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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 33-64325
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REUNION INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
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(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400
PITTSBURGH, PENNSYLVANIA 15222
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
At April 30, 2001, 15,235,624 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 27 pages.
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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act which are intended to be covered by the safe harbors created thereby. The
forward-looking statements contained in this report are enclosed in brackets
[] for ease of identification. Note that all forward-looking statements
involve risks and uncertainties, including, without limitation, factors which
could cause the future results and shareholder values to differ materially
from those expressed in the forward-looking statements. Although the Company
believes that the assumptions underlying the forward-looking statements
contained in this report are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurances that the forward-looking
statements included or incorporated by reference in this report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included or incorporated by reference herein, the
inclusion of such information should not be regarded as a representation by
the Company or any other person that the Company's objectives and plans will
be achieved. In addition, the Company does not intend to, and is not
obligated to, update these forward-looking statements after filing and
distribution of this report, even if new information, future events or other
circumstances have made them incorrect or misleading as of any future date.
- 2 -
REUNION INDUSTRIES, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at
March 31, 2001 (unaudited) and December 31, 2000 4
Condensed Consolidated Statement of Income and
Comprehensive Income for the three months ended
March 31, 2001 and 2000 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for
the three months ended March 31, 2001 and 2000 (unaudited) 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K 26
SIGNATURES 27
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AT MARCH 31, 2001 AND DECEMBER 31, 2000
(in thousands)
At March 31, At December 31,
2001 2000
----------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 886 $ 1,826
Receivables, net 35,938 31,777
Advances to employees 233 233
Inventories, net 19,723 21,781
Other current assets 3,522 3,307
Net assets of discontinued operations - 9
-------- --------
Total current assets 60,302 58,933
Property, plant and equipment, net 31,034 31,166
Due from related parties 1,606 3,950
Goodwill, net 27,007 18,837
Other assets, net 16,832 17,069
-------- --------
Total assets $136,781 $129,955
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Revolving credit facilities $ 24,763 $ 19,367
Current maturities of debt 6,441 4,061
Trade payables 17,043 21,662
Due to related parties 472 224
Other current liabilities 15,896 15,133
Net liabilities of discontinued operations 607 -
-------- --------
Total current liabilities 65,222 60,447
Long-term debt 43,507 42,656
Long-term debt - related party 4,615 4,015
Other liabilities 1,117 1,278
-------- --------
Total liabilities 114,461 108,396
Commitments and contingent liabilities - -
Stockholders' equity 22,320 21,559
-------- --------
Total liabilities and stockholders' equity $136,781 $129,955
======== ========
See accompanying notes to condensed consolidated financial statements.
- 4 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(in thousands, except per share information)(unaudited)
Three Months Ended
March 31, March 31,
2001 2000
-------- --------
Operating revenue:
Metals Group $ 37,388 $ 34,448
Plastics Group 12,235 3,109
-------- --------
Total sales 49,623 37,557
-------- --------
Cost of sales:
Metals Group 28,931 28,184
Plastics Group 10,233 2,594
-------- --------
Total cost of sales 39,164 30,778
-------- --------
Gross profit 10,459 6,779
Selling, general & administrative 6,328 4,008
Other expense, net 569 294
-------- --------
Operating profit 3,562 2,477
Interest expense, net 2,409 2,129
Equity in loss of continuing operations of affiliate - 296
-------- --------
Income from continuing operations before income taxes 1,153 52
Provision for (benefit from) income taxes 392 (817)
-------- --------
Income from continuing operations 761 869
Loss from discontinued operations, net of tax of $-0- - 74
-------- --------
Income before extraordinary items 761 795
-------- --------
Extraordinary items, net of tax of $-0-:
Write-off of deferred financing costs - (1,501)
Equity in loss of extraordinary item of affiliate - (271)
-------- --------
Loss from extraordinary items - (1,772)
-------- --------
Net and comprehensive income (loss) $ 761 $ (977)
======== ========
- 5 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000(continued)
(in thousands, except per share information)(unaudited)
Three Months Ended
March 31, March 31,
2001 2000
-------- --------
Income (loss) applicable to common stockholders $ 761 $ (1,072)
======== ========
Earnings per common share - basic:
Continuing operations $ 0.05 $ 0.08
Discontinued operations - (0.01)
Extraordinary items - (0.18)
-------- --------
Income (loss) per common share - basic $ 0.05 $ (0.11)
======== ========
Weighted average shares outstanding - basic 15,236 9,910
======== ========
Earnings per common share - diluted:
Continuing operations $ 0.05 $ 0.08
Discontinued operations - (0.01)
Extraordinary items - (0.18)
-------- --------
Income (loss) per common share - diluted $ 0.05 $ (0.11)
======== ========
Weighted average shares outstanding - diluted 15,340 9,910
======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(in thousands)
(unaudited)
Three Months Ended
March 31, March 31,
2001 2000
-------- --------
Cash used in operating activities $ (4,507) $ (1,258)
-------- --------
Cash flow from investing activities:
Capital expenditures (799) (572)
Acquisition of NPSAC common stock (10) -
Acquisition of Kingway common stock - (100)
Cash acquired in merger - 2,666
-------- --------
Cash provided by (used in) investing activities (809) 1,994
-------- --------
Cash flow from financing activities:
Proceeds from issuance of debt - 30,800
Net change in revolving credit facilities 5,396 24,167
Repayments of debt (1,632) (50,642)
Repayments of debt - related party - (1,076)
Payments of deferred financing costs and closing fees - (1,404)
-------- --------
Cash provided by financing activities 3,764 1,845
-------- --------
Net increase (decrease) in cash and cash equivalents (1,552) 2,581
Less: Change in cash of discontinued operations 612 -
Cash and cash equivalents, beginning of year 1,826 252
-------- --------
Cash and cash equivalents, end of period $ 886 $ 2,833
======== ========
See accompanying notes to condensed consolidated financial statements.
