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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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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 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 April 30, 2003, 16,278,579 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 31 pages.
Exhibit index is on page 30.
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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
March 31, 2003 (unaudited) and December 31, 2002 4
Condensed Consolidated Statement of Loss and
Comprehensive Loss for the three months ended
March 31, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for
the three months ended March 31, 2003 and 2002 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 3. Defaults Upon Senior Securities 24
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
CERTIFICATIONS 28
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AT MARCH 31, 2003 AND DECEMBER 31, 2002
(in thousands)
At March 31, At December 31,
2003 2002
----------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 790 $ 807
Receivables (net of allowance of
$275 and $300, respectively) 13,422 12,269
Advances to employees 113 113
Inventories, net 9,104 7,895
Other current assets 1,518 1,913
-------- --------
Total current assets 24,947 22,997
Property, plant and equipment, net 16,164 16,716
Due from related parties 1,508 1,496
Goodwill, net 11,007 11,007
Other assets, net 3,152 3,102
-------- --------
Total assets $ 56,778 $ 55,318
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Debt in default $ 40,574 $ 40,049
Current maturities of debt 86 89
Trade payables 12,049 10,961
Accrued interest 7,647 6,748
Due to related parties 2,655 2,422
Other current liabilities 10,083 11,251
Notes payable 4,161 4,661
Notes payable - related parties 5,115 4,615
-------- --------
Total current liabilities 82,370 80,796
Long-term debt 38 61
Other liabilities 5,301 5,301
-------- --------
Total liabilities 87,709 86,158
Commitments and contingent liabilities - -
Stockholders' deficit (30,931) (30,840)
-------- --------
Total liabilities and stockholders' deficit $ 56,778 $ 55,318
======== ========
See accompanying notes to condensed consolidated financial statements.
- 4 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF LOSS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(in thousands, except per share information)(unaudited)
Three Months Ended
March 31, March 31,
2003 2002
-------- --------
Operating revenue:
Sales $ 21,263 $ 14,844
Cost of Sales 17,072 14,142
-------- --------
Gross profit 4,191 702
Selling, general & administrative 2,801 3,669
Other expense (income), net 28 (761)
-------- --------
Operating profit (loss) 1,418 (2,206)
Interest expense, net 1,509 2,078
-------- --------
Loss from continuing operations before
income taxes (91) (4,284)
Provision for income taxes - -
-------- --------
Loss from continuing operations (91) (4,284)
Income (loss) from discontinued operations, net
of income taxes of $-0- - -
-------- --------
Net and comprehensive loss $ (91) $ (4,284)
======== ========
Loss applicable to common stockholders $ (91) $ (4,284)
======== ========
Loss per common share - basic and diluted $ (0.01) $ (0.27)
======== ========
Weighted average shares outstanding - basic 16,279 15,591
======== ========
Weighted average shares outstanding - diluted 16,279 15,591
======== ========
See accompanying notes to condensed consolidated financial statements.
- 5 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(in thousands)
(unaudited)
Three Months Ended
March 31, March 31,
2003 2002
-------- --------
Cash (used in) provided by operating activities $ (384) $ 4,107
-------- --------
Cash flow from investing activities:
Proceeds from sale of property - 375
Capital expenditures (133) (260)
-------- --------
Cash (used in) provided by investing activities (133) 115
-------- --------
Cash flow from financing activities:
Net change in revolving credit facility 1,646 (3,618)
Repayments of debt (1,146) (1,003)
-------- --------
Cash provided by (used in) financing activities 500 (4,621)
-------- --------
Net decrease in cash and cash equivalents (17) (399)
Net change in cash of discontinued operations - 425
Cash and cash equivalents, beginning of year 807 686
-------- --------
Cash and cash equivalents, end of period $ 790 $ 712
======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all normal
recurring adjustments considered necessary for a fair statement of the results
of operations have been included. The results of operations for the three
month period ended March 31, 2003 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, 2002, as amended by Form
10-K/A as filed on April 30, 2003.
Going Concern
These condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The negative
working capital position of $57.4 million at March 31, 2003, the defaults of
the Bank of America (BOA) Financing and Security Agreement and the 13% senior
notes, and the lack of borrowing capacity under its revolving credit facility
indicate that the Company may not be able to continue as a going concern for a
reasonable period of time. These condensed consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement
requires recognition of a liability for any legal obligations associated with
the retirement of a tangible long-lived asset. Any such liability will be
recorded at fair value when incurred and generally results in an increase to
the carrying amount of the related long-lived asset. The Company adopted SFAS
No. 143 in the first quarter of 2003. In doing so, the Company evaluated its
operating leases for property and equipment and environmental review reports
for owned property and concluded that the Company has no legal obligations for
retirement of tangible long-lived assets as of March 31, 2003. Therefore, no
amount has been accrued in the financial statements at and for the period
ended March 31, 2003 related to the adoption of SFAS No. 143.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement eliminates the automatic
classification of gain or loss on extinguishment of debt as an extraordinary
item of income and requires that such gain or loss be evaluated for
extraordinary classification under the criteria of Accounting Principles Board
No. 30 "Reporting Results of Operations." This statement also requires sales-
leaseback accounting for certain lease modifications that have economic
effects that are similar to sales-leaseback transactions, and makes various
other technical corrections to existing pronouncements. This statement will
be effective for us for the year ending December 31, 2003. If we attempted to
and were successful in buying back the senior notes at a discount, the
adoption of this statement could have a material effect on our results of
operations.
