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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 33-64325
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REUNION INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400
PITTSBURGH, PENNSYLVANIA 15222
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
At July 31, 2004, 16,278,579 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 44 pages.
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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act which are intended to be covered by the safe harbors created thereby. The
forward-looking statements contained in this report are enclosed in brackets
[] for ease of identification. All forward-looking statements involve risks
and uncertainties which could cause the future results and shareholder values
to differ materially from those expressed in the forward-looking statements.
Although the Company believes that the assumptions underlying the
forward-looking statements contained in this report are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurances
that the forward-looking statements included or incorporated by reference in
this report will prove to be accurate. Factors that could cause actual
results to differ materially from those described in the forward-looking
statements include, without limitation, the strengths/weaknesses of the
Company's primary markets, the Company's ability to negotiate trade terms with
its vendors, the continued forbearance of the Company's creditors with respect
to indebtedness in default and the Company's ability to restructure and
renegotiate the terms of the Company's indebtedness. In light of the
significant uncertainties inherent in the forward-looking statements included
or incorporated by reference herein, the inclusion of such information should
not be regarded as a representation by the Company or any other person that
the Company's objectives and plans will be achieved. In addition, the Company
does not intend to, and is not obligated to update these forward-looking
statements after filing and distribution of this report, even if new
information, future events or other circumstances have made them incorrect or
misleading as of any future date.
- 2 -
REUNION INDUSTRIES, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at
June 30, 2004 (unaudited) and December 31, 2003 4
Condensed Consolidated Statement of Operations
and Comprehensive Income (Loss) for the three and
six months ended June 30, 2004 and 2003 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for
the six months ended June 30, 2004 and 2003 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 38
Item 4. Controls and Procedures 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 38
Item 6. Exhibits and Reports on Form 8-K 39
SIGNATURES 40
CERTIFICATIONS 41
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AT JUNE 30, 2004 AND DECEMBER 31, 2003
(in thousands)
At June 30, At December 31,
2004 2003
----------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 1,601 $ 755
Receivables (net of allowance of
$471 and $485, respectively) 11,344 10,031
Advances to employees 41 56
Inventories, net 9,725 8,207
Other current assets 1,602 1,427
-------- --------
Total current assets 24,313 20,476
Property, plant and equipment, net 13,539 14,197
Due from related parties 1,041 1,405
Goodwill, net 11,007 11,007
Other assets, net 4,352 4,438
-------- --------
Total assets $ 54,252 $ 51,523
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current maturities of debt $ 660 $ 683
Trade payables 9,719 9,463
Accrued interest 3,718 2,119
Due to related parties 167 3,276
Other current liabilities 6,888 7,973
Notes payable 4,161 4,161
Notes payable - related parties 500 5,115
-------- --------
Total current liabilities 25,813 32,790
Long-term debt 49,139 41,129
Other liabilities 4,897 5,359
-------- --------
Total liabilities 79,849 79,278
Minority interests 211 -
Commitments and contingent liabilities - -
Stockholders' deficit (25,808) (27,755)
-------- --------
Total liabilities and stockholders' deficit $ 54,252 $ 51,523
======== ========
See accompanying notes to condensed consolidated financial statements.
- 4 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(in thousands, except per share information)(unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
-------- -------- -------- --------
Sales $ 20,636 $ 18,076 $ 39,483 $ 39,339
Cost of sales 17,021 14,858 32,106 31,930
-------- -------- -------- --------
Gross profit 3,615 3,218 7,377 7,409
Selling, general & administrative 2,600 2,663 5,287 5,464
Gains on debt extinguishments (470) - (3,540) -
Other expense (income), net (201) (33) (282) (61)
-------- -------- -------- --------
Operating profit 1,686 588 5,912 2,006
Interest expense, net 1,975 1,912 3,754 3,421
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes
and minority interests (289) (1,324) 2,158 (1,415)
Provision for income taxes - - - -
-------- -------- -------- --------
Income (loss) from continuing
operations before minority
interests (289) (1,324) 2,158 (1,415)
Minority interests 113 - 211 -
-------- -------- -------- --------
Net and comprehensive income (loss) $ (402) $ (1,324) $ 1,947 $ (1,415)
======== ======== ======== ========
Loss applicable to common
stockholders $ (402) $ (1,324) $ 1,947 $ (1,415)
======== ======== ======== ========
Income (loss) per common
share - basic $ (0.02) $ (0.08) $ 0.12 $ (0.09)
======== ======== ======== ========
Income (loss) per common
share - diluted $ (0.02) $ (0.08) $ 0.10 $ (0.09)
======== ======== ======== ========
Weighted average shares
outstanding - basic 16,279 16,279 16,279 16,279
======== ======== ======== ========
Weighted average shares
outstanding - diluted 18,832 16,279 18,829 16,279
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
- 5 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(in thousands)
(unaudited)
Six Months Ended
June 30, June 30,
2004 2003
-------- --------
Cash (used in) provided by operating activities $ (1,935) $ 850
-------- --------
Cash flow from investing activities:
Capital expenditures (588) (165)
-------- --------
Cash used in investing activities (588) (133)
-------- --------
Cash flow from financing activities:
Net change in revolving credit facility 1,024 1,199
Issuance of debt 3,000 -
Repayments of debt (345) (1,782)
Payments of deferred financing costs (310) -
-------- --------
Cash provided by (used in) financing activities 3,369 (583)
-------- --------
Net increase in cash and cash equivalents 846 102
Cash and cash equivalents, beginning of period 755 807
-------- --------
Cash and cash equivalents, end of period $ 1,601 $ 909
======== ========
Interest paid $ 1,052 $ 712
======== ========
Non-cash financing activity:
Debt extinguishments $ 3,540 -
======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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 six month periods
ended June 30, 2004 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, 2003, as amended by Form 10-K/A Amendment
No. 1 as filed on April 29, 2004.
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. At June 30,
2004, the Company had a negative working capital position of $0.8 million net
of related party obligations and a deficiency in assets of $25.8 million.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. These condensed consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
We successfully refinanced our bank debt, extinguished a significant
portion of our obligations under the senior notes and removed all previously
existing defaults on our debt. These steps were taken to improve liquidity
and defer the principal maturities on a significant portion of our debt. The
Company is investigating other recapitalization scenarios in an effort to
provide additional liquidity and extinguishments or deferrals of debt
obligations. Although we believe we can accomplish these plans, no assurances
exist that we will. If we fail to accomplish these plans, it could have an
adverse impact on the Company's liquidity, financial position and future
operations.
Recent Accounting Pronouncements
In January 2004 and May 2004, the FASB issued FASB Staff Position Nos.
106-1 and 106-2, respectively, regarding accounting and disclosure
requirements related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (Act). Recognition of the Act was permitted to be
deferred under FASB Staff Position No. FAS 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." Under the provisions of the Act, companies that
provide prescription drug coverage to retirees over age 65 will be entitled to
a government subsidy beginning in 2006 if the benefits provided under the
company plan are at least actuarially equivalent to those that will otherwise
be offered by the government. The FASB issued final accounting guidance in
May 2004 with FASB Staff Position No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003", which requires that the effect of the Act to be
- 7 -
reflected in third quarter 2004 financial statements. We are evaluating the
impact of the Act on our benefit plan accounting but do not expect the Act
will have a significant effect on our financial position or results of
operations.
In December 2003, the FASB revised and reissued SFAS No. 132 (revised
2003), "Employer's Disclosures about Pensions and Other Postretirement
Benefits - an amendment of FASB Statements No. 87, 88 and 106." While
requiring certain new disclosures, the revised Standard does not change the
measurement or recognition of employee benefit plans. We adopted the
provisions of the revised Standard effective December 2003, except for certain
provisions regarding disclosure of information about estimated future benefit
payments, which are not required until the fourth quarter of 2004. See NOTE
10: COMPONENTS OF BENEFIT COSTS for the required interim disclosures.
On December 17, 2003, the Staff of the Securities and Exchange Commission
(SEC or the Staff) issued Staff Accounting Bulletin No. 104, "Revenue
Recognition" (SAB 104), which supercedes Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" (SAB 101). SAB 104 rescinds
accounting guidance contained in SAB 101 related to multiple element revenue
arrangements, superceded as a result of the issuance of Emerging Issues Task
Force Issue No. 00-21 (EITF 00-21), "Accounting for Revenue Arrangements with
Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers
(the FAQ) issued with SAB 101 that had been codified in SEC topic 13, "Revenue
Recognition". While the wording of SAB 104 has changed to reflect the
issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. The adoption of SAB 104 has not
had, and is not expected to have, a material effect on Reunion's financial
condition or results of operations.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock options and awards. Accordingly, no compensation costs
for stock options is included in operating results since all awards were made
at exercise prices at or above their fair value on the dates of grants. The
following table illustrates the effect on results of operations if the Company
had applied fair value recognition provisions of SFAS No. 123 for the three
and six month periods ended June 30, 2004 and 2003 (in thousands, except for
per share amount)(unaudited):
- 8 -
3-Mos. Ended 6-Mos. Ended
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) as reported $ (402) $ (1,324) $ 1,947 $ (1,415)
Deduct: Total stock-based employee
compensation determined
under fair value method for
stock options, net of tax - - - -
-------- -------- -------- --------
Pro forma loss applicable
to common stockholders $ (402) $ (1,324) $ 1,947 $ (1,415)
======== ======== ======== ========
Basic income (loss) per
share, as reported $ (0.02) $ (0.08) $ 0.12 $ (0.09)
======== ======== ======== ========
Basic income (loss) per
share, pro forma $ (0.02) $ (0.08) $ 0.12 $ (0.09)
======== ======== ======== ========
Diluted income (loss) per
share, as reported $ (0.02) $ (0.08) $ 0.10 $ (0.09)
======== ======== ======== ========
Diluted income (loss) per
share, pro forma $ (0.02) $ (0.08) $ 0.10 $ (0.09)
======== ======== ======== ========
NOTE 2: RECENT DEVELOPMENTS
Congress Financial Corporation Supplemental Revolving Credit Financing
The Company's loan agreement with Congress Financial Corporation
(Congress) provides for a loan facility of up to $25.0 million, collateralized
by substantially all of the assets of the Company as described below. The
amount which the Company may borrow at any time under such loan facility is
based on a formula related to the value of the collateral securing the loan.