- 7 -
REUNION INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
NOTE 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by 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
month period ended March 31, 2001 are not necessarily indicative of the
results of operations for the full year. When reading the financial
information contained in this Quarterly Report, reference should be made to
the financial statements, schedules and notes contained in Reunion's Annual
Report on Form 10-K for the year ended December 31, 2000.
Recent Accounting Pronouncement
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement requires that derivative instruments such as
options, forward contracts and swaps be recorded as assets and liabilities at
fair value and provides guidance for recognition of changes in fair value
depending on the reason for holding the derivative. Reunion Industries does
not presently have transactions involving derivative instruments.
NOTE 2: RECENT DEVELOPMENTS AND OTHER MATTERS OF IMPORTANCE
Additional Shares of Reunion Common Stock
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The merger agreement also provided that up
to an additional 500,000 shares of Reunion common stock would be issued to
former Chatwins Group common stockholders if the former Chatwins Group
businesses and the acquired Kingway business achieve specified performance
levels in 2000. A preliminary determination of the number of shares to be
issued was made by the board of directors at its meeting held on May 15, 2001.
Such additional shares total 349,000.
Acquisition of NPS Acquisition Corp.
On January 17, 2001, the Company acquired NPS Acquisition Corp. (f/k/a
Naptech Pressure Systems) from Charles E. Bradley, Sr. (Mr. Bradley), the
Company's chairman of the board and chief executive officer. NPSAC is based
in Clearfield, Utah and manufactures seamless steel pressure vessels, an
existing Metals Group product line.
The purchase price was $10,000 plus the assumption of $10.3 million of
NPSAC's liabilities, including a 15% per annum $6.9 million note payable to
Shaw Industries, the former owner of Naptech Pressure Systems. Simultaneously
with the acquisition, Reunion paid Shaw Industries $2.0 million of the note
payable in cash from funds available under its revolving credit facility with
Bank of America (BOA). The remainder of the note payable of $4.9 million was
then restructured to include quarterly principal payments of $0.6 million for
eight quarters which began on February 28, 2001. Reunion made the first
payment from funds available under its revolving credit facility. The note is
unsecured and subordinate to the BOA term loan and revolving credit facilities
and the 13% senior notes.
- 8 -
The transaction was accounted for as a purchase under APB 16. The
estimated fair value of assets acquired included approximately $1.4 million of
cash, receivables, inventories and other current assets and approximately $0.3
million of fixed assets. The purchase price in excess of net assets acquired
of $8.6 million was recorded as goodwill and is being amortized over 15 years.
Repayment of $120,000 of 13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
As such, on June 1, 2000 Reunion made the required offer to purchase
$2,525,000 of senior notes, of which holders of only $120,000 of senior notes
tendered. However, the $25.0 million of 13% senior notes repaid from the
merger proceeds was and can be applied against Reunion's obligations for
sinking fund payments and the purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
Therefore, $120,000 principal amount of 13% senior notes was repaid by
the Company on May 1, 2001 from funds available under its revolving credit
facility. Of the remaining $24.855 million of senior notes, $12.5 million is
scheduled to be repaid in May 2002 and $12.355 million is scheduled to be
repaid in May 2003.
- 9 -
Long-term debt consists of the following (in thousands):
At March 31, At December 31,
2001 2000
----------- --------------
(unaudited)
13% senior notes due May 1, 2003 (net of
unamortized discount of $11 and $14) $ 24,964 $ 24,961
BOA term loan A due March 16, 2007 18,836 19,757
BOA capital expenditure facility 605 640
Note payable due February 28, 2003 4,252 -
Other 1,291 1,359
Other - related parties 4,615 4,015
-------- --------
Total long-term debt 54,563 50,732
Current maturities (6,441) (4,061)
-------- --------
Total long-term debt, less current maturities $ 48,122 $ 46,671
======== ========
Payment of Semi-Annual Interest on 13% Senior Notes
On May 1, 2001 the Company made its $1.623 million semi-annual interest
payment on its 13% senior notes from funds available under its revolving
credit facility.
Payment of $680,000 Industrial Revenue Development Bonds
Upon the sale of its domestic grating operations in September 1999, the
Company retained an obligation for a $680,000 note payable due May 1, 2001
related to an industrial development revenue bond issue by Orem City, Utah.
This note payable was repaid in May 2001 from funds available under the
Company's revolving credit facility.
2001 Covenant Compliance
For quarters ended March 31, 2001 and for each fiscal quarter thereafter
in 2001, the BOA financing and security agreement required the Company to
maintain a minimum fixed charge coverage ratio of 1.25:1 and maximum funded
debt to EBITDA ratios of 3.75:1, 3.50:1, 3.25:1 and 3.00:1.
