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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
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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
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Commission File Number 01-15739
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REUNION INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
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(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400
PITTSBURGH, PENNSYLVANIA 15222
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(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
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At November 1, 2005, 16,656,519 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 37 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 that are intended to be covered by the safe harbors created thereby. The
forward-looking statements contained in this report are enclosed in brackets
[ ] for ease of identification. Note that all forward-looking statements
involve risks and uncertainties. Factors which could cause the future results
and shareholder values to differ materially from those expressed in the
forward-looking statements include, but are not limited to, the strengths of
the markets which the Company serves, the Company's ability to generate
liquidity and the Company's ability to service its debts and meet financial
covenants. Although the Company believes that the assumptions underlying the
forward-looking statements contained in this report are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurances
that the forward-looking statements included or incorporated by reference in
this report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included or
incorporated by reference herein, the inclusion of such information should not
be regarded as a representation by the Company or any other person that the
Company's objectives and plans will be achieved. In addition, the Company
does not intend to, and is not obligated to, update these forward-looking
statements after filing and distribution of this report, even if new
information, future events or other circumstances have made them incorrect or
misleading as of any future date.
- 2 -
REUNION INDUSTRIES, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 2005 (unaudited) and December 31, 2004 4
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the three and nine
Months ended September 30, 2005 and 2004 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2005 and
2004 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 3. Defaults Upon Senior Securities 31
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
CERTIFICATIONS 34
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(in thousands)
At September 30, At December 31,
2005 2004
--------------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 1,525 $ 1,146
Receivables (net of allowance of
$195 and $202, respectively) 11,934 12,768
Advances to employees 3 26
Inventories, net 9,087 9,300
Other current assets 3,257 1,832
Current assets of discontinued operations 461 3,216
-------- --------
Total current assets 26,267 28,288
Property, plant and equipment, net 7,229 9,374
Property, plant and equipment, held for sale 3,376 2,911
Due from related parties 932 919
Goodwill, net 10,994 10,994
Other assets, net 3,421 4,110
-------- --------
Total assets $ 52,219 $ 56,596
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Debt in default $ 42,342 $ -
Current maturities of debt 5 645
Revolving credit facilities - 14,485
Trade payables 7,085 9,300
Accrued interest 7,014 5,663
Due to related parties 77 285
Other current liabilities 6,257 5,680
Notes payable - 4,161
Notes payable - related parties 500 500
Current liabilities of discontinued operations 285 827
-------- --------
Total current liabilities 63,565 41,546
Long-term debt 8,240 35,628
Other liabilities 3,500 3,759
Non-current liabilities of discontinued
Operations 910 916
-------- --------
Total liabilities 76,215 81,849
Minority interests 323 330
Commitments and contingent liabilities - -
Stockholders' deficit (24,319) (25,583)
-------- --------
Total liabilities and stockholders' deficit $ 52,219 $ 56,596
======== ========
See accompanying notes to condensed consolidated financial statements.
- 4 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(in thousands, except per share information)(unaudited)
Three Months Ended Nine Months Ended
Sept.30, Sept.30, Sept.30, Sept.30,
2005 2004 2005 2004
-------- -------- -------- --------
Sales $ 17,294 $ 17,101 $ 54,050 $ 50,459
Cost of sales 14,204 14,070 43,338 40,798
-------- -------- -------- --------
Gross profit 3,090 3,031 10,712 9,661
Selling, general & administrative 2,131 2,135 6,762 6,664
Gain on debt extinguishments (3,450) - (3,450) (3,540)
Other (income), net (28) (379) (41) (662)
------- -------- ------- --------
Operating profit 4,437 1,275 7,441 7,199
Interest expense, net 2,287 2,033 6,551 5,787
------- -------- ------- --------
Income (loss) from continuing
operations before income taxes
and minority interests 2,150 (758) 890 1,412
Provision for income taxes 35 - 46 -
------- -------- ------- --------
Income (loss) from continuing
operations before minority
interests 2,115 (758) 844 1,412
Minority interests 62 115 206 326
------- ------- ------- --------
Income (loss) from continuing
operations 2,053 (873) 638 1,086
Gain on disposal of discontinued
operations, net of tax of $-0- - - 370 -
(Loss) from discontinued
operations, net of tax of $-0- (130) (60) (207) (72)
------- ------- ------- --------
Net and comprehensive income (loss) $ 1,923 $ (933) $ 801 $ 1,014
======= ======= ======= =======
Earnings (loss) applicable to
common stockholders $ 1,923 $ (933) $ 801 $ 1,014
======= ======= ======= =======
Basic earnings (loss) per share:
Continuing operations $ 0.12 $ (0.05) $ 0.04 $ 0.06
Discontinued operations 0.00 (0.01) 0.01 0.00
------- ------- ------- -------
Income (loss) per share - basic $ 0.12 $ (0.06) $ 0.05 $ 0.06
======= ======= ======= =======
Weighted average shares
outstanding - basic 16,657 16,279 16,419 16,279
======= ======= ======= =======
Diluted income (loss) per share:
Continuing operations $ 0.10 $ (0.05) $ 0.03 $ 0.05
Discontinued operations (0.01) (0.01) 0.01 0.00
------ ------- ------- -------
Income (loss) per share - diluted $ 0.09 $ (0.06) $ 0.04 $ 0.05
======= ======= ======= =======
Weighted average shares
outstanding - diluted 20,798 16,279 20,202 18,798
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
- 5 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2005 2004
-------- --------
Cash (used in) provided by operating activities $ 78 $ (2,935)
-------- --------
Cash flow from investing activities:
Capital expenditures (276) (717)
Proceeds from asset sales 3,680 -
-------- --------
Cash (used in) provided by investing activities 3,404 (717)
-------- --------
Cash flow from financing activities:
Net change in revolving credit facility (2,854) 1,815
Issuance of debt 3,100 3,000
Repayments of debt (3,197) (514)
Dividend paid to China minority interest (213) -
Payments of deferred financing costs - (418)
-------- --------
Cash provided by financing activities (3,164) 3,883
-------- --------
Net increase in cash and cash equivalents 318 231
Less: Change in cash of discontinued operations 61 (47)
Cash and cash equivalents, beginning of period 1,146 656
-------- --------
Cash and cash equivalents, end of period $ 1,525 $ 840
======== ========
Interest paid $ 2,271 $ 1,627
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Non-cash financing activity:
Debt extinguishments $ 3,450 $ 3,540
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Conversion of guarantee and interest fees to
common stock $ 378 $ -
======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Reunion Industries, Inc. and its subsidiaries (collectively, "Reunion" or the
"Company") 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 nine months
ended September 30, 2005 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, 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 September
30, 2005, the Company had a deficiency in working capital of $37.3 million, a
loss from continuing operations before gain on debt extinguishment for the
nine months then ended of $2.8 million and a deficiency in assets of $24.3
million. Additionally, as described below in "Recent Developments", we are
currently in default under our 13% Senior Notes, our loan agreement with
Wachovia Bank and a note payable to a private fund lender (LCC). 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.
Over the past several years, the Company has taken steps to improve its
liquidity and defer the principal maturities of a significant portion of its
debt. The Company is investigating other recapitalization scenarios in an
effort to provide additional liquidity and extinguishments or deferrals of
debt obligations. Although the Company believes that it can accomplish these
plans, no assurances exist that it will. Failure to accomplish these plans
could have an adverse impact on the Company's liquidity, financial position
and future operations. (See Note 2: RECENT DEVELOPMENTS - Sale of Assets and
NapTech Settlement.)
