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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 33-64325
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REUNION INDUSTRIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400
PITTSBURGH, PENNSYLVANIA 15222
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
At August 31, 2002, 15,590,619 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 42 pages.
Exhibit index is on page 40.
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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act which are intended to be covered by the safe harbors created thereby. The
forward-looking statements contained in this report are enclosed in brackets
[] for ease of identification. All forward-looking statements involve risks
and uncertainties which could cause the future results and shareholder values
to differ materially from those expressed in the forward-looking statements.
Although the Company believes that the assumptions underlying the
forward-looking statements contained in this report are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurances
that the forward-looking statements included or incorporated by reference in
this report will prove to be accurate. Factors that could cause actual
results to differ materially from those described in the forward-looking
statements include, without limitation, the strengths/weaknesses of the
Company's primary markets, the Company's ability to complete the sale of
certain assets on acceptable terms, the Company's ability to realize the
benefits of its restructuring plan, the Company's ability to negotiate trade
terms with its vendors, the continued forbearance of the Company's creditors
with respect to indebtedness in default and the Company's ability to
restructure and renegotiate the terms of the Company's indebtedness. In light
of the significant uncertainties inherent in the forward-looking statements
included or incorporated by reference herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the Company's objectives and plans will be achieved. In
addition, the Company does not intend to, and is not obligated to, update
these forward-looking statements after filing and distribution of this report,
even if new information, future events or other circumstances have made them
incorrect or misleading as of any future date.
- 2 -
REUNION INDUSTRIES, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at
September 30, 2002 (unaudited) and December 31, 2001 4
Condensed Consolidated Statement of Income (Loss) and
Comprehensive Income (Loss) for the three and nine
months ended September 30, 2002 and 2001 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for the
nine months ended September 30, 2002 and 2001 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 3. Defaults Upon Senior Securities 34
Item 4. Controls and Procedures 35
Item 6. Exhibits and Reports on Form 8-K 36
SIGNATURES AND CERTIFICATIONS 37
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(in thousands)
At September 30, At December 31,
2002 2001
--------------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 1,157 $ 686
Receivables, net 10,268 12,347
Advances to employees 213 213
Inventories, net 6,489 10,814
Other current assets 1,607 1,219
Current assets of discontinued operations - 17,311
-------- --------
Total current assets 19,734 42,590
Property, plant and equipment, net 17,204 19,134
Due from related parties 1,522 1,488
Goodwill, net 11,007 11,443
Other assets, net 2,835 3,269
Other assets of discontinued operations - 18,641
-------- --------
Total assets $ 52,302 $ 96,565
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Debt in default $ 32,334 $ 64,389
Current maturities of debt 3,729 87
Trade payables 14,732 11,212
Due to related parties 2,122 1,107
Other current liabilities 19,216 13,825
Current liabilities of discontinued operations - 12,149
-------- --------
Total current liabilities 72,133 102,769
Long-term debt 1,106 4,810
Long-term debt - related party 4,615 4,615
Other liabilities 1,908 1,616
-------- --------
Total liabilities 79,762 113,810
Commitments and contingent liabilities - -
Stockholders' deficit (27,460) (17,245)
-------- --------
Total liabilities and stockholders' deficit $ 52,302 $ 96,565
======== ========
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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands, except per share information)(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Sales $ 15,528 $ 21,658 $ 51,829 $ 80,448
Cost of sales 14,395 18,481 46,644 65,095
-------- -------- -------- --------
Gross profit 1,133 3,177 5,185 15,353
Selling, general & administrative 3,312 3,544 10,354 11,943
Other expense (income), net (6) 520 (787) 1,505
-------- -------- -------- --------
Operating profit (loss) (2,173) (887) (4,382) 1,905
Interest expense, net 2,151 1,489 6,053 4,635
-------- -------- -------- --------
Loss from continuing operations
before income taxes (4,324) (2,376) (10,435) (2,730)
Benefit from income taxes - (1,307) - (1,135)
-------- -------- -------- --------
Loss from continuing operations (4,324) (1,069) (10,435) (1,595)
Income (loss) from discontinued
operations, net of tax of $-0- 2,492 (1,651) 220 (864)
-------- -------- -------- --------
Net loss and comprehensive loss $ (1,832) $ (2,720) $(10,215) $ (2,459)
======== ======== ======== ========
Basic and diluted earnings
(loss) per common share:
Continuing operations $ (0.28) $ (0.07) $ (0.67) $ (0.10)
Discontinued operations 0.16 (0.10) 0.01 (0.06)
-------- -------- -------- --------
Loss per common share - basic
and diluted $ (0.12) $ (0.17) $ (0.66) $ (0.16)
======== ======== ======== ========
Weighted average shares
outstanding - basic 15,591 15,587 15,591 15,585
======== ======== ======== ========
Weighted average shares
outstanding - diluted 15,591 15,636 15,591 15,651
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
- 5 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2002 2001
-------- --------
Cash provided by (used in) operating activities $ 4,571 $ (2,907)
-------- --------
Cash flow from investing activities:
Proceeds from sale of discontinued material
handling systems operations 25,000 -
Proceeds from sale of assets of discontinued
bridges and cranes operations 3,058 -
Proceeds from sale of property 375 -
Capital expenditures (414) (2,517)
Acquisition of NPSAC common stock - (10)
-------- --------
Cash provided by (used in) investing activities 28,019 (2,527)
-------- --------
Cash flow from financing activities:
Net change in revolving credit facility (22,325) 7,991
Borrowings - 534
Repayments of debt (9,794) (4,305)
-------- --------
Cash provided by (used in) financing activities (32,119) 4,220
-------- --------
Net increase (decrease) in cash and cash equivalents 471 (1,214)
Net change in cash of discontinued operations - 672
Cash and cash equivalents, beginning of year 686 1,826
-------- --------
Cash and cash equivalents, end of period $ 1,157 $ 1,284
======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
NOTE 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all normal recurring adjustments
considered necessary for a fair statement of the results of operations have
been included. The results of operations for the three and nine month periods
ended September 30, 2002 are not necessarily indicative of the results of
operations for the full year. When reading the financial information
contained in this Quarterly Report, reference should be made to the financial
statements, schedule and notes contained in Reunion's Annual Report on Form
10-K for the year ended December 31, 2001.
Going Concern
These condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The negative
working capital position of $52.4 million at September 30, 2002 and the
defaults of the Bank of America (BOA) Financing and Security Agreement and the
13% senior notes indicate that the Company may not be able to continue as a
going concern for a reasonable period of time. These condensed consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Goodwill and Other Intangible Assets
The Company has recorded goodwill totaling $11.0 million at September 30,
2002, of which $9.5 million relates to our pressure vessel and springs segment
and $1.5 million relates to our cylinders segment. Effective January 1, 2002,
we adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" and we ceased amortizing goodwill. We
completed internal impairment tests of goodwill as of January 1, 2002. We
concluded, based primarily on the historically positive operating results and
cash generation of these reporting units, together with our forecast of future
reporting unit operating results, that our goodwill is not impaired. Had we
stopped amortizing goodwill at the beginning of 2001, the effect on net income
(loss) and diluted earnings (loss) per share for the three and nine month
periods ended September 30, 2001 and the year ended December 31, 2001 are as
follows (in thousands, except per share information):
9 Months Ended 3 Months Ended Year Ended
September 30 September 30 December 31
----------------- ----------------- -----------------
Net Loss LPS Net Loss LPS Net Loss LPS
-------- ------- -------- ------- -------- -------
As reported $ (2,459) $ (0.16) $ (2,720) $ (0.17) $(38,128) $ (2.45)
Add back
goodwill
amortization 1,417 0.09 481 0.03 1,903 0.13
-------- ------- -------- ------- -------- -------
As adjusted $ (1,042) $ (0.07) $ (2,239) $ (0.14) $(36,225) $ (2.32)
======== ======= ======== ======= ======== =======
- 7 -
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." This statement requires
recognition of a liability for any legal obligations associated with the
retirement of a tangible long-lived asset. Any such liability will be
recorded at fair value when incurred and generally results in an increase to
the carrying amount of the related long-lived asset. This statement will be
effective for us for the year ending December 31, 2003. The adoption of this
statement is not expected to have a material effect on our results of
operations or financial position.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" but retains many of its
fundamental provisions. SFAS 144 also supersedes certain provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" but retains its provision to separately
report discontinued operations and extends that reporting to a component of an
entity, as defined therein, that either has been disposed of or is classified
as held for sale, thus broadening the presentation of discontinued operations
to include more disposal transactions. Effective January 1, 2002, the Company
adopted this statement with no effect on financial position or results of
operations. However, certain amounts related to our discontinued operations
as of December 31, 2001 have been reclassified in the condensed consolidated
balance sheet to conform to the presentation requirements of SFAS 144.
In April 2002, the Financial Accounting Standards Board issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This statement eliminates the
automatic classification of gain or loss on extinguishment of debt as an
extraordinary item of income and requires that such gain or loss be evaluated
for extraordinary classification under the criteria of Accounting Principles
Board No. 30 "Reporting Results of Operations." This statement also requires
sales-leaseback accounting for certain lease modifications that have economic
effects that are similar to sales-leaseback transactions, and makes various
other technical corrections to existing pronouncements. This statement will
be effective for us for the year ending December 31, 2003. We are attempting
to buy back the senior notes at a discount. If successful, the adoption of
this statement could have a material effect on our results of operations or
financial position.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement addresses accounting for and reporting of costs associated with exit
or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." This
statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Whereas, EITF
94-3 requires an estimated liability to be recognized for exit or disposal
- 8 -
activities at the date an entity commits to an exit plan. This statement will
be effective for exit or disposal activities that are initiated after December
31, 2002, with earlier application encouraged. We adopted a restructuring
plan in the fourth quarter of 2001 pursuant to the guidance of EITF 94-3.