Because the Company's 2001 business plan includes assumptions regarding
results of operations and economic conditions, achievement of which is
necessary for compliance with the financial covenants included in the BOA
financing and security agreement in 2001, particularly the third and fourth
quarters, in April 2001, the Company entered into a letter agreement with Bank
of America whereby, as long as the Company maintains both a fixed charge
coverage ratio of at least 1.00:1 and has a funded debt to EBITDA ratio of no
more than 4.50:1 as of the September 30, 2001 and December 31, 2001
calculation dates, and as long as the Company is in compliance on all other
covenants, the Bank of America will not accelerate any of its loans.
For the quarter ended March 31, 2001, the Company's fixed charge coverage
ratio was 1.48:1 and the funded debt to EBITDA ratio was 2.94:1.
- 10 -
NOTE 3: INVENTORIES
Inventories are comprised of the following (in thousands):
At March 31, At December 31,
2001 2000
----------- --------------
(unaudited)
Metals Group:
Raw material $ 4,502 $ 5,933
Work-in-process 5,380 4,295
Finished goods 5,092 7,214
-------- --------
Gross inventories 14,974 17,442
Less: LIFO reserves 80 80
-------- --------
Metals Group inventories 15,054 17,522
-------- --------
Plastics Group:
Raw material 2,898 2,584
Work-in-process 310 323
Finished goods 1,461 1,352
-------- --------
Plastics Group inventories 4,669 4,259
-------- --------
Inventories $ 19,723 $ 21,781
======== ========
NOTE 4: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
equity for the three month period ended March 31, 2001 (in thousands):
Par Capital
Value in
of Excess Accum-
Common of Par ulated
Stock Value Deficit Total
------ ------- -------- --------
At January 1, 2001 $152 $24,608 $ (3,201) $ 21,559
Activity (unaudited):
Net income - - 761 761
---- ------- -------- --------
At March 31, 2001 $152 $24,608 $ (2,440) $ 22,320
==== ======= ======== ========
- 11 -
The computations of basic and diluted earnings per common share (EPS) for
the three month periods ended March 31, 2001 and 2000 are as follows (in
thousands, except per share amounts)(unaudited):
Income Shares EPS
-------- -------- -------
Three months ended March 31, 2001:
Income applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ 761 15,236 $ 0.05
=======
Dilutive effect of stock options 104
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted EPS $ 761 15,340 $ 0.05
======== ======== =======
Three months ended March 31, 2000:
Net loss $ (977)
Less: Preferred stock dividend accretions (95)
--------
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted EPS $ (1,072) 9,910 $ (0.11)
======== ======== =======
At March 31, 2001, the Company's stock options outstanding totaled
868,000, of which 331,000 were at exercise prices below the average market
price of the underlying security during the first quarter 2001. Such options
include a dilutive component of 103,805 shares. The assumed conversion of
potentially dilutive instruments is inconsequential in the three month period
ended March 31, 2000. Therefore, basic and dilutive EPS are equal.
NOTE 5: 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.
- 12 -
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit is in the initial stages of discovery. Reunion
intends to vigorously contest the suit.
The Company has been named as a defendant in seven related lawsuits filed
in December 2000 or early 2001 in the Superior Court for Los Angeles County,
California. The plaintiffs in these suits except one are structured
settlement payees to whom Stanwich Financial Services Corp. (SFSC) is
indebted. The Company and SFSC are related parties.
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Bradley, 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. Although the claims made and the
relief sought vary somewhat from suit to suit, in general (1) the suits allege
breach of contract, breach of fiduciary duty, negligence, conversion,
fraudulent conveyance, fraud and violations of certain statutes and (2) the
relief sought includes compensatory and punitive damages, statutory penalties
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 structured
settlement business. They also 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 in
three of the suits claim class action status.
The plaintiffs' theory of liability against the Company in these suits is
based on allegations that the Company is the alter ego of SFSC and Mr.
Bradley, sole shareholder and director of SFSC, and that the Company
participated in the actions and omissions alleged. The Company denies these
allegations and intends to vigorously defend against these lawsuits.
The Company has been named in approximately 195 separate asbestos suits
filed since January 1, 2001 by two plaintiffs' law firms in Wayne County,
Michigan. The claims allege that cranes from the Company's crane
manufacturing location in Alliance, OH were present in various parts of
McLouth Steel Mill in Wayne County, Michigan and that those cranes contained
asbestos to which plaintiffs were exposed over a 40 year span. As of the date
of this report, counsel for the Company has filed an answer to each complaint
denying liability by the Company and asserting all alternative defenses
permitted under the Court's Case Management Order. 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.
Reunion is involved in various litigation matters in the ordinary course
of business. In the opinion of management, settlement of these and other
contingent matters will not have any material effect on the Company's
financial position, results of operations or liquidity.
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
- 13 -
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. The Company has expended $262,000 and has
accrued an additional $133,000 based on current estimates of remediation
costs.
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 Office of
Conservation. 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 1998 the Company increased this accrual by a charge of $1,200,000,
based on revised estimates of the remaining remediation costs. 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. No decision has been rendered to date, but the Company does not believe
that the cost of future remediation will exceed the amount accrued. No
remediation was performed in 2000 pending the decision. However, the Company
paid $118,000 for its share of legal and consulting services in connection
with the hearings. At March 31, 2001, the balance accrued for these
remediation costs is approximately $1,141,000. Owners of a portion of the
property have objected to the Company's cleanup methodology and have filed
suit to require additional procedures. The Company is contesting this
litigation, and believes its proposed methodology is well within accepted
industry practice for remediation efforts of a similar nature. No accrual has
been made for costs of any alternative cleanup methodology which might be
imposed as a result of the litigation.