In May 2004, two private capital funds invested $1.5 million each to purchase
from Congress junior participating interests in the revolving credit portion
of the Congress loan facility. These investments increased by $3.0 million
the amount which the Company could borrow under the loan facility, subject to
the overall borrowing limit of $25.0 million, which did not change. The
Company used the $3.0 million in proceeds to pay trade payables and for other
corporate purposes. In consideration of such investments, the Company has
agreed in principle to grant warrants to such private capital funds allowing
each to purchase 375,000 shares of the Company's common stock at an initial
exercise price of $0.01 per share and with registration rights, subject to the
approval by the Company's stockholders to amend the Company's Articles of
Incorporation to increase the authorized number of shares of common stock of
the Company by 10,000,000.
Interest on the Congress supplemental revolving credit financing is
payable monthly at a fixed rate of 15% per annum. The Congress supplemental
revolving credit financing is collateralized by a continuing security interest
and lien on substantially all of the current and after-acquired assets of
Reunion including, without limitation, all accounts receivable, inventory,
real property, equipment, chattel paper, documents, instruments, deposit
accounts, contract rights and general intangibles.
- 9 -
The Congress supplemental revolving credit financing is subject to the
same financial covenants and other covenants as the revolving credit and term
loan facilities, including the minimum amount of earnings before interest,
taxes, depreciation and amortization (EBITDA) and the minimum fixed charge
coverage ratio. At June 30, 2004, the Company was in compliance with all
financial and other covenants under the Congress financing facilities.
SFSC Litigation Settlement
The Company had been named as one of several defendants in fifteen
consolidated lawsuits filed in December 2000 or early 2001 in the Superior
Court for Los Angeles County, California. The plaintiffs in these suits,
except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC were related parties.
The plaintiffs alleged that the Company received loans from SFSC that have not
been repaid. On May 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in
the U.S. Bankruptcy Court for the District of Connecticut.
A settlement was reached in the Superior Court action among the
plaintiffs, Bankers Trust Co. and certain other financial institution
defendants. In the settlement, Bankers Trust Co. and the other settling
financial institution defendants paid the plaintiffs an amount specified in
the settlement agreement, and Bankers Trust Co. received an assignment of the
claims of the plaintiffs and such other settling defendants against the
Company and other defendants. In the SFSC bankruptcy proceeding, the Company
and certain other defendants entered into a settlement with SFSC and Bankers
Trust Co. Under this settlement (1) the Company is obligated to pay SFSC a
settlement amount by December 31, 2006 in the sum of $4.29 million, plus
interest at the rate of 10% per annum, in full satisfaction of the Company's
indebtedness to SFSC under notes payable totaling $4.6 million, plus interest,
and for certain credit support fees payable, which settlement amount is net of
an offset against SFSC's note payable to the Company in the amount of $310,000
plus interest, and (2) provided it makes such settlement payment, the Company
is released from all claims that have been or could have been asserted against
the Company by the plaintiffs or the settling financial institution defendants
in the California Superior Court suits or by SFSC in the bankruptcy
proceeding. The settlement amount does not constitute a new liability of the
Company, as it relates to indebtedness and a note receivable that had
previously been recorded on the Company's balance sheet. The settlement
resulted in a $3.1 million gain on debt extinguishment calculated as follows
(000's):
Interest
Payable and Fee
Description (Receivable) Accruals Totals
------------------------------- ---------- ---------- ----------
SFSC note receivable $ (310) $ (155) $ (465)
Reserve for interest receivable - 101 101
SFSC collateral fee - 690 690
SFSC credit support fee - 294 294
SFSC note payable 2,999 1,501 4,500
SFSC note payable 500 290 790
SFSC note payable 100 53 153
SFSC note payable by assignment 1,017 280 1,297
-------- -------- --------
Totals $ 4,306 $ 3,054 7,360
======== ========
Less: Note payable under settlement agreement (4,290)
--------
Gain on SFSC litigation settlement first quarter 2004 $ 3,070
========
- 10 -
The gain on debt extinguishment of $3.1 million was recorded in the first
quarter of 2004 as the settlement was reached in the Superior Court and the
financial institution defendants paid the plaintiffs in January 2004.
However, subsequent to the filing of our Form 10-Q for the quarter ended March
31, 2004, the parties to the settlement agreement set the effective date of
the settlement as May 10, 2004. Accordingly, the Company recorded interest
expense through May 10, 2004 under the terms of the prior SFSC notes payable
and then recorded an additional gain on debt extinguishment of $262,000 to
reflect the effective date of the settlement as being May 10, 2004. The
Company then adjusted interest expense under the terms of the new note payable
as though it began accruing on May 10, 2004.
13% Senior Notes
In January 2004, we solicited our noteholders for the second time to
consent to certain provisions and waivers of the indenture governing the 13%
senior notes. In the first consent in November 2003, $23,250,700 of the
$24,855,000 principal amount of senior notes, or 93.55%, had consented. The
second consent solicitation period ended on April 28, 2004 at which time
holders of an additional $434,300 principal amount of senior notes had
consented. The significant provisions of the solicitation requested that the
noteholders consent to waive all then existing defaults under the indenture,
cancel all accrued and unpaid interest, cancel 12% of the principal amount of
senior notes and extend the maturity of the notes to December 2006.
Accordingly, 12% of the $434,300 principal amount of senior notes of
noteholders that had consented to the various provisions and waivers in the
second solicitation, or $52,000, was extinguished pursuant to the provisions
of the consent. As of April 28, 2004, accrued and unpaid interest related to
the 13% senior notes consenting in the second solicitation totaled $156,000.
Such interest was extinguished pursuant to the provisions of the consent.
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
At June 30, At December 31,
2004 2003
----------- --------------
(unaudited)
Congress revolving credit facility $ 10,238 $ 9,214
Congress supplemental revolving credit financing 3,000 -
Congress term loan 2,857 3,175
Note payable due December 1, 2006 4,200 4,200
Note payable due December 5, 2006 (net of
warrant value of $67 and $83, respectively) 3,433 3,417
13% senior notes (net of warrant value
of $261 and $315, respectively) 21,752 21,750
Notes payable 8,451 4,161
Notes payable - related parties 500 5,115
Capital leases and other 29 56
-------- --------
Total long-term debt 54,460 51,088
Classified as current (5,321) (9,959)
-------- --------
Long-term debt $ 49,139 $ 41,129
======== ========
- 11 -
In May 2004, the Company and Congress Financial entered an amendment to
the loan and security agreement whereby Congress provided an additional $3.0
million of supplemental revolving credit financing to the Company. Proceeds
from the loan were used to pay trade payables and for other corporate
purposes. See NOTE 2: RECENT DEVELOPMENTS, Congress Financial Corporation
Supplemental Revolving Credit Facility."
Certain notes payable - related parties totaling $4.6 million were
settled in the first quarter of 2004, offset against a related party note
receivable of $364,000 and reclassified to a note payable totaling $4.29
million. See NOTE 2: RECENT DEVELOPMENTS, "SFSC Litigation Settlement",
above.
NOTE 4: INVENTORIES
Inventories are comprised of the following (in thousands):
At June 30, At December 31,
2004 2003
----------- --------------
(unaudited)
Raw material $ 3,481 $ 3,206
Work-in-process 3,697 2,077
Finished goods 2,547 2,924
-------- --------
Inventories $ 9,725 $ 8,207
======== ========
NOTE 5: STOCKHOLDERS' DEFICIT AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
deficit for the three month period ended June 30, 2004 (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, 2004 $163 $25,609 $(51,548) $ (1,979) $(27,755)
Activity (unaudited):
Net income - - 1,947 - 1,947
---- ------- -------- -------- --------
At June 30, 2004 $163 $25,609 $(49,601) $ (1,979) $(25,808)
==== ======= ======== ======== ========
- 12 -
The computations of basic and diluted earnings (loss) per common share
EPS (LPS) for the three and six month periods ended June 30, 2004 and 2003 are
as follows (in thousands, except per share amounts)(unaudited):
Net
Income EPS
(Loss) Shares (LPS)
-------- -------- -------
Three months ended June 30, 2004:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic LPS $ (402) 16,279 $ (0.02)
=======
Dilutive effect of stock options and warrants 2,553
-------- --------
Income available to common stockholders,
shares outstanding and diluted LPS $ (402) 18,832 $ (0.02)
======== ======== =======
Three months ended June 30, 2003:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted LPS $ (1,324) 16,279 $ (0.08)
======== ======== =======
Six months ended June 30, 2004:
Income available to common stockholders,
weighted average shares outstanding
and basic LPS $ 1,947 16,279 $ 0.12
=======
Dilutive effect of stock options and warrants 2,550
-------- --------
Income available to common stockholders,
shares outstanding and diluted LPS $ 1,947 18,829 $ 0.10
======== ======== =======
Six months ended June 30, 2003:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted LPS $ (1,415) 16,279 $ (0.09)
======== ======== =======
At June 30, 2004, the Company's stock options outstanding totaled
614,000. Such options included a dilutive component of 183,577 shares for the
three month period and 191,133 shares for the six month period ended June 30,
2004. At June 30, 2004, outstanding warrants to purchase the Company's common
totaled 2,930,049. Such warrants included a dilutive component of 2,378,798
shares for the three month period and 2,379,787 shares for the six month
period ended June 30, 2004. At June 30, 2003, the Company's stock options
outstanding totaled 44,000, none of which were at exercise prices below the
average market price of the underlying security during the second quarter or
first half of 2003.