Should we engage in any future exit, disposal or restructuring activities, the
guidance set forth in SFAS 146 will be followed.
NOTE 2: RECENT DEVELOPMENTS
Restructuring and Other Actions
During 2002, the Company has made significant progress towards completion
of our restructuring plan adpoted in 2001.
On September 24, 2002, we sold Kingway, our discontinued materials
handling systems operations, for cash proceeds of $25.0 million, from which we
paid $881,000 in transaction-related expenses and fees, and a $7.0 million
note receivable. Future proceeds from the note receivable, if any, are
contingent upon the operating results during 2003, 2004 and 2005 of the newly
created entity to which Kingway was sold up to a maximum of $2.33 million for
each year. The net cash proceeds of $24.12 million were used to reduce
borrowings under our BOA revolving credit facility of $18.96 million, term
loan A facility of $4.11 million and pay overadvance fees of $1.05 million.
We realized a gain of $3.4 million, classified within discontinued operations,
on this transaction.
On June 30, 2002, we sold the inventory and substantially all of the
property, plant and equipment of Alliance, our discontinued bridges and cranes
operations, for cash proceeds of $3.058 million and the assumption by the
buyer of $242,000 of accrued liabilities. We retained all receivables, trade
payables and certain other liabilities of this discontinued operation. The
net cash proceeds of $3.058 million were used to reduce borrowings under our
BOA revolving credit facility ($322,000), term loan A facility ($1.87 million)
and capital expenditure facility ($866,000). We realized a loss of $2.3
million, classified within discontinued operations, on this transaction.
During the first quarter of 2002, NPSAC, the Company's former pressure
vessel operations in Clearfield, Utah, was relocated to and combined with the
pressure vessel operations in McKeesport, PA. The cylinder operations in
Milwaukee, WI have been relocated to our leased facility in Libertyville, IL.
The land and building in Milwaukee, WI is being prepared for sale. We have
been preparing to move the cylinder operations in Chicago, IL to the
Libertyville facility during the third quarter of 2002. We closed the
Plastics' corporate headquarters in Charlotte, NC and all administrative and
managerial positions were eliminated. Plastics' corporate responsibilities
have been returned to our manufacturing and administrative operations in
Oneida, NY.
We reevaluated the shut-down of our Plastics operation in Siler City, NC
and have determined to maintain our presence in the southern U.S. and service
the customers of the Siler City, NC location. This reevaluation does not
change our intent to dispose of the land, building and a large portion of the
existing machinery and equipment or the fourth quarter restructuring charge
related thereto as the leased and owned machinery and equipment related to the
charge remains out of service.
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder is due on May 1, 2003. The senior notes require semi-annual
- 9 -
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001,
May 1, 2002 and November 1, 2002. We were also unable to make the $12.5
million sinking fund payment due May 1, 2002. This inability to fund our
obligations under the 13% senior notes is due to a lack of liquidity and
availability under our revolving credit facility with BOA.
An event of default as defined in the indenture governing the senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. Although they have not moved to do so while we
execute our plan to restructure and generate liquidity through asset sales,
the senior note holders have the right to accelerate all amounts outstanding,
including accrued and unpaid interest of $5.16 million, totaling $30.0 million
at October 31, 2002. Interest continues to accrue at approximately $0.3
million per month, including compounded interest at 13% per annum on the
unpaid semi-annual interest payments.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $7.5 million of senior secured revolving and term loan
credit facilities outstanding at September 30, 2002 with BOA. Although we
have repaid over $26.0 million of our BOA facilities since the beginning of
the year with cash proceeds from sales of assets, we are still in default
under these facilities and have been since September 30, 2001 due to our
inability to achieve our financial ratio covenants contained in the financing
and security agreement with BOA.
NOTE 3: DEBT IN DEFAULT AND LONG-TERM DEBT
Debt in default consists of the following (in thousands):
At September 30, At December 31,
2002 2001
--------------- --------------
(unaudited)
13% senior notes (net of unamortized
discount of $0 and $2) $ 24,855 $ 24,853
BOA revolving credit facility 150 22,475
BOA term loan A due March 16, 2007 7,329 16,071
BOA capital expenditure facility - 990
-------- --------
Total debt in default $ 32,334 $ 64,389
======== ========
Long-term debt consists of the following (in thousands):
At September 30, At December 31,
2002 2001
--------------- --------------
(unaudited)
Note payable due February 28, 2003 $ 3,644 $ 3,644
Other 1,191 1,253
Other - related parties 4,615 4,615
-------- --------
Total long-term debt 9,450 9,512
Current maturities (3,729) (87)
-------- --------
Total long-term debt, less current maturities $ 5,721 $ 9,425
======== ========
- 10 -
NOTE 4: INVENTORIES
Inventories are comprised of the following (in thousands):
At September 30, At December 31,
2002 2001
--------------- --------------
(unaudited)
Raw material $ 2,615 $ 5,012
Work-in-process 1,727 2,329
Finished goods 2,016 3,342
-------- --------
Gross inventories 6,358 10,683
Plus: LIFO adjustment 131 131
-------- --------
Inventories $ 6,489 $ 10,814
======== ========
NOTE 5: STOCKHOLDERS' DEFICIT AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
equity (deficit) for the nine month period ended September 30, 2002 (in
thousands):
Accum-
Par Capital ulated
Value in Other
of Excess Accum- Compre-
Common of Par ulated hensive
Stock Value Deficit Loss Total
------ ------- -------- -------- --------
At January 1, 2002 $156 $25,064 $(41,329) $ (1,136) $(17,245)
Activity (unaudited):
Net loss - - (10,215) - (10,215)
---- ------- -------- -------- --------
At September 30, 2002 $156 $25,064 $(51,544) $ (1,136) $(27,460)
==== ======= ======== ======== ========
The computations of basic and diluted loss per common share (LPS) for the
three and nine month periods ended September 30, 2002 and 2001 are as follows
(in thousands, except per share amounts)(unaudited):
Net
Loss Shares LPS
-------- -------- -------
Three months ended September 30, 2002:
Net loss, weighted average shares
outstanding and basic and diluted LPS $ (1,832) 15,591 (0.12)
======== ======== =======
Three months ended September 30, 2001:
Net loss, weighted average shares
outstanding and basic LPS $ (2,720) 15,587 $ (0.17)
=======
Dilutive effect of stock options 49
-------- --------
Net loss, weighted average shares
outstanding and diluted LPS $ (2,720) 15,636 $ (0.17)
======== ======== =======
- 11 -
Nine months ended September 30, 2002:
Net loss, weighted average shares
outstanding and basic and diluted LPS $(10,215) 15,591 (0.66)
======== ======== =======
Nine months ended September 30, 2001:
Net loss, weighted average shares
outstanding and basic LPS $ (2,459) 15,585 $ (0.16)
=======
Dilutive effect of stock options 66
-------- --------
Net loss, weighted average shares
outstanding and diluted LPS $ (2,459) 15,651 $ (0.16)
======== ======== =======
At September 30, 2002, the Company's stock options outstanding totaled
959,700, none of which were at exercise prices below the average market
price of the underlying security during the first nine months 2002.
Therefore, basic and diluted LPS are equal.
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
Legal Proceedings
The Company and its subsidiaries are defendants in a number of lawsuits
and administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. The Company believes that any
material liability which can result from any of such lawsuits or proceedings
has been properly reserved for in the Company's consolidated financial
statements or is covered by indemnification in favor of the Company or its
subsidiaries, and therefore the outcome of these lawsuits or proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended. There is no applicable insurance coverage.
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. In August 2002, the plaintiff stockholders filed a first request
for the production of documents in Delaware Chancery Court. Reunion is in the
process of complying with the document production request and intends to
vigorously contest the suit.
The Company has been named as a defendant in fifteen consolidated
lawsuits filed in December 2000 or early 2001 in the Superior Court for Los
- 12 -
Angeles County, California, three of which are purported class actions
asserted on behalf of approximately 200 payees. The plaintiffs in these
suits, except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC are related parties.
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Charles E. Bradley, Sr., Chairman of the Board, Chief
Executive Officer and a director of the Company (Mr. Bradley), the sole
shareholder of SFSC's parent, several major financial institutions and certain
others. All of these suits arise out of the inability of SFSC to make
structured settlement payments when due. Pursuant to the court's order,
plaintiffs in the purported class actions and plaintiffs in the individual
cases actions filed a model complaint. Except for the class allegations, the
two model complaints are identical. The plaintiffs seek compensatory and
punitive damages, restoration of certain alleged trust assets, restitution and
attorneys' fees and costs.
The plaintiffs in one of the suits are former owners of a predecessor of
SFSC and current operators of a competing structured settlement business.
These plaintiffs claim that their business and reputations have been damaged
by SFSC's structured settlement defaults, seek damages for unfair competition
and purport to sue on behalf of the payees.