NOTE 6: OPERATING SEGMENT DISCLOSURES
The Company owns and operates a diverse group of industrial manufacturing
operations that design and manufacture highly engineered, high-quality
products for specific customer requirements, such as large-diameter seamless
pressure vessels, hydraulic and pneumatic cylinders, precision plastic
components, heavy-duty cranes and materials handling systems. The Company's
customers include original equipment manufacturers and end-users in a variety
of industries, such as transportation, power generation, chemicals, metals,
home electronics, office equipment and consumer goods. The Company's business
units are organized into two major operating groups:
- 14 -
The Metals Group, through its five manufacturing divisions (representing
the divisions of the former Chatwins Group plus the acquired Kingway and NPSAC
business), designs, manufactures and markets a broad range of fabricated and
machined industrial metal parts and products to original equipment
manufacturers and end-users. The Metals Group serves over 5,000 customers.
The Plastics Group (which is comprised of the pre-merger plastics
business units of Reunion) manufactures precision molded plastic parts and
provides engineered plastics services to more than 500 original equipment
manufacturers.
Reunion Industries considers these groups to be its reportable segments
pursuant to the management approach.
The following represents the disaggregation of financial data (in
thousands)(unaudited):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended and at
March 31, 2001:
Metals Group $ 37,388 $ 5,600 $ 661 $ 67,955
Plastics Group 12,235 753 137 25,854
Corporate and other - (966) 1 42,972
-------- -------- -------- --------
Totals $ 49,623 5,387 $ 799 $136,781
======== ======== ========
Depreciation and amortization(3) (1,825)
Interest expense (2,409)
--------
Income from continuing operations
before income taxes $ 1,153
========
Three months ended March 31, 2000
and at December 31, 2000:
Metals Group $ 34,448 $ 3,953 $ 566 $ 69,838
Plastics Group 3,109 244 - 23,485
Corporate and other - (709) 6 36,623
Discontinued operations - - - 9
-------- -------- -------- --------
Totals $ 37,557 3,488 $ 572 $129,955
======== ======== ========
Depreciation and amortization(3) (1,011)
Interest expense (2,129)
Equity in loss of continuing
operations of affiliate (296)
--------
Income from continuing operations
before income taxes $ 52
========
(1) EBITDA (earnings before interest, taxes, depreciation and amortization)
is the primary measure used by management in assessing performance.
(2) Headquarters total assets at March 31, 2001 and December 31, 2000 are
primarily comprised of goodwill of $23.9 million and $15.7 million,
respectively, and deferred tax assets of $12.9 million at each.
(3) Excludes amortization of debt issuance expenses of $174,000 and $252,000
for the three month periods ended March 31, 2001 and 2000, respectively, which
is included in interest expense.
- 15 -
NOTE 7: DISCONTINUED OPERATIONS
On October 27, 2000, the Company sold substantially all of its wine grape
agricultural operations and real estate holdings in Napa County, California.
The Company classified and began accounting for the agricultural operations as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" (APB 30), which requires
discontinued operations to be reported separately from continuing operations.
During 1999, Chatwins Group's management adopted plans to exit the
grating manufacturing business and oil and gas business through the
disposition of all of its grating and oil and gas related assets. Upon
adoption of the plans, Chatwins Group classified and began accounting for such
businesses as discontinued operations in accordance with APB 30.
At March 31, 2001 and December 31, 2000, the assets and liabilities of
discontinued operations are comprised primarily of the assets and liabilities
of the discontinued wine grape agricultural business, the remaining reserve
for expenses of the discontinued grating business and a $680,000 note payable
due May 1, 2001 related to an industrial development revenue bond issue by
Orem City, Utah, retained by the Company upon the sale of its domestic grating
operations. This note payable was repaid in May 2001. The assets and
liabilities have been separately classified on the balance sheet as net assets
of (liabilities) discontinued operations. A summary follows (in thousands):
At March 31, At December 31,
2001 2000
----------- --------------
ASSETS: (unaudited)
Cash and cash equivalents $ 99 $ 711
Receivables, net 40 690
Property held for sale 246 252
-------- --------
Total assets 385 1,653
-------- --------
LIABILITIES AND EQUITY:
Current maturities of debt 680 680
Trade payables - 478
Other current liabilities 24 36
Reserve for estimated expenses 288 450
-------- --------
Total liabilities 992 1,644
-------- --------
Net assets (liabilities) of
discontinued operations $ (607) $ 9
======== ========
Pursuant to APB 30, the consolidated financial statements reflect the
operating results of discontinued operations separately from continuing
operations. For 2001, there are no results from discontinued operations. For
2000, results of discontinued operations relate to the Company's discontinued
wine grape agricultural operations. Summarized results of discontinued
operations for the three month period ended March 31, 2000 follow (in
thousands):
2000
--------
Net sales $ 53
Loss before taxes (74)
The above results of discontinued operations include actual and allocated
interest expense totaling $58,000.