- 13 -
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
The Company is and has been involved in a number of lawsuits and
administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. A summary of such legal
proceedings follows.
Gambonini Environmental
On May 16, 2002, the Company, as the successor to Buttes Gas & Oil
Company (BGO), received from the United States Environmental Protection Agency
(USEPA) a notice of potential liability and demand for payment of
$3,909,614.37 for reimbursement of costs related to the USEPA's removal and
environmental restoration efforts at the Gambonini Mine Site (Site) initiated
in 1998 pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA).
BGO, predecessor by merger to the Company, leased the Site for mining
purposes and operated a mercury mine there from 1965 to 1970. BGO's mining
operations were terminated in 1970. Subsequently, under the supervision of
the environmental and planning representatives of Marin County, BGO completed
closure and environmental restoration activities at the Site, including
stabilization and re-vegetation of the Site. BGO then quitclaimed the mining
lease to the Site owners, the Gambonini's, in 1973. Because of apparent
overgrazing at the Site subsequent to BGO's restoration efforts, a storm in
1982 caused severe flooding, which resulted in the failure of a dam built to
retain mining materials. Runoff from the flood released mining materials into
the creek below and, ultimately, into the Tomales Bay, a local recreation and
fishing area.
In March 2003, the Company and the USEPA reached an agreement in
principle to settle the USEPA's claim for payment by the Company of $100,000
plus interest at the Superfund rate (which is currently 1.27%), payable in
three installments over a two-year period. On May 8, 2004, the United States
District Court for the Northern District of California entered a Consent
Decree in accordance with the settlement. The settlement amount was accrued
by The Company in 2002. This settlement agreement will resolve the USEPA's
claims for reimbursement of past environmental response costs under CERCLA,
but does not resolve all possible claims the United States may have with
respect to the Gambonini mine site, which could include, but not be limited
to, claims for future costs or natural resource damages. The United States
has given no indication as to whether or not it will pursue such claims. The
Company has agreed to toll the statute of limitations with respect to any
natural resource damages claims, if any, from August 30, 2002 to April 1,
2008.
Asbestos (Hanna)
During 2003, Reunion Industries was named as defendant in 32 actions in
the state of Georgia and one action in the state of Alabama. Such actions
claim that cylinders manufactured by the Hanna division of Reunion Industries
contained asbestos that caused severe illness. Since most of the plaintiffs'
exposure occurred prior to the purchase of the assets of this business by
Reunion's predecessor in 1980, and since there is no evidence that asbestos
was used in Hanna products after 1980, the Company's position is that it has
- 14 -
no liability in these suits. Upon motion made by plaintiff's attorney, in May
2004, the Court dismissed the Alabama suit against the Company with no
liability. The plaintiffs' attorney has tentatively agreed to dismiss Reunion
from the Georgia suits, subject to his review of certain information we have
provided to him about our predecessor and if Reunion will assist the
plaintiffs in their case against the pre-1980 owner of the business. Reunion
has agreed to and is currently providing the requested assistance to
plaintiffs' attorney.
SFSC Litigation
The settlement of the litigation involving or relating to Stanwich
Financial Services Corp. (SFSC) as described in Item 3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2003 as filed on March 30,
2004, has been settled as described in NOTE 2: RECENT DEVELOPMENTS, "SFSC
Litigation Settlement."
Shareholder Suit
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, sought rescission of the merger or awarding
of damages. In the second quarter of 2004, the case was voluntarily dismissed
by the plaintiff and, on July 14, 2004, a Stipulation and Order of Dismissal
was filed in and approved by the Delaware Chancery Court.
Suit Against Paquet and Paquet Counterclaim
In the 2002 fourth quarter, the Company filed suit in the District Court
for New Jersey against Paquet, a general contractor doing business in the
state of New Jersey. The Company contends that it is owed approximately $1.5
million in overdue payments and backcharges related to the supply of
structural steel for the construction of a bridge in New Jersey. The
defendant has asserted a counterclaim against the Company in the amount of
$2.5 million. Discovery is in process. The Company intends to vigorously
pursue its suit against the defendant and defend against its counterclaim. No
amount has been accrued for this matter in the Company's financial statements.
NAPTech Suit
On or about March 16, 2004, Shaw NAPTech, Inc. ("NAPTech"), as successor
by merger to NAPTech, Inc. and NAPTech PS Corporation, filed a suit against
the Company in state court in Baton Rouge, Louisiana, to collect payment on a
subordinated note issued to NAPTech and assumed by the Company in a January
2001 acquisition. NAPTech claims the amounts due under this note are
$3,145,403 in principal plus $1,207,875 in unpaid interest through November
30, 2003 plus interest at 15% per annum on the unpaid principal thereafter.
Such amounts are approximately the same as amounts recorded as payable to
NAPTech by the Company in the accompanying consolidated balance sheet. The
Company has filed an answer to the complaint, in which the Company claims,
among other things, that the suit is currently barred by a subordination
agreement to which NAPTech is a party and that the Court lacks personal
jurisdiction over the Company. Also named as defendants in the suit are
Charles E. Bradley, Sr. (a director of the Company), as guarantor of the
subordinated note, and KSB Acquisition Corp. and Hanna Investment Corp. (both
of which are affiliates of Mr. Bradley), as pledgors of certain assets
securing the note.
- 15 -
Product Warranties
The Company provides for warranty claims at its cylinders segment.
Amounts accrued are estimates of future claims based on historical claims
experience or a management estimate related to a specifically identified
issue. The Company reevaluates its product warranty reserve quarterly and
adjusts it based on changes in historical experience and identification of new
or resolution of prior specifically identified issues. A tabular
reconciliation of the product warranty reserve for the six-month periods ended
June 30, 2004 and 2003 follows (in 000's):
June 30, June 30,
Description 2004 2003
------------------------------------------ -------- --------
Beginning balance $ 211 $ 379
Add: Provision for estimated future claims 72 45
Deduct: Cost of claims (49) (216)
-------- --------
Ending balance $ 234 $ 208
======== ========
NOTE 7: OPERATING SEGMENT DISCLOSURES
The following represents the disaggregation of financial data (in
thousands)(unaudited):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended and
at June 30, 2004:
---------------------- At 06/30
Metals: --------
Pressure vessels and springs $ 6,620 $ 1,141 $ 200 $ 14,655
Cylinders 4,402 188 119 8,472
Grating 2,582 325 - 645
-------- -------- -------- --------
Subtotal Metals 13,604 1,654 319 23,772
Plastics 7,032 518 136 15,040
Corporate and other - (333) - 15,440
-------- -------- -------- --------
Totals $ 20,636 1,839 $ 455 $ 54,252
======== ======== ========
Gains on debt extinguishments 470
Depreciation (623)
Interest expense, net (1,975)
--------
Loss from continuing operations before
income taxes and minority interests $ (289)
========
- 16 -
Three months ended June 30, 2003
and at December 31, 2003:
-------------------------------- At 12/31
Metals: --------
Pressure vessels and springs $ 6,250 $ 1,360 $ - $ 13,407
Cylinders 4,718 68 5 7,877
-------- -------- -------- --------
Subtotal Metals 10,968 1,428 5 21,284
Plastics 7,108 646 27 14,516
Corporate and other - (813) - 15,723
-------- -------- -------- --------
Totals $ 18,076 1,261 $ 32 $ 51,523
======== ======== ========
Depreciation (673)
Interest expense, net (1,912)
--------
Loss from continuing operations
before income taxes $ (1,324)
========
Six months ended June 30, 2004:
-------------------------------
Metals:
Pressure vessels and springs $ 11,804 $ 2,086 $ 208
Cylinders 9,277 487 169
Grating 4,643 608 -
-------- -------- --------
Subtotal Metals 25,724 3,181 377
Plastics 13,759 1,288 200
Corporate and other - (851) 11
-------- -------- --------
Totals $ 39,483 3,618 $ 588
======== ========
Gain on debt extinguishment 3,540
Depreciation (1,246)
Interest expense, net (3,754)
--------
Income from continuing operations before
income taxes and minority interests $ 2,158
========
Six months ended June 30, 2003:
-------------------------------
Metals:
Pressure vessels and springs $ 13,780 $ 3,123 $ -
Cylinders 10,308 597 62
-------- -------- --------
Subtotal Metals 24,088 3,720 62
Plastics 15,251 1,297 102
Corporate and other - (1,653) 1
-------- -------- --------
Totals $ 39,339 3,364 $ 165
======== ========
Depreciation (1,358)
Interest expense, net (3,421)
--------
Loss from continuing operations
before income taxes $ (1,415)
========
- 17 -
(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) Corporate and other assets at June 30, 2004 and at December 31, 2003
includes $8.0 million of goodwill that relates to the Company's pressure
vessel and springs segment. For evaluation purposes under SFAS No. 142,
this goodwill is included in the carrying value of the pressure vessels
and springs segment. At June 30, 2004 and December 31, 2003, goodwill
of $1.5 million is recorded at each of pressure vessels and springs and
cylinders.
NOTE 8: DISCONTINUED OPERATIONS - CHANGE IN PLAN
In December 1995, the Company entered into a joint venture agreement with
China Metallurgical Import & Export Shanghai Company and Wanggang Township
Economic Development Corporation. The Company has a 65% interest in the joint
venture. During 1996, the Company capitalized its investment in the joint
venture by contributing cash of $150,000 and machinery and equipment with an
estimated fair market value of $1.9 million to the joint venture. The joint
venture manufacturers grating panels and is located in Wangang Township,
Pudong New Area, Shanghai in the People's Republic of China.