The plaintiffs allege that the Company borrowed funds from SFSC and has
not repaid these loans. The plaintiffs' theories of liability against the
Company are that it is the alter ego of SFSC and Mr. Bradley and that the
Company received fraudulent transfers of SFSC's assets. The plaintiffs also
assert direct claims against the Company for inducing breach of contract and
aiding and abetting an alleged breach of fiduciary duty by SFSC.
On June 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. As a result of this
restraining order of the bankruptcy court, the Company entered a standstill
agreement with the plaintiffs on August 22, 2001. Pursuant to the standstill
agreement, and the stipulation of the parties to the SFSC bankruptcy case, the
plaintiffs agreed to take no further action to prosecute any claim in the
litigation against the Company, Mr. Bradley and others to recover any
structured settlement trust assets or any derivative claims or claims based on
allegations of alter ego, fraudulent transfer or conversion. The plaintiffs
did not agree to waive or release their direct personal claims against the
Company for damages, but the plaintiffs agreed to cease and desist the
prosecution of those claims until no earlier than sixty days following service
of written notice to the Company stating that they have elected to
unilaterally terminate the standstill.
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. Both model complaints allege causes of
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted cross-
complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
- 13 -
vigorously defend against these actions and cross-actions.
The Company has been named in approximately 750 separate asbestos suits
filed since January 1, 2001 by three plaintiffs' law firms in Wayne County,
Michigan. The claims allege that cranes from the Company's crane
manufacturing location in Alliance, OH were present in various parts of
McLouth and Great Lakes Steel Mills in Wayne County, Michigan and that those
cranes contained asbestos to which plaintiffs were exposed over a 40 year
span. Counsel for the Company has filed an answer to each complaint denying
liability by the Company and asserting all alternative defenses permitted
under the Court's Case Management Order. Counsel for the Company has
negotiated dismissal of 202 cases with little or no cost to the Company. The
Company denies that it manufactured any products containing asbestos or
otherwise knew or should have known that any component part manufacturers
provided products containing asbestos. The Company intends to vigorously
defend against these lawsuits.
Since July 10, 2001, various legal actions, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon, Washington
and Mississippi, against a large number of defendants, including Oneida
Rostone Corporation (ORC), pre-merger Reunion's Plastics subsidiary and the
Company's Plastics segment. In October 2001, Allen-Bradley Company, a former
owner of the Rostone business of ORC, accepted Reunion Industries' tender of
its defense and indemnification in the first such lawsuit filed pursuant to a
contractual obligation to do so. Subsequent to the acceptance of the tender
of defense and indemnification in the first lawsuit, Allen-Bradley Company has
accepted the Company's tender of defense and indemnification in a total of 90
separate actions, all of which are being defended by Allen-Bradley Company.
Environmental Compliance
Various U.S. federal, state and local laws and regulations including,
without limitation, laws and regulations concerning the containment and
disposal of hazardous waste, oil field waste and other waste materials, the
use of storage tanks, the use of insecticides and fungicides and the use of
underground injection wells directly or indirectly affect the Company's
operations. In addition, environmental laws and regulations typically impose
"strict liability" upon the Company for certain environmental damages.
Accordingly, in some situations, the Company could be liable for clean up
costs even if the situation resulted from previous conduct of the Company that
was lawful at the time or from improper conduct of, or conditions caused by,
previous property owners, lessees or other persons not associated with the
Company or events outside the control of the Company. Such clean up costs or
costs associated with changes in environmental laws and regulations could be
substantial and could have a materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Except as described in the following paragraphs, the Company believes it
is currently in material compliance with existing environmental protection
laws and regulations and is not involved in any significant remediation
activities or administrative or judicial proceedings arising under federal,
state or local environmental protection laws and regulations. In addition to
management personnel who are responsible for monitoring environmental
compliance and arranging for remedial actions that may be required, the
Company has also employed outside consultants from time to time to advise and
assist the Company's environmental compliance efforts. Except as described in
the following paragraphs, the Company has not recorded any accruals for
environmental costs.
- 14 -
In February 1996, Reunion was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. Since then, the Company has expended $376,000 of
remediation costs and accrued an additional $20,000.
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. The Company's
environmental consultant is in the process of updating the estimate of the
costs to comply with this order, but the Company does not believe that the
cost of future remediation will exceed the amount accrued. No remediation was
performed in 2000 or 2001 pending the decision. However, the Company has paid
$263,000 for its share of consulting services in connection with the hearings.
At September 30, 2002, the balance accrued for these remediation costs is
approximately $1,045,000. Owners of a portion of the property have objected
to the Company's cleanup methodology and have filed suit to require additional
procedures. The Company is contesting this litigation, and believes its
proposed methodology is well within accepted industry practice for remediation
efforts of a similar nature. No accrual has been made for costs of any
alternative cleanup methodology which might be imposed as a result of the
litigation.
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site outside Petaluma, Marin County, California. The Company
gathered and forwarded to the USEPA the information it requested. On May 16,
2002, the Company, as the successor to Buttes Gas & Oil Company (BGO),
received from the USEPA a notice of potential liability and demand for payment
of $3,909,614.37 for reimbursement of costs related to its removal and
disposal efforts initiated in 1998 pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA).
BGO, predecessor by merger to the Company, leased the site for mining
purposes and operated a mercury mine on this site from 1965 to 1970. BGO's
mining operations were terminated in 1970. Subsequently, under the
supervision of the environmental and planning representatives of Marin County,
BGO completed closure and environmental restoration activities at the site,
including stabilization and re-vegetation of the site. BGO then quitclaimed
the mining lease back to the Gambonini's in 1973. Because of apparent
overgrazing at the site subsequent to BGO's restoration efforts, a storm in
1982 caused severe flooding resulting in the failure of the dam built to
retain mining materials. Runoff from the flood released mining materials into
the creek below and, ultimately, into the Tomales Bay, a local recreation and
fishing area.
In 1985, BGO, headquartered in Houston, Texas, filed Chapter 11
proceedings in bankruptcy court in the Southern District of Texas in Houston.
In December 1988, BGO confirmed its plan of reorganization which provided for,
among other things, a discharge of all claims that arose prior to the date of
confirmation of the plan. The reorganization plan became effective in
February 1989.
- 15 -
In response to the USEPA's demand, the Company filed an adversary
proceeding in bankruptcy court in the Southern District of Texas in Houston
seeking an order to enjoin the efforts of the USEPA to pursue collection of
any claims related to the site. The USEPA has responded by filing a motion to
dismiss based on several jurisdictional and substantive grounds. A status
conference was held on August 27, 2002, at which time the judge for the the
bankruptcy court in the Southern District of Texas in Houston ruled that the
court did not have jurisdiction and, at that time, the Company and the USEPA
entered into a standstill agreement through December 31, 2002. Company's
counsel is currently investigating the Company's legal alternatives in this
matter. The Company intends to vigorously defend against the USEPA's claim.
The Company has made no accrual of any amount related to this matter as, at
this time, the probability of an adverse outcome to the Company is reasonably
possible, but not probable.
NOTE 7: OPERATING SEGMENT DISCLOSURES
The following represents the disaggregation of financial data (in
thousands)(unaudited):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended and
at September 30, 2002:
------------------------
Metals:
Pressure vessels and springs $ 4,313 $ (41) $ 2 $ 11,956
Cylinders 3,572 (579) - 8,197
-------- -------- -------- --------
Subtotal Metals 7,885 (620) 2 20,153
Plastics 7,643 303 26 17,074
Corporate and other - (1,163) 2 15,075
Discontinued operations - - 98 -
-------- -------- -------- --------
Totals $ 15,528 (1,480) $ 128 $ 52,302
======== ======== ========
Depreciation and amortization(3) (693)
Interest expense (2,151)
--------
Loss from continuing operations
before income taxes $ (4,324)
========
Three months ended September 30, 2001
and at December 31, 2001:
-------------------------------------
Metals:
Pressure vessels and springs $ 8,699 $ 1,397 $ 121 $ 17,936
Cylinders 4,246 (285) - 9,662
-------- -------- -------- --------
Subtotal Metals 12,945 1,112 121 27,598
Plastics 8,713 223 200 18,443
Corporate and other - (857) 1 14,572
Discontinued operations - - 334 35,952
-------- -------- -------- --------
Totals $ 21,658 478 $ 656 $ 96,565
======== ======== ========
Depreciation and amortization(3) (1,365)
Interest expense (1,489)
--------
Loss from continuing operations
before income taxes $ (2,376)
========
- 16 -
Capital
Net Sales EBITDA(1) Spending
--------- --------- ---------
Nine months ended
September 30, 2002:
---------------------
Metals:
Pressure vessels and springs $ 14,913 $ 318 $ 48
Cylinders 12,690 (750) 25
-------- -------- --------
Subtotal Metals 27,603 (432) 73
Plastics 24,226 1,015 109
Corporate and other - (2,800) 2
Discontinued operations - - 230
-------- -------- --------
Totals $ 51,829 (2,217) $ 414
======== ========
Depreciation and amortization(3) (2,165)
Interest expense (6,053)
--------
Loss from continuing operations
before income taxes $(10,435)
========
Nine months ended
September 30, 2001:
---------------------
Metals:
Pressure vessels and springs $ 32,974 $ 7,104 $ 254
Cylinders 15,776 204 -
-------- -------- --------
Subtotal Metals 48,750 7,308 254
Plastics 31,698 1,543 878
Corporate and other - (2,824) 8
Discontinued operations - - 1,377
-------- -------- --------
Totals $ 80,448 6,027 $ 2,517
======== ========
Depreciation and amortization(3) (4,122)
Interest expense (4,635)
--------
Loss from continuing operations
before income taxes $ (2,730)
========
(1) EBITDA is presented as it is the primary measurement used by management
in assessing segment performance and not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a
widely accepted financial indicator of a company's ability to incur and
service debt.
