1985, BGO, headquartered in Houston, Texas, filed Chapter 11
proceedings in bankruptcy court in the Southern District of Texas in Houston.
In December 1988, BGO confirmed its plan of reorganization which provided for,
among other things, a discharge of all claims that arose prior to the date of
confirmation of the plan. The reorganization plan became effective in
February 1989.
In response to the USEPA's demand, the Company has filed an adversary
proceeding in bankruptcy court in the Southern District of Texas in Houston
seeking an order to enjoin the efforts of the USEPA to pursue collection of
any claims related to the site. The USEPA has responded by filing a motion to
dismiss based on several jurisdictional and substantive grounds. The matter
- 16 -
is set for a status conference on August 27, 2002, at which time the Company's
counsel anticipates the court will set a hearing date on the USEPA's motion to
dismiss.
The Company intends to prosecute the pending litigation vigorously. The
Company has made no accrual of any amount related to this matter as, at this
time, the probability of an adverse outcome to the Company is reasonably
possible, but not probable.
NOTE 7: OPERATING SEGMENT DISCLOSURES
The following represents the disaggregation of financial data (in
thousands)(unaudited):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended and
at June 30, 2002:
----------------------
Metals:
Pressure vessels and springs $ 8,119 $ 1,230 $ 5 $ 14,458
Cylinders 4,677 (84) - 9,720
-------- -------- -------- --------
Subtotal Metals 12,796 1,146 5 24,178
Plastics 8,661 540 - 17,843
Corporate and other - (927) - 14,434
Discontinued operations - - 21 21,902
-------- -------- -------- --------
Totals $ 21,457 759 $ 26 $ 78,357
======== ======== ========
Depreciation and amortization(3) (762)
Interest expense (1,824)
--------
Loss from continuing operations
before income taxes $ (1,827)
========
Three months ended June 30, 2001
and at December 31, 2001:
---------------------------------
Metals:
Pressure vessels and springs $ 10,191 $ 2,108 $ 73 $ 17,936
Cylinders 5,377 (13) 17 9,662
-------- -------- -------- --------
Subtotal Metals 15,568 2,095 90 27,598
Plastics 10,750 534 541 18,443
Corporate and other - (1,001) 6 14,572
Discontinued operations - - 425 23,803
-------- -------- -------- --------
Totals $ 26,318 1,628 $ 1,062 $ 84,416
======== ======== ========
Depreciation and amortization(3) (1,340)
Interest expense (1,545)
--------
Loss from continuing operations
before income taxes $ (1,257)
========
- 17 -
Capital
Net Sales EBITDA(1) Spending
--------- --------- ---------
Six months ended June 30, 2002:
-------------------------------
Metals:
Pressure vessels and springs $ 10,600 $ 359 $ 46
Cylinders 9,118 (171) 25
-------- -------- --------
Subtotal Metals 19,718 188 71
Plastics 16,583 712 113
Corporate and other - (1,637) -
Discontinued operations - - 102
-------- -------- --------
Totals $ 36,301 (737) $ 286
======== ========
Depreciation and amortization(3) (1,472)
Interest expense (3,902)
--------
Loss from continuing operations
before income taxes $ (6,111)
========
Six months ended June 30, 2001:
-------------------------------
Metals:
Pressure vessels and springs $ 24,275 $ 5,707 $ 133
Cylinders 11,530 489 37
-------- -------- --------
Subtotal Metals 35,805 6,196 170
Plastics 22,985 1,320 678
Corporate and other - (1,967) 7
Discontinued operations - - 1,006
-------- -------- --------
Totals $ 58,790 5,549 $ 1,861
======== ========
Depreciation and amortization(3) (2,757)
Interest expense (3,146)
--------
Loss from continuing operations
before income taxes $ (354)
========
(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 June 30, 2002 and December 31, 2001 includes
goodwill related to its pressure vessel and springs segment totaling
$9.5 million).
(3) Excludes amortization of debt issuance expenses and fees of $192,000
and $174,000 for the three month periods ended June 30, 2002 and 2001,
respectively, and $324,000 and $348,000 for the six month period ended
June 30, 2002 and 2001, respectively, which are included in interest
expense.
- 18 -
NOTE 8: DISCONTINUED OPERATIONS
At June 30, 2002 and December 31, 2001, the assets and liabilities of
discontinued operations are comprised of the assets and liabilities of the
discontinued bridges and cranes and material handling systems businesses and
the remaining reserve for expenses of the discontinued grating business. The
assets and liabilities of discontinued operations have been separately
classified on the balance sheet as follows (in thousands):
At June 30, At December 31,
2002 2001
----------- --------------
ASSETS: (unaudited)
Cash and cash equivalents $ 158 $ 506
Receivables, net 12,510 14,463
Inventories, net 2,002 2,093
Other current assets 260 249
-------- --------
Total current assets 14,930 17,311
-------- --------
LIABILITIES AND EQUITY:
Trade payables 6,012 7,182
Other current liabilities 1,213 2,014
Reserve for operating loss during phase-out 1,068 2,628
Reserve for estimated expenses 115 325
-------- --------
Total liabilities 8,408 12,149
-------- --------
Net assets of discontinued operations, current $ 6,522 $ 5,162
======== ========
ASSETS, NON-CURRENT:
Property, plant and equipment, net $ 3,584 $ 6,985
Goodwill, net 11,628 11,628
Other assets, net 168 28
-------- --------
Assets of discontinued operations, non-current $ 15,380 $ 18,641
======== ========
Summarized results of discontinued operations for the three and six month
periods ended June 30, 2002 and 2001 follow (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 12,934 $ 17,399 $ 26,182 $ 34,550
Income (loss) before taxes (2,272) 537 (2,272) 787
The above results of discontinued operations include actual and allocated
interest expense for the three month periods ended June 30, 2002 and 2001
totaling $1,193,000 and $798,000, respectively, and for the six month periods
ended June 30, 2002 and 2001 totaling $1,820,000 and $1,606,000, respectively.
