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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 June 30, 2001
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 33-64325
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REUNION INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400
PITTSBURGH, PENNSYLVANIA 15222
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
At July 31, 2001, 15,584,619 shares of common stock, par value $.01 per share,
were outstanding.
Page 1 of 36 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
June 30, 2001 (unaudited) and December 31, 2000 4
Condensed Consolidated Statement of Income and
Comprehensive Income for the three and six months
ended June 30, 2001 and 2000 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for
the six months ended June 30, 2001 and 2000 (unaudited) 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K 36
SIGNATURES 36
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AT JUNE 30, 2001 AND DECEMBER 31, 2000
(in thousands)
At June 30, At December 31,
2001 2000
----------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 950 $ 1,826
Receivables, net 35,594 31,777
Advances to employees 213 233
Inventories, net 19,197 21,781
Other current assets 2,774 3,307
Net assets of discontinued operations 201 9
-------- --------
Total current assets 58,929 58,933
Property, plant and equipment, net 30,903 31,166
Due from related parties 1,586 3,950
Goodwill, net 26,977 18,837
Deferred tax assets, net 12,678 12,678
Other assets, net 3,817 4,391
-------- --------
Total assets $134,890 $129,955
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Revolving credit facilities $ 27,866 $ 19,367
Current maturities of debt 18,825 4,061
Trade payables 18,605 21,662
Due to related parties 629 224
Other current liabilities 11,304 15,133
-------- --------
Total current liabilities 77,229 60,447
Long-term debt 29,447 42,656
Long-term debt - related party 4,615 4,015
Other liabilities 1,325 1,278
-------- --------
Total liabilities 112,616 108,396
Commitments and contingent liabilities - -
Stockholders' equity 22,274 21,559
-------- --------
Total liabilities and stockholders' equity $134,890 $129,955
======== ========
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, 2001 AND 2000
(in thousands, except per share information)(unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Operating revenue:
Metals Group $ 32,967 $ 36,802 $ 70,355 $ 71,250
Plastics Group 10,750 15,538 22,985 18,647
-------- -------- -------- --------
Total sales 43,717 52,340 93,340 89,897
-------- -------- -------- --------
Cost of sales:
Metals Group 26,296 28,398 55,227 56,582
Plastics Group 9,324 13,039 19,557 15,633
-------- -------- -------- --------
Total cost of sales 35,620 41,437 74,784 72,215
-------- -------- -------- --------
Gross profit 8,097 10,903 18,556 17,682
Selling, general & administrative 5,844 6,482 12,172 10,490
Other expense, net 630 327 1,199 621
-------- -------- -------- --------
Operating profit 1,623 4,094 5,185 6,571
Interest expense, net 2,343 2,915 4,752 5,044
Equity in loss of continuing
operations of affiliate - - - 296
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes (720) 1,179 433 1,231
Provision for (benefit from)
income taxes (220) 475 172 (342)
-------- -------- -------- --------
Income (loss) from continuing
operations (500) 704 261 1,573
Loss from discontinued
operations, net of tax of $-0- - (356) - (430)
-------- -------- -------- --------
Income (loss) before
extraordinary items (500) 348 261 1,143
-------- -------- -------- --------
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 income (loss) and
comprehensive income (loss) (500) 348 261 (629)
Preferred stock dividend accretions - - - (95)
-------- -------- -------- --------
Income (loss) applicable to
common stockholders $ (500) $ 348 $ 261 $ (724)
======== ======== ======== ========
- 5 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (continued)
(in thousands, except per share information)(unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Basic earnings (loss)
per common share:
Continuing operations $ (0.03) $ 0.06 $ 0.02 $ 0.13
Discontinued operations - (0.03) - (0.03)
Extraordinary items - - - (0.16)
-------- -------- -------- --------
Income (loss) per common share $ (0.03) $ 0.03 $ 0.02 $ (0.06)
======== ======== ======== ========
Weighted average shares outstanding 15,585 12,489 15,585 11,214
======== ======== ======== ========
Diluted earnings (loss)
per common share:
Continuing operations $ (0.03) $ 0.06 $ 0.02 $ 0.13
Discontinued operations - (0.03) - (0.03)
Extraordinary items - - - (0.16)
-------- -------- -------- --------
Income (loss) per common share $ (0.03) $ 0.03 $ 0.02 $ (0.06)
======== ======== ======== ========
Weighted average shares outstanding 15,646 12,489 15,661 11,214
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(in thousands)
(unaudited)
Six Months Ended
June 30, June 30,
2001 2000
-------- --------
Cash used in operating activities $ (4,806) $ (3,618)
-------- --------
Cash flow from investing activities:
Capital expenditures (1,861) (1,814)
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 (1,871) 752
-------- --------
Cash flow from financing activities:
Proceeds from issuance of debt - 30,800
Net change in revolving credit facilities 8,499 27,836
Repayments of debt (3,311) (52,326)
Repayments of debt - related party - (1,076)
Payments of deferred financing costs and closing fees - (1,404)
-------- --------
Cash provided by financing activities 5,188 3,830
-------- --------
Net increase (decrease) in cash and cash equivalents (1,489) 964
Change in cash of discontinued operations 613 -
Cash and cash equivalents, beginning of year 1,826 252
-------- --------
Cash and cash equivalents, end of period $ 950 $ 1,216
======== ========
See accompanying notes to condensed consolidated financial statements.
- 7 -
REUNION INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair statement of the results of
operations have been included. The results of operations for the three and
six month periods ended June 30, 2001 are not necessarily indicative of the
results of operations for the full year. When reading the financial
information contained in this Quarterly Report, reference should be made to
the financial statements, schedules and notes contained in Reunion's Annual
Report on Form 10-K for the year ended December 31, 2000.
Recent Accounting Pronouncement
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard 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 Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 142 "Goodwill and Other Intangible Assets." This
statement eliminates the amortization of goodwill and indefinite lived
intangible assets and requires such assets be reviewed for impairment at least
annually. This statement is effective for goodwill and intangible assets
acquired prior to July 1, 2001 upon adoption, which is required for fiscal
years beginning after December 15, 2001. The Company is beginning the process
of evaluating the adoption and effects of this statement on the Company.
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 totaled 348,995 and were issued on May 29, 2001. The
closing price of Reunion's common stock on that date was $1.30 per share. The
issuance of the additional shares was recorded as a merger purchase price
adjustment to goodwill.
Acquisition of NPS Acquisition Corp.
On January 17, 2001, the Company acquired NPS Acquisition Corp. (NPSAC)
(f/k/a Naptech Pressure Systems) from Charles E. Bradley, Sr. (Mr. Bradley),
the Company's chairman of the board and chief executive officer. NPSAC is
based in Clearfield, Utah and manufactures seamless steel pressure vessels, an
existing Metals Group product line.