(2) Headquarters total assets at September 30, 2002 and December 31, 2001
includes goodwill related to its pressure vessel and springs segment
totaling $8.1 million.
(3) Excludes amortization of debt issuance expenses and fees of $186,000
and $60,000 for the three month periods ended September 30, 2002
and 2001, respectively, and $510,000 and $408,000 for the nine month
period ended September 30, 2002 and 2001, respectively, which are
included in interest expense.
- 17 -
NOTE 8: DISCONTINUED OPERATIONS
At December 31, 2001, the assets and liabilities of discontinued
operations are comprised of the assets and liabilities of the discontinued
bridges and cranes and material handling systems businesses and the remaining
reserve for expenses of the discontinued grating business. The assets and
liabilities of discontinued operations have been separately classified on the
balance sheet as follows (in thousands):
At December 31,
2001
--------------
CURRENT ASSETS:
Cash and cash equivalents $ 506
Receivables, net 14,463
Inventories, net 2,093
Other current assets 249
--------
Current assets $ 17,311
========
OTHER ASSETS:
Property, plant and equipment, net $ 6,985
Goodwill, net 11,628
Other assets, net 28
--------
Other assets $ 18,641
========
CURRENT LIABILITIES:
Trade payables $ 7,182
Other current liabilities 2,014
Reserve for operating loss during phase-out 2,628
Reserve for estimated expenses 325
--------
Current liabilities $ 12,149
========
Summarized results of discontinued operations for the three and nine
month periods ended September 30, 2002 and 2001 follow (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 7,442 $ 17,074 $ 33,624 $ 51,624
Income (loss) before taxes 2,492 (1,651) 220 (864)
The above results of discontinued operations include actual and allocated
interest expense for the three month periods ended September 30, 2002 and 2001
totaling $637,000 and $764,000, respectively, and for the nine month periods
ended September 30, 2002 and 2001 totaling $2,457,000 and $2,370,000,
respectively. Income before income taxes for the three and nine months ended
September 30, 2002 includes a $3.4 million gain on sale of the discontinued
materials handling systems operations.
- 18 -
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis is provided to assist readers in
understanding financial performance during the periods presented and
significant trends which may impact future performance. It should be read in
conjunction with the consolidated financial statements and accompanying notes
included elsewhere in this Form 10-Q and in conjunction with our annual report
on Form 10-K for the year ended December 31, 2001.
We adopted a plan to restructure continuing operations and dispose of or
shut-down other businesses. Such businesses are being reported as
discontinued operations. Prior year information has been restated for
comparative purposes and the following discussion of results of operations is
separated into continuing and discontinued operations.
GENERAL
The Company owns and operates a group of industrial manufacturing
operations that design and manufacture engineered, high-quality products for
specific customer requirements, such as large-diameter seamless pressure
vessels, hydraulic and pneumatic cylinders, leaf springs and precision plastic
components. Until December 2001, the Company's products also included heavy-
duty cranes, bridge structures and materials handling systems. The Company
classified its heavy-duty cranes, bridge structures and materials handling
systems businesses as discontinued operations.
RECENT DEVELOPMENTS
Restructuring and Other Actions
During 2002, the Company has made significant progress towards completion
of our restructuring plan adpoted in 2001.
On September 24, 2002, we sold Kingway, our discontinued materials
handling systems operations, for cash proceeds of $25.0 million, from which we
paid $881,000 in transaction-related expenses and fees, and a $7.0 million
note receivable. Future proceeds from the note receivable, if any, are
contingent upon the operating results during 2003, 2004 and 2005 of the newly
created entity to which Kingway was sold up to a maximum of $2.33 million for
each year. The net cash proceeds of $24.12 million were used to reduce
borrowings under our BOA revolving credit facility of $18.96 million, term
loan A facility of $4.11 million and pay overadvance fees of $1.05 million.
We realized a gain of $3.4 million, classified within discontinued operations,
on this transaction.
On June 30, 2002, we sold the inventory and substantially all of the
property, plant and equipment of Alliance, our discontinued bridges and cranes
operations, for cash proceeds of $3.058 million and the assumption by the
buyer of $242,000 of accrued liabilities. We retained all receivables, trade
payables and certain other liabilities of this discontinued operation. The
net cash proceeds of $3.058 million were used to reduce borrowings under our
BOA revolving credit facility ($322,000), term loan A facility ($1.87 million)
and capital expenditure facility ($866,000). We realized a loss of $2.3
million, classified within discontinued operations, on this transaction.
- 19 -
During the first quarter of 2002, NPSAC, the Company's former pressure
vessel operations in Clearfield, Utah, was relocated to and combined with the
pressure vessel operations in McKeesport, PA. The cylinder operations in
Milwaukee, WI have been relocated to our leased facility in Libertyville, IL.
The land and building in Milwaukee, WI is being prepared for sale. We have
been preparing to move the cylinder operations in Chicago, IL to the
Libertyville facility during the third quarter of 2002 [and expect to be
substantially completed by the first quarter of 2003]. We closed the
Plastics' corporate headquarters in Charlotte, NC and all administrative and
managerial positions were eliminated. Plastics' corporate responsibilities
have been returned to our manufacturing and administrative operations in
Oneida, NY.
We reevaluated the shut-down of our Plastics operation in Siler City, NC
and have determined to maintain our presence in the southern U.S. and service
the customers of the Siler City, NC location. This reevaluation does not
change our intent to dispose of the land, building and a large portion of the
existing machinery and equipment or the fourth quarter restructuring charge
related thereto as the leased and owned machinery and equipment related to the
charge remains out of service.
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder is due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001,
May 1, 2002 and November 1, 2002. We were also unable to make the $12.5
million sinking fund payment due May 1, 2002. This inability to fund our
obligations under the 13% senior notes is due to a lack of liquidity and
availability under our revolving credit facility with BOA.
An event of default as defined in the indenture governing the senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. Although they have not moved to do so while we
execute our plan to restructure and generate liquidity through asset sales,
the senior note holders have the right to accelerate all amounts outstanding,
including accrued and unpaid interest of $5.16 million, totaling $30.0 million
at October 31, 2002. Interest continues to accrue at approximately $0.3
million per month, including compounded interest at 13% per annum on the
unpaid semi-annual interest payments.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $7.5 million of senior secured revolving and term loan
credit facilities outstanding at September 30, 2002 with BOA. Although we
have repaid over $26.0 million of our BOA facilities since the beginning of
the year with cash proceeds from sales of assets, we are still in default
under these facilities and have been since September 30, 2001 due to our
inability to achieve our financial ratio covenants contained in the financing
and security agreement with BOA.
- 20 -
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 Compared to
Three Months Ended September 30, 2001
Continuing Operations
Sales, gross margins and EBITDA percentages for the three months ended
September 30, 2002 and 2001 are as follows:
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2002 2001 2002 2001 2002 2001
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 4,313 $ 8,699 8.3% 23.8% -1.0% 16.1%
Cylinders 3,572 4,246 -1.4% 6.1% -16.2% -6.7%
Plastics 7,643 8,713 10.8% 9.7% 4.0% 2.6%
--------- --------- ------ ------ ------ ------
Totals $ 15,528 $ 21,658 7.3% 14.7% -2.0% 6.2%
========= ========= ====== ====== ====== ======
Pressure vessels and springs sales declined again in the third quarter of
2002 when compared to the same period in 2001 primarily to a management
decision to scale-back production to reduce spending due to our liquidity
issues and to lessen the strain on this segment's raw material vendors. We
are currently attempting to correct vendor-related issues with cash proceeds
from asset sales by reducing days payables outstanding for our significant
vendors. However, due to limited raw material availability caused by vendor
production schedules, [this segment's sales may not recover to normal
operating levels until late in the fourth quarter of 2002 or the first quarter
of 2003].
Sales of cylinders continues to be affected by a softness in this market,
[a trend which the Company believes will bottom-out but possibly not reverse
during 2002.]
The decrease in Plastics revenues is the continuation of a downward trend
which began in 1999 and resulted from several factors, including certain
customers relocating manufacturing operations to Mexico and Asia, reduced
customer orders for continuing programs, end of product cycles and delays in
new program starts, which affected all Plastics facilities. Plastics also
lost a top ten customer in the second half of 2001 to competitive bidding on
the internet. [Management is seeking to expand Plastics' product offerings in
the business machines, consumer products and medical products industries to
mitigate this trend. However, if not successful, this trend in Plastics
revenue could continue during the remainder of 2002 and possibly into 2003.]