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R, "Share Based Payment." SFAS
123R is a revision to SFAS 123 and supersedes APB 25, "Accounting for Stock
Issued to Employees," and amends SFAS 95, "Statement of Cash Flows." This
statement requires a public entity to expense the cost of employee services
received in exchange for an award of equity instruments. This statement also
provides guidance on valuing and expensing these awards, as well as disclosure
requirements of these equity arrangements. This statement is effective for the
first interim reporting period that begins after January 1, 2006.
SFAS 123R permits public companies to choose between the following two
adoption methods:
- 7 -
1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of Statement 123 for all awards granted to employees prior to
the effective date of SFAS 123R that remain unvested on the effective date, or
2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123 for purposes
of pro forma disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption
Reunion currently accounts for share-based payments to employees using
APB 25's intrinsic value method and, as such, recognizes no compensation
expense for employee stock options. The impact of the adoption of SFAS 123R on
Reunion cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. There would have been no material
impact on reported results of operations and earnings per share had the
Company applied the fair value provisions of SFAS 123 to share-based payments.
The adoption of SFAS 123R's fair value method may have an impact,
possibly material, on Reunion's future results of operations but no material
impact on overall financial position. SFAS 123R also requires the benefits of
tax deductions in excess of recognized compensation expense, if any, to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement may reduce net operating
cash flows and increase net financing cash flows in the consolidated statement
of cash flows of periods after adoption. Due to timing of the release of SFAS
123R and the choice between the two adoption methods, the Company is still
analyzing the ultimate impact that this new pronouncement may have on its
results of operations.
On March 29, 2005, the Staff of the Securities and Exchange Commission
(SEC or the Staff) issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" (SAB 107). Although not altering any conclusions reached in SFAS
123R, SAB 107 provides the views of the Staff regarding the interaction
between SFAS 123R and certain SEC rules and regulations and, among other
things, provide the Staff's views regarding the valuation of share-based
payment arrangements for public companies. Reunion intends to follow the
interpretative guidance on share-based payment set forth in SAB 107 during the
Company's adoption of SFAS 123R.
Stock Based Compensation
In June, 2005, ten year options to purchase 500,000 shares of the
Company's common stock and five year options to purchase 300,000 shares of the
Company's common stock, all pursuant to the Company's 2004 Stock Option Plan,
were awarded to various officers, employees and directors. One third of such
options vest immediately and the remaining options vest annually over a two
year period. 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. If the Company had applied the fair value recognition
provisions of SFAS No. 123 for the three and nine month periods ended
September 30, 2005, using the Black-Scholes option pricing model assuming a
risk free discount rate of 6%, no dividend yield, expected volatility of 99%
and an expected option life of 3 years, pro forma earnings and per share
amounts would have been as follows (in thousands, except for per share
amounts) (unaudited):
- 8 -
3-Mos. Ended 9-Mos. Ended
--------------- --------------
2005 2004 2005 2004
----- ----- ----- -----
Net income (loss) as reported $ 1,923 $ (933) $ 801 $ 1,014
Deduct: Total stock-based employee
compensation determined under
fair value method for stock
options, net of tax - - (30) -
------ ------- -------- -------
Pro forma income (loss) applicable
to common stockholders $ 1,923 $ (933) $ 771 $ 1,014
====== ======= ======== =======
Basic income (loss) per
share, as reported $ 0.12 $ (0.06) $ 0.05 $ 0.06
====== ======= ======== =======
Basic income (loss) per
share, pro forma $ 0.12 $ (0.06) $ 0.05 $ 0.06
====== ======= ======== =======
Diluted income (loss) per
share, as reported $ 0.09 $ (0.06) $ 0.04 $ 0.05
====== ======= ======== =======
Diluted income (loss) per
share, pro forma $ 0.09 $ (0.06) $ 0.04 $ 0.05
====== ======= ======== =======
NOTE 2: RECENT DEVELOPMENTS
NapTech Settlement
On April 26, 2005 a judgment was entered in Louisiana in favor of Shaw
Naptech, Inc. ("Naptech") against various parties, including the Company. On
July 8, 2005, the Company entered into a Settlement Agreement with Naptech
pursuant to which the Company paid NapTech $1.65 million in settlement of the
Company's indebtedness to NapTech of approximately $5.1 million under a
promissory note and the related judgment. As a result of the NapTech
settlement, Reunion recognized a gain on debt extinguishment of approximately
$3.4 million in the third quarter of 2005.
In connection with the NapTech settlement, Wachovia Bank, National
Association ("Wachovia") made a $3.1 million supplemental loan to Reunion
under its existing $25 million loan facility, thereby increasing the total
amount of the supplemental loan portion of the facility to $6.1 million.
Reunion used $1.65 million of this additional supplemental loan to make the
Reunion settlement payment to NapTech and is using the balance of the loan
proceeds for inventory purchases and to support letters of credit that may be
issued for it under the Wachovia facility. Wachovia required, as a condition
to making the additional supplemental loan, that LC Capital Master Fund, Ltd.
("LCC") purchase an additional $3.1 million junior participation interest in
the Wachovia loan facility, and LCC did so, thereby increasing its junior
participation interest in the facility to $6.1 million. LCC in turn
simultaneously sold a 50% interest in its junior participation interest to
WebFinancial Corporation ("Web").
To induce LCC to purchase the additional junior participation interest
in the Wachovia loan facility and to induce Web to purchase a 50% interest in
such junior participation interest, Reunion issued two warrants, one to LCC
and one to Web, to purchase, in each case, 387,500 shares of the Company's
common stock at a price of $0.01 per share. These warrants are exercisable at
anytime until July 12, 2010. The value of these warrants is estimated to be
$85,000 using the Black-Scholes pricing model. The $85,000 was shown as a
discount on the debt and will be amortized as interest expense over the life
of the debt
- 9 -
Reunion's indebtedness under the Wachovia loan facility, including the
supplemental loans, is secured by liens on substantially all of Reunion's
assets.
13% Senior Notes
On February 3, 2005, the Company announced that it was unable to make a
$2,928,000 interest payment by February 2, 2005 to the holders of the
Company's 13% Senior Notes. Holders of more than 80% of the principal amount
of such Senior Notes entered into a Standstill Agreement with the Company,
pursuant to which such holders agreed that they would not exercise and will
cause the Trustee not to exercise any remedies provided for in the Indenture
under which the Senior Notes were issued, or any other agreements related to
such notes,
with respect to this payment default or with respect to a potential event of
default if the Company failed to make the next scheduled interest payment due
April 1, 2005 (which the Company did not make). In the Standstill Agreement,
such holders agreed to defer such interest payments to December 2006.