- 8 -
The purchase price was $10,000 plus the non-cash assumption of $10.3
million of NPSAC's liabilities, including a 15% per annum $6.9 million note
payable to Shaw Group, the former owner of Naptech Pressure Systems and $0.6
million of notes payable to Stanwich Financial Services Corp., a related party
(see note 5). Simultaneously with the acquisition, Reunion paid Shaw Group
$2.0 million of the note payable in cash from funds available under its
revolving credit facility with Bank of America (BOA). The remainder of the
note payable of $4.9 million was then restructured to include quarterly
principal payments of $0.6 million for eight quarters which began on February
28, 2001. Reunion made the first two payments from funds available under its
revolving credit facility. The note is unsecured and subordinate to the BOA
term loan and revolving credit facilities.
The estimated fair value of assets acquired included approximately $1.4
million of cash, receivables, inventories and other current assets,
approximately $0.3 million of fixed assets and $1.3 million of deferred tax
assets which are fully reserved by a valuation allowance. The purchase price
in excess of net assets acquired of $8.6 million was recorded as goodwill and
is being amortized over 15 years. NPSAC's deferred tax assets are comprised
primarily of net operating losses.
Repayment of $120,000 of 13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
As such, on June 1, 2000 Reunion made the required offer to purchase
$2,525,000 of senior notes, of which holders of only $120,000 of senior notes
tendered. However, the $25.0 million of 13% senior notes repaid from the
merger proceeds was applied against Reunion's obligations for sinking fund
payments and the purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
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 June 30, At December 31,
2001 2000
----------- --------------
(unaudited)
13% senior notes (net of unamortized
discount of $8 and $14) $ 24,847 $ 24,961
BOA term loan A due March 16, 2007 17,914 19,757
BOA capital expenditure facility 570 640
Note payable due February 28, 2003 3,645 -
Other 1,296 1,359
Other - related parties 4,615 4,015
-------- --------
Total long-term debt 52,887 50,732
Current maturities (18,825) (4,061)
-------- --------
Total long-term debt, less current maturities $ 34,062 $ 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 the quarter ended March 31, 2001 and for each fiscal quarter
thereafter in 2001, the BOA financing and security agreement required the
Company to maintain a minimum fixed charge coverage ratio of 1.25:1 and
maximum funded debt to EBITDA ratios of 3.75:1, 3.50:1, 3.25:1 and 3.00:1.
In April 2001, the Company entered into a letter agreement with Bank of
America whereby, as long as the Company 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 June 30, 2001, the Company's fixed charge coverage
ratio was 1.34:1 and the funded debt to EBITDA ratio was 3.46:1.
- 10 -
NOTE 3: INVENTORIES
Inventories are comprised of the following (in thousands):
At June 30, At December 31,
2001 2000
----------- --------------
(unaudited)
Metals Group:
Raw material $ 4,821 $ 5,933
Work-in-process 3,846 4,295
Finished goods 6,199 7,214
-------- --------
Gross inventories 14,866 17,442
Less: LIFO reserves 80 80
-------- --------
Metals Group inventories 14,946 17,522
-------- --------
Plastics Group:
Raw material 2,952 2,584
Work-in-process 108 323
Finished goods 1,191 1,352
-------- --------
Plastics Group inventories 4,251 4,259
-------- --------
Inventories $ 19,197 $ 21,781
======== ========
NOTE 4: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
equity for the six month period ended June 30, 2001 (in thousands):
Par Capital
Value in
of Excess Accum-
Common of Par ulated
Stock Value Deficit Total
------ ------- -------- --------
At January 1, 2001 $152 $24,608 $ (3,201) $ 21,559
Activity (unaudited):
Net income - - 261 261
Issuance of common stock (note 2) 3 451 - 454
---- ------- -------- --------
At June 30, 2001 $155 $25,059 $ (2,940) $ 22,274
==== ======= ======== ========
- 11 -
The computations of basic and diluted earnings per common share (EPS) for
the three and six month periods ended June 30, 2001 and 2000 are as follows
(in thousands, except per share amounts)(unaudited):
Income
(Loss) Shares EPS
-------- -------- -------
Three months ended June 30, 2001:
Net loss, weighted average shares
outstanding and basic EPS $ (500) 15,585 $ (0.03)
=======
Dilutive effect of stock options 61
-------- --------
Net loss, weighted average shares
outstanding and diluted EPS $ (500) 15,646 $ (0.03)
======== ======== =======
Three months ended June 30, 2000:
Net income, weighted average shares
outstanding and basic and diluted EPS $ 348 12,489 $ 0.03
======== ======== =======
Six months ended June 30, 2001:
Net income, weighted average shares
outstanding and basic EPS $ 261 15,585 $ 0.02
=======
Dilutive effect of stock options 76
-------- --------
Net income, weighted average shares
outstanding and diluted EPS $ 261 15,661 $ 0.02
======== ======== =======
Six months ended June 30, 2000:
Net loss $ (629)
Less: Preferred stock dividend accretions (95)
--------
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted EPS $ (724) 11,214 $ (0.06)
======== ======== =======
At June 30, 2001, the Company's stock options outstanding totaled
1,100,000, of which 292,500 were at exercise prices below the average market
price of the underlying security during the three and six month periods ended
June 30, 2001. Such options include a dilutive component of 60,990 shares for
the 2001 second quarter and 76,316 shares for the 2001 year-to-date period.
The remainder were at exercise prices equal to or above the average market
price of the underlying security.
At June 30, 2000, the Company's stock options outstanding totaled
869,000. On June 14, 2000, 326,000 options were awarded with an average
exercise price of $1.01 per share. Such options included a dilutive component
of 111,000 shares. However, due the to the short time period these options
were outstanding during the three and six month periods ended June 30, 2000,
basic and diluted EPS are the same. The remainder were at exercise prices
equal to or above the average market price of the underlying security.
- 12 -
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.
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit is in the initial stages of discovery. Reunion
intends to vigorously contest the suit.
The Company has been named as a defendant in fifteen consolidated
lawsuits filed in December 2000 or early 2001 in the Superior Court for Los
Angeles County, California, three of which are purported class actions
asserted on behalf of approximately 200 payees. The plaintiffs in these suits
except one are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC are related parties.
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Bradley, the sole shareholder of SFSC's parent, several
major financial institutions and certain others. All of these suits arise out
of the inability of SFSC to make structured settlement payments when due.
Pursuant to the court's order, plaintiffs in the purported class actions and
plaintiffs in the individual cases actions filed a model complaint. Except
for the class allegations, the two model complaints are identical and assert
causes of action for breach of contract, breach of fiduciary duty, breach of
applied covenant of good faith and fair dealing, declaratory relief, tortious
interference with contract, negligence, conversion, fraudulent conveyance,
constructive fraud, reformation, violation of the California Unfair
Competition Law and unjust enrichment. The plaintiffs seek compensatory and
punitive damages, restoration of certain alleged trust assets, restitution and
attorneys' fees and costs.