- 19 -
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, 2001.
We adopted a plan to restructure continuing operations and dispose of or
shut-down other businesses. Such businesses are being reported as
discontinued operations. Prior year information has been restated for
comparative purposes and the following discussion of results of operations is
separated into continuing and discontinued operations.
GENERAL
The Company owns and operates a diverse group of 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. Until December 2001, the Company's products also included heavy-
duty cranes, bridge structures and materials handling systems. The Company
classified its heavy-duty cranes, bridge structures and materials handling
systems businesses as discontinued operations.
RECENT DEVELOPMENTS
Restructuring and Other Actions
In the fourth quarter of 2001, we developed and adopted a plan to
restructure our continuing operations. During 2002, the Company has made
significant progress towards implementation of this plan.
On June 30, 2002, we sold the inventory and substantially all of the
property, plant and equipment of Alliance, our discontinued bridges and cranes
operations, for net cash proceeds of $3.058 million and the assumption by the
buyer of certain liabilities. We retained all receivables, trade payables and
certain other liabilities of this discontinued operation. The net cash
proceeds of $3.058 million were used to reduce borrowings under our BOA
revolving credit facility ($322,000), term loan A facility ($1.87 million) and
capital expenditure facility ($866,000).
On April 30, 2002, we entered into a non-binding letter of intent (LOI)
for the sale of substantially all of the assets and business of Kingway, our
discontinued materials handling systems operations, for a total of $34.0
million in a combination of cash and subordinated notes. Since then we have
had further negotiations with the buyer and have agreed to a purchase price of
$32.0 million, comprised of $27.5 million in cash and a $4.5 million
subordinated contingent note, the terms of which are being negotiated. The
due diligence process by the buyer is substantially complete. We are
currently negotiating a definitive asset purchase agreement. The closing of
this transaction is subject to certain conditions, including the execution of
a definitive asset purchase agreement. There are no assurances that this
transaction will close on the terms set forth in the draft asset purchase
agreement or at all.
- 20 -
During the first quarter of 2002, NPSAC, the Company's former pressure
vessel operations in Clearfield, Utah, was relocated to and combined with the
pressure vessel operations in McKeesport, PA. The cylinder operations in
Milwaukee, WI have been relocated to our leased facility in Libertyville, IL.
The land and building in Milwaukee, WI is being prepared for sale. We are
preparing to move the cylinder operations in Chicago, IL to the Libertyville
facility during the third quarter of 2002. We closed the Plastics' corporate
headquarters in Charlotte, NC and all administrative and managerial positions
were eliminated. Plastics' corporate responsibilities have been returned to
our manufacturing and administrative operations in Oneida, NY.
We reevaluated the shut-down of our Plastics operation in Siler City, NC
and have determined to maintain our presence in the southern U.S. and service
the customers of the Siler City, NC location. This reevaluation does not
change our intent to dispose of the land, building and a large portion of the
existing machinery and equipment or the fourth quarter restructuring charge
related thereto as the leased and owned machinery and equipment related to the
charge remains out of service.
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 is 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
and May 1, 2002. We were also unable to make the $12.5 million sinking fund
payment due May 1, 2002. 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 Bank of America (BOA).
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to
Three Months Ended June 30, 2001
Continuing Operations
Sales, gross margins and EBITDA percentages for the three months ended
June 30, 2002 and 2001 are as follows:
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2002 2001 2002 2001 2002 2001
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 8,119 $ 10,191 21.3% 26.9% 15.1% 20.1%
Cylinders 4,677 5,377 10.0% 11.4% 0.2% -
Plastics 8,661 10,750 13.3% 13.3% 6.2% 5.0%
--------- --------- ------ ------ ------ ------
Totals $ 21,457 $ 26,318 15.6% 18.1% 7.9% 10.0%
========= ========= ====== ====== ====== ======
Pressure vessels and springs sales rebounded to nearly normal levels in
the second quarter of 2002, although still lower when compared to the same
period in 2001. This decrease compared to the second quarter of 2001 is due
primarily to a continuation into the second quarter of 2002 from the 2002
first quarter of a scaled-back production schedule to reduce spending due to
our liquidity problems and to lessen the strain on this segment's raw material
vendors. [We anticipate correcting vendor-related issues in the near-term
with cash proceeds from asset sales].