In 1999, the Company adopted a plan to exit the grating manufacturing
business through the disposition of its grating businesses, including its
Chinese joint venture investment. Upon adoption of the plan, the grating
businesses and assets were classified and accounted for as discontinued
operations, including a provision for estimated loss on disposal of the
Chinese joint venture of $2.0 million, and ceased consolidating the joint
venture as control of its daily operations was given to our joint venture
partners and our then expatriate management was removed.
In the four years since adopting this plan, the Company has made several
unsuccessful attempts to dispose of its investment in the joint venture but
now perceives that a presence in China is consistent with its future plans for
certain of its continuing operations. As a result and in connection with our
Chinese partners' expressed desire to return control of the business to the
Company for various reasons, the Company has decided to retain its investment
in the Chinese joint venture and return it to continuing operations resulting
in consolidation of the joint venture's results of operations. Certain
information related to the joint venture's results of operations for the three
and six month periods ended June 30, 2004 is as follows (in 000's):
Three months ended June 30, 2004 Six months ended June 30, 2004
-------------------------------- --------------------------------
Net sales $ 2,582 Net sales $ 4,643
Income before taxes 322 Income before taxes 602
EBITDA 325 EBITDA 608
- 18 -
NOTE 9: RESTRUCTURING
In the fourth quarter of 2001, we developed and adopted a restructure
plan for our continuing businesses and certain other businesses were
identified for disposal. By the end of 2002, this plan was substantially
completed except for continuing commitments under leases for two idle
facilities and certain equipment. The Company recorded restructuring costs,
including lease termination costs, related to the plan. The following
represents a summary of first half of 2004 cash activity of the remaining
lease termination reserves (in thousands):
At Cash At
Description 12/31/03 Activity 06/30/04
--------------------------------------------- -------- -------- --------
Lease termination costs $ 474 $ (145) $ 329
======== ======== ========
Of the remaining lease termination costs, $315,000 relates to idle
manufacturing facilities in Milwaukee, Wisconsin and Clearfield, Utah. The
remainder relates to lease commitments under idle machinery in the Plastics
Group.
NOTE 10: COMPONENTS OF BENEFIT COSTS
The following tables present the components of net periodic benefit costs
for Metals pension and Metals and Corporate Executive Payroll other
postretirement plans for the three- and six-month periods ended June 30, 2004
(000's):
Pension Postretirement
------------------ ------------------
Three months ended Three months ended
------------------ ------------------
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
Benefits earned during year $ 35 $ 35 $ 6 $ 19
Interest cost 52 52 9 26
Amortization of:
Prior service cost 5 5 - -
Unrecognized net loss (gain) 11 11 2 6
Unrecognized net obligation - - 4 12
Expected return on plan assets (45) (45) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 58 $ 58 $ 21 $ 63
====== ====== ====== ======
- 19 -
Pension Postretirement
------------------ ------------------
Six months ended Six months ended
------------------ ------------------
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
Benefits earned during year $ 70 $ 70 $ 12 $ 38
Interest cost 105 104 18 52
Amortization of:
Prior service cost 10 10 - -
Unrecognized net loss (gain) 22 22 4 12
Unrecognized net obligation - - 8 24
Expected return on plan assets (90) (90) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 117 $ 116 $ 42 $ 126
====== ====== ====== ======
In May 2004, the Company made a required payment of $397,214 associated
with the Metals pension plan.
The following tables present the components of net periodic benefit costs
for Plastics pension and other postretirement plans for the three- and six-
month periods ended June 30, 2004 (000's):
Pension Postretirement
------------------ ------------------
Three months ended Three months ended
------------------ ------------------
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
Benefits earned during year $ - $ - $ 15 $ 14
Interest cost 56 55 31 30
Amortization of:
Unrecognized net loss (gain) 17 16 4 4
Expected return on plan assets (43) (43) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 30 $ 28 $ 50 $ 48
====== ====== ====== ======
- 20 -
Pension Postretirement
------------------ ------------------
Six months ended Six months ended
------------------ ------------------
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
Benefits earned during year $ - $ - $ 30 $ 28
Interest cost 112 110 62 60
Amortization of:
Unrecognized net loss (gain) 34 32 8 8
Expected return on plan assets (86) (86) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 60 $ 56 $ 100 $ 96
====== ====== ====== ======
The Company is required to make a payment of $497,000 in the third
quarter of 2004 associated with the Plastics pension plan.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis is provided to assist readers in
understanding financial performance during the periods presented and
significant trends which may impact future performance. It should be read in
conjunction with the consolidated financial statements and accompanying notes
included elsewhere in this Form 10-Q and in conjunction with our annual report
on Form 10-K for the year ended December 31, 2003, as amended by Form 10-K/A
as filed on April 29, 2004.
GENERAL
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements, such as large-diameter seamless pressure vessels, hydraulic and
pneumatic cylinders, grating, leaf springs and precision plastic components.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004 Compared to
Three Months Ended June 30, 2003
Net sales, gross margins and EBITDA percentages for the three months
ended 2004 and 2003 are as follows. The percentages of EBITDA to net sales
excludes corporate and other EBITDA. Including corporate and other EBITDA,
the percentages of consolidated EBITDA to net sales for the three month
periods ended June 30, 2004 and 2003 are 8.9% and 7.0%, respectively ($'s in
000's):
- 21 -
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2004 2003 2004 2003 2004 2003
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 6,620 $ 6,250 21.2% 26.5% 17.2% 21.8%
Cylinders 4,402 4,718 16.7% 12.8% 4.3% 1.4%
Grating 2,582 - 26.3% - 12.6% -
Plastics 7,032 7,108 12.6% 13.5% 7.4% 9.1%
--------- --------- ------ ------ ------ ------
Totals $ 20,636 $ 18,076 17.5% 17.8% 10.5% 11.5%
========= ========= ====== ====== ====== ======
Net sales for the second quarter of 2004 were up 14.2% from the second
quarter of 2003. Such increase is the result of the inclusion of grating
sales in the second quarter of 2004, which reflects the operations of the
Company's 65% owned Chinese subsidiary. Such operation had been treated as a
discontinued operation. See "Minority Interests" and "Discontinued Operations
- Change in Plan" below. Excluding the $2.6 million of grating sales, second
quarter 2004 sales were about the same as the second quarter of 2003.
Pressure vessels and springs sales were $0.4 million higher in the second
quarter of 2004 compared to the second quarter of 2003 primarily as the result
of the fact that this segment has experienced a 79% increase in its backlog
since year-end 2003 to the end of the second quarter of 2004, from $5.8
million to $10.4 million, and such backlog increase is beginning to have an
increasing effect on this segment's sales. Cylinder sales were $0.3 million
lower in the second quarter of 2004 compared to the second quarter of 2003.
The Company completed the consolidation of its cylinder operations into a
single facility in Libertyville, Illinois, in the 2004 second quarter, which
caused some disruption in this segment's shipping activity but contributed to
an increase in this segment's backlog. The cylinders' backlog increased 40%
since year-end 2003 to the end of the second quarter 2004. Plastics sales
decreased slightly in the second quarter of 2004 compared to the 2003 second
quarter. The continued reluctance and lag in customers' decisions on newly
quoted programs due to the uncertainty surrounding our financial condition was
offset by some new customer programs andresulted in this segment's second
quarter-to-quarter 2004 compared to 2003 sales being almost even. With
Plastics' backlog having increased 35% since year-end 2003 to the end of the
2004 second quarter, from $5.9 million to $8.0 million, [management
anticipates the declining trend in sales will reverse in the second half of
2004].
Gross margin as a percentage of sales in the second quarter of 2004
compared to the 2003 second quarter was down slightly, to 17.5% from 17.8%.
Excluding the sales and gross margin of the Chinese grating joint venture, the
U.S. operations gross margin percentage decreased from 17.8% in the second
quarter of 2003 to 16.8% in the second quarter of 2004. Even though pressure
vessels and springs sales increased in the second quarter of 2004 compared to
the 2003 second quarter, gross margin as a percentage of sales declined. This
decrease is primarily the result of a week-long interruption in production
caused by an electrical failure resulting in unanticipated costs and
underabsorbed overheads. Cylinder gross margin increased in the second
quarter of 2004 compared to the 2003 second quarter due primarily to the fact
that, through the consolidation of cylinder operations into a single facility
in Libertyville, Illinois in May 2004, we eliminated redundant expense and
experienced other production efficiencies. Plastics gross margin was lower in
the second quarter of 2004 compared to the 2003 second quarter primarily due
to the decrease in sales and the fact that certain of the new customer
programs discussed above carry lower profit margins than those they replaced.
- 22 -
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. Excluding the Chinese grating subsidiary and
corporate and other EBITDA, EBITDA and EBITDA as a percentage of sales
decreased during the second quarter of 2004 compared to 2003 primarily due to
the same factors affecting gross profit margin discussed above. A
reconciliation of EBITDA to operating income for the three months ended June
30, 2004 and 2003 by segment and corporate and other is as follows (000's):
Operating Deprec- Amortiz-
Profit iation ation EBITDA
--------- --------- --------- ---------
2004:
-----
Pressure vessels and springs $ 986 $ 155 $ - $ 1,141
Cylinders 138 50 - 188
Grating 325 - - 325
Plastics 110 408 - 518
Corporate and other(1)(2) (343) 10 - (333)
-------- -------- -------- --------
Totals 1,216 $ 623 $ - $ 1,839
======== ======== ========
Gain on debt extinguishment 470
--------
Operating profit $ 1,686
========
2003:
-----
Pressure vessels and springs $ 1,186 $ 174 $ - $ 1,360
Cylinders (5) 73 - 68
Plastics 237 409 - 646
Corporate and other (830) 17 - (813)
-------- -------- -------- --------
Totals $ 588 $ 673 $ - $ 1,261
======== ======== ======== ========
(1) - Excludes gain on debt extinguishment of $470,000. See "Gain on Debt
Extinguishment" below.