- 13 -
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. The court
has sustained a demurrer to the model complaints by one of the defendants with
leave to amend. The plaintiff's amended complaints are due by August 16,
2001.
On May 25, 2001, SFSC filed a chapter 11 bankruptcy petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. On August 7, 2001, the
bankruptcy court, pursuant to the stipulation of the parties, ordered that,
pending the August 15, 2001 hearing on SFSC's motion for preliminary
injunction, the plaintiffs shall take no 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 stay on the
plaintiffs' direct claims against the Company was lifted, but the plaintiffs
were ordered not to conduct any discovery on those claims without leave of the
bankruptcy court.
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 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. 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.
- 14 -
On July 10, 2001, a lawsuit that alleges asbestos exposure has been filed
in the Superior Court for San Francisco County in California against greater
than fifty defendants, including Oneida Rostone Corporation (ORC), pre-merger
Reunion's Plastics subsidiary and the Company's Plastics Group. The lawsuit
was improperly served as ORC no longer exists. On July 23, 2001, service of
process was withdrawn and service of process is pending against the Company as
successor-in-interest to ORC. The Company intends to vigorously defend
against this lawsuit.
Environmental Compliance
Various U.S. federal, state and local laws and regulations including,
without limitation, laws and regulations concerning the containment and
disposal of hazardous waste, oil field waste and other waste materials, the
use of storage tanks, the use of insecticides and fungicides and the use of
underground injection wells directly or indirectly affect the Company's
operations. In addition, environmental laws and regulations typically impose
"strict liability" upon the Company for certain environmental damages.
Accordingly, in some situations, the Company could be liable for clean up
costs even if the situation resulted from previous conduct of the Company that
was lawful at the time or from improper conduct of, or conditions caused by,
previous property owners, lessees or other persons not associated with the
Company or events outside the control of the Company. Such clean up costs or
costs associated with changes in environmental laws and regulations could be
substantial and could have a materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Except as described in the following paragraphs, the Company believes it
is currently in material compliance with existing environmental protection
laws and regulations and is not involved in any significant remediation
activities or administrative or judicial proceedings arising under federal,
state or local environmental protection laws and regulations. In addition to
management personnel who are responsible for monitoring environmental
compliance and arranging for remedial actions that may be required, the
Company has also employed outside consultants from time to time to advise and
assist the Company's environmental compliance efforts. Except as described in
the following paragraphs, the Company has not recorded any accruals for
environmental costs.
In February 1996, Reunion was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. Since then, the Company has expended $299,000 of
remediation costs and accrued an additional $60,000.
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
- 15 -
that the cost of future remediation will exceed the amount accrued. No
remediation was performed in 2000 or to date in 2001 pending the decision.
However, the Company has paid $192,000 for its share of legal and consulting
services in connection with the hearings. At June 30, 2001, the balance
accrued for these remediation costs is approximately $1,126,000. 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:
The Metals Group 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.
Reunion Industries considers these groups to be its operating segments
pursuant to the management approach.
- 16 -
The following represents the disaggregation of financial data:
Capital Total
(000's)(unaudited) Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended and at
June 30, 2001:
Metals Group $ 32,967 $ 3,884 $ 515 $ 68,240
Plastics Group 10,750 567 541 23,758
Corporate and other - (1,001) 6 42,691
Discontinued operations - - - 201
-------- -------- -------- --------
Totals $ 43,717 3,450 $ 1,062 $134,890
======== ======== ========
Depreciation and amortization(3) (1,827)
Interest expense (2,343)
--------
Loss from continuing operations
before income taxes $ (720)
========
Three months ended June 30, 2000
and at December 31, 2000:
Metals Group $ 36,802 $ 5,657 $ 278 $ 69,838
Plastics Group 15,538 1,049 680 23,485
Corporate and other - (1,017) 27 36,623
Discontinued operations - - 257 9
-------- -------- -------- --------
Totals $ 52,340 5,689 $ 1,242 $129,955
======== ======== ========
Depreciation and amortization(3) (1,595)
Interest expense (2,915)
--------
Income from continuing operations
before income taxes $ 1,179
========
Six months ended June 30, 2001:
Metals Group $ 70,355 $ 9,484 $ 1,176
Plastics Group 22,985 1,320 678
Corporate and other - (1,967) 7
-------- -------- --------
Totals $ 93,340 8,837 $ 1,861
======== ========
Depreciation and amortization(3) (3,652)
Interest expense (4,752)
--------
Income from continuing operations
before income taxes $ 433
========
Six months ended June 30, 2000:
Metals Group $ 71,250 $ 9,610 $ 844
Plastics Group 18,647 1,544 680
Corporate and other - (1,627) 33
Discontinued operations - - 257
-------- -------- --------
Totals $ 89,897 9,527 $ 1,814
======== ========
Depreciation and amortization(3) (2,956)
Interest expense (5,044)
Equity in loss of continuing
operations of affiliate (296)
--------
Income from continuing operations
before income taxes $ 1,231
========
- 17 -
(1) EBITDA (earnings before interest, taxes, depreciation and amortization)
is the primary measure used by management in assessing performance.
(2) Corporate and other total assets at June 30, 2001 and December 31, 2000
are primarily comprised of goodwill of $23.9 million and $15.7 million,
respectively, and deferred tax assets of $12.7 million at each date.
(3) Excludes amortization of debt issuance expenses of $174,000 and $405,000
for the three month periods ended June 30, 2001 and 2000, respectively, and
$348,000 and $657,000 for the six month periods ended June 30, 2001 and 2000,
respectively, which are included in interest expense.
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 June 30, 2001 and December 31, 2000, the assets and liabilities of
discontinued operations are comprised primarily of the assets and liabilities
of the discontinued wine grape agricultural business and the remaining reserve
for expenses of the discontinued grating business. The liabilities of
discontinued operations at December 31, 2000 also included a $680,000 note
payable due May 1, 2001 related to an industrial development revenue bond
issue by Orem City, Utah, retained by the Company upon the sale of its
domestic grating operations. This note payable was repaid in May 2001. The
assets and liabilities have been separately classified on the balance sheet as
net assets of discontinued operations. A summary follows (in thousands):
At June 30, At December 31,
2001 2000
----------- --------------
ASSETS: (unaudited)
Cash and cash equivalents $ 98 $ 711
Receivables, net 37 690
Property held for sale 246 252
-------- --------
Total assets 381 1,653
-------- --------
LIABILITIES AND EQUITY:
Current maturities of debt - 680
Trade payables 4 478
Other current liabilities 42 36
Reserve for estimated expenses 134 450
-------- --------
Total liabilities 180 1,644
-------- --------
Net assets of discontinued operations $ 201 $ 9
======== ========
- 18 -
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 and six month periods ended June 30, 2000 follow (in
thousands):
3-Mos. 6-Mos.