The Company also failed to make the interest payments on the Senior Notes
that were due on July 1 and October 1, 2005, each in the amount of $0.7
million. As a result, events of default have occurred under the Indenture
("Indenture Default") under which the Senior Notes were issued. With an
Indenture Default, holders of more than 25% of the principal amount of the
Senior Notes may, by written notice to the Company and to the Trustee, declare
the principal of and accrued but unpaid interest on all the Senior Notes to be
immediately due and payable (the "acceleration"). However, under an
Intercreditor and Subordination Agreement entered into in December 2003 among
Wachovia, the holders of the Senior Notes and certain other lenders, the
holders of approximately 95% of the Senior Note holders can not commence any
action to enforce their liens on any collateral for a 180 day period beginning
after the date of receipt by Wachovia, the senior secured lender, of a written
notice from the Senior Note holders informing Wachovia of such Indenture
Default and demanding the acceleration. At this date, neither the Company nor
Wachovia has received written notice of any acceleration.
Defaults and Waivers Under the Wachovia Loan Facility and the LCC Debt
On December 3, 2003, the Company entered into a revolving and term loan
credit facility with Wachovia (formerly, Congress Financial Corporation). The
Wachovia 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. In November 2004, Wachovia and the Company entered into an
amendment of the revolving and term loan credit facility wherein Wachovia
eliminated the fixed charge coverage ratio and reduced the monthly minimum
EBITDA covenant going forward. Under the November 2004 amendment, the Company
was required to maintain new minimum monthly amounts of EBITDA of $280,000 in
November 2004, $290,000 in December 2004, $350,000 in January 2005, $280,000
in February 2005 and $300,000 per month thereafter. In January 2005, the
Company failed to meet the minimum monthly amount, when it had an EBITDA loss
for the month of $39,000. Wachovia has waived this EBITDA shortfall.
As described above under "Naptech Settlement", in April 2005, Naptech
secured a judgment against the Company. The judgment obtained by Naptech
constituted a cross default under the Wachovia Loan Agreement. Such default
was waived by Wachovia.
As described above under "13% Senior Notes", the Company is in default
with respect to such notes. This default also constitutes a cross default
under the Company's loan and financing agreements with each of Wachovia and
LCC. Such defaults have not been waived by Wachovia or LCC and the Company is
currently in default under the Wachovia Loan Agreement and under its note
payable to a private capital fund, LCC.
- 10 -
Sale of Assets
The Company's management, having reevaluated the Company's ability to
service its debt and meet future obligations, is investigating the sale of
certain assets in order to generate liquidity. These asset sales may take one
or more forms including, but not limited to, the sale of a division or
piecemeal sales of assets including real estate, buildings, machinery and
equipment and/or intangibles. The Company's management cannot provide any
assurances that any asset sales will occur or, if asset sales do occur, that
such sales will generate sufficient liquidity for the Company.
During the first quarter of 2005, the Company did sell all of the assets
and liabilities of its leaf spring manufacturing segment, located in Miami,
OK, to an unrelated entity for $792,000. Of this amount, $250,000 was used to
pay down the private capital fund note payable secured by the real property,
$41,000 was used to pay down the Wachovia term loan secured by the machinery
and equipment and the remaining amount was used to reduce the borrowings under
the revolving credit facility. The Company recorded a loss of $318,000 on such
sale which was provided for in the Company's 2004 year.
Additionally, during the first quarter of 2005, the Company sold certain
of the receivables, inventory and intangibles of its thermoset plastics
operation ("Rostone") located in Lafayette, IN, along with certain of its
machinery and equipment. The sale of such assets was accomplished in two
separate transactions, with the sale of certain of the Company's compounding
operation assets being sold to one unrelated entity and the sale of certain of
the Company's molding operation assets being made to a different unrelated
entity. At the time of such sale, the Company entered into tolling or
manufacturing agreements with such buyers under which the Company agreed to
operate the compounding and molding operations at its Lafayette, IN facility
for a limited time until the buyers could move such operations to different
geographical locations. The buyers agreed to reimburse the Company for all
expenses in connection with these activities. The sale of the selected assets
noted above was for approximately $2.9 million. Of this amount, $712,000 was
used to pay down the Wachovia term loan secured by the machinery and equipment
and the remaining amount was used to reduce the borrowings under the revolving
credit facility. The Company recorded a gain of approximately $370,000 on
such sales.
Insurance Receipt
During the second quarter of 2005, the Company received a business
interruption insurance payment of approximately $600,000 related to a plant
accident at the pressure vessel segment plant in the first quarter of 2005
which was classified to cost of sales. An additional $114,000 was received in
the third quarter of 2005 which was also classified to cost of sales.
- 11 -
NOTE 3: DEBT IN DEFAULT AND LONG-TERM DEBT
The Company is in default on its 13% senior notes, its Wachovia bank
financing (including the junior participation portion thereof) and its note
payable to a private capital fund, LCC.
Debt in default consists of the following (in thousands):
At September 30,
2005
----------------
(unaudited)
Wachovia revolving credit facility $ 8,796
Junior participation portion of the
revolving credit facility (net of
warrant value of $160) 5,940
Wachovia term loan 1,246
Note payable due December 5, 2006 (net of
warrant value of $44) 3,456
13% senior notes (net of warrant value
of $126) 21,887
Note payable 1,017
--------
Total debt in default $ 42,342
========
Long-term debt consists of the following (in thousands):
At September 30, December 31,
2005 2004
--------------- --------------
(unaudited)
Wachovia revolving credit facility $ - $ 11,650
Junior participation portion of the
revolving credit facility (net of
warrant value of $165) - 2,835
Wachovia term loan - 2,539
Note payable due December 1, 2006 3,950 4,200
Note payable due December 5, 2006 (net of
warrant value of $71) - 3,429
13% senior notes (net of warrant value
of $207) - 21,806
Notes payable 4,290 8,451
Notes payable - related parties 500 500
Capital leases and other 5 9
-------- --------
Total long-term debt 8,745 55,419
Classified as current (505) (19,791)
-------- --------
Long-term debt $ 8,240 $ 35,628
======== ========
- 12 -
NOTE 4: INVENTORIES
Inventories are comprised of the following (in thousands):
At September 30, At December 31,
2005 2004
----------- --------------
(unaudited)
Raw material $ 4,795 $ 3,760
Work-in-process 1,788 2,775
Finished goods 2,504 2,765
-------- --------
Inventories $ 9,087 $ 9,300
======== ========
Inventories are valued at the lower of cost or market, cost being
determined on the first-in, first-out method. The above amounts are net of
inventory reserves of $893 and $682 at September 30, 2005 and December 31,
2004, respectively.
NOTE 5: STOCKHOLDERS' DEFICIT AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
deficit for the nine month period ended September 30, 2005 (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, 2005 $163 $27,866 $(51,710) $ (1,902) $(25,583)
Activity (unaudited):
Stock issuance 4 374 - - 378
Warrant issuances - 85 - - 85
Net loss - - 801 - 801
---- ------- -------- -------- --------
At September 30, 2005
(unaudited) $167 $28,325 $(50,909) $ (1,902) $(24,319)
==== ======= ======== ======== ========
At the June 21, 2005 Board of Directors meeting, approval was granted
for the Company to enter into settlement agreements with two officers of the
Company. Under such settlement agreements, the officers agreed to forgive
$309,960 of guarantee fees and interest owed to them and to convert an
additional $68,040 of such fees and interest into 378,000 shares of common
stock of the Company. Such conversion added $378,000 to the Company's equity.
In July 2005, in connection with the borrowing under the $3.1 million
additional junior participation interest, the Company issued two warrants, one
to LCC and one to Web. The value of these warrants was estimated to be
$85,000 using the Black-Scholes pricing model. Such amount was recorded as
original issue discount with an increase to paid-in-capital and is being
amortized to interest expense using the effective interest method of
amortization.