- 21 -
Sales of cylinders continues to be affected by a softness in this market,
[a trend which the Company believes will bottom-out but possibly not reverse
during 2002.]
The decrease in Plastics revenues is the continuation of a downward trend
which began in 1999 and resulted from several factors, including certain
customers relocating manufacturing operations to Mexico and Asia, reduced
customer orders for continuing programs, end of product cycles and delays in
new program starts, which affected all Plastics facilities. Plastics also
lost a top ten customer in the second half of 2001 to competitive bidding on
the internet. [Management is seeking to expand Plastics' product offerings in
the business machines, consumer products and medical products industries to
mitigate this trend. However, if not successful, this trend in Plastics
revenue could continue during the remainder of 2002.]
The decreases in gross margins across all segments is related to volume
declines resulting in a decrease in production activity and our ability to
absorb costs. We are responding to these conditions by making progress on our
plan to restructure, including combining certain operations and eliminating
various administrative and management positions. [However, the benefits of
these actions may not materialize immediately.]
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
decreased during the 2002 second quarter compared to the same period in 2001
primarily due to the same factors affecting gross profit margin discussed
above. Total EBITDA as a percentage of sales in the second quarters of 2002
and 2001 exclude corporate and other EBITDA in each period.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the second quarter
of 2002 were $3.4 million, compared to $4.0 million for the second quarter of
2001. This decrease in SGA is directly related to the decreasing trend in
sales, resulting in lower commissions expense, cost cutting measures taken
during June 2001 and progress made on the restructuring, both of which
included personnel reductions in sales and administration. [Management
estimates the savings from these reductions to be approximately $1.8 million
annually.] However, the benefits of these cost cutting measures are being
offset by the continuation of the negative trend in sales and the resulting
effect on the Company's ability to absorb costs. SGA expenses as a percentage
of sales increased to 15.7% for the 2002 second quarter compared to 15.1% in
the 2001 second quarter. SGA as a percentage of sales was higher in the 2002
second quarter compared to the second quarter of 2001 due to the faster rate
at which volume has decreased compared to decreases in relatively fixed
administrative costs.
- 22 -
Other (Income) Expense
Other income for the second quarter of 2002 was $20,000, compared to
other expense of $0.5 million for the second quarter of 2001. The components
are as follows:
2002 2001 Change
-------- -------- --------
Amortization of goodwill and other intangibles $ 3 $ 515 $ (512)
Other (income) expense, net (23) 1 (24)
-------- -------- --------
Total other (income) expense, net $ (20) $ 516 $ (536)
======== ======== ========
We stopped amortizing goodwill effective January 1, 2002. There were no
significant offsetting items netted into other (income) expense, net, in
either period.
Interest Expense
Interest expense, net, for the second quarter of 2002 was $1.8 million
compared to $1.5 million for the second quarter of 2001. For the second
quarters of 2002 and 2001, a total of $1.2 million and $0.8 million,
respectively, of interest expense has been allocated to or actually incurred
in discontinued operations. On a combined basis interest expense was $3.0
million in the second quarter of 2002 compared to $2.3 million in the second
quarter of 2001. Although debt and prime lending rates have decreased from
end of second quarter 2001 levels to end of second quarter 2002 levels, the
resulting decrease was more than offset by the increased default rate being
paid on the BOA revolving credit and term loan facilities and $500,000 in
overadvance fees accrued in the second quarter of 2002. [Interest expense for
2002 may decrease compared to 2001 depending on the amount of proceeds and
timing of asset dispositions in 2002 as part of the restructuring plan.]
Income Taxes
There was no tax provision from continuing operations in the second
quarter of 2002 compared to a benefit of $0.2 million for the second quarter
of 2001. The Company has net operating loss carryforwards for Federal tax
return reporting purposes totaling $124.1 million at December 31, 2001, $79.2
million of which expire by 2004. [The Company may be able to utilize its loss
carryforwards against possible increased profitability as the result of the
Company's corporate-wide restructuring plan. However, until the amount of
proceeds from and timing of asset dispositions as part of such plan are
known], management has determined to fully reserve for the total amount of net
deferred tax assets as of December 31, 2001 [and to continue to do so during
2002 until assets are disposed]. The tax benefit from continuing operations
and resulting effective rate of 17.5% in the second quarter of 2001 was based
on the loss from continuing operations before tax adjusted for permanent
differences.
Discontinued Operations
There was a loss from discontinued operations for the second quarter of
2002 of $2.3 million compared to income from discontinued operations of $0.5
million in the second quarter of 2001. The loss from discontinued operations
of $2.3 million in the second quarter of 2002 relates to adjustments of the
carrying values to net realizable value, primarily machinery and equipment and
receivables, of assets retained from the sale of the discontinued bridges and
cranes operations. For the second quarters of 2002 and 2001, discontinued
operations includes a total of $1.2 million and $0.8 million, respectively, of
interest expense.