-------- --------
Net sales $ 1,147 $ 1,200
Loss before taxes (356) (430)
The above results of discontinued operations include actual and allocated
interest expense totaling $350,000 and $408,000 for the three and six month
periods ended June 30, 2000, respectively.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
The Company owns and operates a diverse group of industrial manufacturing
operations that design and manufacture highly engineered, high-quality
products for specific customer requirements, such as large-diameter seamless
pressure vessels, hydraulic and pneumatic cylinders, precision plastic
components, heavy-duty cranes, bridge structures and materials handling
systems. The Company's customers include original equipment manufacturers and
end-users in a variety of industries, such as transportation, power
generation, chemicals, metals, home electronics, office equipment and consumer
goods. The Company's business units are organized into two operating groups:
The Metals Group designs, manufactures and markets a broad range of
fabricated and machined industrial metal parts and products 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 totaled 348,995 and were issued on May 29, 2001. The
closing price of Reunion's common stock on that date was $1.30 per share. The
issuance of the additional shares was recorded as a merger purchase price
adjustment to goodwill.
- 19 -
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 non-cash assumption of $10.3
million of NPSAC's liabilities, including a 15% per annum $6.9 million note
payable to Shaw Group, the former owner of Naptech Pressure Systems and $0.6
million of notes payable to Stanwich Financial Services Corp., a related
party. Simultaneously with the acquisition, Reunion paid Shaw Group $2.0
million of the note payable in cash from funds available under its revolving
credit facility with Bank of America (BOA). The remainder of the note payable
of $4.9 million was then restructured to include quarterly principal payments
of $0.6 million for eight quarters which began on February 28, 2001. Reunion
made the first two payments from funds available under its revolving credit
facility. The note is unsecured and subordinate to the BOA term loan and
revolving credit facilities.
The estimated fair value of assets acquired included approximately $1.4
million of cash, receivables, inventories and other current assets,
approximately $0.3 million of fixed assets and $1.3 million of deferred tax
assets which are fully reserved by a valuation allowance. The purchase price
in excess of net assets acquired of $8.6 million was recorded as goodwill and
is being amortized over 15 years. NPSAC's deferred tax assets are comprised
primarily of net operating losses.
Repayment of $120,000 of 13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
As such, on June 1, 2000 Reunion made the required offer to purchase
$2,525,000 of senior notes, of which holders of only $120,000 of senior notes
tendered. However, the $25.0 million of 13% senior notes repaid from the
merger proceeds was applied against Reunion's obligations for sinking fund
payments and the purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
- 20 -
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 and
repayment scenarios. Such scenarios involve not only mezzanine or additional
term debt, which could potentially include warrants, but also could involve
other considerations such as a request to the noteholders for an extension of
the sinking fund payment date. Management believes that the Company has the
ability to secure the necessary funds and make the $12.5 million sinking fund
payment on May 1, 2002.]
Long-term debt consists of the following (000'S):
At June 30, At December 31,
2001 2000
----------- --------------
(unaudited)
13% senior notes due May 1, 2003 (net of
unamortized discount of $8 and $14) $ 24,847 $ 24,961
BOA term loan A due March 16, 2007 17,914 19,757
BOA capital expenditure facility 570 640
Note payable due February 28, 2003 3,645 -
Other 1,296 1,359
Other - related parties 4,615 4,015
-------- --------
Total long-term debt 52,887 50,732
Current maturities (18,825) (4,061)
-------- --------
Total long-term debt, less current maturities $ 34,062 $ 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. [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 the quarter ended March 31, 2001 and for each fiscal quarter
thereafter in 2001, the BOA financing and security agreement required the
Company to maintain a minimum fixed charge coverage ratio of 1.25:1 and
maximum funded debt to EBITDA ratios of 3.75:1, 3.50:1, 3.25:1 and 3.00:1.
- 21 -
Because the Company's 2001 business plan includes assumptions regarding
results of operations and economic conditions, achievements of which are
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 June 30, 2001, the Company's fixed charge coverage
ratio was 1.34:1 and the funded debt to EBITDA ratio was 3.46:1.
[The Company prepares monthly forecasts of its financial covenants using
year-to-date actual results and forecasts of quarterly results of operations
and funded debt levels for the next two quarters. As of the date of this
report, July 2001 results of operations and debt levels are not final. The
current forecast indicates that the Company will be close to but in compliance
with its financial covenants in the third and fourth quarters of 2001.
Forecasted results of operations and funded debt levels are based on
assumptions that management believes are reasonable based on conditions in the
markets it serves, the overall economy and other factors at the time forecasts
are prepared. If one or more of these assumptions do not occur or if overall
economic conditions and conditions in the markets served by the Company
worsen, the Company could fall out of compliance with one or both of its
financial covenants during the third and fourth quarters of 2001. Also,
should a monthly forecast of ratios indicate that the Company may fall out of
compliance with one or both ratios in the current or future quarters,
management would take actions necessary to achieve ratio compliance including,
but not limited to, cost cutting measures and a restriction on capital
expenditures. If all such actions taken together are not enough to achieve
ratio compliance, the Company will seek to renegotiate or obtain waivers of
its financial covenants. Although management believes it is unlikely, in the
event that the Company is not in compliance with one or both of its financial
ratios or is unsuccessful in renegotiating its covenants or obtaining the
necessary waivers, the lenders would have various remedies available to them
including, but not limited to, acceleration of all amounts outstanding under
the term and revolving credit facilities and a liquidation of its collateral.]
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 Compared to
Three Months Ended June 30, 2000
Metals Group
Metals Group sales for the second quarter of 2001 totaled $33.0 million,
compared to $36.8 million for the second quarter of 2000, a decrease of $3.8
million, or 11%. Second quarter 2000 sales excludes the second quarter 2000
sales of NPS Acquisition Corp. acquired by the Company in January 2001. Had
this event occurred at the beginning of 2000, Metals Group sales for the
second quarter of 2000 would have been $37.7 million, indicating a pro forma
decrease of $4.7 million. Increases of $0.8 million in the Company's pressure
vessel product line and $0.3 million materials handling and computer-assisted
picking systems product line were more than offset by decreases of $2.9
million in cylinder sales, $2.6 million in crane and bridge structure sales
- 22 -
and $0.3 million in leaf spring sales. The increase in pressure vessel sales
in the second quarter of 2001 compared to 2000 was due to a continuation of
strong order levels in that product line, the backlog for which at the end of
2000 was $8.6 million higher than at the end of 1999. Sales of cylinders
continues to be affected by softness in this market, [a trend which the
Company believes will continue for the remainder of 2001.] Sales of leaf
springs in the second quarter 2001 were impacted by the economic downturn as
consumers decreased spending on recreational items, particularly in the marine
market.