The computations of basic and diluted earnings (loss) per common share
EPS (LPS) for the three and nine month periods ended September 30, 2005 and
2004 are as follows (in thousands, except per share amounts)(unaudited):
- 13 -
Net
Income EPS
(Loss) Shares (LPS)
-------- -------- -------
Three months ended September 30, 2005:
Income applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ 1,923 16,657 $ 0.12
=======
Dilutive effect of stock options and warrants 4,141
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted EPS $ 1,923 20,798 $ 0.09
======== ======== =======
Three months ended September 30, 2004:
Loss applicable to common stockholders,
Weighted average shares outstanding
and basic LPS $ (933) 16,279 $ (0.06)
=======
Dilutive effect of stock options and warrants -
-------- --------
Loss applicable to common stockholders,
shares outstanding and diluted LPS $ (933) 16,279 $ (0.06)
======== ======== =======
Nine months ended September 30, 2005:
Income applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ 801 16,419 $ 0.05
=======
Dilutive effect of stock options and warrants 3,783
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted EPS $ 801 20,202 $ 0.04
======== ======== =======
Nine months ended September 30, 2004:
Income applicable to common stockholders,
Weighted average shares outstanding
and basic EPS $ 1,014 16,279 $ 0.06
=======
Dilutive effect of stock options and warrants 2,519
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted EPS $ 1,014 18,798 $ 0.05
======== ======== =======
At September 30, 2005 and 2004, the Company's stock options outstanding
totaled 1,370,000 and 614,000, respectively. Such options included a dilutive
component of 23,037 and 174,184 shares for the three and nine month periods
ended September 30, 2005, respectively, and a dilutive component of 157,044
shares for the nine month period ended September 30, 2004. At September 30,
2005 and 2004, outstanding warrants to purchase the Company's common totaled
4,935,989 and 2,429,323, respectively. Such warrants included a dilutive
component of 4,118,286 and 3,608,239 shares for the three and nine month
periods ended September 30, 2005, respectively, and a dilutive component of
2,375,330 shares for the nine month period ended September 30, 2004. Because
the Company had a loss from operations for the three month period ended
September 30, 2004, inclusion of options and warrants has an anti-dilutive
effect on LPS.
- 14 -
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. Other than the Naptech
Settlement as described in Note 2: Recent Developments, there have been no
major changes in such lawsuits from that reported in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004.
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 nine month periods
ended September 30, 2005 and 2004 follows (in 000's):
September 30,
Description 2005 2004
------------------------------------------ -------- --------
Beginning balance $ 100 $ 211
Add: Provision for estimated future claims 127 82
Deduct: Cost of claims (114) (77)
-------- --------
Ending balance $ 113 $ 216
======== ========
NOTE 7: OPERATING SEGMENT DISCLOSURES
The following represents the disaggregation of financial data (in
thousands)(unaudited):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended and
at September 30, 2005:
------------------------ At 09/30
Metals: --------
Pressure vessels $ 5,371 $ 590 $ 5 $ 15,002
Cylinders 5,104 478 34 7,282
Grating 1,954 155 - 3,919
-------- -------- -------- --------
Subtotal Metals 12,429 1,223 39 26,203
Plastics 4,865 612 21 8,171
Corporate and other - (501) - 14,008
Discontinued operations - - - 3,837
-------- -------- -------- --------
Totals $ 17,294 1,334 $ 60 $ 52,219
======== ======== ========
Gain on extinguishment of debt 3,450
Depreciation (347)
Interest expense, net (2,287)
--------
Income from continuing operations before
income taxes and minority interests $ 2,150
========
- 15 -
Three months ended September 30, 2004
and at December 31, 2004:
------------------------------------ At 12/31
Metals: --------
Pressure vessels $ 5,777 $ 972 $ 77 $ 15,403
Cylinders 4,473 (24) 29 8,452
Grating 2,449 331 - 4,013
-------- -------- -------- --------
Subtotal Metals 12,699 1,279 106 27,868
Plastics 4,402 566 16 8,000
Corporate and other - (141) - 14,601
Discontinued operations - - 7 6,127
-------- -------- -------- --------
Totals $ 17,101 1,704 $ 129 $ 56,596
======== ======== ========
Depreciation (429)
Interest expense, net (2,033)
--------
Loss from continuing operations
before income taxes $ (758)
========
Capital
Net Sales EBITDA(1) Spending
--------- --------- ---------
Nine months ended September 30, 2005:
------------------------------------
Metals:
Pressure vessels $ 17,426 $ 2,970 $ 132
Cylinders 15,763 1,439 57
Grating 5,768 637 11
-------- -------- --------
Subtotal Metals 38,957 5,046 200
Plastics 15,093 1,826 76
Corporate and other - (1,713) -
Discontinued operations - - -
-------- -------- --------
Totals $ 54,050 5,159 $ 276
======== ========
Gain on extinguishment of debt 3,450
Depreciation (1,168)
Interest expense, net (6,551)
--------
Loss from continuing operations before
income taxes and minority interests $ 890
========
- 16 -
Nine months ended September 30, 2004:
------------------------------------
Metals:
Pressure vessels $ 16,149 $ 2,856 $ 285
Cylinders 13,750 463 198
Grating 7,092 939 -
-------- -------- --------
Subtotal Metals 36,991 4,258 483
Plastics 13,468 1,701 172
Corporate and other - (992) 11
Discontinued operations - - 51
-------- -------- --------
Totals $ 50,459 4,967 $ 717
======== ========
Gain on extinguishment of debt 3,540
Depreciation (1,308)
Interest expense, net (5,787)
--------
Loss from continuing operations
before income taxes $ 1,412
========
(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 September 30, 2005 and at December 31, 2004
includes $8.0 million of goodwill that relates to the Company's pressure
vessels segment. For evaluation purposes under SFAS No. 142,
this goodwill is included in the carrying value of the pressure vessels
segment. At September 30, 2005 and December 31, 2004, goodwill of $1.5
million is recorded at each of pressure vessels and cylinders.