- 23 -
Six Months Ended June 30, 2002 Compared to
Six Months Ended June 30, 2001
Continuing Operations
Sales, gross margins and EBITDA percentages for the six months ended June
30, 2002 and 2001 are as follows:
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2002 2001 2002 2001 2002 2001
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 10,600 $ 24,275 12.5% 28.7% 3.4% 23.5%
Cylinders 9,118 11,530 9.1% 15.4% (1.9%) 4.2%
Plastics 16,583 22,985 11.5% 14.9% 4.3% 5.7%
--------- --------- ------ ------ ------ ------
Totals $ 36,301 $ 58,790 11.2% 20.7% 2.5% 12.8%
========= ========= ====== ====== ====== ======
Pressure vessels and springs sales, although rebounding to nearly normal
levels in the second quarter of 2002, are down significantly in the first half
of 2002 compared to the same period in 2001. This decrease is due primarily
to management's decision to shut-down our pressure vessels facility during the
first quarter of 2002. We made this decision to reduce spending due to our
liquidity problems and to lessen the strain on this segment's raw material
vendors. The decrease was also caused by the fact that the first quarter of
2001 included the recognition of $2.8 million of revenues on a large NASA
contract manufactured in 2000 but shipped in the first quarter of 2001. [We
anticipate correcting vendor-related issues in the near-term with cash
proceeds from asset sales].
Sales of cylinders in the first half of 2002 was affected by the
temporary disruption caused by the relocation of our former Milwaukee, WI
cylinder operations to Libertyville, IL and continues to be affected by a
softness in this market, [a trend which the Company believes will bottom-out
but possibly not reverse during 2002.]
The decrease in Plastics revenues is the continuation of a downward trend
which began in 1999 and resulted from several factors, including certain
customers relocating manufacturing operations to Mexico and Asia, reduced
customer orders for continuing programs, end of product cycles and delays in
new program starts, which affected all Plastics facilities. Plastics also
lost a top ten customer in the second half of 2001 to competitive bidding on
the internet. [Management is seeking to expand Plastics' product offerings in
the business machines, consumer products and medical products industries to
mitigate this trend. However, if not successful, this trend in Plastics
revenue could continue during the remainder of 2002.]
The decreases in gross margins across all segments is related to volume
declines resulting in a decrease in production activity and our ability to
absorb costs. We are responding to these conditions by making progress on our
plan to restructure, including combining certain operations and eliminating
various administrative and management positions. [However, the benefits of
these actions may not materialize immediately.]
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
- 24 -
decreased during the 2002 first half compared to the same period in 2001
primarily due to the same factors affecting gross profit margin discussed
above. Total EBITDA as a percentage of sales in the first halves of 2002 and
2001 exclude corporate and other EBITDA in each period.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first half of
2002 were $7.0 million, compared to $8.4 million for the first half of 2001.
This decrease in SGA is directly related to the decreasing trend in sales,
resulting in lower commissions expense, cost cutting measures taken during
June 2001 and progress made on the restructuring, both of which included
personnel reductions in sales and administration. [Management estimates the
savings from these reductions to be approximately $1.8 million annually.]
However, the benefits of these cost cutting measures are being offset by the
continuation of the negative trend in sales and the resulting effect on the
Company's ability to absorb costs. SGA expenses as a percentage of sales
increased to 19.4% for the 2002 first half compared to 14.3% in the 2001 first
half. SGA as a percentage of sales was higher in the 2002 first half compared
to the first half of 2001 due to the faster rate at which volume has decreased
compared to decreases in relatively fixed administrative costs.
Other (Income) Expense
Other income for the first half of 2002 was $0.8 million, compared to
other expense of $1.0 million for the first half of 2001. The components are
as follows:
2002 2001 Change
-------- -------- --------
Amortization of goodwill and other intangibles $ 6 $ 1,007 $ (1,001)
Gain on sale of equipment with zero book value (375) - (375)
Other (income) expense, net (412) (22) (390)
-------- -------- --------
Total other (income) expense, net $ (781) $ 985 $ (1,766)
======== ======== ========
We stopped amortizing goodwill effective January 1, 2002. In January
2002, we sold equipment that had no book value. The increase in the remaining
other income is primarily due to higher levels of sales of scrap and
miscellaneous parts due to cleaning out idled facilities. There were no
significant offsetting items netted into other (income) expense, net, in
either period.
Interest Expense
Interest expense, net, for the first half of 2002 was $3.9 million
compared to almost $3.2 million for the first half of 2001. For the first
halves of 2002 and 2001, a total of $1.8 million and $1.6 million,
respectively, of interest expense has been allocated to or actually incurred
in discontinued operations. On a combined basis interest expense was $5.7
million in the first half of 2002 compared to $4.8 million in the first half
of 2001. Although debt and prime lending rates have decreased from end of
second quarter 2001 levels to end of second quarter 2002 levels, the effect on
interest expense resulting from these decreases was almost fully offset by the
increased default rate being paid on the BOA revolving credit and term loan
facilities and $1.125 million in combined paid and accrued overadvance fees in
the first half of 2002. [Interest expense for 2002 may decrease compared to
2001 depending on the amount of proceeds and timing of asset dispositions in
2002 as part of the restructuring plan.]