(2) - Includes an environmental reserve adjustment of $331,000. See "Other
Income" below.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the second quarter
of 2004 were $2.6 million, compared to $2.7 million for the 2003 second
quarter. SGA in the second quarter of 2004 includes $0.3 million from the
Chinese grating joint venture. Excluding this, SGA decreased to $2.3 million
domestically, or by $0.4 million. This decrease in SGA is due to continued
cost cutting measures and payroll reductions. Excluding the sales and SGA of
the grating joint venture, SGA as a percentage of sales decreased to 13.0% for
the second quarter of 2004 compared to 14.7% in the 2003 second quarter
primarily due to the effects of the cost savings described above.
- 23 -
Gains on Debt Extinguishments
The Company had been named as one of several defendants in fifteen
consolidated lawsuits filed in December 2000 or early 2001 in the Superior
Court for Los Angeles County, California. The plaintiffs in these suits,
except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC were related parties.
The plaintiffs alleged that the Company received loans from SFSC that have not
been repaid. On May 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in
the U.S. Bankruptcy Court for the District of Connecticut.
A settlement was reached in the Superior Court action among the
plaintiffs, Bankers Trust Co. and certain other financial institution
defendants. In the settlement, Bankers Trust Co. and the other settling
financial institution defendants paid the plaintiffs an amount specified in
the settlement agreement, and Bankers Trust Co. received an assignment of the
claims of the plaintiffs and such other settling defendants against the
Company and other defendants. In the SFSC bankruptcy proceeding, the Company
and certain other defendants entered into a settlement with SFSC and Bankers
Trust Co. Under this settlement (1) the Company is obligated to pay SFSC a
settlement amount by December 31, 2006 in the sum of $4.29 million, plus
interest at the rate of 10% per annum, in full satisfaction of the Company's
indebtedness to SFSC under notes payable totaling $4.6 million, plus interest,
and for certain credit support fees payable, which settlement amount is net of
an offset against SFSC's note payable to the Company in the amount of $310,000
plus interest, and (2) provided it makes such settlement payment, the Company
is released from all claims that have been or could have been asserted against
the Company by the plaintiffs or the settling financial institution defendants
in the California Superior Court suits or by SFSC in the bankruptcy
proceeding. The settlement amount does not constitute a new liability of the
Company, as it relates to indebtedness and a note receivable that had
previously been recorded on the Company's balance sheet.
The Company recorded a gain on debt extinguishment of $3.1 million in the
first quarter of 2004 effective January 1, 2004 as the settlement was reached
in the Superior Court and the financial institution defendants paid the
plaintiffs in January 2004. However, subsequent to the filing of our Form 10-
Q for the quarter ended March 31, 2004, the parties to the settlement
agreement set the effective date of the settlement as May 10, 2004.
Accordingly, the Company recorded interest expense through May 10, 2004 under
the terms of the prior SFSC notes payable and then recorded an additional gain
on debt extinguishment of $262,000 to reflect the effective date of the
settlement as being May 10, 2004. The Company then adjusted interest expense
under the terms of the new note payable as though it began accruing on May 10,
2004.
In January 2004, we solicited our noteholders for the second time to
consent to certain provisions and waivers of the indenture governing the 13%
senior notes. In the first consent in November 2003, $23,250,700 of the
$24,855,000 principal amount of senior notes, or 93.55%, had consented. The
second consent solicitation period ended on April 28, 2004 at which time
holders of an additional $434,300 principal amount of senior notes had
consented. The significant provisions of the solicitation requested that the
noteholders consent to waive all then existing defaults under the indenture,
cancel all accrued and unpaid interest, cancel 12% of the principal amount of
senior notes and extend the maturity of the notes to December 2006.
- 24 -
Accordingly, 12% of the $434,300 principal amount of senior notes of
noteholders that had consented to the various provisions and waivers in the
second solicitation, or $52,000, was extinguished pursuant to the provisions
of the consent. As of April 28, 2004, accrued and unpaid interest related to
the 13% senior notes consenting in the second solicitation totaled $156,000.
Such interest was extinguished pursuant to the provisions of the consent.
[The Company is currently investigating other recapitalization scenarios
that include, among other things, the use of additional private capital fund
financing to repurchase at discounts some portion or all of our senior and
unsecured subordinated notes payable.]
Other Income
Other income for the second quarter of 2004 was $201,000, compared to
other income of $33,000 for the second quarter of 2003. The components are as
follows:
2004 2003 Change
-------- -------- --------
Costs to consolidate cylinder locations $ 171 $ - $ 171
Adjustment of environmental reserve (331) - (331)
Rental income on sublease (37) (10) (27)
Other (income) expense, net (4) (23) 19
-------- -------- --------
Total other income, net $ (201) $ (33) $ (168)
======== ======== ========
During May 2004, we completed the consolidation of our cylinder
manufacturing operations into a single facility in Libertyville, Illinois.
Costs totaling $171,000 were incurred in the 2004 second quarter. The Company
finalized the settlement of a Louisiana environmental litigation matter in the
second quarter of 2004. Such settlement has resulted in a new estimate of the
required reserve, resulting in a $331,000 adjustment in the 2004 second
quarter. In June 2003, the Company sublet its idle manufacturing facility in
Clearfield, Utah. There were no other significant offsetting items of other
income or expenses in either of the second quarters of 2004 and 2003.
Minority Interests
Minority interests of $0.1 million represents income during the second
quarter of 2004 allocated to the minority ownerships of the Company's
consolidated foreign grating joint venture. Minority interests are calculated
based on the percentage of minority ownership. See "Discontinued Operations"
below.
Interest Expense
Interest expense for the second quarter of 2004 was $2.0 million compared
to $1.9 million for the second quarter of 2003. This increase is primarily
due to the higher level of amortization of deferred financing costs and
estimated warrant value in the 2004 second quarter than the 2003 second
quarter.
- 25 -
Income Taxes
There was no tax provision from continuing operations in the first
quarters of 2004 or 2003. The Company has net operating loss carryforwards
for Federal tax return reporting purposes totaling $115.2 million at December
31, 2003. The years in which such net operating losses expire are as follows
(000's):
Year ending December 31: Year ending December 31:
------------------------ ------------------------
2004 $ 53,099 2017 7,574
2006 6,067 2018 10,860
2007 609 2019 1,907
2008 3,231 2020 1,047
2009 2,526 2021 12,431
2011 1,069 2022 14,760
[The Company may be able to utilize its loss carryforwards against
possible increased future profitability.] However, management has determined
to fully reserve for the total amount of net deferred tax assets as of
December 31, 2003 [and to continue to do so during 2004 until management can
conclude that it is more likely than not that some or all of our loss
carryforwards can be utilized.]
Discontinued Operations - Change in Plan
In December 1995, the Company entered into a joint venture agreement with
China Metallurgical Import & Export Shanghai Company and Wanggang Township
Economic Development Corporation. The Company has a 65% interest in the joint
venture. During 1996, the Company capitalized its investment in the joint
venture by contributing cash of $150,000 and machinery and equipment with an
estimated fair market value of $1.9 million to the joint venture. The joint
venture manufacturers grating panels and is located in Wangang Township,
Pudong New Area, Shanghai in the People's Republic of China.
In 1999, the Company adopted a plan to exit the grating manufacturing
business through the disposition of its grating businesses, including its
Chinese joint venture investment. Upon adoption of the plan, the grating
businesses and assets were classified and accounted for as discontinued
operations, including a provision for estimated loss on disposal of the
Chinese joint venture of $2.0 million, and ceased consolidating the joint
venture as control of its daily operations was given to our joint venture
partners and our then expatriate management was removed.
In the four years since adopting this plan, the Company has made several
unsuccessful attempts to dispose of its investment in the joint venture and
now perceives that a presence in China is consistent with its future plans for
certain of its continuing operations. As a result and in connection with our
Chinese partners' expressed desire to return control of the business to the
Company for various reasons, the Company has decided to retain its investment
in the Chinese joint venture and returned it to continuing operations
effective at the beginning of 2004 resulting in consolidation of the joint
venture's results of operations for the quarter ended June 30, 2004.
- 26 -
Six Months Ended June 30, 2004 Compared to
Six Months Ended June 30, 2003
Net sales, gross margins and EBITDA percentages for the six months ended
2004 and 2003 are as follows. The percentages of EBITDA to net sales excludes
corporate and other EBITDA. Including corporate and other EBITDA, the
percentages of consolidated EBITDA to net sales for the six month periods
ended June 30, 2004 and 2003 are 9.2% and 8.6%, respectively ($'s in 000's):
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2004 2003 2004 2003 2004 2003
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 11,804 $ 13,780 22.2% 27.5% 17.7% 22.7%
Cylinders 9,277 10,308 17.6% 16.0% 5.2% 5.8%
Grating 4,643 - 23.8% - 13.1% -
Plastics 13,759 15,251 14.7% 12.9% 9.4% 8.5%
--------- --------- ------ ------ ------ ------
Totals $ 39,483 $ 39,339 18.7% 18.8% 11.3% 12.8%
========= ========= ====== ====== ====== ======
Net sales for the first half of 2004 were almost equal to the first half
of 2003. First half 2004 sales includes over $4.6 million of sales from the
consolidation of the Company's 65% owned Chinese grating manufacturing
subsidiary. Such operation had been treated as a discontinued operation. See
"Minority Interests" and "Discontinued Operations - Change in Plan" below.
Excluding such grating sales, first half 2004 sales were down $4.5 million, or
11.4%, when compared to the first half of 2003 due primarily to low order
levels in later 2003 and early 2004. Such low orders were partially
attributable to the Company's liquidity difficulties prior to its refinancing
in December 2003 and partially attributable to the general economy and year-
end holiday shut-downs at our customers.