NOTE 8: DISCONTINUED OPERATIONS
At September 30, 2005, the assets and liabilities of discontinued
operations are comprised of the remaining assets and liabilities of the
Rostone business and the Company's land and buildings in Milwaukee, WI that
are held for sale. Such assets and liabilities are as follows (in thousands):
CURRENT ASSETS:
Cash and cash equivalents $ 10
Inventories, net 300
Other current assets 151
--------
Total current assets $ 461
========
CURRENT LIABILITIES:
Trade payables $ 280
Other current liabilities 5
--------
Total current liabilities $ 285
========
OTHER ASSETS:
Property, plant and equipment, held for sale $ 3,376
========
OTHER LIABILITIES:
Other liabilities $ 910
========
- 17 -
Results of discontinued operations for the three and nine months ended
September 30, 2005 relate primarily to Rostone while the results of
discontinued operations for the three and nine months ended September 30, 2004
include both Rostone and the Company's springs segment. A summarization of
such results is as follows (in thousands):
3-months ended September 30, 2005 3-months ended September 30, 2004
--------------------------------- ---------------------------------
Net sales $ - Net sales $ 3,337
Loss before taxes (130) Loss before taxes (60)
9-months ended September 30, 2005 9-months ended September 30, 2004
--------------------------------- ---------------------------------
Net sales $ 2,909 Net sales $ 9,462
Loss before taxes (207) Loss before taxes (72)
NOTE 9: 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 nine month periods ended September 30,
2005 and 2004 (000's)(unaudited):
Pension Postretirement
------------------ ------------------
3-months ended 3-months ended
------------------ ------------------
Sept. 30, Sept. 30,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------ ------
Benefits earned during year $ 53 $ 35 $ 27 $ 6
Interest cost 57 53 28 9
Amortization of:
Prior service cost 4 5 - -
Unrecognized net loss (gain) 16 11 18 2
Unrecognized net obligation - - 12 4
Expected return on plan assets (55) (45) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 75 $ 59 $ 85 $ 21
====== ====== ====== ======
- 18 -
Pension Postretirement
------------------ ------------------
9-months ended 9-months ended
------------------ ------------------
Sept. 30, Sept. 30,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------ ------
Benefits earned during year $ 159 $ 105 $ 81 $ 18
Interest cost 171 158 84 27
Amortization of:
Prior service cost 12 15 - -
Unrecognized net loss (gain) 48 33 54 6
Unrecognized net obligation - - 36 12
Expected return on plan assets (165) (135) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 225 $ 176 $ 255 $ 63
====== ====== ====== ======
In May 2005, the Company made a required payment of $383,602 to 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 nine
month periods ended September 30, 2005 and 2004 (000's)(unaudited):
Pension Postretirement
------------------ ------------------
3-months ended 3-months ended
------------------ ------------------
Sept. 30, Sept. 30,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------ ------
Benefits earned during year $ - $ - $ - $ 15
Interest cost 56 56 12 31
Amortization of:
Unrecognized net loss (gain) 15 17 - 4
Expected return on plan assets (71) (43) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ - $ 30 $ 12 $ 50
====== ====== ====== ======
- 19 -
Pension Postretirement
------------------ ------------------
9-months ended 9-months ended
------------------ ------------------
Sept. 30, Sept. 30,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------ ------
Benefits earned during year $ - $ - $ - $ 45
Interest cost 168 168 36 93
Amortization of:
Unrecognized net loss (gain) 45 51 - 12
Expected return on plan assets (213) (129) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ - $ 90 $ 36 $ 150
====== ====== ====== ======
In October 2005, the Company made a required payment of $362,691 to the
Plastics pension plan.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis is provided to assist readers in
understanding financial performance during the periods presented and
significant trends which may impact future performance. It should be read in
conjunction with the consolidated financial statements and accompanying notes
included elsewhere in this Form 10-Q and in conjunction with our annual report
on Form 10-K for the year ended December 31, 2004.
GENERAL
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements, such as large-diameter seamless pressure vessels, hydraulic and
pneumatic cylinders, grating and precision plastic components.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2005 Compared to
Three Months Ended September 30, 2004
Net sales, gross margins and EBITDA percentages for the three months
ended 2005 and 2004 are as follows. The percentages of EBITDA to net sales
exclude corporate and other EBITDA. Including corporate and other EBITDA, the
percentages of consolidated EBITDA to net sales for the three month periods
ended September 30, 2005 and 2004 are 7.7% and 10.0%, respectively ($'s in
000's):
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2005 2004 2005 2004 2005 2004
--------- --------- ------ ------ ------ ------
Pressure vessels $ 5,371 $ 5,777 17.1% 21.3% 11.0% 16.8%
Cylinders 5,104 4,473 17.2% 9.5% 9.4% (0.5%)
Grating 1,954 2,449 20.9% 24.9% 7.9% 13.5%
Plastics 4,865 4,402 18.2% 17.4% 12.6% 12.9%
--------- --------- ------ ------ ------ ------
Totals $ 17,294 $ 17,101 17.9% 17.7% 10.6% 10.8%
========= ========= ====== ====== ====== ======
- 20 -
Net sales for the third quarter of 2005 were up slightly from the third
quarter of 2004. Such increase reflects sales increases in our cylinders and
plastics segments offset, for the most part, by reduced sales in our pressure
vessel and grating segments. The increases in the cylinder and plastics
segments primarily reflects the higher backlog of these operations at June 30,
2005 compared to June 30, 2004. Orders during the latter months of the 2005
third quarter have slowed somewhat and backlogs at these two operations have
declined approximately 20% in total from June 2005 to September 2005. [The
Company considers this decline temporary and does not expect this trend to
continue.] The decrease in pressure vessel sales is attributable to both a
vendor delay in the manufacture and delivery of raw material as well as a
scheduled summer shut down of the plant. The backlog at the pressure vessel
segment continues to grow and, compared to comparable periods in 2004, was up
50% at June 30, 2005 and up 37% at September 30, 2005. The decrease in grating
sales reflects the impact of additional competition from local Chinese
businesses, [which situation is expected to continue throughout the year.]
Gross margin as a percentage of sales in the third quarter of 2005 also
increased slightly compared to the same quarter in 2004. This increase
reflects the same pattern as the increase discussed above regarding net sales.
Gross margin increases in the cylinder and plastics segments were offset, for
the most part, by decrease in gross margin in the pressure vessel and grating
segments. The increases in gross margin percentage at the cylinder and
plastics segments are primarily attributable to the increases in sales which
generated improved efficiencies at those segments. The decrease in gross
margin percentage at the cylinder segment primarily reflects the negative
impact from decreased sales resulting from a delay in the delivery of raw
material which also caused operating inefficiencies. Offsetting these
negative impacts at the cylinder segment was the receipt of an additional
business interruption insurance payment of $114,000 related to a plant
accident noted in the Company's first quarter filing. The decrease in gross
margin in the grating segment reflects the negative impact from reduced sales
as noted above.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales was
slightly lower in the third quarter of 2005 compared to 2004 primarily due to
a higher amount of other income in 2004 as discussed below. A reconciliation
of EBITDA to operating income for the three months ended September 30, 2005
and 2004 by segment and corporate and other is as follows (000's)(unaudited):
Operating Deprec-
Profit iation EBITDA
--------- --------- ---------
2005:
-----
Pressure vessels $ 460 $ 130 $ 590
Cylinders 440 38 478
Grating 187 (32) 155
Plastics 412 200 612
Corporate and other (512) 11 (501)
-------- -------- --------
Totals 987 $ 347 $ 1,334
======== ========
Gain on debt extinguishment 3,450
--------
Operating profit $ 4,437
========
- 21 -
2004:
-----
Pressure vessels $ 825 $ 147 $ 972
Cylinders (69) 45 (24)
Grating 331 - 331
Plastics 339 227 566
Corporate and other (151) 10 (141)
-------- -------- --------
Totals $ 1,275 $ 429 $ 1,704
======== ======== ========
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the third quarter
of 2005 were $2.1 million, virtually the same as the expenses for the third
quarter of 2004. There were no significant variances in expenses from the
current quarter of 2005 to the comparable quarter of 2004. Changes in segment
expense for the comparable quarters are mainly due to changes in volume in the
applicable segment. As a percentage of sales, SGA expenses decreased to 12.3%
for the third quarter of 2005 compared to 12.5% for the same quarter of 2004
as overall expenses remained constant with the slight increase in sales. [The
Company continues to look for ways to cut costs in all areas.]