Income Taxes
There was no tax provision from continuing operations in the first half
- 25 -
of 2002 compared to a tax provisions of $0.2 million for the first half of
2001. The Company has net operating loss carryforwards for Federal tax return
reporting purposes totaling $124.1 million at December 31, 2001, $79.2 million
of which expire by 2004. [The Company may be able to utilize its loss
carryforwards against possible increased profitability as the result of the
Company's corporate-wide restructuring plan. However, until the amount of
proceeds from and timing of asset dispositions as part of such plan are
known], management has determined to fully reserve for the total amount of net
deferred tax assets as of December 31, 2001 [and to continue to do so during
2002 until assets are disposed]. The tax provision from continuing operations
in the first half of 2001 was based on the loss from continuing operations
before tax adjusted for permanent differences.
Discontinued Operations
There was a loss from discontinued operations for the first half of 2002
of $2.3 million compared to income from discontinued operations of $0.8
million in the first half of 2001. The loss from discontinued operations of
$2.3 million in the first half of 2002 relates to adjustments of the carrying
values to net realizable value, primarily machinery and equipment and
receivables, of assets retained from the sale of the discontinued bridges and
cranes operations. For the first halves of 2002 and 2001, discontinued
operations includes a total of $1.9 million and $1.6 million, respectively, of
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.
Restructuring and Other Actions
In the fourth quarter of 2001, we developed and adopted a plan to
restructure our continuing operations. During 2002, the Company has made
significant progress towards implementation of this plan.
On June 30, 2002, we sold the inventory and substantially all of the
property, plant and equipment of Alliance, our discontinued bridges and cranes
operations, for net cash proceeds of $3.058 million and the assumption by the
buyer of certain liabilities. We retained all receivables, trade payables and
certain other liabilities of this discontinued operation. The net cash
proceeds of $3.058 million were used to reduce borrowings under our BOA
revolving credit facility ($322,000), term loan A facility ($1.87 million) and
capital expenditure facility ($866,000).
On April 30, 2002, we entered into a non-binding letter of intent (LOI)
for the sale of substantially all of the assets and business of Kingway, our
discontinued materials handling systems operations, for a total of $34.0
million in a combination of cash and subordinated notes. Since then we have
had further negotiations with the buyer and have agreed to a purchase price of
$32.0 million, comprised of $27.5 million in cash and a $4.5 million
subordinated contingent note, the terms of which are being negotiated. The
due diligence process by the buyer is substantially complete. We are
- 26 -
currently negotiating a definitive asset purchase agreement. The closing of
this transaction is subject to certain conditions, including the execution of
a definitive asset purchase agreement. There are no assurances that this
transaction will close on the terms set forth in the draft asset purchase
agreement or at all.
[We anticipate using the cash proceeds from this asset sale to pay
accrued interest on our senior notes, reduce debt, pay our overextended
vendors and for other corporate purposes. Debt reductions will include a
combination of BOA revolving credit and term loan facilities and 13% senior
notes. Cash proceeds to be applied to reducing debt is dependent on a number
of factors including, but not limited to, finalization of the net cash to be
received in the sale and limitations imposed by BOA, if any.]
The closing of this transaction is subject to certain conditions,
including the execution of a definitive asset purchase agreement. There are
no assurances that this transaction will close on the terms set forth in the
draft asset purchase agreement or at all.
During the first quarter of 2002, NPSAC, the Company's former pressure
vessel operations in Clearfield, Utah, was relocated to and combined with the
pressure vessel operations in McKeesport, PA. The cylinder operations in
Milwaukee, WI have been relocated to our leased facility in Libertyville, IL.
The land and building in Milwaukee, WI is being prepared for sale. We are
preparing to move the cylinder operations in Chicago, IL to the Libertyville
facility during the third quarter of 2002. We closed the Plastics' corporate
headquarters in Charlotte, NC and all administrative and managerial positions
were eliminated. Plastics' corporate responsibilities have been returned to
our manufacturing and administrative operations in Oneida, NY.
The restructuring charge we recorded in the fourth quarter of 2001
included estimated cash and non-cash components. The cash components were
comprised of reserves for lease termination costs and employee separations.
The employee separation costs recorded in the restructuring related to the 7
employees of NPSAC, the Company's former pressure vessel operations in
Clearfield, Utah. We did not accrue for any additional employee separations
related to the restructuring, although such separations totaled approximately
200 employees as of June 30, 2002. The termination costs were recorded upon
notification to the employees, which occurred in the same period as the
terminations. The following represents a summary of first half 2002 cash
activity for the estimated cash components of our fourth quarter 2001
restructuring charge (in thousands).
At 2002 At
Description 12/31/01 Activity 06/30/02
--------------------------------------------- -------- -------- --------
Lease termination costs $ 1,172 $ (166) $ 1,006
Employee separations 20 (20) -
-------- -------- --------
Reserve for restructuring $ 1,192 $ (186) $ 1,006
======== ======== ========
We reevaluated the shut-down of our Plastics operation in Siler City, NC
and have determined to maintain our presence in the southern U.S. and service
the customers of the Siler City, NC location. This reevaluation does not
change our intent to dispose of the land, building and a large portion of the
existing machinery and equipment or the fourth quarter restructuring charge
related thereto as the leased and owned machinery and equipment related to the
charge remains out of service.