Pressure vessels and springs sales were $2.0 million lower and cylinder
sales were $1.0 million in the first half of 2004 compared to the first half
of 2003 due primarily to the lower backlog at year-end 2003 compared to year-
end 2002. However, the pressure vessel and springs segment has experienced a
79% increase in its backlog since year-end 2003 to the end of the second
quarter of 2004, from $5.8 million to $10.4 million, and such backlog increase
is beginning to have an increasing effect on this segment's sales. Cylinder
sales were also affected by the consolidation of its cylinder operations into
a single facility in Libertyville, Illinois, in the 2004 second quarter, which
caused some disruption in this segment's shipping activity but contributed to
an increase in this segment's backlog. The cylinders' backlog increased 40%
since year-end 2003 to the end of the second quarter 2004. The $1.5 million
decrease in Plastics sales in the first half of 2004 compared to the 2003
first half is a continuation of a trend that began several years ago and is
primarily the result of a continued reluctance and lag in customers' decisions
on newly quoted programs due to the uncertainty surrounding our financial
condition. Although the Plastics segment has recently been awarded some new
customer programs, [this segment may continue to be affected by an overall lag
in new program starts.] The continued reluctance and lag in customers'
decisions on newly quoted programs due to the uncertainty surrounding our
financial condition was more than offset by the effect on sales from new
customer programs. However, with Plastics' backlog having increase 35% since
year-end 2003 to the end of the 2004 second quarter, from $5.9 million to $8.0
million, [management anticipates the declining trend in sales will reverse in
the second half of 2004].
- 27 -
Gross margin as a percentage of sales in the first half of 2004 compared
to the 2003 first half was down slightly, to 18.7% from 18.8%. Excluding the
sales and gross margin of the Chinese grating joint venture, the U.S.
operations gross margin percentage decreased from 18.8% in the first half of
2003 to 18.0% in the first half of 2004. The decrease in pressure vessels and
springs gross margin as a percentage of sales was due to the decrease in sales
volume and a week-long interruption in June 2004 production caused by an
electrical failure resulting in unanticipated costs and underabsorbed
overheads. Cylinder gross margin increased in the first half of 2004 compared
to the 2003 first half despite a decline in sales due primarily to the fact
that, through the consolidation of cylinder operations into a single facility
in Libertyville, Illinois in May 2004, we eliminated redundant expense and
experienced other production efficiencies. The Plastics segment increased its
gross profit margin percentage even with reduced sales as a result of
increased productivity and a lower cost structure resulting from prior year
cost reduction efforts.
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. Excluding the Chinese grating subsidiary and
corporate and other EBITDA, EBITDA and EBITDA as a percentage of sales
decreased during the first quarter of 2004 compared to 2003 primarily due to
the same factors affecting gross profit margin discussed above. A
reconciliation of EBITDA to operating income for the six months ended June 30,
2004 and 2003 by segment and corporate and other is as follows (000's):
Operating Deprec- Amortiz-
Profit iation ation EBITDA
--------- --------- --------- ---------
2004:
-----
Pressure vessels and springs $ 1,775 $ 311 $ - $ 2,086
Cylinders 388 99 - 487
Grating 608 - - 608
Plastics 473 815 - 1,288
Corporate and other(1)(2) (872) 21 - (851)
-------- -------- -------- --------
Totals 2,372 $ 1,246 $ - $ 3,618
======== ======== ========
Gain on debt extinguishment 3,540
--------
Operating profit $ 5,912
========
2003:
-----
Pressure vessels and springs $ 2,770 $ 353 $ - $ 3,123
Cylinders 453 144 - 597
Plastics 471 826 - 1,297
Corporate and other (1,688) 35 - (1,653)
-------- -------- -------- --------
Totals $ 2,006 $ 1,358 $ - $ 3,364
======== ======== ======== ========
- 28 -
(1) - Excludes gain on debt extinguishment of $3,540,000. See "Gain on Debt
Extinguishment" below.
(2) - Includes an environmental reserve adjustment of $331,000. See "Other
Income" below.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first half of
2004 were $5.3 million, compared to $5.5 million for the 2003 first half. SGA
in the first half of 2004 includes $0.5 million from the Chinese grating joint
venture. Excluding this, SGA decreased to $4.8 million domestically, or by
$0.7 million. This decrease in SGA is due to continued cost cutting measures
and payroll reductions. Excluding the sales and SGA of the grating joint
venture, SGA as a percentage of sales decreased to 13.7% for the first half of
2004 compared to 13.9% in the 2003 first half primarily due to the effects of
the cost savings described above.
Gains on Debt Extinguishments
The Company had been named as one of several defendants in fifteen
consolidated lawsuits filed in December 2000 or early 2001 in the Superior
Court for Los Angeles County, California. The plaintiffs in these suits,
except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC were related parties.
The plaintiffs alleged that the Company received loans from SFSC that have not
been repaid. On May 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in
the U.S. Bankruptcy Court for the District of Connecticut.
A settlement was reached in the Superior Court action among the
plaintiffs, Bankers Trust Co. and certain other financial institution
defendants. In the settlement, Bankers Trust Co. and the other settling
financial institution defendants paid the plaintiffs an amount specified in
the settlement agreement, and Bankers Trust Co. received an assignment of the
claims of the plaintiffs and such other settling defendants against the
Company and other defendants. In the SFSC bankruptcy proceeding, the Company
and certain other defendants entered into a settlement with SFSC and Bankers
Trust Co. Under this settlement (1) the Company is obligated to pay SFSC a
settlement amount by December 31, 2006 in the sum of $4.29 million, plus
interest at the rate of 10% per annum, in full satisfaction of the Company's
indebtedness to SFSC under notes payable totaling $4.6 million, plus interest,
and for certain credit support fees payable, which settlement amount is net of
an offset against SFSC's note payable to the Company in the amount of $310,000
plus interest, and (2) provided it makes such settlement payment, the Company
is released from all claims that have been or could have been asserted against
the Company by the plaintiffs or the settling financial institution defendants
in the California Superior Court suits or by SFSC in the bankruptcy
proceeding. The settlement amount does not constitute a new liability of the
Company, as it relates to indebtedness and a note receivable that had
previously been recorded on the Company's balance sheet. The settlement
resulted in a $3.1 million gain on debt extinguishment calculated as follows
(000's):
- 29 -
Interest
Payable and Fee
Description (Receivable) Accruals Totals
------------------------------- ---------- ---------- ----------
SFSC note receivable $ (310) $ (155) $ (465)
Reserve for interest receivable - 101 101
SFSC collateral fee - 690 690
SFSC credit support fee - 294 294
SFSC note payable 2,999 1,501 4,500
SFSC note payable 500 290 790
SFSC note payable 100 53 153
SFSC note payable by assignment 1,017 280 1,297
-------- -------- --------
Totals $ 4,306 $ 3,054 7,360
======== ========
Less: Note payable under settlement agreement (4,290)
--------
Gain on SFSC litigation settlement first quarter 2004 $ 3,070
========
The gain on debt extinguishment of $3.1 million was recorded in the first
quarter of 2004 as the settlement was reached in the Superior Court and the
financial institution defendants paid the plaintiffs in January 2004.
However, subsequent to the filing of our Form 10-Q for the quarter ended March
31, 2004, the parties to the settlement agreement set the effective date of
the settlement as May 10, 2004. Accordingly, the Company recorded interest
expense through May 10, 2004 under the terms of the prior SFSC notes payable
and then recorded an additional gain on debt extinguishment of $262,000 to
reflect the effective date of the settlement as being May 10, 2004. The
Company then adjusted interest expense under the terms of the new note payable
as though it began accruing on May 10, 2004.
In January 2004, we solicited our noteholders for the second time to
consent to certain provisions and waivers of the indenture governing the 13%
senior notes. In the first consent in November 2003, $23,250,700 of the
$24,855,000 principal amount of senior notes, or 93.55%, had consented. The
second consent solicitation period ended on April 28, 2004 at which time
holders of an additional $434,300 principal amount of senior notes had
consented. The significant provisions of the solicitation requested that the
noteholders consent to waive all then existing defaults under the indenture,
cancel all accrued and unpaid interest, cancel 12% of the principal amount of
senior notes and extend the maturity of the notes to December 2006.
Accordingly, 12% of the $434,300 principal amount of senior notes of
noteholders that had consented to the various provisions and waivers in the
second solicitation, or $52,000, was extinguished pursuant to the provisions
of the consent. As of April 28, 2004, accrued and unpaid interest related to
the 13% senior notes consenting in the second solicitation totaled $156,000.
Such interest was extinguished pursuant to the provisions of the consent.
[The Company is currently investigating other recapitalization scenarios
that include, among other things, the use of additional private capital fund
financing to repurchase at discounts some portion or all of our senior and
unsecured subordinated notes payable.]
- 30 -
Other Income
Other income for the first half of 2004 was $282,000, compared to other
income of $61,000 for the first half of 2003. The components are as follows:
2004 2003 Change
-------- -------- --------
Costs to consolidate cylinder locations $ 288 $ - $ 288
Adjustment of environmental reserve (331) - (331)
Rental income on sublease (73) (10) (63)
Other (income) expense, net (166) (51) (115)
-------- -------- --------
Total other income, net $ (282) $ (61) $ (221)
======== ======== ========
During May 2004, we completed the consolidation of our cylinder
manufacturing operations into a single facility in Libertyville, Illinois.
Costs totaling $171,000 were incurred in the 2004 second quarter. The Company
finalized the settlement of a Louisiana environmental litigation matter in the
second quarter of 2004. Such settlement has resulted in a new estimated of
the required reserve, resulting in a $331,000 adjustment in the 2004 second
quarter. In June 2003, the Company sublet its idle manufacturing facility in
Clearfield, Utah. There were no other individually significant or offsetting
items of other income or expenses in either of the first halves of 2004 and
2003.