The decreases in gross margins across all segments is related to volume
declines resulting in a decrease in production activity and our ability to
absorb costs. We are responding to these conditions by making progress on our
plan to restructure, including combining certain operations and eliminating
various administrative and management positions.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales
- 21 -
decreased during the 2002 third quarter compared to the same period in 2001
primarily due to the same factors affecting gross profit margin discussed
above. Total EBITDA as a percentage of sales in the third quarters of 2002
and 2001 exclude corporate and other EBITDA of negative $1.2 million and $0.9
million, respectively.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the third quarter
of 2002 were $3.3 million, compared to $3.5 million for the third quarter of
2001. This decrease in SGA is related to the decreasing trend in sales,
resulting in lower commissions expense, cost cutting measures taken during
June 2001 and progress made on the restructuring, both of which included
personnel reductions in sales and administration. [Management estimates the
savings from these reductions to be approximately $1.8 million annually.]
However, the benefits of these cost cutting measures are being more than
offset by the continuation of the negative trend in sales and the resulting
effect on the Company's ability to absorb costs. SGA expenses as a percentage
of sales increased to 21.3% for the 2002 third quarter compared to 16.4% in
the 2001 third quarter. SGA as a percentage of sales was higher in the 2002
third quarter compared to the third quarter of 2001 due to the faster rate at
which volume has decreased compared to decreases in relatively fixed
administrative costs.
Other (Income) Expense
Other income for the third quarter of 2002 was $6,000, compared to other
expense of $0.5 million for the third quarter of 2001. The components are as
follows:
2002 2001 Change
-------- -------- --------
Amortization of goodwill and other intangibles $ - $ 501 $ (501)
Other (income) expense, net (6) 19 (25)
-------- -------- --------
Total other (income) expense, net $ (6) $ 520 $ (526)
======== ======== ========
We stopped amortizing goodwill effective January 1, 2002. There were no
significant offsetting items netted into other (income) expense, net, in
either period.
Interest Expense
Interest expense, net, for the third quarter of 2002 was $2.2 million
compared to $1.5 million for the third quarter of 2001. For the third
quarters of 2002 and 2001, a total of $0.6 million and $0.8 million,
respectively, of interest expense has been allocated to or actually incurred
in discontinued operations. On a combined basis interest expense was $2.8
million in the third quarter of 2002 compared to $2.3 million in the third
quarter of 2001. Although debt and prime lending rates have decreased from
end of third quarter 2001 levels to end of third quarter 2002 levels, the
resulting decrease was more than offset by the increased default rate being
paid on the BOA revolving credit and term loan facilities and $450,000 in
overadvance fees accrued in the third quarter of 2002.
Income Taxes
There was no tax provision from continuing operations in the third
quarter of 2002 compared to a benefit of $1.3 million for the third quarter of
2001. The Company has net operating loss carryforwards for Federal tax return
- 22 -
reporting purposes totaling $124.1 million at December 31, 2001, $79.2 million
of which expire by 2004. [The Company may be able to utilize its loss
carryforwards against possible increased profitability as the result of the
Company's corporate-wide restructuring plan]. However, given recent operating
results, management has determined to fully reserve for the total amount of
net deferred tax assets as of December 31, 2001 [and to continue to do so
during 2002 until it is more likely than not that the Company will realize
some benefit from its loss carryforwards]. The tax benefit from continuing
operations and resulting effective rate of 55.0% in the third quarter of 2001
was based on the loss from continuing operations before tax adjusted for
permanent differences.
Discontinued Operations
There was income from discontinued operations for the third quarter of
2002 of $2.5 million compared to a loss from discontinued operations of $1.7
million in the third quarter of 2001. The income from discontinued operations
of $2.5 million in the third quarter of 2002 relates to a $3.4 million gain
from the sale of the discontinued materials handling systems operations in
September 2002 partially offset by allocated interest expense. For the third
quarters of 2002 and 2001, discontinued operations includes a total of $0.6
million and $0.8 million, respectively, of interest expense.
Nine Months Ended September 30, 2002 Compared to
Nine Months Ended September 30, 2001
Continuing Operations
Sales, gross margins and EBITDA percentages for the nine months ended
September 30, 2002 and 2001 are as follows:
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2002 2001 2002 2001 2002 2001
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 14,913 $ 32,974 11.3% 27.4% 2.1% 21.5%
Cylinders 12,690 15,776 6.2% 12.9% -5.9% 1.3%
Plastics 24,226 31,698 11.2% 13.5% 4.2% 4.9%
--------- --------- ------ ------ ------ ------
Totals $ 51,829 $ 80,448 10.0% 19.1% 1.1% 11.0%
========= ========= ====== ====== ====== ======
Pressure vessels and springs sales were down significantly in the first
nine months of 2002 compared to the same period in 2001. This decrease is due
primarily to management's decision to shut-down our pressure vessels facility
during the first quarter of 2002 and also in July 2002. We made these
decisions to reduce spending due to our liquidity problems and to lessen the
strain on this segment's raw material vendors. The decrease was also caused
by the fact that the first quarter of 2001 included the recognition of $2.8
million of revenues on a large NASA contract manufactured in 2000 but shipped
in the first quarter of 2001. We are currently attempting to correct vendor-
related issues with cash proceeds from asset sales. However, due to limited
raw material availability caused by vendor production schedules, [this
segment's sales may not recover to normal operating levels until late in the
fourth quarter of 2002 or the first quarter of 2003].
Sales of cylinders in the first nine months of 2002 was affected by the
temporary disruption caused by the relocation of our former Milwaukee, WI
cylinder operations to Libertyville, IL and continues to be affected by a
softness in this market, [a trend which the Company believes will bottom-out
but possibly not reverse during 2002.]
- 23 -
The decrease in Plastics revenues is the continuation of a downward trend
which began in 1999 and resulted from several factors, including certain
customers relocating manufacturing operations to Mexico and Asia, reduced
customer orders for continuing programs, end of product cycles and delays in
new program starts, which affected all Plastics facilities. Plastics also
lost a top ten customer in the second half of 2001 to competitive bidding on
the internet. [Management is seeking to expand Plastics' product offerings in
the business machines, consumer products and medical products industries to
mitigate this trend. However, if not successful, this trend in Plastics
revenue could continue during the remainder of 2002 and possibly into 2003.]
The decreases in gross margins across all segments is related to volume
declines resulting in a decrease in production activity and our ability to
absorb costs. We are responding to these conditions by making progress on our
plan to restructure, including combining certain operations and eliminating
various administrative and management positions. [However, the benefits of
these actions may not materialize immediately.]
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales
decreased during the 2002 first nine months compared to the same period in
2001 primarily due to the same factors affecting gross profit margin discussed
above. Total EBITDA as a percentage of sales in the first nine month periods
of 2002 and 2001 exclude corporate and other EBITDA of negative $2.8 million
in each period.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first nine
months of 2002 were $10.4 million, compared to $12.0 million for the first
nine months of 2001. This decrease in SGA is directly related to the
decreasing trend in sales, resulting in lower commissions expense, cost
cutting measures taken during June 2001 and progress made on the
restructuring, both of which included personnel reductions in sales and
administration. [Management estimates the savings from these reductions to be
approximately $1.8 million annually.] However, the benefits of these cost
cutting measures are being more than offset by the continuation of the
negative trend in sales and the resulting effect on the Company's ability to
absorb costs. SGA expenses as a percentage of sales increased to 20.0% for
the 2002 first nine months compared to 14.8% in the 2001 first nine months.
SGA as a percentage of sales was higher in the 2002 first nine months compared
to the first nine months of 2001 due to the faster rate at which volume has
decreased compared to decreases in relatively fixed administrative costs.
Other (Income) Expense
Other income for the first nine months of 2002 was $0.8 million, compared
to other expense of $1.5 million for the first nine months of 2001. The
components are as follows:
2002 2001 Change
-------- -------- --------
Amortization of goodwill and other intangibles $ - $ 1,508 $ (1,508)
Gain on sale of equipment with zero book value (375) - (375)
Other (income) expense, net (412) (3) (409)
-------- -------- --------
Total other (income) expense, net $ (787) $ 1,505 $ (2,292)
======== ======== ========
- 24 -
We stopped amortizing goodwill effective January 1, 2002. In January
2002, we sold equipment that had no book value. The increase in the remaining
other income is primarily due to higher levels of sales of scrap and
miscellaneous parts due to cleaning out idled facilities. There were no
significant offsetting items netted into other (income) expense, net, in
either period.
Interest Expense
Interest expense, net, for the first nine months of 2002 was almost $6.1
million compared to $4.6 million for the first nine months of 2001. For the
first nine month periods of 2002 and 2001, a total of $2.5 million and $2.4
million, respectively, of interest expense has been allocated to or actually
incurred in discontinued operations. On a combined basis interest expense was
$8.5 million in the first nine months of 2002 compared to $7.0 million in the
first nine months of 2001. Although debt and prime lending rates have
decreased from end of third quarter 2001 levels to end of third quarter 2002
levels, the effect on interest expense resulting from these decreases was more
than offset by the increased default rate being paid on the BOA revolving
credit and term loan facilities and $1.675 million in combined paid and
accrued overadvance fees in the first nine months of 2002.
Income Taxes
There was no tax provision from continuing operations in the first nine
months of 2002 compared to a tax benefit of $1.1 million for the first nine
months of 2001. The Company has net operating loss carryforwards for Federal
tax return reporting purposes totaling $124.1 million at December 31, 2001,
$79.2 million of which expire by 2004. [The Company may be able to utilize
its loss carryforwards against possible increased profitability as the result
of the Company's corporate-wide restructuring plan]. However, given recent
operating results, management has determined to fully reserve for the total
amount of net deferred tax assets as of December 31, 2001 [and to continue to
do so during 2002 until it is more likely than not that the Company will
realize some benefit from its loss carryforwards]. The tax benefit from
continuing operations in the first nine months of 2001 was based on the loss
from continuing operations before tax adjusted for permanent differences.