- 27 -
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 is 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
and May 1, 2002. We were also unable to make the $12.5 million sinking fund
payment due May 1, 2002. 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 while we
execute our plan to restructure and generate liquidity through asset sales,
the senior notes holders have the right to accelerate all amounts outstanding,
including accrued and unpaid interest of $4.25 million, totaling $29.1 million
at July 31, 2002. Interest accrues at approximately $0.3 million per month,
including compounded interest at 13% per annum on the unpaid semi-annual
interest payments.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $34.8 million of senior secured revolving and term
loan credit facilities outstanding at June 30, 2002 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.
In November 2001, BOA informed us that a borrowing base deficiency
existed. Since that time, the Company and BOA have entered into six side
letter agreements wherein BOA and the other lenders that participated in the
BOA refinancing of the Company in March 2000 agreed to provide monthly
advances in excess of our calculated borrowing base for working capital needs
while we execute our plan to restructure and generate liquidity by selling
assets. The sixth side letter agreement, dated April 1, 2002, provides
overadvance approval on a day-to-day basis whereby the overadvance may not
exceed $3.5 million. As of August 19, 2002, we have not exceeded the $3.5
million overadvance availability. However, nothing in these six side letter
agreements waives or otherwise alters BOA's already existing remedies under
the BOA financing and security agreement including acceleration of all amounts
outstanding under the BOA financing and security agreement.
In consideration of providing its approval of overadvance availability,
we had been paying to BOA through direct charges to our revolving credit
facility a weekly fee of $25,000 or $50,000, depending on the amount of the
overadvance. Since entering into the side letter agreements beginning in
November 2001, the Company has paid BOA a total of $800,000 in such fees. In
the last week of April 2002, BOA agreed to not directly charge our revolving
credit facility for these overadvance fees but, instead, permit us to accrue
such fees to be paid upon the sale of our discontinued materials handling
systems operations. As of June 30, 2002, we had accrued $500,000 of such
fees, which continue to accrue at either $25,000 or $50,000 per week,
depending on the amount of the overadvance.
[Since we could not repay our senior noteholders or bank lenders if
either or both of them exercised their existing rights to accelerate what we
owe them, they could pursue all remedies available to creditors in the normal
course of business, including filing of involuntary bankruptcy petitions.]
- 28 -
SUMMARY OF 2002 ACTIVITIES
Cash and cash equivalents totaled $0.6 million (including $0.2 million
classified within discontinued operations) at June 30, 2002, compared to $1.2
million (including $0.5 million classified within discontinued operations) at
December 31, 2001, a decrease of $0.6 million. This decrease resulted from
$1.0 million of cash provided by operations and $3.2 million of cash provided
by investing activities being more than offset by $4.8 million used in
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 provided by operating activities of $1.0 million in the first half
of 2002 was the result of continued losses being more than offset by a
decrease in net working capital as lower volume levels led to a reduction in
receivables and as tighter liquidity resulted in the missed May 1, 2002
interest payment and a slowdown in payments to vendors which increased trade
payables.
Investing Activities
The Company disposed of the inventory and substantially all of the
property, plant and equipment of the discontinued bridges and cranes
operations for $3.058 million of net cash proceeds on June 30, 2002. Also, in
January 2002, machinery and equipment with no book value was sold, generating
$0.4 million in cash proceeds. Capital expenditures have been substantially
scaled-back and were less than $0.3 million.
Financing Activities
The Company made scheduled repayments of debt totaling $2.0 million,
which included almost $1.9 million on its term loan A and $0.1 million on its
capital expenditures facility. Revolving credit facility borrowings decreased
$48,000 during the first half of 2002. These reductions were funded primarily
with working capital. Other debt repayments totaling $41,000 represent
payments on capital lease obligations and other debt. Also, the net cash
proceeds of $3.058 million from the disposal of the inventory and
substantially all of the property, plant and equipment of the discontinued
bridges and cranes operations were used to reduce borrowings under our BOA
revolving credit facility ($322,000), term loan A facility ($1.87 million) and
capital expenditure facility ($866,000).
FACTORS AFFECTING CURRENT AND FUTURE LIQUIDITY
During the third and fourth quarters of 2001, downturns in several of the
markets we serve adversely affected our ability to absorb costs and we
experienced an increase in ineligible receivables and inventory. This
increase in ineligibles resulted in a decrease in borrowing availability under
the revolving credit facility. These events have and continue to adversely
affect our ability to meet obligations. We have extended our vendors and
failed to make the November 1, 2001 and May 1, 2002 $1.616 million semi-annual
interest payments and the May 1, 2002 $12.5 million sinking fund payment on
our 13% senior notes.
During 2002, we have made significant progress towards implementation of
our restructuring plan, including the sale of certain assets of the
discontinued bridges and cranes operations for $3.058 million in net cash
proceeds and entering into an LOI for the sale of our discontinued materials
handling systems operations. [We believe we will generate adequate proceeds
from asset sales to alleviate the current and future strain on liquidity and
- 29 -
meet past due, immediate and near-term obligations. However, no assurances
can be given that our pursuits will be successful.]