Minority Interests
Minority interests of $0.2 million represents income during the first
half of 2004 allocated to the minority ownerships of the Company's
consolidated foreign grating joint venture. Minority interests are calculated
based on the percentage of minority ownership. See "Discontinued Operations"
below.
Interest Expense
Interest expense for the first half of 2004 was $3.8 million compared to
$3.4 million for the first half of 2003. This increase is primarily due to
the higher level of amortization of deferred financing costs and estimated
warrant value in the 2004 first half than the 2003 first half.
Income Taxes
There was no tax provision from continuing operations in the first halves
of 2004 or 2003. The Company has net operating loss carryforwards for Federal
tax return reporting purposes totaling $115.2 million at December 31, 2003.
The years in which such net operating losses expire are as follows (000's):
Year ending December 31: Year ending December 31:
------------------------ ------------------------
2004 $ 53,099 2017 7,574
2006 6,067 2018 10,860
2007 609 2019 1,907
2008 3,231 2020 1,047
2009 2,526 2021 12,431
2011 1,069 2022 14,760
- 31 -
[The Company may be able to utilize its loss carryforwards against
possible increased future profitability.] However, management has determined
to fully reserve for the total amount of net deferred tax assets as of
December 31, 2003 [and to continue to do so during 2004 until management can
conclude that it is more likely than not that some or all of our loss
carryforwards can be utilized.]
Discontinued Operations - Change in Plan
In December 1995, the Company entered into a joint venture agreement with
China Metallurgical Import & Export Shanghai Company and Wanggang Township
Economic Development Corporation. The Company has a 65% interest in the joint
venture. During 1996, the Company capitalized its investment in the joint
venture by contributing cash of $150,000 and machinery and equipment with an
estimated fair market value of $1.9 million to the joint venture. The joint
venture manufacturers grating panels and is located in Wangang Township,
Pudong New Area, Shanghai in the People's Republic of China.
In 1999, the Company adopted a plan to exit the grating manufacturing
business through the disposition of its grating businesses, including its
Chinese joint venture investment. Upon adoption of the plan, the grating
businesses and assets were classified and accounted for as discontinued
operations, including a provision for estimated loss on disposal of the
Chinese joint venture of $2.0 million, and ceased consolidating the joint
venture as control of its daily operations was given to our joint venture
partners and our then expatriate management was removed.
In the four years since adopting this plan, the Company has made several
unsuccessful attempts to dispose of its investment in the joint venture and
now perceives that a presence in China is consistent with its future plans for
certain of its continuing operations. As a result and in connection with our
Chinese partners' expressed desire to return control of the business to the
Company for various reasons, the Company has decided to retain its investment
in the Chinese joint venture and returned it to continuing operations
effective at the beginning of 2004 resulting in consolidation of the joint
venture's results of operations for the six months ended June 30, 2004.
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.
- 32 -
Recent Events
Congress Financial Corporation Supplemental Revolving Credit Financing
The Company's loan agreement with Congress Financial Corporation
(Congress) provides for a loan facility of up to $25.0 million, collateralized
by substantially all of the assets of the Company as described below. The
amount which the Company may borrow at any time under such loan facility is
based on a formula related to the value of the collateral securing the loan.
In may 2004, two private capital funds invested $1.5 million each to purchase
from Congress junior participating interests in the revolving credit portion
of the Congress loan facility. These investments increased by $3.0 million
the amount which the Company could borrow under the loan facility, subject to
the overall borrowing limit of $25.0 million, which did not change. The
Company used the $3.0 million in proceeds to pay trade payables and for other
corporate purposes. In consideration of such investments, the Company has
agreed to grant warrants to such private capital funds allowing each to
purchase 375,000 shares of the Company's common stock at an initial exercise
price of $0.01 per share and with registration rights, subject to the approval
by the Company's stockholders to amend the Company's Articles of Incorporation
to increase the authorized number of shares of common stock of the Company by
10,000,000.
Interest on the Congress supplemental revolving credit financing is
payable monthly at a fixed rate of 15% per annum. The Congress supplemental
revolving credit financing is collateralized by a continuing security interest
and lien on substantially all of the current and after-acquired assets of
Reunion including, without limitation, all accounts receivable, inventory,
real property, equipment, chattel paper, documents, instruments, deposit
accounts, contract rights and general intangibles.
The Congress supplemental revolving credit financing is subject to the
same financial covenants and other covenants as the revolving credit and term
loan facilities, including the minimum amount of earnings before interest,
taxes, depreciation and amortization (EBITDA) and the minimum fixed charge
coverage ratio.
Congress Financial Corporation Revolving and Term Loan Credit Facility
On December 3, 2003, the Company entered into a new revolving and term
loan bank credit facility with Congress Financial Corporation. This credit
facility consists of revolving credit, term loan and letter of credit
accommodations up to a maximum credit of $25.0 million. At June 30, 2004, the
Company had outstanding borrowings under this facility totaling $13.1 million,
including $10.2 million of revolving credit and a term loan of $2.9 million.
The term loan amortizes to the revolving credit availability at a rate of
$53,000 per month which began on January 31, 2004 and continues until fully
paid. This facility has a three-year initial term and automatically renews for
additional one-year increments unless either party gives the other notice of
termination at least 90 days prior to the beginning of the next one-year term.
The Congress facility requires Reunion to comply with financial covenants
and other covenants, including a minimum amount of earnings before interest,
taxes, depreciation and amortization (EBITDA) and a minimum fixed charge
coverage ratio. The minimum EBITDA covenant began in 2004 and requires the
Company to maintain minimum monthly amounts of EBITDA ranging from $450,000 in
January 2004 to $600,000 in December 2004 with $50,000 to $100,000 increments
or decrements occurring during the year. There are also minimum monthly
- 33 -
EBITDA amounts required during 2005 and 2006. Through June 2004, the Company
achieved the minimum monthly EBITDA required for compliance with this
covenant. The minimum fixed charge coverage ratio covenant requires the
Company to maintain a minimum fixed charge coverage ratio to be tested as of
the last day of each fiscal quarter beginning with the quarter ended March 31,
2004, for the year-to-date period starting on January 1, 2004. For quarters
ended on and after December 31, 2004, the components of the calculation are on
a rolling, twelve-month basis. The ratio is defined as EBITDA divided by
fixed charges (defined as interest expense, capital expenditures, regularly
scheduled or required principal payments on debt and taxes paid). For the
ratio calculation period ended March 31, 2004 and for each year-to-date period
during 2004 ended on quarters thereafter, the required minimum fixed charge
coverage ratio is 0.65:1, 0.77:1, 0.77:1 and 0.80:1, respectively. There are
also minimum fixed charge coverage ratio amounts required during 2005 and
2006. The Company was in compliance with the minimum fixed charge coverage
ratio covenant for the period ended June 30, 2004.
In addition, the facilities contain various other affirmative and
negative covenants. As of the date of this report, the Company was in
compliance with all other covenants. The facilities require Reunion to pay
the reasonable expenses incurred by Congress in connection with the
facilities. Available borrowings under the revolving credit portion are based
upon a percentage of eligible receivables and inventories.
13% Senior Notes
In January 2004, we solicited our noteholders for the second time to
consent to certain provisions and waivers of the indenture governing the 13%
senior notes. In the first consent in November 2003, $23,250,700 of the
$24,855,000 principal amount of senior notes, or 93.55%, had consented. The
second consent solicitation period ended on April 28, 2004 at which time
holders of an additional $434,300 principal amount of senior notes had
consented. The significant provisions of the solicitation requested that the
noteholders consent to waive all then existing defaults under the indenture,
cancel all accrued and unpaid interest, cancel 12% of the principal amount of
senior notes and extend the maturity of the notes to December 2006.
Accordingly, 12% of the $434,300 principal amount of senior notes of
noteholders that had consented to the various provisions and waivers in the
second solicitation, or $52,000, was extinguished pursuant to the provisions
of the consent. As of April 28, 2004, accrued and unpaid interest related to
the 13% senior notes consenting in the second solicitation totaled $156,000.
Such interest was extinguished pursuant to the provisions of the consent.
SFSC Litigation Settlement
The Company had been named as one of several defendants in fifteen
consolidated lawsuits filed in December 2000 or early 2001 in the Superior
Court for Los Angeles County, California. The plaintiffs in these suits,
except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC were related parties.
The plaintiffs alleged that the Company received loans from SFSC that have not
been repaid. On May 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in
the U.S. Bankruptcy Court for the District of Connecticut.
- 34 -
A settlement was reached in the Superior Court action among the
plaintiffs, Bankers Trust Co. and certain other financial institution
defendants. In the settlement, Bankers Trust Co. and the other settling
financial institution defendants paid the plaintiffs an amount specified in
the settlement agreement, and Bankers Trust Co. received an assignment of the
claims of the plaintiffs and such other settling defendants against the
Company and other defendants. In the SFSC bankruptcy proceeding, the Company
and certain other defendants entered into a settlement with SFSC and Bankers
Trust Co. Under this settlement (1) the Company is obligated to pay SFSC a
settlement amount by December 31, 2006 in the sum of $4.29 million, plus
interest at the rate of 10% per annum, in full satisfaction of the Company's
indebtedness to SFSC under notes payable totaling $4.6 million, plus interest,
and for certain credit support fees payable, which settlement amount is net of
an offset against SFSC's note payable to the Company in the amount of $310,000
plus interest, and (2) provided it makes such settlement payment, the Company
is released from all claims that have been or could have been asserted against
the Company by the plaintiffs or the settling financial institution defendants
in the California Superior Court suits or by SFSC in the bankruptcy
proceeding. The settlement amount does not constitute a new liability of the
Company, as it relates to indebtedness and a note receivable that had
previously been recorded on the Company's balance sheet. The settlement
resulted in a $3.1 million gain on debt extinguishment calculated as follows
(000's): Interest
Payable and Fee
Description (Receivable) Accruals Totals
------------------------------- ---------- ---------- ----------
SFSC note receivable $ (310) $ (155) $ (465)
Reserve for interest receivable - 101 101
SFSC collateral fee - 690 690
SFSC credit support fee - 294 294
SFSC note payable 2,999 1,501 4,500
SFSC note payable 500 290 790
SFSC note payable 100 53 153
SFSC note payable by assignment 1,017 280 1,297
-------- -------- --------
Totals $ 4,306 $ 3,054 7,360
======== ========
Less: Note payable under settlement agreement (4,290)
--------
Gain on SFSC litigation settlement first quarter 2004 $ 3,070
========
The gain on debt extinguishment of $3.1 million was recorded in the first
quarter of 2004 as the settlement was reached in the Superior Court and the
financial institution defendants paid the plaintiffs in January 2004.