Metals Group gross profit for the second quarter of 2001 was $6.7
million, or 20.4%, compared to $8.4 million for the second quarter of 2000, or
22.8%, a decrease of $1.7 million. Second quarter 2000 gross profit excludes
the second quarter 2000 gross profit of NPS Acquisition Corp., acquired by the
Company in January 2001. Had this event occurred at the beginning of 2000,
Metals Group gross profit for the second quarter of 2000 would have been $8.7
million, or 23.1%, indicating a pro forma decrease of $2.0 million. Gross
profit and gross profit margin decreased during the 2001 second quarter
compared to the pro forma 2000 second quarter primarily due to the decreased
volume in the bridge structure, crane and cylinder product lines, resulting in
a decreased ability to absorb fixed overheads, particularly at the Company's
mobile cylinder production facility in Milwaukee, Wisconsin, which has seen
volume decrease over 40% since last year. [The Company is currently
considering combining the operations of its Milwaukee, Wisconsin and Chicago,
Illinois cylinder manufacturing locations in order improve efficiencies and
counter this trend.]
Metals Group EBITDA for the second quarter of 2001 was $3.9 million, or
11.8%, compared to $5.7 million for the second quarter of 2000, or 15.4%, a
decrease of $1.8 million. Second quarter 2000 EBITDA excludes the second
quarter 2000 EBITDA of NPS Acquisition Corp., acquired by the Company in
January 2001. Had this event occurred at the beginning of 2000, Metals Group
EBITDA for the second quarter of 2000 would have been $5.9 million, or 16.1%,
indicating a pro forma decrease of $2.0 million. EBITDA and EBITDA as a
percentage of sales decreased during the 2001 second quarter compared to the
pro forma 2000 second quarter primarily due to the same factors effecting
gross profit and gross profit margin discussed above.
Plastics Group
Plastics Group sales for the second quarter of 2001 totaled $10.8
million, compared to $15.5 million in the second quarter of 2000, a decrease
of $4.7 million. Second quarter 2000 Plastics Groups sales included $2.6
million from its former Irish plastics subsidiary which the Company sold in
the 2000 third quarter. On a proforma basis, Plastic Group 2000 sales
excluding sales of the Irish business would be $12.9 million, indicating a
$2.1 million decrease quarter-to-quarter. The remaining decrease in revenues
is the continuation into 2001 of a trend which began in 1999 and resulted from
several factors, including certain customers relocating manufacturing
operations to Mexico and Asia, reduced customer orders for continuing
programs, end of product cycles and delays in new program starts, which
affected all Plastics Group facilities. [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 the United States and Mexico has caused
management to put this plan temporarily on hold. Accordingly, the trend in
Plastics Group revenue could continue during the remainder of 2001.]
- 23 -
Plastics Group gross profit for the second quarter of 2001 was $1.4
million, or 13.3%, compared to $2.5 million, or 16.1%, for the second quarter
of 2000. Second quarter 2000 Plastics Groups gross profit included $0.4
million from its former Irish plastics subsidiary which the Company sold in
the 2000 third quarter. On a proforma basis, Plastic Group 2000 gross profit
excluding the gross profit of the Irish business would be $2.1 million,
indicating a $0.7 million decrease quarter-to-quarter. The remaining decrease
in gross profit is directly related to the decreasing trend in sales,
resulting in inefficiencies and the inability to absorb fixed overheads.
[However, management believes cost cutting measures taken during June 2001,
including personnel reductions in sales and administration, to counter the
effect on gross margin and overall operating results of the Plastics Group
will result in an increase in margin as a percentage of sales.] The cost of
these reductions was inconsequential as the Company paid no severance packages
and retained no post-severance obligations related to these reductions.
[Management estimates the savings from these reductions to be approximately
$1.0 million annually.]
Plastics Group EBITDA for the second quarter of 2001 was less than $0.6
million, or 5.3%, compared to $1.0 million for the second quarter of 2000, or
6.8%, a decrease of $0.4 million. Second quarter 2000 Plastics Groups EBITDA
included $0.3 million from its former Irish plastics subsidiary which the
Company sold in the 2000 third quarter. On a proforma basis, Plastic Group
2000 EBITDA excluding the EBITDA of the Irish business would be $0.8 million,
indicating a $0.2 million decrease quarter-to-quarter. EBITDA and EBITDA as a
percentage of sales decreased during the 2001 second quarter compared to the
pro forma 2000 second quarter primarily due to the same factors effecting
gross profit and gross profit margin discussed above.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the second quarter
of 2001 were $5.8 million, compared to $6.5 million for the second quarter of
2000, a decrease of $0.7 million. Second quarter 2000 SGA included $0.3
million from its former Irish plastics subsidiary which the Company sold in
the 2000 third quarter. On a proforma basis, Plastic Group 2000 SGA excluding
SGA of the Irish business would be $6.2 million, indicating a $0.4 million
decrease quarter-to-quarter. The remaining decrease in SGA is directly
related to the decreasing trend in sales, resulting in lower commissions
expense. SGA expenses as a percentage of sales increased to 13.4% for the
2001 second quarter compared to 12.4% on a proforma basis in the 2000 second
quarter. SGA as a percentage of sales was higher in the 2001 second quarter
compared to 2000 due to the overall decrease in volume without associated
decreases in fixed administrative costs, primarily sales and administrative
compensation. [However, management believes cost cutting measures taken
during June 2001, including personnel reductions in sales and administration,
will result in a decrease in SGA as a percentage of sales.]
Other Expense
Other expense for the second quarter of 2001 was $0.6 million, compared
to other expense of $0.3 million for the second quarter of 2000, a net
increase of $0.3 million. The increase in other expense in the second quarter
of 2001 compared to 2000 is the result of an increase in goodwill amortization
as the result of the $8.6 million of goodwill created in the NPSAC acquisition
in January 2001 compared to no such amortization in the 2000 second quarter.
Except for goodwill amortization, there were no individually significant or
offsetting items in either of the second quarters of 2001 or 2000.
- 24 -
Interest Expense
Interest expense, net, for the second quarter of 2001 was $2.3 million,
compared to $2.9 million for the second quarter of 2000, a decrease of $0.6
million. The decrease in interest expense reflects the lower level of debt of
the Company as the result of the $29.5 million of cash proceeds generated
through asset sales during the second half of 2000 partially offset by the
debt assumed in the NPSAC acquisition. The decrease in interest expense is
also the result of the lower interest rates on the Company's Bank of America
facilities due to rate reductions by the Federal Reserve Bank after June 2000.
[The Company anticipates that interest expense for 2001 will continue to
decrease compared to 2000 due to the lower debt level as the result of the
$29.5 million of cash proceeds generated through asset sales during the second
half of 2000 and the decrease in prime lending rates during the first half of
2001 if not increased during the remainder of 2001.]
Income Taxes
There was a tax benefit from continuing operations of $0.2 million for
the second quarter of 2001 compared to a tax provision of $0.5 million for the
second quarter of 2000. The tax benefit in the 2001 second quarter and the
tax provision in the 2000 second are directly related to the level of pre-tax
operating results in each period.