If we are not able to complete sales of assets on acceptable terms or if
other anticipated benefits of our plan to restructuring do not materialize,
[we may not be able to continue as a going concern].
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal Proceedings
The Company and its subsidiaries are defendants in a number of lawsuits
and administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. The Company believes that any
material liability which can result from any of such lawsuits or proceedings
has been properly reserved for in the Company's consolidated financial
statements or is covered by indemnification in favor of the Company or its
subsidiaries, and therefore the outcome of these lawsuits or proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended. There is no applicable insurance coverage.
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. In August 2002, the plaintiff stockholder filed a first request
for the production of documents in Delaware Chancery Court. Reunion is in the
initial stages of reviewing the document production request and intends to
vigorously contest the suit.
The Company has been named as a defendant in fifteen consolidated
lawsuits filed in December 2000 or early 2001 in the Superior Court for Los
Angeles County, California, three of which are purported class actions
asserted on behalf of approximately 200 payees. The plaintiffs in these
suits, except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC are related parties.
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Bradley, the sole shareholder of SFSC's parent, several
major financial institutions and certain others. All of these suits arise out
- 30 -
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 June 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.
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. Both model complaints allege causes of
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted cross-
complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
vigorously defend against these actions and cross-actions.
The Company has been named in approximately 350 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
negotiated dismissal of 95 cases without any cost to the Company. The Company
- 31 -
denies that it manufactured any products containing asbestos or otherwise knew
or should have known that any component part manufacturers provided products
containing asbestos. The Company intends to vigorously defend against these
lawsuits.
Since July 10, 2001, various lawsuits, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon 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 73
separate actions, all of which are being defended by Allen-Bradley Company.
Environmental Compliance
Various U.S. federal, state and local laws and regulations including,
without limitation, laws and regulations concerning the containment and
disposal of hazardous waste, oil field waste and other waste materials, the
use of storage tanks, the use of insecticides and fungicides and the use of
underground injection wells directly or indirectly affect the Company's
operations. In addition, environmental laws and regulations typically impose
"strict liability" upon the Company for certain environmental damages.
Accordingly, in some situations, the Company could be liable for clean up
costs even if the situation resulted from previous conduct of the Company that
was lawful at the time or from improper conduct of, or conditions caused by,
previous property owners, lessees or other persons not associated with the
Company or events outside the control of the Company. Such clean up costs or
costs associated with changes in environmental laws and regulations could be
substantial and could have a materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Except as described in the following paragraphs, the Company believes it
is currently in material compliance with existing environmental protection
laws and regulations and is not involved in any significant remediation
activities or administrative or judicial proceedings arising under federal,
state or local environmental protection laws and regulations. In addition to
management personnel who are responsible for monitoring environmental
compliance and arranging for remedial actions that may be required, the
Company has also employed outside consultants from time to time to advise and
assist the Company's environmental compliance efforts. Except as described in
the following paragraphs, the Company has not recorded any accruals for
environmental costs.
In February 1996, Reunion was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. Since then, the Company has expended $376,000 of
remediation costs and accrued an additional $20,000.
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
- 32 -
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. The Company's
environmental consultant is in the process of updating the estimate of the
costs to comply with this order, but the Company does not believe that the
cost of future remediation will exceed the amount accrued. No remediation was
performed in 2000 or 2001 pending the decision. However, the Company has paid
$247,000 for its share of consulting services in connection with the hearings.
At June 30, 2002, the balance accrued for these remediation costs is
approximately $1,061,000. Owners of a portion of the property have objected
to the Company's cleanup methodology and have filed suit to require additional
procedures. The Company is contesting this litigation, and believes its
proposed methodology is well within accepted industry practice for
remediation efforts of a similar nature. No accrual has been made for costs
of any alternative cleanup methodology which might be imposed as a result of
the litigation.
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site outside Petaluma, Marin County, California. The Company
gathered and forwarded to the USEPA the information it 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 its removal and
disposal efforts 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 on this site 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 back to 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 resulting in the failure of the dam built to
retain mining materials. Runoff from the flood released mining materials into
the creek below and, ultimately, into the Tomales Bay, a local recreation and
fishing area.
In 1985, BGO, headquartered in Houston, Texas, filed Chapter 11
proceedings in bankruptcy court in the Southern District of Texas in Houston.
In December 1988, BGO confirmed its plan of reorganization which provided for,
among other things, a discharge of all claims that arose prior to the date of
confirmation of the plan. The reorganization plan became effective in
February 1989.
In response to the USEPA's demand, the Company has filed an adversary
proceeding in bankruptcy court in the Southern District of Texas in Houston
seeking an order to enjoin the efforts of the USEPA to pursue collection of
any claims related to the site. The USEPA has responded by filing a motion to
dismiss based on several jurisdictional and substantive grounds. The matter
is set for a status conference on August 27, 2002, at which time the Company's
counsel anticipates the court will set a hearing date on the USEPA's motion to
dismiss.
The Company intends to prosecute the pending litigation vigorously. The
Company has made no accrual of any amount related to this matter as, at this
time, the probability of an adverse outcome to the Company is reasonably
possible, but not probable.