- 16 -
In the merger, Chatwins Group was considered the acquirer for purposes of
applying purchase accounting. Because Chatwins Group used the equity method
to account for its approximately 37% investment in Reunion prior to the
merger, the agricultural operations were not reclassified to discontinued
operations. Had the agricultural operations been reclassified from equity in
loss of affiliate from continuing operations, the effect on Reunion's results
from continuing operations as follows (in thousands, except for per share
amounts)(unaudited):
Three months ended
March 31, 2000
------------------
Income from continuing operations $ 869
Effect of reclassification 168
-------
Adjusted income from continuing operations 1,037
Preferred stock dividend accretions (95)
-------
Adjusted income applicable to common stockholders $ 942
=======
Income from continuing operations per
common share - basic and diluted $ 0.10
=======
Weighted average number of common shares - basic and diluted 9,910
=======
- 17 -
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
The Company owns and operates a diverse group of industrial manufacturing
operations that design and manufacture highly engineered, high-quality
products for specific customer requirements, such as large-diameter seamless
pressure vessels, hydraulic and pneumatic cylinders, precision plastic
components, heavy-duty cranes, bridge structures and materials handling
systems. The Company's customers include original equipment manufacturers and
end-users in a variety of industries, such as transportation, power
generation, chemicals, metals, home electronics, office equipment and consumer
goods. The Company's business units are organized into two operating groups:
The Metals Group, through its five manufacturing divisions, designs,
manufactures and markets a broad range of fabricated and machined industrial
metal parts and products to original equipment manufacturers and end-users.
The Metals Group serves over 5,000 customers.
The Plastics Group manufactures precision molded plastic parts and
provides engineered plastics services to more than 500 original equipment
manufacturers.
RECENT DEVELOPMENTS AND OTHER MATTERS OF IMPORTANCE
Additional Shares of Reunion Common Stock
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The merger agreement also provided that up
to an additional 500,000 shares of Reunion common stock would be issued to
former Chatwins Group common stockholders if the former Chatwins Group
businesses and the acquired Kingway business achieve specified performance
levels in 2000. A preliminary determination of the number of shares to be
issued was made by the board of directors at its meeting held on May 15, 2001.
Such additional shares total 349,000.
Acquisition of NPS Acquisition Corp.
On January 17, 2001, the Company acquired NPS Acquisition Corp. (f/k/a
Naptech Pressure Systems) from Charles E. Bradley, Sr. (Mr. Bradley), the
Company's chairman of the board and chief executive officer. NPSAC is based
in Clearfield, Utah and manufactures seamless steel pressure vessels, an
existing Metals Group product line.
The purchase price was $10,000 plus the assumption of $10.3 million of
NPSAC's liabilities, including a 15% per annum $6.9 million note payable to
Shaw Industries, the former owner of Naptech Pressure Systems. Simultaneously
with the acquisition, Reunion paid Shaw Industries $2.0 million of the note
payable in cash from funds available under its revolving credit facility with
Bank of America (BOA). The remainder of the note payable of $4.9 million was
then restructured to include quarterly principal payments of $0.6 million for
eight quarters which began on February 28, 2001. Reunion made the first
payment from funds available under its revolving credit facility. The note is
unsecured and subordinate to the BOA term loan and revolving credit facilities
and the 13% senior notes. [Management believes that the Company will have
adequate availability under its revolving credit facility to make the
remaining quarterly payments in 2001 under this note payable.]
- 18 -
The transaction was accounted for as a purchase under APB 16. The
estimated fair value of assets acquired included approximately $1.4 million of
cash, receivables, inventories and other current assets and approximately $0.3
million of fixed assets. The purchase price in excess of net assets acquired
of $8.6 million was recorded as goodwill and is being amortized over 15 years.
Repayment of $120,000 of 13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
As such, on June 1, 2000 Reunion made the required offer to purchase
$2,525,000 of senior notes, of which holders of only $120,000 of senior notes
tendered. However, the $25.0 million of 13% senior notes repaid from the
merger proceeds was and can be applied against Reunion's obligations for
sinking fund payments and the purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
Therefore, $120,000 principal amount of 13% senior notes was repaid by
the Company on May 1, 2001 from funds available under its revolving credit
facility. Of the remaining $24.855 million of senior notes, $12.5 million is
scheduled to be repaid in May 2002 and $12.355 million is scheduled to be
repaid in May 2003. [Management does not expect to have the internally
generated liquidity necessary to fund the May 1, 2002 sinking fund payment and
is in the preliminary stages of investigating various refinancing scenarios.
Management believes that the Company has the ability to secure the necessary
refinancing and make the $12.5 million sinking fund payment on May 1, 2002.]
Long-term debt consists of the following (000'S):
At March 31, At December 31,
2001 2000
----------- --------------
(unaudited)
13% senior notes due May 1, 2003 (net of
unamortized discount of $11 and $14) $ 24,964 $ 24,961
BOA term loan A due March 16, 2007 18,836 19,757
BOA capital expenditure facility 605 640
Note payable due February 28, 2003 4,252 -
Other 1,291 1,359
Other - related parties 4,615 4,015
-------- --------
Total long-term debt 54,563 50,732
Current maturities (6,441) (4,061)
-------- --------
Total long-term debt, less current maturities $ 48,122 $ 46,671
======== ========
- 19 -
Payment of Semi-Annual Interest on 13% Senior Notes
On May 1, 2001 the Company made its $1.623 million semi-annual interest
payment on its 13% senior notes from funds available under its revolving
credit facility. [Management believes the Company will have adequate
availability under its revolving credit facility to fund its November 1, 2001
semi-annual interest payment.]
Payment of $680,000 Industrial Revenue Development Bonds
Upon the sale of its domestic grating operations in September 1999, the
Company retained an obligation for a $680,000 note payable due May 1, 2001
related to an industrial development revenue bond issue by Orem City, Utah.