Gain on Debt Extinguishments
There was a $3.4 million gain on extinguishment of debt in the third
quarter of 2005 but no such gain in the comparable 2004 quarter. The gain was
related to the NapTech settlement as more fully described in Note 2: Recent
Developments.
[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, net
Other income, net for the third quarter of 2005 was $28,000, compared to
other income, net of $379,000 for the third quarter of 2004. There were no
significant offsetting items of other income and expense in the 2005 period.
Significant items in the 2004 period included other income of $270,000,
relating to an adjustment of the Louisiana environmental reserve and $50,000
relating to the repayment of a previously written off advance.
Minority Interests
Minority interests for the third quarter in 2005 and 2004 was $62,000 and
$115,000, respectively. These amounts represent the income during the quarter
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.
Interest Expense
Interest expense for the third quarter of 2005 was $2.3 million compared
to $2.0 million for the third quarter of 2004. The significant interest
increases were $191,000 for interest accrued on the Senior Note interest that
the Company was not able to make in January, April and July of 2005, as
discussed earlier under Note 2: Recent Developments, $104,000 for interest
expensed in connection with the July 2005 supplemental loan to the Wachovia
credit facility as described earlier under Note 2: Recent Developments -
NapTech Settlement and $62,000 related to a higher level of amortization of
deferred financing costs and estimated warrant value. Offsetting a portion of
- 22 -
these increases was a $119,000 decrease in interest expense as a result of the
NapTech settlement as referred to above in the caption "Gain on Debt
Extinguishments". The remaining net increase in expense is primarily due to an
increase in interest rates in the 2005 period over the 2004 period.
Income Taxes
There was a tax provision of $35,000 in the third quarter of 2005
compared to no tax provision in the third quarter of 2004. This provision is
at the Company's Chinese subsidiary, whose tax holiday ended in April, 2005.
The Company has net operating loss carryforwards for federal tax return
reporting purposes totaling $64.1 million at December 31, 2004. The years in
which such net operating losses expire are as follows (000's):
Year ending December 31:
------------------------------
2007 $ 6,067
2008 609
2009 3,235
2010 2,520
After 2010 51,666
[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
September 30, 2005 [and to continue to do so during 2005 until management can
conclude that it is more likely than not that some or all of our loss
carryforwards can be utilized.]
Nine Months Ended September 30, 2005 Compared to
Nine Months Ended September 30, 2004
Net sales, gross margins and EBITDA percentages for the nine months ended
2005 and 2004 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 nine month periods
ended September 30, 2005 and 2004 are 9.5% and 9.8%, respectively ($'s in
000's):
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2005 2004 2005 2004 2005 2004
--------- --------- ------ ------ ------ ------
Pressure vessels $ 17,426 $ 16,149 23.0% 21.8% 17.0% 17.7%
Cylinders 15,763 13,750 17.3% 15.0% 9.1% 3.4%
Grating 5,768 7,092 23.0% 24.2% 11.0% 13.2%
Plastics 15,093 13,468 17.5% 17.6% 12.1% 12.6%
--------- --------- ------ ------ ------ ------
Totals $ 54,050 $ 50,459 19.8% 19.1% 12.7% 11.8%
========= ========= ====== ====== ====== ======
Net sales for the first nine months of 2005 were up $3.6 million, 7.1%,
from the comparable period in 2004. Such increase reflects sales increases at
all of the domestic operations which offset reduced sales of grating at our
Chinese joint venture. The increased domestic sales primarily is the result of
the 54% increase in the domestic backlog going into the 2005 year over the
backlog that existed going into the 2004 year and increased orders in the
first half of 2005 over the first half of 2004. Pressure vessels sales would
have been even higher in the first nine months of 2005 were it not for both a
plant accident in January 2005 that crippled that plant's heat treating
operation, preventing this division from completing and shipping product for a
period in excess of five weeks, which negatively impacted the division's
ability to take on additional new business, as well as a third quarter vendor
- 23 -
delay in the manufacture and delivery of raw material. [The increase in
cylinder sales over the prior year for the fourth quarter of 2005 is not
expected to continue due to a slow down in orders late in the third quarter.
The Company does not believe that this is any indication of a trend in the
business.] The decrease in grating sales reflects the impact of additional
competition from local Chinese businesses, [which situation is expected to
continue throughout the year.]
Gross margin as a percentage of sales in the first nine months of 2005
compared to the first nine months of 2004 increased to 19.8% from 19.1%. This
increase reflects increases in the gross margin percentage in the pressure
vessel and cylinder segments offset, to some extent, by a decrease of 1.2% in
the gross margin percentage in the grating segment and a slight overall
decrease in margin percentage in the plastic segment The increases in the
pressure vessel and cylinder margins as a percentage of sales are primarily
due to the increased sales in those segments over the prior year which
generated improved efficiencies of operation. The pressure vessel margin
increase would have been larger were it not for the unreimbursed costs and
inefficiencies resulting from the plant accident in the first quarter of 2005
as noted above. Although approximately $714,000 has been received from
business interruption insurance, the Company calculates that this amount does
not cover the costs incurred and opportunities lost. The decrease in grating
gross margin percentage is primarily the result of the decrease in sales as
noted above. The decrease in gross margin percentage in the plastics segment
is due primarily to a more favorable product mix in 2004, higher plant
inefficiencies in 2005 related to new molds and higher material costs that
have yet to be passed on to customers.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales was
higher in the first nine months of 2005 compared to 2004 primarily due to the
same factors affecting gross profit margin discussed above. A reconciliation
of EBITDA to operating income for the nine months ended September 30, 2005 and
2004 by segment and corporate and other is as follows (000's)(unaudited):
Operating Deprec-
Profit iation EBITDA
--------- --------- ---------
2005:
-----
Pressure vessels $ 2,568 $ 402 $ 2,970
Cylinders 1,331 108 1,439
Grating 614 23 637
Plastics 1,223 603 1,826
Corporate and other (1,745) 32 (1,713)
-------- -------- --------
Totals 3,991 $ 1,168 $ 5,159
======== ========
Gain on debt extinguishment 3,450
--------
Operating profit $ 7,441
========
- 24 -
2004:
-----
Pressure vessels $ 2,415 $ 441 $ 2,856
Cylinders 319 144 463
Grating 939 - 939
Plastics 1,009 692 1,701
Corporate and other (1,023) 31 (992)
-------- -------- --------
Totals 3,659 $ 1,308 $ 4,967
======== ========
Gain on debt extinguishment 3,540
--------
Operating profit $ 7,199
========
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first nine
months of 2005 were $6.8 million, up $98,000 from the expenses for the first
nine months of 2004. This increase reflects the net of $187,000 in additional
divisional expense offset partially by a reduction of $89,000 in corporate
expense. Of the divisional increase, $234,000 was in the pressure vessel
segment and related primarily to an increase of $153,000 in sales commissions
due to an increase in foreign sales. The decrease in corporate expenses
reflects reductions in both staff and operating expenses. As a percentage of
sales, SGA expenses decreased to 12.5% for the first nine months of 2005
compared to 13.2% for the first nine months of 2004 as, even with higher
sales, and excluding the increase in sales commissions, the Company recorded
lower expenses in 2005 than in 2004. [The Company continues to look for ways
to cut costs in all areas.]