Discontinued Operations
There was income from discontinued operations for the first nine months
of 2002 of $220,000 compared to a loss from discontinued operations of $0.9
million in the first nine months of 2001. The income from discontinued
operations of $220,000 in the first nine months of 2002 relates to a $3.4
million gain from the sale of the discontinued materials handling systems
operations in September 2002 partially offset by allocated interest expense.
For the first nine months of 2002 and 2001, discontinued operations includes a
total of $2.5 million and $2.4 million, respectively, of interest expense.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company manages its liquidity as a consolidated enterprise. The
operating groups of the Company carry minimal cash balances. Cash generated
from group operating activities generally is used to repay borrowings under
revolving credit arrangements, as well as other uses (e.g. corporate
headquarters expenses, debt service, capital expenditures, etc.). Conversely,
cash required for group operating activities generally is provided from funds
available under the same revolving credit arrangements.
- 25 -
Restructuring and Other Actions
During 2002, the Company has made significant progress towards completion
of our restructuring plan adpoted in 2001.
On September 24, 2002, we sold Kingway, our discontinued materials
handling systems operations, for cash proceeds of $25.0 million, from which we
paid $881,000 in transaction-related expenses and fees, and a $7.0 million
note receivable. Future proceeds from the note receivable, if any, are
contingent upon the operating results during 2003, 2004 and 2005 of the newly
created entity to which Kingway was sold up to a maximum of $2.33 million for
each year. The net cash proceeds of $24.12 million were used to reduce
borrowings under our BOA revolving credit facility of $18.96 million, term
loan A facility of $4.11 million and pay overadvance fees of $1.05 million.
We realized a gain of $3.4 million, classified within discontinued operations,
on this transaction.
On June 30, 2002, we sold the inventory and substantially all of the
property, plant and equipment of Alliance, our discontinued bridges and cranes
operations, for cash proceeds of $3.058 million and the assumption by the
buyer of $242,000 of accrued liabilities. We retained all receivables, trade
payables and certain other liabilities of this discontinued operation. The
net cash proceeds of $3.058 million were used to reduce borrowings under our
BOA revolving credit facility ($322,000), term loan A facility ($1.87 million)
and capital expenditure facility ($866,000). We realized a loss of $2.3
million, classified within discontinued operations, on this transaction.
During the first quarter of 2002, NPSAC, the Company's former pressure
vessel operations in Clearfield, Utah, was relocated to and combined with the
pressure vessel operations in McKeesport, PA. The cylinder operations in
Milwaukee, WI have been relocated to our leased facility in Libertyville, IL.
The land and building in Milwaukee, WI is being prepared for sale. We have
been preparing to move the cylinder operations in Chicago, IL to the
Libertyville facility during the third quarter of 2002 [and expect to be
substantially completed by the first quarter of 2003]. We closed the
Plastics' corporate headquarters in Charlotte, NC and all administrative and
managerial positions were eliminated. Plastics' corporate responsibilities
have been returned to our manufacturing and administrative operations in
Oneida, NY.
We reevaluated the shut-down of our Plastics operation in Siler City, NC
and have determined to maintain our presence in the southern U.S. and service
the customers of the Siler City, NC location. This reevaluation does not
change our intent to dispose of the land, building and a large portion of the
existing machinery and equipment or the fourth quarter restructuring charge
related thereto as the leased and owned machinery and equipment related to the
charge remains out of service.
The restructuring charge we recorded in the fourth quarter of 2001
included estimated cash and non-cash components. The cash components were
comprised of reserves for lease termination costs and employee separations.
The employee separation costs recorded in the restructuring related to the 7
employees of NPSAC, the Company's former pressure vessel operations in
Clearfield, Utah. We did not accrue for any additional employee separations
related to the restructuring, although such separations totaled approximately
200 employees as of September 30, 2002. The termination costs were recorded
upon notification to the employees, which occurred in the same period as the
terminations. The following represents a summary of first nine months of 2002
cash activity for the estimated cash components of our fourth quarter 2001
restructuring charge (in thousands):
- 26 -
At 2002 At
Description 12/31/01 Activity 09/30/02
--------------------------------------------- -------- -------- --------
Lease termination costs $ 1,172 $ (249) $ 923
Employee separations 20 (20) -
-------- -------- --------
Reserve for restructuring $ 1,192 $ (269) $ 923
======== ======== ========
We reevaluated the shut-down of our Plastics operation in Siler City, NC
and have determined to maintain our presence in the southern U.S. and service
the customers of the Siler City, NC location. This reevaluation does not
change our intent to dispose of the land, building and a large portion of the
existing machinery and equipment or the fourth quarter restructuring charge
related thereto as the leased and owned machinery and equipment related to the
charge remains out of service.
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder is due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001,
May 1, 2002 and November 1, 2002. We were also unable to make the $12.5
million sinking fund payment due May 1, 2002. This inability to fund our
obligations under the 13% senior notes is due to a lack of liquidity and
availability under our revolving credit facility with BOA.
An event of default as defined in the indenture governing the senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. Although they have not moved to do so while we
execute our plan to restructure and generate liquidity through asset sales,
the senior note holders have the right to accelerate all amounts outstanding,
including accrued and unpaid interest of $5.16 million, totaling $30.0 million
at October 31, 2002. Interest continues to accrue at approximately $0.3
million per month, including compounded interest at 13% per annum on the
unpaid semi-annual interest payments.
We are attempting to restructure the 13% senior notes and have taken
action to do so. On October 15, 2002, we offered to purchase the senior notes
and asked our senior noteholders to consent to various amendments to and
waivers of the indenture. The terms of the offer are that we will buy back up
to $20.0 million par value of senior notes for 75% of par value and no accrued
and unpaid interest which, by accepting the purchase offer with no interest,
would cure the interest default on the tendered senior notes that exists for
not making our semi-annual interest payments on each of November 1, 2001, May
1, 2002 and November 1, 2002. We would cure the interest default on any
senior notes not tendered for buy-back by paying the accrued and unpaid
interest, but then the non-tendering noteholders would be subject to the
modification of the maturity dates described below. If more than $20.0
million of senior notes are tendered for buy-back, the repayments would be
made on a pro rata basis.
In order to participate in the buy-back, the senior noteholders must
consent to modify the indenture to change the maturity date of the May 1, 2002
$12.5 million mandatory redemption that we missed to be redemptions of $6.25
million on each of May 1, 2004 and May 1, 2005. Further, senior noteholders
must agree to modify the indenture to include a new mandatory redemption
payment of $6.25 million on May 1, 2006 and change the final maturity of any
remaining outstanding senior notes after that to be May 1, 2007. We are also
- 27 -
asking senior noteholders to waive the section of the indenture that could
possibly require us to offer to purchase senior notes upon the sale of assets
to exclude the Kingway sale. Only if 100% of senior noteholders agree to
these amendments and waivers can any of them participate in the purchase
offer.
The purchase offer is contingent on certain things happening, including
the Company obtaining the necessary financing and the noteholders consenting
to the amendments and waivers. We are also requiring that at least $12.5
million of senior notes be tendered for buy-back. If not, the purchase offer
is terminated. The purchase offer and consent solicitation was originally
scheduled to terminate at 5:00PM Eastern time on November 4, 2002 but was
extended to 5:00PM Eastern time on November 18, 2002. We have retained the
right to terminate the purchase offer and consent solicitaion no matter what
happens and tendering senior note holders have the right to withdraw their
tenders subject to certain terms and timing. [We think we will be able to
secure the necessary financing to consummate the buy-back, but we cannot
assure it. The lenders we have talked to about refinancing our BOA revolving
credit and term loan facilities described below have informed us that they
would not participate in a refinancing of our BOA facilities if any interest
or principal payment defaults exist under the senior notes.]
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $7.5 million of senior secured revolving and term loan
credit facilities outstanding at September 30, 2002 with BOA. Although we
have repaid over $26.0 million of our BOA facilities since the beginning of
the year with cash proceeds from sales of assets, we are still in default
under these facilities and have been since September 30, 2001 due to our
inability to achieve our financial ratio covenants contained in the financing
and security agreement with BOA.
Since then, the Company and BOA have entered into a number of side letter
agreements wherein BOA and the other lenders that participated in the BOA
refinancing of the Company in March 2000 agreed to provide monthly advances in
excess of our calculated borrowing base for working capital needs while we
executed our plan to restructure and generate liquidity by selling assets.
One of the side letter agreements in April 2002 provided overadvance approval
on a day-to-day basis whereby the overadvance could not exceed $3.5 million.
Before we sold Kingway on September 24, 2002, we did not exceeded the $3.5
million overadvance availability. However, nothing in these side letter
agreements waives or otherwise alters BOA's already existing remedies under
the BOA financing and security agreement including acceleration of all amounts
outstanding under the BOA financing and security agreement. The final side
letter agreement in September 2002, among other things, amends the expiration
date of the BOA financing and security agreement to be December 31, 2002 and
requires us to maintain a minimum availability of $3.0 million. Through the
date of this report we have maintained enough availability to comply with the
$3.0 million minimum and management is investigating several refinancing
scenarios with certain financial institutions. [We think we will be able to
successfully refinance our BOA revolving and term loan obligations with one or
more other lenders by December 31, 2002, but it is not a certainty. The
lenders we have talked to have informed us that they would not participate in
a refinancing of our BOA facilities if any interest or principal payment
defaults exist under the senior notes discussed above. We are uncertain as to
what actions BOA would take if we are not able to secure funds for a
refinancing on or before December 31, 2002.]