This note payable was repaid in May 2001 from funds available under the
Company's revolving credit facility.
[2001 Covenant Compliance
For quarters ended March 31, 2001 and for each fiscal quarter thereafter
in 2001, the BOA financing and security agreement required the Company to
maintain a minimum fixed charge coverage ratio of 1.25:1 and maximum funded
debt to EBITDA ratios of 3.75:1, 3.50:1, 3.25:1 and 3.00:1.
Because the Company's 2001 business plan includes assumptions regarding
results of operations and economic conditions, achievement of which is
necessary for compliance with the financial covenants included in the BOA
financing and security agreement in 2001, particularly the third and fourth
quarters, in April 2001, the Company entered into a letter agreement with Bank
of America whereby, as long as the Company maintains both a fixed charge
coverage ratio of at least 1.00:1 and has a funded debt to EBITDA ratio of no
more than 4.50:1 as of the September 30, 2001 and December 31, 2001
calculation dates, and as long as the Company is in compliance on all other
covenants, the Bank of America will not accelerate any of its loans.
Management believes, based on its most recent financial covenant ratio
forecast, that the Company will be in compliance with the newly agreed to
financial covenants and all other covenants for each quarter in 2001.]
For the quarter ended March 31, 2001, the Company's fixed charge coverage
ratio was 1.48:1 and the funded debt to EBITDA ratio was 2.94:1.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 Compared to
Three Months Ended March 31, 2000
Metals Group
Metals Group sales for the first quarter of 2001 totaled $37.2 million,
compared to $34.4 million for the first quarter of 2000, an increase of $2.8
million, or 11%. First quarter 2000 sales excludes the approximately two and
one-half months of Kingway Material Handling Company's sales prior to the
Company's acquisition of Kingway simultaneously with the merger on March 16,
2000 and the full first quarter 2000 sales of NPS Acquisition Corp. acquired
by the Company in January 2001. Had both of these events occurred at the
beginning of 2000, Metals Group sales for the first quarter of 2000 would have
been $38.6 million, indicating a pro forma decrease of $1.4 million. A
increase of $5.3 million in the Company's pressure vessel product line was
more than offset by decreases of $3.4 million in materials handling and
computer-assisted picking systems product line and $2.4 million in cylinder
sales. The increase in pressure vessel sales in the first quarter of 2001
compared to 2000 was due to a continuation of strong order levels in that
product line and the recognition of $2.8 million of revenues on a large NASA
- 20 -
contract relating to pressure vessels produced in the fourth quarter of 2000
but not received by NASA until the first quarter of 2001. The decrease in
materials handling sales is the result of customer requested delays in
shipments. [Management believes materials handling sales will rebound and
increase during the remainder of 2001 as these delayed deliveries ship and
based on large contract orders received from or committed to by a large
national retail chain during the second quarter of 2001.] Sales of cylinders
continues to be affected by softness in this market, [a trend which may
continue for the remainder of 2001.]
Metals Group gross profit for the first quarter of 2001 was $8.5 million,
or 22.7%, compared to $6.3 million for the first quarter of 2000, or 18.2%, an
increase of $2.2 million. First quarter 2000 gross profit excludes the
approximately two and one-half months of Kingway Material Handling Company's
sales prior to the Company's acquisition of Kingway simultaneously with the
merger on March 16, 2000 and the full first quarter 2000 gross profit of NPS
Acquisition Corp. acquired by the Company in January 2001. Had both of these
events occurred at the beginning of 2000, Metals Group gross profit for the
first quarter of 2000 would have been $7.7 million, or 20.0%, indicating a pro
forma increase of $0.8 million. Pro forma gross profit and gross profit
margin increased during the 2001 first quarter compared to the 2000 first
quarter primarily due to a change in product mix in the 2001 first quarter,
which included a significant amount of seamless pressure vessel sales, gross
margins on which exceed all other product lines.
Plastics Group
Plastics Group sales for the first quarter of 2001 totaled $12.2 million,
compared to $3.1 million in the first quarter of 2000, an increase of $9.1
million. First quarter 2000 sales excludes the approximately two and one-half
months of Plastics Group's sales prior to the merger on March 16, 2000. Had
the Company merged at the beginning of 2000, Plastics Group sales for the
first quarter of 2000 would have been $13.8 million, indicating a pro forma
decrease of $1.6 million. The decrease in revenues is the continuation into
2000 of a trend which began in 1999 and resulted from several factors,
including certain customers relocating manufacturing operations to Mexico and
Asia, reduced customer orders for continuing programs, end of product cycles
and delays in new program starts, which affected all Plastics Group
facilities. [Management was investigating the feasibility of opening or
acquiring a molding facility in Mexico or establishing a joint venture in
Mexico with an existing plastics molding company in order to counter these
trends. However, management's view of current business conditions in Mexico
and the impact on the Company's liquidity caused by the need to fund increased
working capital demands in the Company's seamless pressure vessel product line
due to a substantial increase in order levels in the first quarter of 2001 has
caused management to put this plan temporarily on hold. Accordingly, the
trend in Plastics Group revenue could continue during the remainder of 2001.
However, first quarter 2001 Plastics Group sales of $12.2 million represents a
$2.1 million increase over the fourth quarter of 2000 sales of $10.1 million,
possibly indicating a reversal of this decreasing trend.]