Discontinued Operations
There was a loss from discontinued operations during the second quarter
of 2000 of $356,000 related to the discontinued wine grape agricultural
operations.
Six Months Ended June 30, 2001 Compared to
Six Months Ended June 30, 2000
Metals Group
Metals Group sales for the first half of 2001 totaled $70.4 million,
compared to $71.3 million for the first half of 2000, a decrease of $0.9
million, or 1%. First half 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, 2000 and the full first half 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 half of 2000 would have been $76.4 million, indicating a pro forma
decrease of $6.0 million. An increase of $6.3 million in the Company's
pressure vessel product line was more than offset by decreases of $5.3 million
in cylinder sales, $3.5 million in bridge structure and crane sales, $3.0
million in materials handling and computer-assisted picking systems product
line sales and $0.5 million in leaf spring sales. The increase in pressure
vessel sales in the first half of 2001 compared to 2000 was due to a
continuation of strong order levels in that product line, the backlog for
which at the end of 2000 was $8.6 million higher than at the end of 1999, and
the recognition of $2.8 million of revenues on a large NASA contract relating
to pressure vessels produced in the fourth quarter of 2000 but not received by
NASA until the first quarter of 2001. Sales of cylinders continues to be
affected by softness in this market, [a trend the Company believes will
continue for the remainder 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 leaf springs in the first half of 2001 were
impacted by the economic downturn as consumers decreased spending on
recreational items, particularly in the marine market.
- 25 -
Metals Group gross profit for the first half of 2001 was $15.1 million,
or 21.5%, compared to $14.7 million for the first half of 2000, or 20.6%, an
increase of $0.4 million. First half 2000 gross profit excludes the
approximately two and one-half months of Kingway Material Handling Company's
gross profit prior to the Company's acquisition of Kingway and the full first
half 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 half of 2000 would have been $16.4
million, or 21.5%, indicating a pro forma decrease of $1.3 million. Gross
profit decreased during the 2001 first half compared to the proforma 2000
first half primarily due to, except for the pressure vessel product line, the
lower volume and resulting lessened ability to absorb fixed costs. Gross
profit margin was slightly higher in the 2001 first half compared to the 2000
first half due to product mix, which had a significant increase in higher
margin pressure vessel sales period-to-period.
Metals Group EBITDA for the first half of 2001 was $9.5 million, or
13.5%, compared to $9.6 million for the second quarter of 2000, or 13.5%, a
decrease of $0.1 million. First half 2000 EBITDA excludes the approximately
two and one-half months of Kingway Material Handling Company's EBITDA prior to
the Company's acquisition of Kingway and the full first half 2000 gross profit
of NPS Acquisition Corp., acquired by the Company in January 2001. Had these
events occurred at the beginning of 2000, Metals Group EBITDA for the first
half of 2000 would have been $11.8 million, or 15.4%, indicating a pro forma
decrease of $2.3 million. EBITDA and EBITDA as a percentage of sales
decreased during the 2001 first half compared to the pro forma 2000 first half
primarily due to the same factors effecting gross profit and gross profit
margin discussed above.
Plastics Group
Plastics Group sales for the first half of 2001 totaled $23.0 million,
compared to $18.6 million in the first half of 2000, an increase of $4.4
million. First half 2000 sales includes the sales of the Company's Irish
plastics subsidiary, which was sold in the third quarter of 2000, but 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, excluding the Irish plastics business sales, Plastics Group sales for
the first half of 2000 would have been $26.8 million, indicating a pro forma
decrease of $3.8 million. The decrease in revenues is the continuation into
2001 of a trend which began in 1999 and resulted from several factors,
including certain customers relocating manufacturing operations to Mexico and
Asia, reduced customer orders for continuing programs, end of product cycles
and delays in new program starts, which affected all Plastics Group
facilities. [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 the
United States and Mexico has caused management to put this plan temporarily on
hold. Accordingly, the trend in Plastics Group revenue could continue during
the remainder of 2001.]
- 26 -
Plastics Group gross profit for the first half of 2001 was $3.4 million,
or 14.9%, compared to $3.0 million, or 16.2%, for the first half of 2000.
First half 2000 gross profit includes the gross profit of the Company's Irish
plastics subsidiary, which was sold in the third quarter of 2000, but 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, excluding the Irish plastics business gross profit,
Plastics Group gross profit for the first half of 2000 would have been $4.3
million, indicating a pro forma decrease of $0.9 million. The decrease in
gross profit is directly related to the decreasing trend in sales, resulting
in inefficiencies and the inability to absorb fixed overheads. [However,
management believes cost cutting measures taken during June 2001, including
personnel reductions in sales and administration, to counter the effect on
gross margin and overall operating results of the Plastics Group will result
in an increase in margin as a percentage of sales.] The cost of these
reductions was inconsequential as the Company paid no severance packages and
retained no post-severance obligations related to these reductions.
[Management estimates the savings from these reductions to be approximately
$1.0 million annually.]
Plastics Group EBITDA for the first half of 2001 was $1.3 million, or
5.7%, compared to $1.5 million for the first half of 2000, or 8.3%, a decrease
of $0.2 million. First half 2000 EBITDA includes the EBITDA of the Company's
Irish plastics subsidiary, which was sold in the third quarter of 2000, but
excludes the approximately two and one-half months of Plastics Group's EBITDA
prior to the merger on March 16, 2000. Had the Company merged at the
beginning of 2000, excluding the Irish plastics business, Plastics Group
EBITDA for the first half of 2000 would have been $2.0 million, indicating a
pro forma decrease of $0.7 million. EBITDA and EBITDA as a percentage of
sales decreased during the 2001 first half compared to the pro forma 2000
first half primarily due to the same factors effecting gross profit and gross
profit margin discussed above.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first half of
2001 were $12.2 million, compared to $10.5 million for the first half of 2000,
an increase of $1.7 million. Had the merger and acquisitions of Kingway and
NPSAC occurred at the beginning of 2000, first half 2000 SGA expenses would
have been $12.6 million, indicating a pro forma decrease of $0.4 million.
The remaining decrease in SGA is directly related to the decreasing trend in
sales, resulting in lower commissions expense. SGA expenses as a percentage
of sales increased to 13.0% for the 2001 second half compared to 12.2% on a
proforma basis in the 2000 second quarter. SGA as a percentage of sales was
higher in the 2001 second quarter compared to 2000 due to the overall decrease
in volume without associated decreases in fixed administrative costs,
primarily sales and administrative compensation. [However, management
believes cost cutting measures taken during June 2001, including personnel
reductions in sales and administration, will result in a decrease in SGA as a
percentage of sales.] The Company retained no post-severance obligations
related to these reductions.