In consideration of providing its approval of overadvance availability,
we had been paying to BOA through direct charges to our revolving credit
facility a weekly fee of $25,000 or $50,000, depending on the amount of the
overadvance. Since entering into the side letter agreements beginning in
- 28 -
November 2001, the Company paid BOA a total of $1.850 million in such fees, of
which $1.675 million was expensed in 2002. In the last week of April 2002,
BOA agreed to not directly charge our revolving credit facility for these
overadvance fees but, instead, permit us to accrue such fees to be paid upon
the sale of our discontinued materials handling systems operations. On
September 24, 2002, the date of sale of our discontinued materials handling
systems operations, we paid $1.05 million of such fees from sale proceeds and,
with the expiration of the overadvance facility, the weekly fees have stopped.
[Since we could not repay our senior noteholders or bank lenders if
either or both of them exercised their existing rights to accelerate what we
owe them, they could pursue all remedies available to creditors in the normal
course of business, including filing of involuntary bankruptcy petitions.]
SUMMARY OF 2002 ACTIVITIES
Cash and cash equivalents totaled $1.2 million at September 30, 2002,
compared to $1.2 million (including $0.5 million classified within
discontinued operations) at December 31, 2001. Cash provided from operations
totaled $4.6 million and $28.0 million of cash was provided by investing
activities. These cash sources were used in financing activities to repay a
total of $32.1 million of debt. Cash and cash equivalents at the end of a
period generally represents lockbox receipts from customers to be applied to
our BOA revolving credit facility the following business day.
Operating Activities
Cash provided by operating activities of $4.6 million in the first nine
months of 2002 was the result of continued losses being more than offset by a
decrease in net working capital as lower volume levels led to a reduction in
receivables and inventories and as tighter liquidity resulted in the missed
May 1, 2002 interest payment and a slowdown in payments to vendors which
provided funds by increased trade payables.
Investing Activities
The Company disposed of the inventory and substantially all of the
property, plant and equipment of the discontinued bridges and cranes
operations for $3.058 million of net cash proceeds on June 30, 2002 and the
discontinued materials handling systems operations for $25.0 million in cash
on September 24, 2002. Also, in January 2002, machinery and equipment with no
book value was sold, generating $0.4 million in cash proceeds. Capital
expenditures have been substantially scaled-back and were only $0.4 million.
Financing Activities
The Company made scheduled repayments of debt totaling $2.9 million,
which included $2.8 million on its term loan A and $0.1 million on its capital
expenditures facility. The Company made other debt repayments of term loan A
debt totaling $6.0 million and capital expenditure facility totaling $866,000
with the proceeds from asset sales. Revolving credit facility borrowings
decreased $22.3 million during the first nine months of 2002, included $19.3
million applied to the revolving credit facility from the proceeds from asset
sales. Other debt repayments totaling $63,000 represent payments on capital
lease obligations and other debt.
- 29 -
FACTORS AFFECTING CURRENT AND FUTURE LIQUIDITY
During the third and fourth quarters of 2001, downturns in several of the
markets we serve adversely affected our ability to absorb costs and we
experienced an increase in ineligible receivables and inventory. This
increase in ineligibles resulted in a decrease in borrowing availability under
the revolving credit facility. These events adversely affected our ability to
meet obligations. We have extended our vendors and failed to make the
November 1, 2001, May 1, 2002 and November 1, 2002 $1.616 million semi-annual
interest payments and the May 1, 2002 $12.5 million sinking fund payment on
our 13% senior notes.
During 2002, we have made significant progress towards completion of our
restructuring plan, including the sale of certain assets of the discontinued
bridges and cranes operations for $3.058 million in net cash proceeds and the
sale of our discontinued materials handling systems operations for $25.0
million in cash. [We believe the proceeds generated from asset sales are
adequate to alleviate the current and near-term strain on liquidity to the
point we can continue to operate and correct vendor-related issues which have
negatively affected our divisions. However, no assurances can be given that
our divisions will recover to the point of profitability or our pursuits
regarding the refinancing or our bank debt and restructuring of our senior
note obligations will be successful. If not successful in achieving one or
more of these future factors or if other anticipated benefits of our nearly
completed plan to restructuring do not materialize, we may not be able to
continue as a going concern].
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risk factors which
affect the Company since the end of the preceding fiscal year.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal Proceedings
The Company and its subsidiaries are defendants in a number of lawsuits
and administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. The Company believes that any
material liability which can result from any of such lawsuits or proceedings
has been properly reserved for in the Company's consolidated financial
statements or is covered by indemnification in favor of the Company or its
subsidiaries, and therefore the outcome of these lawsuits or proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended. There is no applicable insurance coverage.
- 30 -
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. In August 2002, the plaintiff stockholder filed a first request
for the production of documents in Delaware Chancery Court. Reunion is in the
process of complying with the document production request and intends to
vigorously contest the suit.
The Company has been named as a defendant in fifteen consolidated
lawsuits filed in December 2000 or early 2001 in the Superior Court for Los
Angeles County, California, three of which are purported class actions
asserted on behalf of approximately 200 payees. The plaintiffs in these
suits, except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC are related parties.
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Bradley, the sole shareholder of SFSC's parent, several
major financial institutions and certain others. All of these suits arise out
of the inability of SFSC to make structured settlement payments when due.
Pursuant to the court's order, plaintiffs in the purported class actions and
plaintiffs in the individual cases actions filed a model complaint. Except
for the class allegations, the two model complaints are identical. The
plaintiffs seek compensatory and punitive damages, restoration of certain
alleged trust assets, restitution and attorneys' fees and costs.
The plaintiffs in one of the suits are former owners of a predecessor of
SFSC and current operators of a competing structured settlement business.
These plaintiffs claim that their business and reputations have been damaged
by SFSC's structured settlement defaults, seek damages for unfair competition
and purport to sue on behalf of the payees.
The plaintiffs allege that the Company borrowed funds from SFSC and has
not repaid these loans. The plaintiffs' theories of liability against the
Company are that it is the alter ego of SFSC and Mr. Bradley and that the
Company received fraudulent transfers of SFSC's assets. The plaintiffs also
assert direct claims against the Company for inducing breach of contract and
aiding and abetting an alleged breach of fiduciary duty by SFSC.
On June 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. As a result of this
restraining order of the bankruptcy court, the Company entered a standstill
agreement with the plaintiffs on August 22, 2001. Pursuant to the standstill
agreement, and the stipulation of the parties to the SFSC bankruptcy case, the
plaintiffs agreed to take no further action to prosecute any claim in the
litigation against the Company, Mr. Bradley and others to recover any
structured settlement trust assets or any derivative claims or claims based on
allegations of alter ego, fraudulent transfer or conversion. The plaintiffs
did not agree to waive or release their direct personal claims against the
Company for damages, but the plaintiffs agreed to cease and desist the
prosecution of those claims until no earlier than sixty days following service
of written notice to the Company stating that they have elected to
unilaterally terminate the standstill.
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. Both model complaints allege causes of
- 31 -
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted cross-
complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
vigorously defend against these actions and cross-actions.
The Company has been named in approximately 750 separate asbestos suits
filed since January 1, 2001 by three plaintiffs' law firms in Wayne County,
Michigan. The claims allege that cranes from the Company's crane
manufacturing location in Alliance, OH were present in various parts of
McLouth and Great Lakes Steel Mills in Wayne County, Michigan and that those
cranes contained asbestos to which plaintiffs were exposed over a 40 year
span. Counsel for the Company has filed an answer to each complaint denying
liability by the Company and asserting all alternative defenses permitted
under the Court's Case Management Order. Counsel for the Company has
negotiated dismissal of 202 cases with little or no cost to the Company. The
Company denies that it manufactured any products containing asbestos or
otherwise knew or should have known that any component part manufacturers
provided products containing asbestos. The Company intends to vigorously
defend against these lawsuits.
Since July 10, 2001, various lawsuits, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon, Washington
and Mississippi, against a large number of defendants, including Oneida
Rostone Corporation (ORC), pre-merger Reunion's Plastics subsidiary and the
Company's Plastics segment. In October 2001, Allen-Bradley Company, a former
owner of the Rostone business of ORC, accepted Reunion Industries' tender of
its defense and indemnification in the first such lawsuit filed pursuant to a
contractual obligation to do so. Subsequent to the acceptance of the tender
of defense and indemnification in the first lawsuit, Allen-Bradley Company has
accepted the Company's tender of defense and indemnification in a total of 90
separate actions, all of which are being defended by Allen-Bradley Company.
Environmental Compliance
Various U.S. federal, state and local laws and regulations including,
without limitation, laws and regulations concerning the containment and
disposal of hazardous waste, oil field waste and other waste materials, the
use of storage tanks, the use of insecticides and fungicides and the use of
underground injection wells directly or indirectly affect the Company's
operations. In addition, environmental laws and regulations typically impose
"strict liability" upon the Company for certain environmental damages.