Gain on Debt Extinguishments
There was a $3.4 million gain on extinguishment of debt in the first nine
months of 2005 compared to $3.5 million of gains on extinguishment on debt in
the first nine months of 2004. The gain in 2005 was related to the NapTech
settlement as more fully described in Note 2: Recent Developments. Of the
gains in 2004, $3.3 million was related to the SFSC Settlement and $0.2
million was related to the 13% Senior Note second Consent Solicitation, all as
more fully described in the Company's December 31, 2004 annual filing on Form
10-K.
[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 first nine months of 2005 was $41,000, compared to
other income of $662,000 for the first nine months of 2004. There were no
significant offsetting items of other income and expense in the 2005 period.
Significant items in the 2004 period included other income of $601,000,
relating to an adjustment of the Louisiana environmental reserve, other
expense of $288,000, related to the costs to complete the consolidation of the
cylinder operations into one facility in Libertyville, IL. and other income of
$50,000 relating to the repayment of a previously written off advance. There
were no other significant items in the 2004 period.
- 25 -
Minority Interests
Minority interests for the first nine months of 2005 and 2004 were
$206,000 and $326,000, respectively. These amounts represent the income
during the period 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. From a balance sheet
perspective, minority interest was reduced by the minority ownership of the
2005 declared and paid dividend.
Interest Expense
Interest expense for the first nine months of 2005 was $6.6 million
compared to $5.8 million for the first nine months of 2004. The significant
interest increases were $390,000 for interest accrued on the Senior Note
interest that the Company was not able to make in January, April and July of
2005, as discussed earlier under Note 2: Recent Developments, $278,000 for
interest expensed in connection with the May 2004 supplemental loan to the
Wachovia credit facility (as described in the Company's December 31, 2004
filing on form 10-K) and the July 2005 supplemental loan to the Wachovia
credit facility (as described earlier under Note 2: Recent Developments -
NapTech Settlement) and $300,000 related to a higher level of amortization of
deferred financing costs and estimated warrant value. Offsetting a portion of
these increases was a $120,000 decrease in interest expense as a result of the
NapTech Settlement and a $111,000 decrease in interest expense as a result of
the SFSC Settlement as referred to above in the caption "Gain on Debt
Extinguishments". The remaining net increase in expense is primarily due to an
increase in interest rates in the 2005 period over the 2004 period.
Income Taxes
There was a tax provision of $46,000 in the first nine months of 2005
compared to no tax provision in the first nine months of 2004. This provision
is at the Company's Chinese subsidiary, whose tax holiday ended in April,
2005. The Company has net operating loss carryforwards for federal tax return
reporting purposes totaling $64.1 million at December 31, 2004. The years in
which such net operating losses expire are as follows (000's):
Year ending December 31:
------------------------------
2007 $ 6,067
2008 609
2009 3,235
2010 2,520
After 2010 51,666
[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
September 30, 2005 [and to continue to do so during 2005 until management can
conclude that it is more likely than not that some or all of our loss
carryforwards can be utilized.]
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.
- 26 -
Recent Events
NapTech Settlement
On April 26, 2005 a judgment was entered in Louisiana in favor of Shaw
Naptech, Inc. ("Naptech") against various parties, including the Company. On
July 8, 2005, the Company entered into a Settlement Agreement with Naptech
pursuant to which the Company paid NapTech $1.65 million in settlement of the
Company's indebtedness to NapTech of approximately $5.1 million under a
promissory note and the related judgment. As a result of the NapTech
settlement, Reunion recognized a gain on debt extinguishment of $3.4 million
in the third quarter of 2005.
In connection with the NapTech settlement, Wachovia Bank, National
Association ("Wachovia") made a $3.1 million supplemental loan to Reunion
under its existing $25 million loan facility, thereby increasing the total
amount of the supplemental loan portion of the facility to $6.1 million.
Reunion used $1.65 million of this additional supplemental loan to make the
Reunion Settlement Payment to NapTech and will use the balance of the loan
proceeds for inventory purchases and to support letters of credit that may be
issued for it under the Wachovia facility. Wachovia required, as a condition
to making the additional supplemental loan, that LC Capital Master Fund, Ltd.
("LCC") purchase an additional $3.1 million junior participation interest in
the Wachovia loan facility, and LCC did so, thereby increasing its junior
participation interest in the facility to $6.1 million. LCC in turn
simultaneously sold a 50% interest in its junior participation interest to
WebFinancial Corporation ("Web").
To induce LCC to purchase the additional junior participation interest
in the Wachovia loan facility and to induce Web to purchase a 50% interest in
such junior participation interest, Reunion issued two warrants, one to LCC
and one to Web, to purchase, in each case, 387,500 shares of the Company's
common stock at a price of $0.01 per share. These warrants are exercisable at
anytime until July 12, 2010.
Reunion's indebtedness under the Wachovia loan facility, including the
supplemental loans, is secured by liens on substantially all of Reunion's
assets.
13% Senior Notes
On February 3, 2005, the Company announced that it was unable to make a
$2,928,000 interest payment by February 2, 2005 to the holders of the
Company's 13% Senior Notes. Holders of more than 80% of the principal amount
of such Senior Notes agreed to enter into a Standstill Agreement with the
Company, pursuant to which such holders agreed that they would not exercise
and will cause the Trustee not to exercise any remedies provided for in the
Indenture under which the Senior Notes were issued, or any other agreements
related to such notes, with respect to this payment default or with respect to
a potential event of default if the Company failed to make the next scheduled
interest payment due April 1, 2005 (which the Company did not make). In the
Standstill Agreement, such holders agreed to defer such interest payments to
December 2006.
The Company also failed to make the interest payments on the Senior
Notes that were due on July 1 and October 1, 2005, each in the amount of $0.7
million. As a result, events of default have occurred under the Indenture
("Indenture Default") under which the Senior Notes were issued. With an
Indenture Default, holders of more than 25% of the principal amount of the
Senior Notes may, by written notice to the Company and to the Trustee, declare
the principal of and accrued but unpaid interest on all the Senior Notes to be
immediately due and payable (the "acceleration"). However, under an
Intercreditor and Subordination Agreement entered into in December 2003 among
- 27 -
Wachovia, the holders of the Senior Notes and certain other lenders, the
holders of approximately 95% of the Senior Notes may not commence any action
to enforce their liens on any collateral for a 180 day period beginning after
the date of receipt by Wachovia, the senior secured lender, of a written
notice from the Senior Note holders informing Wachovia of such Indenture
Default and demanding the acceleration. At this date, neither the Company nor
Wachovia has received written notice of any acceleration.
Defaults and Waivers Under the Wachovia Loan Facility and the LCC Debt
On December 3, 2003, the Company entered into a revolving and term loan
credit facility with Wachovia (formerly, Congress Financial Corporation). The
Wachovia 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. In November 2004, Wachovia and the Company entered into an
amendment of the revolving and term loan credit facility wherein Wachovia
eliminated the fixed charge coverage ratio and reduced the monthly minimum
EBITDA covenant going forward. Under the November 2004 amendment, the Company
was required to maintain new minimum monthly amounts of EBITDA of $280,000 in
November 2004, $290,000 in December 2004, $350,000 in January 2005, $280,000
in February 2005 and $300,000 per month thereafter. In January 2005, the
Company failed to meet the minimum monthly amount, when it had an EBITDA loss
for the month of $39,000. Wachovia has waived this EBITDA shortfall.