Plastics Group gross profit for the first quarter of 2001 was $2.0
million, or 16.4%, compared to $0.5 million, or 16.6%, for the first quarter
of 2000. First quarter 2000 gross profit excludes the approximately two and
one-half months of Plastics Group's gross profit prior to the merger on March
16, 2000. Had the Company merged at the beginning of 2000, Plastics Group
gross profit for the first quarter of 2000 would have been $2.2 million, or
15.7%, indicating a pro forma decrease of $0.2 million. The decrease in gross
profit is directly related to the decreasing trend in sales. However, cost
cutting measures taken during 2000 to counter the effect on gross margin and
overall operating results of the Plastics Group have resulted in an increase
in margin as a percentage of sales.
- 21 -
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first quarter
of 2001 were $6.3 million, compared to $4.0 million for the first quarter of
2000, an increase of $2.3 million. Had the merger and acquisitions of Kingway
and NPSAC occurred at the beginning of 2000, first quarter 2000 SGA expenses
would have been $6.1 million, indicating a pro forma increase of $0.2 million.
This increase is primarily due to an increase in commissions expense in the
seamless pressure vessel product line as the result of the increased volume.
SGA expenses as a percentage of sales increased to 12.5% for the 2001 first
quarter compared to 11.7% on a pro forma basis in the 2000 first quarter. SGA
as a percentage of sales was higher in the 2001 first quarter compared to 2000
due to the overall decrease in volume coupled with the increased commissions
discussed above.
Other Expense
Other expense for the first quarter of 2001 was $0.6 million, compared to
other expense of $0.3 million for the first quarter of 2000, a net increase of
$0.3 million. The increase in other expense in the first quarter of 2001
compared to 2000 is the result of an increase in goodwill amortization. The
first quarter of 2001 includes a full quarter of goodwill amortization related
to the merger and Kingway acquisition compared to the approximate two week
post-merger and Kingway acquisition period in the 2000 first quarter. Also,
the first quarter of 2001 includes goodwill amortization related to the NPSAC
acquisition compared to no such amortization in the 2000 first quarter.
Except for goodwill amortization, there were no individually significant or
offsetting items in either of the first quarters of 2001 or 2000.
Interest Expense
Interest expense, net, for the first quarter of 2001 was $2.4 million,
compared to $2.1 million for the first quarter of 2000, an increase of $0.3
million. The increase in interest expense reflects the higher level of debt
of the post-merger company, which is included in the full first quarter of
2001 versus only the approximate two week post-merger period in the 2000 first
quarter. [The Company anticipates that interest expense for 2001 will
decrease compared to 2000 due to the lower debt level as the result of the
$29.5 million of cash proceeds generated through asset sales during the second
half of 2000 and the decrease in prime lending rates during the first quarter
of 2001 if not increased during the remainder of 2001.]
Equity Results
Equity in loss of continuing operations of affiliate in the first quarter
of 2000 represents Chatwins Group's pre-merger share of Reunion's loss from
continuing operations in that period.
Income Taxes
There was a tax provision from continuing operations of $0.5 million for
the first quarter of 2001 compared to a tax benefit of $0.8 million for the
first quarter of 2000. The tax provision in the 2001 first quarter is
directly related to the level of pre-tax operating results and the tax benefit
in the 2000 first quarter is the result of the fact that the valuation
allowance against the deferred tax assets related to the Company's net
operating loss carryforwards was reduced for the tax effects of the
extraordinary items discussed below.
- 22 -
Discontinued Operations
There was a loss from discontinued operations during the first quarter of
2000 of $74,000 related to the discontinued wine grape agricultural
operations.
Extraordinary Items
The losses from extraordinary items in the first quarter of 2000 of $1.8
million, net of $-0- taxes, represents the pre-merger write-offs of deferred
financing costs at both Chatwins Group and pre-merger Reunion.
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. Although the Company
operates in relatively mature markets, [it intends to continue to invest in
and grow its businesses through selected capital expenditures as cash
generation permits.]
Recent Developments and Other Matters of Importance
Acquisition of NPS Acquisition Corp.
On January 17, 2001, the Company acquired NPS Acquisition Corp. (f/k/a
Naptech Pressure Systems) from Charles E. Bradley, Sr. (Mr. Bradley), the
Company's chairman of the board and chief executive officer. NPSAC is based
in Clearfield, Utah and manufactures seamless steel pressure vessels, an
existing Metals Group product line.
The purchase price was $10,000 plus the assumption of $10.3 million of
NPSAC's liabilities, including a 15% per annum $6.9 million note payable to
Shaw Industries, the former owner of Naptech Pressure Systems. Simultaneously
with the acquisition, Reunion paid Shaw Industries $2.0 million of the note
payable in cash from funds available under its revolving credit facility with
Bank of America (BOA). The remainder of the note payable of $4.9 million was
then restructured to include quarterly principal payments of $0.6 million for
eight quarters which began on February 28, 2001. Reunion made the first
payment from funds available under its revolving credit facility. The note is
unsecured and subordinate to the BOA term loan and revolving credit facilities
and the 13% senior notes. [Management believes that the Company will have
adequate availability under its revolving credit facility to make the
remaining quarterly payments in 2001 under this note payable.]
The transaction was accounted for as a purchase under APB 16. The
estimated fair value of assets acquired included approximately $1.4 million of
cash, receivables, inventories and other current assets and approximately $0.3
million of fixed assets. The purchase price in excess of net assets acquired
of $8.6 million was recorded as goodwill and is being amortized over 15 years.