Accordingly, in some situations, the Company could be liable for clean up
costs even if the situation resulted from previous conduct of the Company that
was lawful at the time or from improper conduct of, or conditions caused by,
previous property owners, lessees or other persons not associated with the
Company or events outside the control of the Company. Such clean up costs or
costs associated with changes in environmental laws and regulations could be
substantial and could have a materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Except as described in the following paragraphs, the Company believes it
is currently in material compliance with existing environmental protection
laws and regulations and is not involved in any significant remediation
activities or administrative or judicial proceedings arising under federal,
state or local environmental protection laws and regulations. In addition to
- 32 -
management personnel who are responsible for monitoring environmental
compliance and arranging for remedial actions that may be required, the
Company has also employed outside consultants from time to time to advise and
assist the Company's environmental compliance efforts. Except as described in
the following paragraphs, the Company has not recorded any accruals for
environmental costs.
In February 1996, Reunion was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. Since then, the Company has expended $376,000 of
remediation costs and accrued an additional $20,000.
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. The Company's
environmental consultant is in the process of updating the estimate of the
costs to comply with this order, but the Company does not believe that the
cost of future remediation will exceed the amount accrued. No remediation was
performed in 2000 or 2001 pending the decision. However, the Company has paid
$263,000 for its share of consulting services in connection with the hearings.
At September 30, 2002, the balance accrued for these remediation costs is
approximately $1,045,000. Owners of a portion of the property have objected
to the Company's cleanup methodology and have filed suit to require additional
procedures. The Company is contesting this litigation, and believes its
proposed methodology is well within accepted industry practice for
remediation efforts of a similar nature. No accrual has been made for costs
of any alternative cleanup methodology which might be imposed as a result of
the litigation.
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site outside Petaluma, Marin County, California. The Company
gathered and forwarded to the USEPA the information it requested. On May 16,
2002, the Company, as the successor to Buttes Gas & Oil Company (BGO),
received from the USEPA a notice of potential liability and demand for payment
of $3,909,614.37 for reimbursement of costs related to its removal and
disposal efforts initiated in 1998 pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA).
BGO, predecessor by merger to the Company, leased the site for mining
purposes and operated a mercury mine on this site from 1965 to 1970. BGO's
mining operations were terminated in 1970. Subsequently, under the
supervision of the environmental and planning representatives of Marin County,
BGO completed closure and environmental restoration activities at the site,
including stabilization and re-vegetation of the site. BGO then quitclaimed
the mining lease back to the Gambonini's in 1973. Because of apparent
overgrazing at the site subsequent to BGO's restoration efforts, a storm in
1982 caused severe flooding resulting in the failure of the dam built to
retain mining materials. Runoff from the flood released mining materials into
the creek below and, ultimately, into the Tomales Bay, a local recreation and
fishing area.
- 33 -
In 1985, BGO, headquartered in Houston, Texas, filed Chapter 11
proceedings in bankruptcy court in the Southern District of Texas in Houston.
In December 1988, BGO confirmed its plan of reorganization which provided for,
among other things, a discharge of all claims that arose prior to the date of
confirmation of the plan. The reorganization plan became effective in
February 1989.
In response to the USEPA's demand, the Company filed an adversary
proceeding in bankruptcy court in the Southern District of Texas in Houston
seeking an order to enjoin the efforts of the USEPA to pursue collection of
any claims related to the site. The USEPA has responded by filing a motion to
dismiss based on several jurisdictional and substantive grounds. A status
conference was held on August 27, 2002, at which time the judge for the the
bankruptcy court in the Southern District of Texas in Houston ruled that the
court did not have jurisdiction and, at that time, the Company and the USEPA
entered into a standstill agreement through December 31, 2002. Company's
counsel is currently investigating the Company's legal alternatives in this
matter.
The Company intends to vigorously defend against the USEPA's claim. The
Company has made no accrual of any amount related to this matter as, at this
time, the probability of an adverse outcome to the Company is reasonably
possible, but not probable.
Item 3. Defaults Upon Senior Securities
Debt in default consists of the following (in thousands):
At September 30, At December 31,
2002 2001
--------------- --------------
(unaudited)
13% senior notes (net of unamortized
discount of $-0- and $2) $ 24,855 $ 24,853
BOA revolving credit facility 150 22,475
BOA term loan A due March 16, 2007 7,329 16,071
BOA capital expenditure facility - 990
-------- --------
Total debt in default $ 32,334 $ 64,389
======== ========
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder is due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001,
May 1, 2002 and November 1, 2002. We were also unable to make the $12.5
million sinking fund payment due May 1, 2002.
An event of default as defined in the indenture governing the senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. As such, the senior notes holders have the
right to accelerate all amounts outstanding, including accrued and unpaid
interest of $5.16 million, totaling $30.0 million at October 31, 2002.
Interest accrues at approximately $0.3 million per month, including compounded
interest at 13% per annum on the unpaid semi-annual interest payments.
- 34 -
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $7.5 million of senior secured revolving and term loan
credit facilities outstanding at September 30, 2002 with BOA. Although we
have repaid over $26.0 million of our BOA facilities since the beginning of
the year with cash proceeds from sales of assets, we are still in default
under these facilities and have been since September 30, 2001 due to our
inability to achieve our financial ratio covenants contained in the financing
and security agreement with BOA.
Since then, the Company and BOA have entered into a number of side letter
agreements wherein BOA and the other lenders that participated in the BOA
refinancing of the Company in March 2000 agreed to provide monthly advances in
excess of our calculated borrowing base for working capital needs while we
executed our plan to restructure and generate liquidity by selling assets.
One of the side letter agreements in April 2002 provided overadvance approval
on a day-to-day basis whereby the overadvance could not exceed $3.5 million.
Before we sold Kingway on September 24, 2002, we did not exceeded the $3.5
million overadvance availability. However, nothing in these side letter
agreements waives or otherwise alters BOA's already existing remedies under
the BOA financing and security agreement including acceleration of all amounts
outstanding under the BOA financing and security agreement. The final side
letter agreement in September 2002, among other things, amends the expiration
date of the BOA financing and security agreement to be December 31, 2002 and
requires us to maintain a minimum availability of $3.0 million. Through the
date of this report we have maintained enough availability to comply with the
$3.0 million minimum. Nothing in these side letter agreements waives or
otherwise alters BOA's already existing remedies under the BOA financing and
security agreement including acceleration of all amounts outstanding under the
BOA financing and security agreement.
Itme 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit, is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
Our Chief Executive Officer and Chief Financial Officer have evaluated
our disclosure controls and procedures as of November 14, 2002 and believe
that they are effective.
Changes in Internal Controls
Not applicable.
- 35 -
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On October 10, 2002, the Company filed a Current Report
on Form 8-K dated September 24, 2002 to report under Items 2
and 7 that the Company had completed the sale of its
discontinued materials handling systems operations and to
provide the required pro forma financial disclosures therein.
(c) Exhibits
The following exhibits are filed herewith in accordance
with Item 601 of Regulation S-K:
Exhibit No. Exhibit Description
----------- -------------------
99.3 Certification Pursuant to 18 U.S.C Section
1350, as adopted pursuant to Section 906
of The Sarbanes-Oxley Act of 2002 -
Charles E. Bradley, Sr., Chief Executive
Officer
99.4 Certification Pursuant to 18 U.S.C Section
1350, as adopted pursuant to Section 906
of The Sarbanes-Oxley Act of 2002 -
John M. Froehlich, Chief Financial
Officer
- 36 -
SIGNATURES AND CERTIFICATIONS
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Date: November 14, 2002 REUNION INDUSTRIES, INC.
----------------- (Registrant)
By: /s/ Charles E. Bradley, Sr.
-------------------------------
Charles E. Bradley, Sr.
Chief Executive Officer
By: /s/ John M. Froehlich
-------------------------------
John M. Froehlich
Executive Vice President, Finance
and Chief Financial Officer
(chief financial and accounting officer)
- 37 -
I, Charles E. Bradley, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reunion Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record,process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By /s/ Charles E. Bradley, Sr.
----------------- ------------------------------
Charles E. Bradley, Sr.
Chairman of the Board of
Directors and
Chief Executive Officer
- 38 -
I, John M. Froehlich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reunion Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record,process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By /s/ John M. Froehlich
----------------- ------------------------------
John M. Froehlich
Chief Financial Officer
- 39 -
EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
----------- ------------------- --------
99.3 Certification Pursuant to 18 U.S.C. 41
Section 1350, as adopted pursuant to
Section 906 of The Sarbanes-Oxley Act
of 2002 - Charles E. Bradley, Sr.,
Chief Executive Officer
99.4 Certification Pursuant to 18 U.S.C. 42
Section 1350, as adopted pursuant to
Section 906 of The Sarbanes-Oxley Act
of 2002 - John M. Froehlich,
Chief Financial Officer
- 40 -
Exhibit 99.3
I, Charles E. Bradley, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reunion Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record,process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By /s/ Charles E. Bradley, Sr.
----------------- ------------------------------
Charles E. Bradley, Sr.
Chairman of the Board of
Directors and
Chief Executive Officer
- 41 -
Exhibit 99.4
I, John M. Froehlich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reunion Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record,process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By /s/ John M. Froehlich
----------------- ------------------------------
John M. Froehlich
Chief Financial Officer
- 42 -