As described above under "Naptech Settlement", in April 2005, Naptech
secured a judgment against the Company. The judgment obtained by Naptech
constituted a cross default under the Wachovia Loan Agreement. Such default
was waived by Wachovia.
As described above under "13% Senior Notes", the Company is in default
with respect to such notes. This default also constitutes a cross default
under the Company's loan and financing agreements with each of Wachovia and
LCC. Such defaults have not been waived by Wachovia or LCC and the Company is
currently in default under the Wachovia Loan Agreement and under its note
payable to a private capital fund, LCC.
Sale of Assets
The Company's management, having reevaluated the Company's ability to
service its debt and meet future obligations, is investigating the sale of
certain assets in order to generate liquidity. These asset sales may take one
or more forms including, but not limited to, the sale of a division or
piecemeal sales of assets including real estate, buildings, machinery and
equipment and/or intangibles. The Company's management cannot provide any
assurances that any asset sales will occur or, if asset sales do occur, that
such sales will generate sufficient liquidity for the Company.
During the first quarter of 2005, the Company did sell all of the assets
and liabilities of its leaf spring manufacturing segment, located in Miami,
OK, to an unrelated entity for $792,000. Of this amount, $250,000 was used to
pay down the private capital fund note payable secured by the real property,
$41,000 was used to pay down the Wachovia term loan secured by the machinery
and equipment and the remaining amount was used to reduce the borrowings under
the revolving credit facility. The Company recorded a loss of $318,000 on such
sale which was provided for in the Company's 2004 year.
Additionally, during the first quarter of 2005, the Company sold certain
of the receivables, inventory and intangibles of its thermoset plastics
operation ("Rostone") located in Lafayette, IN, along with certain of its
machinery and equipment. The sale of such assets was accomplished in two
separate transactions, with the sale of certain of the Company's compounding
- 28 -
operation assets being sold to one unrelated entity and the sale of certain of
the Company's molding operation assets being made to a different unrelated
entity. At the time of such sale, the Company entered into tolling or
manufacturing agreements with such buyers under which the Company agreed to
operate the compounding and molding operations at its Lafayette, IN facility
for a limited time until the buyers could move such operations to different
geographical locations. The buyers agreed to reimburse the Company for all
expenses in connection with these activities. The sale of the selected assets
noted above was for approximately $2.9 million. Of this amount, $712,000 was
used to pay down the Wachovia term loan secured by the machinery and equipment
and the remaining amount was used to reduce the borrowings under the revolving
credit facility. The Company recorded a gain of approximately $370,000 on
such sales. The Company plans to sell the remaining assets of the Rostone
business during 2005.
SUMMARY OF 2005 ACTIVITIES
Cash and cash equivalents totaled $1.5 million and $1.1 million at
September 30, 2005 and December 31, 2004, respectively. This increase of $0.4
million primarily resulted from the use of $3.1 of cash in financing
activities being more than offset by $3.5 million in cash from investing and
operating activities. Cash and cash equivalents at the end of a period
generally represents lockbox receipts from customers. The domestic portion of
the cash, $0.8 million, will be applied to our Wachovia revolving credit
facility as the funds clear the banking system.
Operating Activities
Operating activities provided $78,000 in cash in the first nine months of
2005 as reductions in receivables and inventories from continuing operations
combined with depreciation and amortization to offset the payment of trade
payables.
Investing Activities
Investing activities generated $3.4 million as the sales of the springs
segment and Rostone, as described above, were offset by capital expenditures
of $0.3 million.
Financing Activities
The Company used $3.1 million in financing activities during the first
nine months of 2005. Payments of debt included $477,000 in scheduled
repayments of the Wachovia term loan, additional repayments of $1.1 million on
existing non-revolving credit debt in connection with the sale of the springs
segment and the Rostone business, as described above, and repayments of $1.7
million in connection with the NapTech settlement as described above in Note 2
to the financial statements. As described in the NapTech settlement, the
Company entered into an additional $3.1 million supplemental loan. In
addition, there were $2.9 million of repayments of the revolving credit
facility borrowings. The Company's China subsidiary paid a dividend in 2005, a
portion of which went to that subsidiary's minority interest owners.
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.
- 29 -
Reunion's bank financing is currently in default
We are currently in default on our senior notes and bank financing, which
has caused cross default provisions in other debt. There are a number of
standstill provisions that exist in a previously executed Intercreditor and
Subordination Agreement that generally prohibit the senior note holders and
other lenders from commencing any action against the Company until a certain
specified time after notification to our senior bank lender, Wachovia. At
this time, no such notification has been received by Wachovia or the Company.
However, any such notification would have adverse consequences on the
liquidity, financial position and operations of the Company. Although the
Company is investigating the possibility of obtaining waivers of these
defaults from its various lenders, no assurances exist that such waivers can
be obtained.
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
Because of losses suffered by the Company over the past several years,
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 decline in sales, our ability to cover costs
would be further reduced, which could negatively impact our financial position
and results of operations.
Reunion is a 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 September 30, 2005, the
Company has a deficiency in working capital of $37.3 million, a loss from
continuing operations before gain on debt extinguishment for the nine months
then ended of $2.8 million and a deficiency in assets of $24.3 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.
We successfully refinanced our bank debt in December 2003 and have
extinguished a significant portion of our obligations under various debt
instruments over the past year. These steps have improved liquidity and
deferred the principal maturities on a significant portion of our debt.
However, as described above in "Recent Events" and in Note 2 of Notes to
Consolidated Financial Statements in Part I of this Report, we are currently
in default under our 13% Senior Notes, our loan agreement with Wachovia Bank
and a note payable to a private fund lender (LCC).
As noted above, the Company is investigating other recapitalization
scenarios and possible asset sales 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.
Failure to accomplish these plans could have an adverse impact on the
Company's liquidity, financial position and future operations.
- 30 -
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,
corrective action has been implemented in the Plastics operations to correct
the weaknesses in plant reporting and supervision responsibilities noted in
the Company's latest annual report filing on Form 10-K. No other
deterioration or changes were noted.
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" in Part I of this Report.
Item 3. Defaults Upon Senior Securities
The Company is in default on its 13% Senior Notes, which has resulted in
cross defaults under its Wachovia loan agreement and a note payable to a
private fund lender (LCC). See "Item 1. Financial Statements, Note 2: Recent
Developments - 13% Senior Notes" In Part I of this Report.
- 31 -
Item 6. Exhibits and Reports on Form 8-K
(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
- 32 -
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: November 11, 2005 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)
- 33 -
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: November 11, 2005
/s/ Charles E. Bradley, Sr.
-------------------------------------
Chief Executive Officer
- 34 -
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: November 11, 2005
/s/ John M. Froehlich
-------------------------------------
Chief Financial Officer
- 35 -
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 September 30, 2005, 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 September 30, 2005 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
September 30, 2005 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: November 11, 2005
/s/ Charles E. Bradley, Sr.
---------------------------
Chief Executive Officer
- 36 -
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 September 30, 2005, 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 September 30, 2005 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
September 30, 2005 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: November 11, 2005
/s/ John M. Froehlich
---------------------------
Chief Financial Officer
- 37 -