- 27 -
Other Expense
Other expense for the first half of 2001 was $1.2 million, compared to
other expense of $0.6 million for the first half of 2000, a net increase of
$0.6 million. The increase in other expense in the first half of 2001
compared to 2000 is the result of an increase in goodwill amortization. The
first half of 2001 includes a full half of goodwill amortization related to
the merger, Kingway acquisition and NPSAC acquisition compared to the
approximate three-and-one-half month post-merger and Kingway acquisition
period in the 2000 first half and no goodwill amortization related to the
NPSAC goodwill. Except for goodwill amortization, there were no individually
significant or offsetting items in either of the first halves of 2001 or 2000.
Interest Expense
Interest expense, net, for the first half of 2001 was $4.8 million,
compared to $5.0 million for the first half of 2000, a decrease of $0.2
million. The decrease in interest expense reflects the lower level of debt of
the Company as the result of the $29.5 million of cash proceeds generated
through asset sales during the second half of 2000 partially offset by the
debt assumed in the NPSAC acquisition. The decrease in interest expense is
also the result of the lower interest rates on the Company's Bank of America
facilities due to rate reductions by the Federal Reserve Bank after June 2000.
[The Company anticipates that interest expense for 2001 will continue to
decrease compared to 2000 due to the lower debt level as the result of the
$29.5 million of cash proceeds generated through asset sales during the second
half of 2000 and the decrease in prime lending rates during the first half of
2001 if not increased during the remainder of 2001.]
Equity Results
Equity in loss of continuing operations of affiliate in the first half 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 $0.2 million for
the first half of 2001 compared to a tax benefit of $0.3 million for the first
half of 2000. The tax provision in the 2001 first half is directly related to
the level of pre-tax operating results and the tax benefit in the 2000 first
half 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.
Discontinued Operations
There was a loss from discontinued operations during the first half of
2000 of $0.4 million related to the discontinued wine grape agricultural
operations.
Extraordinary Items
The losses from extraordinary items in the first half 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.
- 28 -
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 Group, the former owner of Naptech Pressure Systems. Simultaneously with
the acquisition, Reunion paid Shaw Group $2.0 million of the note payable in
cash from funds available under its revolving credit facility with Bank of
America (BOA). The remainder of the note payable of $4.9 million was then
restructured to include quarterly principal payments of $0.6 million for eight
quarters which began on February 28, 2001. Reunion made the first two
payments from funds available under its revolving credit facility. The note
is unsecured and subordinate to the BOA term loan and revolving credit
facilities.
The estimated fair value of assets acquired included approximately $1.4
million of cash, receivables, inventories and other current assets,
approximately $0.3 million of fixed assets and $1.3 million of deferred tax
assets which are fully reserved by a valuation allowance. The purchase price
in excess of net assets acquired of $8.6 million was recorded as goodwill and
is being amortized over 15 years. NPSAC's deferred tax assets are comprised
primarily of net operating losses.
Repayment of $120,000 of 13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
- 29 -
As such, on June 1, 2000 Reunion made the required offer to purchase
$2,525,000 of senior notes, of which holders of only $120,000 of senior notes
tendered. However, the $25.0 million of 13% senior notes repaid from the
merger proceeds was applied against Reunion's obligations for sinking fund
payments and the purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
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 and
repayment scenarios. Such scenarios involve not only mezzanine or additional
term debt, which could potentially include warrants, but also could involve
other considerations such as a request to the noteholders for an extension of
the sinking fund payment date. Management believes that the Company has the
ability to secure the necessary funds 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 the quarter ended March 31, 2001 and for each fiscal quarter
thereafter in 2001, the BOA financing and security agreement required the
Company to maintain a minimum fixed charge coverage ratio of 1.25:1 and
maximum funded debt to EBITDA ratios of 3.75:1, 3.50:1, 3.25:1 and 3.00:1.
- 30 -
Because the Company's 2001 business plan includes assumptions regarding
results of operations and economic conditions, achievements of which are
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 June 30, 2001, the Company's fixed charge coverage
ratio was 1.34:1 and the funded debt to EBITDA ratio was 3.46:1.
[The Company prepares monthly forecasts of its financial covenants using
year-to-date actual results and forecasts of quarterly results of operations
and funded debt levels for the next two quarters. As of the date of this
report, July 2001 results of operations and debt levels are not final. The
current forecast indicates that the Company will be close to but in compliance
with its financial covenants in the third and fourth quarters of 2001.
Forecasted results of operations and funded debt levels are based on
assumptions that management believes are reasonable based on conditions in the
markets it serves, the overall economy and other factors at the time forecasts
are prepared. If one or more of these assumptions do not occur or if overall
economic conditions and conditions in the markets served by the Company
worsen, the Company could fall out of compliance with one or both of its
financial covenants during the third and fourth quarters of 2001. Also,
should a monthly forecast of ratios indicate that the Company may fall out of
compliance with one or both ratios in the current or future quarters,
management would take actions necessary to achieve ratio compliance including,
but not limited to, cost cutting measures and a restriction on capital
expenditures. If all such actions taken together are not enough to achieve
ratio compliance, the Company will seek to renegotiate or obtain waivers of
its financial covenants. Although management believes it is unlikely, in the
event that the Company is not in compliance with one or both of its financial
ratios or is unsuccessful in renegotiating its covenants or obtaining the
necessary waivers, the lenders would have various remedies available to them
including, but not limited to, acceleration of all amounts outstanding under
the term and revolving credit facilities and a liquidation of its collateral.]
Summary of 2001 Activities
Cash and cash equivalents totaled $1.0 million (including $0.1 million
classified within discontinued operations) at June 30, 2001. During the first
half of 2001, cash and cash equivalents decreased $1.5 million, with $4.8
million used in operations, $1.9 million used in investing activities and $5.2
million provided by financing activities.
Operating Activities
Cash used of $4.8 million for operating activities in the first half of
2001 was the result of an increase in net working capital, primarily
reductions in trade payables and other current liabilities.
Investing Activities
Capital expenditures were $1.9 million, including $1.2 million in the
Metals Group and $0.7 million in the Plastics Group.
- 31 -
Financing Activities
To fund the decreases in trade payables and other current liabilities,
the $2.0 million payment to Shaw Group at the date of the NPSAC acquisition
and to amortize principal payments under the term loan A and capital
expenditure facilities, the Company made a net increase in borrowings under
its revolving credit facility of $8.5 million, partially offset by payments of
debt totaling $3.3 million including $1.8 million of term loan A, $1.2 million
of the Shaw Group note payable and $0.3 million of other debt, primarily
$120,000 of senior notes, $70,000 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are defendants in a number of lawsuits
and administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. The Company believes that any
material liability which can result from any of such lawsuits or proceedings
has been properly reserved for in the Company's consolidated financial
statements or is covered by indemnification in favor of the Company or its
subsidiaries, and therefore the outcome of these lawsuits or proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended. There is no applicable insurance coverage.