- 33 -
Item 3. Defaults Upon Senior Securities
Debt in default consists of the following (in thousands):
At June 30, At December 31,
2002 2001
----------- --------------
(unaudited)
13% senior notes (net of unamortized
discount of $-0- and $2) $ 24,855 $ 24,853
BOA revolving credit facility 22,427 22,475
BOA term loan A due March 16, 2007 12,358 16,071
BOA capital expenditure facility - 990
-------- --------
Total debt in default $ 59,640 $ 64,389
======== ========
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 is 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
and May 1, 2002. We were also unable to make the $12.5 million sinking fund
payment due May 1, 2002.
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. As such, the senior notes holders have the
right to accelerate all amounts outstanding, including accrued and unpaid
interest of $4.25 million, totaling $29.1 million at July 31, 2002. Interest
accrues at approximately $0.3 million per month, including compounded interest
at 13% per annum on the unpaid semi-annual interest payments.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $34.8 million of senior secured revolving and term
loan credit facilities outstanding at June 30, 2002 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.
In November 2001, BOA informed us that a borrowing base deficiency
existed. Since that time, the Company and BOA have entered into six side
letter agreements wherein BOA and the other lenders that participated in the
BOA refinancing of the Company in March 2000 agreed to provide monthly
advances in excess of our calculated borrowing base for working capital needs
while we execute our plan to restructure and generate liquidity by selling
assets. The sixth side letter agreement, dated April 1, 2002, provides
overadvance approval on a day-to-day basis whereby the overadvance may not
exceed $3.5 million. As of August 19, 2002, we have not exceeded the $3.5
million overadvance availability and, with certain previously ineligible
progress billings becoming eligible due to the completion of contracts at our
discontinued materials handling systems operations, have reduced our
overadvance as of August 19, 2002 to $0.0 million. However, nothing in these
six side letter agreements waives or otherwise alters BOA's already existing
remedies under the BOA financing and security agreement including acceleration
of all amounts outstanding under the BOA financing and security agreement.
- 34 -
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of Reunion Industries stockholders held
on June 12, 2002 for the record date of April 15, 2002, stockholders holding a
majority of the shares of common stock of Reunion Industries voted to approve
the proposals included in Reunion Industries' proxy statement as follows:
Proposal 1: Election of Directors For Withhold
---------- ----------
Thomas N. Amonett 8,692,948 253,337
Charles E. Bradley, Sr. 8,688,912 257,373
Kimball J. Bradley 8,689,387 256,898
Thomas L. Cassidy 8,692,633 253,652
W. R. Clerihue 8,692,618 253,667
Joseph C. Lawyer 8,689,597 256,688
Franklin Myers 8,692,963 253,322
John G. Poole 8,693,203 253,082
Proposal 2: To consider and act upon such other business as
may properly come before the meeting
Broker
For Against Abstained Non-Votes
---------- ---------- ---------- ----------
8,603,990 196,099 146,196 -
Item 6. Exhibits and Reports on Form 8-K
(c) Exhibits
The following exhibits are filed herewith in accordance
with Item 601 of Regulation S-K:
Exhibit No. Exhibit Description
----------- -------------------
99.1 Certification Pursuant to Section 906
of The Sarbanes-Oxley Act of 2002 -
Charles E. Bradley, Sr., Chief Executive
Officer
99.2 Certification Pursuant to Section 906
of The Sarbanes-Oxley Act of 2002 -
John M. Froehlich, Chief Financial
Officer
- 35 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Date: August 19, 2002 REUNION INDUSTRIES, INC.
--------------- (Registrant)
By: /s/ Charles E. Bradley, Sr.
-------------------------------
Charles E. Bradley, Sr.
Chief Executive Officer
By: /s/ John M. Froehlich
-------------------------------
John M. Froehlich
Executive Vice President, Finance
and Chief Financial Officer
(chief financial and accounting officer)
- 36 -
EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
----------- ------------------- --------
99.1 Certification Pursuant to Section 906 38
of The Sarbanes-Oxley Act of 2002 -
Charles E. Bradley, Sr., Chief Executive
Officer
99.2 Certification Pursuant to Section 906 39
of The Sarbanes-Oxley Act of 2002 -
John M. Froehlich, Chief Financial
Officer
- 37 -
Exhibit 99.1
Certification Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Reunion
Industries, Inc. (the "Company") for the quarter ended June 30, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Charles E. Bradley, Sr., Chief Executive Officer of the Company, certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best
of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except as required by said Act, be
deemed filed by the Company for purposes of the Securities Exchange Act of
1934, as amended.
/s/ Charles E. Bradley, Sr.
--------------------------------------
Charles E. Bradley, Sr.
Chief Executive Officer
August 19, 2002
- 38 -
Exhibit 99.2
Certification Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Reunion
Industries, Inc. (the "Company") for the quarter ended June 30, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, John M. Froehlich, Chief Financial Officer of the Company, certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best
of my knowledge:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except as required by said Act, be
deemed filed by the Company for purposes of the Securities Exchange Act of
1934, as amended.
/s/ John M. Froehlich
--------------------------------------
John M. Froehlich
Chief Financial Officer
August 19, 2002
- 39 -