Repayment of $120,000 of 13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
- 23 -
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
As such, on June 1, 2000 Reunion made the required offer to purchase
$2,525,000 of senior notes, of which holders of only $120,000 of senior notes
tendered. However, the $25.0 million of 13% senior notes repaid from the
merger proceeds was and can be applied against Reunion's obligations for
sinking fund payments and the purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
Therefore, $120,000 principal amount of 13% senior notes was repaid by
the Company on May 1, 2001 from funds available under its revolving credit
facility. Of the remaining $24.855 million of senior notes, $12.5 million is
scheduled to be repaid in May 2002 and $12.355 million is scheduled to be
repaid in May 2003. [Management does not expect to have the internally
generated liquidity necessary to fund the May 1, 2002 sinking fund payment and
is in the preliminary stages of investigating various refinancing scenarios.
Management believes that the Company has the ability to secure the necessary
refinancing and make the $12.5 million sinking fund payment on May 1, 2002.]
Payment of Semi-Annual Interest on 13% Senior Notes
On May 1, 2001 the Company made its $1.623 million semi-annual interest
payment on its 13% senior notes from funds available under its revolving
credit facility. [Management believes the Company will have adequate
availability under its revolving credit facility to fund its November 1, 2001
semi-annual interest payment.]
Payment of $680,000 Industrial Revenue Development Bonds
Upon the sale of its domestic grating operations in September 1999, the
Company retained an obligation for a $680,000 note payable due May 1, 2001
related to an industrial development revenue bond issue by Orem City, Utah.
This note payable was repaid in May 2001 from funds available under the
Company's revolving credit facility.
[2001 Covenant Compliance
For quarters ended March 31, 2001 and for each fiscal quarter thereafter
in 2001, the BOA financing and security agreement required the Company to
maintain a minimum fixed charge coverage ratio of 1.25:1 and maximum funded
debt to EBITDA ratios of 3.75:1, 3.50:1, 3.25:1 and 3.00:1.
Because the Company's 2001 business plan includes assumptions regarding
results of operations and economic conditions, achievement of which is
necessary for compliance with the financial covenants included in the BOA
financing and security agreement in 2001, particularly the third and fourth
quarters, in April 2001, the Company entered into a letter agreement with Bank
of America whereby, as long as the Company maintains both a fixed charge
- 24 -
coverage ratio of at least 1.00:1 and has a funded debt to EBITDA ratio of no
more than 4.50:1 as of the September 30, 2001 and December 31, 2001
calculation dates, and as long as the Company is in compliance on all other
covenants, the Bank of America will not accelerate any of its loans.
Management believes, based on its most recent financial covenant ratio
forecast, that the Company will be in compliance with the newly agreed to
financial covenants and all other covenants for each quarter in 2001.]
For the quarter ended March 31, 2001, the Company's fixed charge coverage
ratio was 1.48:1 and the funded debt to EBITDA ratio was 2.94:1.
Summary of 2001 Activities
Cash and cash equivalents totaled $1.0 million (including $0.1 million
classified within discontinued operations) at March 31, 2001. During the
first quarter of 2001, cash and cash equivalents decreased $1.5 million, with
$4.5 million used in operations, $0.8 million used in investing activities and
$3.8 million provided by financing activities.
Operating Activities
Cash used of $4.5 million for operating activities in the first quarter
of 2001 was the result of an increase in net working capital, primarily an
increase in receivables and a reduction in trade payables.
Investing Activities
Capital expenditures were $0.8 million and $10,000 was used to acquire
the common stock of NPSAC.
Financing Activities
To fund the changes in working capital the Company made a net increase in
borrowings under its revolving credit facility of $5.4 million, partially
offset by payments of debt totaling $1.6 million including of $0.9 million of
term loan A, $0.6 million of the Shaw Industries note payable and $0.1 million
of other debt, primarily $35,000 of capital expenditure facility repayments
and a $48,000 final payment on a note payable related to the Metals Group.
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.
- 25 -
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
First Quarter 2001:
-------------------
On February 7, 2001, the Company filed a Current Report
on Form 8-K dated October 27, 2000 to report under Items 2
and 7 that the Company had completed the sale of its
discontinued wine grape agricultural business and to file
the required pro forma financial information and exhibits.
On February 23, 2001, the Company filed a Current Report
on Form 8-K dated February 23, 2001 to announce under Item 5
the date, time and place of the annual meeting of shareholders
of the Company.
Second Quarter 2001:
--------------------
On May 8, 2001, the Company filed a Current Report on
Form 8-K dated May 1, 2001 to report under Item 4 that
PricewaterhouseCoopers LLP resigned as independent accountants
of the Company effective after the completion of the review
of the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001.
On May 14, 2001, the Company filed a Current Report on
Form 8-K/A dated May 1, 2001 to file under Item 7, Exhibit 16,
letter from independent accountants pursuant to Item 304(a)(3)
of Regulation S-K.
- 26 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Date: May 15, 2001 REUNION INDUSTRIES, INC.
------------ (Registrant)
By: /s/ Kimball J. Bradley
-------------------------------
Kimball J. Bradley
President and Chief
Operating Officer
By: /s/ John M. Froehlich
-------------------------------
John M. Froehlich
Executive Vice President, Finance
and Chief Financial Officer
(chief financial and accounting officer)
- 27 -