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit is in the initial stages of discovery. Reunion
intends to vigorously contest the suit.
The Company has been named as a defendant in fifteen consolidated
lawsuits filed in December 2000 or early 2001 in the Superior Court for Los
Angeles County, California, three of which are purported class actions
asserted on behalf of approximately 200 payees. The plaintiffs in these suits
except one are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC are related parties.
- 32 -
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Bradley, the sole shareholder of SFSC's parent, several
major financial institutions and certain others. All of these suits arise out
of the inability of SFSC to make structured settlement payments when due.
Pursuant to the court's order, plaintiffs in the purported class actions and
plaintiffs in the individual cases actions filed a model complaint. Except
for the class allegations, the two model complaints are identical and assert
causes of action for breach of contract, breach of fiduciary duty, breach of
applied covenant of good faith and fair dealing, declaratory relief, tortious
interference with contract, negligence, conversion, fraudulent conveyance,
constructive fraud, reformation, violation of the California Unfair
Competition Law and unjust enrichment. 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. The court
has sustained a demurrer to the model complaints by one of the defendants with
leave to amend. The plaintiff's amended complaints are due by August 16,
2001.
On May 25, 2001, SFSC filed a chapter 11 bankruptcy petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. On August 7, 2001, the
bankruptcy court, pursuant to the stipulation of the parties, ordered that,
pending the August 15, 2001 hearing on SFSC's motion for preliminary
injunction, the plaintiffs shall take no 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 stay on the
plaintiffs' direct claims against the Company was lifted, but the plaintiffs
were ordered not to conduct any discovery on those claims without leave of the
bankruptcy court.
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 lawsuits.
- 33 -
The Company has been named in approximately 195 separate asbestos suits
filed since January 1, 2001 by two plaintiffs' law firms in Wayne County,
Michigan. The claims allege that cranes from the Company's crane
manufacturing location in Alliance, OH were present in various parts of
McLouth Steel Mill in Wayne County, Michigan and that those cranes contained
asbestos to which plaintiffs were exposed over a 40 year span. As of the date
of this report, counsel for the Company has filed an answer to each complaint
denying liability by the Company and asserting all alternative defenses
permitted under the Court's Case Management Order. Counsel for the Company
has negotiated dismissal of 95 cases without any cost to the Company.
The Company denies that it manufactured any products containing asbestos
or otherwise knew or should have known that any component part manufacturers
provided products containing asbestos. The Company intends to vigorously
defend against these lawsuits.
On July 10, 2001, a lawsuit that alleges asbestos exposure has been filed
in the Superior Court for San Francisco County in California against greater
than fifty defendants, including Oneida Rostone Corporation (ORC), pre-merger
Reunion's Plastics subsidiary and the Company's Plastics Group. The lawsuit
was improperly served as ORC no longer exists. On July 23, 2001, service of
process was withdrawn and service of process is pending against the Company as
successor-in-interest to ORC. The Company intends to vigorously defend
against this lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of Reunion Industries stockholders held
on May 15, 2001 for the record date of April 2, 2001, 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 14,734,680 3,656
Charles E. Bradley, Sr. 14,734,680 3,656
Kimball J. Bradley 14,734,650 3,686
Thomas L. Cassidy 14,734,680 3,656
W. R. Clerihue 14,734,680 3,656
Joseph C. Lawyer 14,734,680 3,656
Franklin Myers 14,734,680 3,656
John G. Poole 14,734,680 3,656
Proposal 2: To reserve an additional 600,000 shares of Reunion Industries
common stock for issuance under the 1998 stock option plan
Broker
For Against Abstained Non-Votes
---------- ---------- ---------- ----------
14,615,207 111,924 11,205 -
Proposal 3: To consider and act upon such other business as
may properly come before the meeting
Broker
For Against Abstained Non-Votes
---------- ---------- ---------- ----------
14,693,822 11,640 32,874 -
- 34 -
Item 5. Other Information
On June 14, 2000, the Company's Board of Directors approved the exchange
of its Series A and Series B preferred stocks for 3,245,515 shares of the
Company's common stock at an exchange price of $5.00 per share. The Series A
and Series B preferred stocks were issued in connection with the March 16,
2000 merger with Chatwins Group and acquisition of Kingway, and had an
aggregate liquidation value of $16.2 million. The closing market price of
Reunion's common stock was $1.00 on that date.
The Series A preferred stock was issued to holders of Chatwins Group's
Class D, Series A, B and C preferred stock in exchange for their shares.
Since its incorporation on May 12, 1988, Chatwins Group has had several
classes of preferred stock outstanding. Since that time, Chatwins Group made
liquidation value and dividend accretions totaling $15.0 million recorded as
charges to retained earnings. Of the $15.0 million of such charges, $12.5
million related to its Class D, Series A, B and C preferred stock. Since May
12, 1988, Chatwins Group made payments for redemptions and dividends totaling
$3.5 million related to such preferred stock. Accordingly, $9.0 million of
such charges on its Class D, Series A, B and C preferred stock remained
unpaid.
Because Chatwins Group was considered the acquirer in the merger, Reunion
Industries' accumulated deficit at June 30, 2001 is primarily comprised of the
historical activity of Chatwins Group which includes its historical results of
operations, dividends declared and paid and the $9.0 million of unpaid
liquidation value and dividend accretions. As such, the merged Reunion's
accumulated deficit is largely a legacy of the former Chatwins Group's
preferred stock accretions. The following supplemental disclosure of the
components of the $2.9 million accumulated deficit at June 30, 2001 separates
operating results from preferred stock accretions and dividends paid (in
000's):
Components
of Reunion's
Accumulated
Deficit
------------
Accumulated deficit on May 12, 1988 (date of
incorporation of Chatwins Group) $ (13)
Cumulative net income (including post-merger
net income of $5,401) 12,529
Preferred stock liquidation accretions, all classes (7,728)
Preferred stock dividend accretions, all classes (7,293)
Dividends paid (435)
--------
Accumulated deficit at June 30, 2001 $ (2,940)
========
- 35 -
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
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.
On May 22, 2001, the Company filed a Current Report on
Form 8-K/A dated May 1, 2001 to report under Item 4 that,
in connection with their review of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001, there
has been no disagreements with Pricewaterhouse Coopers LLP
on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure and to
announce that, effective May 15, 2001, the Company had engaged
Ernst & Young LLP as its new independent accountants, and to
file under Item 7, Exhibit 16, the letter from independent
accountants required by Item 304(a)(3) of Regulation S-K.
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 14, 2001 REUNION INDUSTRIES, INC.
--------------- (Registrant)
By: /s/ Kimball J. Bradley
-------------------------------
Kimball J. Bradley
President and Chief
Operating Officer
By: /s/ John M. Froehlich
-------------------------------
John M. Froehlich
Executive Vice President, Finance
and Chief Financial Officer
(chief financial and accounting officer)
- 36 -