However, subsequent to the filing of our Form 10-Q for the quarter ended March
31, 2004, the parties to the settlement agreement set the effective date of
the settlement as May 10, 2004. Accordingly, the Company recorded interest
expense through May 10, 2004 under the terms of the prior SFSC notes payable
and then recorded an additional gain on debt extinguishment of $262,000 to
reflect the effective date of the settlement as being May 10, 2004. The
Company then adjusted interest expense under the terms of the new note payable
as though it began accruing on May 10, 2004.
- 35 -
SUMMARY OF 2004 ACTIVITIES
Cash and cash equivalents totaled $1.6 million at June 30, 2004, compared
to $0.8 million at December 31, 2003, an increase of $0.8 million. This
resulted from $1.9 million of cash used in operating activities and $0.6
million used in investing activities being more than offset by almost $3.4
million provided by financing activities. Cash and cash equivalents at the
end of a period generally represents lockbox receipts from customers to be
applied to our Congress revolving credit facility in the following one to two
business days.
Operating Activities
Operating activities used $1.9 million in cash in the first half of 2004
as increases of $2.8 million in receivables and inventories were only
partially funded by an increase in trade payables and other liabilities.
Investing Activities
Capital expenditures were $0.6 million.
Financing Activities
The Company made scheduled repayments of the Congress term loan totaling
$318,000 and paid an additional $310,000 in costs related to the December 2003
refinancing. Revolving credit facility borrowings increased $1.0 million
during the first half of 2004. The Company and Congress entered into a
supplemental revolving credit financing for $3.0 million. See "Recent
Developments - Congress Financial Corporation Supplemental Revolving Credit
Financing" above. Other debt repayments totaling $27,000 represent payments
on capital lease obligations and other debt.
Lease Termination Reserves
In the fourth quarter of 2001, we developed and adopted a restructure
plan for our continuing businesses and certain other businesses were
identified for disposal. By the end of 2002, this plan was substantially
completed except for continuing commitments under leases for two idle
facilities and certain equipment. The Company recorded restructuring costs,
including lease termination costs, related to the plan. The following
represents a summary of first half 2004 cash activity of the remaining lease
termination reserves (in thousands):
At Cash At
Description 12/31/03 Activity 06/30/04
--------------------------------------------- -------- -------- --------
Lease termination costs $ 474 $ (145) $ 329
======== ======== ========
Of the remaining lease termination costs, $315 relates to idle
manufacturing facilities in Milwaukee, Wisconsin and Clearfield, Utah. The
remainder relates to lease commitments under idle machinery in the Plastics
Group.
- 36 -
FACTORS THAT COULD AFFECT FUTURE RESULTS
Reunion's vendors may restrict credit terms
We have corrected many vendor-related problems with liquidity generated
from the refinancing and from asset sales. However, another period of tight
liquidity could result in key vendors restricting or eliminating the extension
of credit terms to us. If this would happen, our ability to obtain raw
materials would be strained significantly and our ability to manufacture
products would be reduced.
Reunion's bank financing is subject to financial covenants
We have removed all defaults on our bank financing and senior notes.
However, our new bank financing is subject to monthly financial and other
covenants. If our operations do not improve during 2004, we may fail to meet
one or more financial or other covenants. If this would happen, we would be
in default on our bank obligations and, subject to the terms of the loan and
security agreement, all of our bank loans would be due and payable. Although
it may be possible to negotiate waivers of defaults, no assurances can be
given that we would be able to do so.
Reunion is exposed to the risks of litigation and environmental matters
We have made significant progress in settling major exposures to
litigation and environmental claims during 2003 and in the first half of 2004.
However, we are still exposed to certain undecided litigation and
environmental matters. An adverse outcome in one or more of these matters
could have a significant negative effect on our financial position and results
of operations.
Reunion operates in highly competitive mature, niche markets
Our products are sold in highly competitive mature, niche markets and we
compete with companies of varying size, including divisions and subsidiaries
of larger companies that have financial resources that exceed ours. This
combination of competitive and financial pressures could cause us to lose
market share or erode prices, which could negatively impact our financial
position and results of operations.
Reunion's past performance could impact future prospects
Our past performance has been poor. Because of this, potential or
current customers may decide not to do business with us. If this were to
happen, our sales may not increase or may decline. If sales do not increase
or we experience a further decline in sales, our ability to cover costs would
be further reduced, which could negatively impact our financial position and
results of operations.
Going concern
The financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At June 30, 2004, the Company
has a deficiency in working capital of $0.8 million net of related party
obligations and a deficiency in assets of $25.8 million. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result from the
outcome of this uncertainty.
- 37 -
We successfully refinanced our bank debt, extinguished a significant
portion of our obligations under the senior notes and removed all previously
existing defaults on our debt. These steps were taken to improve liquidity
and defer the principal maturities on a significant portion of our debt. The
Company is investigating other recapitalization scenarios in an effort to
provide additional liquidity and extinguishments or deferrals of debt
obligations. The Company will also consider sales of assets as part of its
plan to continue in existence. Although we believe we can accomplish these
plans, no assurances exist that we will. Failure to accomplish these plans
could have an adverse impact on the Company's liquidity, financial position
and future operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risk factors which
affect the Company since the end of the preceding fiscal year.
Item 4. Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as
amended, Reunion's management, including its Chief Executive Officer and Chief
Financial Officer, conducted an evaluation as of the end of the period covered
by this report, of the effectiveness of Reunion's disclosure controls and
procedures as defined in Rule 13a-15(e). Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that Reunion's
disclosure controls and procedures were effective as of the end of the period
covered by this report. As required by Rule 13a-15(d), Reunion's management,
including its Chief Executive Officer and Chief Financial Officer, also
conducted an evaluation of Reunion's internal control over financial reporting
to determine whether any changes occurred during the quarter that have
materially affected, or are reasonably likely to materially affect, Reunion's
internal control over financial reporting. Based on that evaluation, there has
been no such change during the quarter.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that
the objectives of the system will be met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood
of future events.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company in involved in various legal proceedings and environmental
matters. See "Item 1. Financial Statements, Note 6: Commitments and
Contingent Liabilities."
- 38 -
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
-------------------
The Company filed a Current Report on Form 8-K dated
May 4, 2004 on May 5, 2004 to set the record date of
those shareholders entitled to vote at and to announce the
time and place of the Company's 2004 annual meeting of the
Company's stockholders.
The Company filed a Current Report on Form 8-K/A dated
May 4, 2004 on May 28, 2004 to change the date of the
Company's 2004 annual meeting of the Company's stockholders.
The Company filed a Current Report on Form 8-K dated
May 18, 2004 on May 28, 2004 to file, as an exhibit, the
Company's press release regarding its results of operations
for the quarter ended March 31, 2004.
(c) Exhibits
--------
Exhibit No. Exhibit Description
----------- -------------------
31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- 39 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Date: August 16, 2004 REUNION INDUSTRIES, INC.
--------------- (Registrant)
By: /s/ Charles E. Bradley, Sr.
-------------------------------
Charles E. Bradley, Sr.
Chairman and Chief
Executive Officer
By: /s/ John M. Froehlich
-------------------------------
John M. Froehlich
Executive Vice President, Finance
and Chief Financial Officer
(chief financial and accounting officer)
- 40 -
EXHIBIT 31.1
CERTIFICATION
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 16, 2004
/s/ Charles E. Bradley, Sr.
-------------------------------------
Chief Executive Officer
- 41 -
EXHIBIT 31.2
CERTIFICATION
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 16, 2004
/s/ John M. Froehlich
-------------------------------------
Chief Financial Officer
- 42 -
EXHIBIT 32.1
REUNION INDUSTRIES, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
In connection with this quarterly report on Form 10-Q of Reunion Industries,
Inc. for the quarter ended June 30, 2004, I, Charles E. Bradley, Sr., Chief
Executive Officer of Reunion Industries, Inc., hereby certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley
Act of 2002, that:
1. this Form 10-Q for the quarter ended June 30, 2004 fully complies
with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. the information contained in this Form 10-Q for the quarter ended
June 30, 2004 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: August 16, 2004
/s/ Charles E. Bradley, Sr.
---------------------------
Chief Executive Officer
- 43 -
EXHIBIT 32.2
REUNION INDUSTRIES, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
In connection with this quarterly report on Form 10-Q of Reunion Industries,
Inc. for the quarter ended June 30, 2004, I, John M. Froehlich, Chief
Financial Officer of Reunion Industries, Inc., hereby certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley
Act of 2002, that:
1. this Form 10-Q for the quarter ended June 30, 2004 fully complies
with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. the information contained in this Form 10-Q for the quarter ended
June 30, 2004 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: August 16, 2004
/s/ John M. Froehlich
---------------------------
Chief Financial Officer
- 44 -