- 7 -
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a rollforward of the entity's product warranty
liabilities. Our financing agreements prohibit us from guaranteeing, either
directly or otherwise, the indebtedness of others. We complied with the
warranty rollforward provisions of FIN 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation, Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No.
148 also requires that disclosures of the pro forma effect of using the fair
value method of accounting for stock-based employee compensation be displayed
more prominently and in tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
transition and annual disclosure requirements are effective for our 2003
fiscal year. The interim disclosure requirements are now effective. We do
not expect the adoption of SFAS No. 148 to have an effect on our results of
operations or financial position.
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure, amending FASB Statement No.
123, Accounting for Stock Based Compensation." This statement amends SFAS No.
123 to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-
based employee compensation. It also amends the disclosure provisions of SFAS
No. 123 to require prominent disclosure about the effects on operating results
of an entity's accounting policy decisions with respect to stock-based
employee compensation. SFAS No. 148 also amends APB 28, "Interim Financial
Reporting" to require disclosure about those effects in interim financial
information. We adopted the disclosure provisions for the year ended December
31, 2002. The following table illustrates the effect on results of operations
if the Company had applied the fair value recognition provisions of SFAS No.
123.
Quarter Ended March 31,
2003 2002
-------- --------
Net loss as reported $ (91) $ (4,284)
Deduct: Total stock-based employee compensation
determined under fair value method for
stock options, net of tax - (62)
-------- --------
Pro forma loss applicable to common stockholders $ (91) $ (4,346)
======== ========
Loss earnings per share, as reported $ (0.01) $ (0.27)
======== ========
Basic loss per share, pro forma $ (0.01) $ (0.28)
======== ========
Diluted loss per share, as reported $ (0.01) $ (0.27)
======== ========
Diluted loss per share, pro forma $ (0.01) $ (0.28)
======== ========
- 8 -
NOTE 2: RECENT DEVELOPMENTS
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder was due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001
and 2002 and May 1, 2002 and 2003. We were also unable to make the sinking
fund payments due May 1, 2002 and 2003. This inability to fund our
obligations under the 13% senior notes is due to a lack of liquidity and
availability under our revolving credit facility with BOA.
An event of default as defined in the indenture governing the senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. Although they have not moved to do so, the
senior notes holders have the right to accelerate all amounts outstanding,
including accrued and unpaid interest of $6.6 million, totaling $31.5 million
at March 31, 2003. Interest accrues at approximately $0.3 million per month,
including compounded interest at 13% per annum on the unpaid semi-annual
interest payments.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $15.7 million of senior secured revolving and term
loan credit facilities outstanding at March 31, 2003 with BOA. We have been
in default under these facilities since September 30, 2001 due to our
inability to achieve our financial ratio covenants contained in the financing
and security agreement with BOA. During the third quarter of 2001 we were
also unable to maintain the $1.5 million minimum availability under the
revolving credit facility as required by a December 2000 amendment.
Although Reunion and BOA have executed a forbearance agreement wherein
BOA has agreed to standstill through May 31, 2003 while we attempt to
refinance our BOA facilities with another lender, nothing in the forbearance
agreement waives or otherwise alters BOA's already existing remedies under the
BOA financing and security agreement including acceleration of all amounts
outstanding under the BOA financing and security agreement.
NOTE 3: DEBT IN DEFAULT AND LONG-TERM DEBT
Debt in default consists of the following (in thousands):
At March 31, At December 31,
2003 2002
----------- --------------
(unaudited)
13% senior notes $ 24,855 $ 24,855
BOA revolving credit facility 13,433 11,787
BOA term loan A due March 16, 2007 2,286 3,407
-------- --------
Total debt in default $ 40,574 $ 40,049
======== ========
- 9 -
NOTE 4: INVENTORIES
Inventories are comprised of the following (in thousands):
At March 31, At December 31,
2003 2002
----------- --------------
(unaudited)
Raw material $ 2,598 $ 2,820
Work-in-process 2,477 2,301
Finished goods 4,056 2,801
-------- --------
Gross inventories 9,131 7,922
Less: LIFO reserves (27) (27)
-------- --------
Inventories $ 9,104 $ 7,895
======== ========
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 March 31, 2003 (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, 2003 $163 $25,195 $(54,188) $ (2,010) $(30,840)
Activity (unaudited):
Net loss - - (91) - (91)
---- ------- -------- -------- --------
At March 31, 2003 $163 $25,195 $(54,279) $ (2,010) $(30,931)
==== ======= ======== ======== ========
The computations of basic and diluted loss per common share [LPS] for the
three month periods ended March 31, 2003 and 2002 are as follows (in
thousands, except per share amounts)(unaudited):
Net
Loss Shares LPS
-------- -------- -------
Three months ended March 31, 2003:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic LPS $ (91) 16,279 $ (0.01)
======== ======== =======
Three months ended March 31, 2002:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic and diluted LPS $ (4,284) 15,591 $ (0.27)
======== ======== =======
At March 31, 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 first quarter 2003. At March 31,
2002, the Company's stock options outstanding totaled 1,089,000, none of which
were at exercise prices below the average market price of the underlying
security during the first quarter 2002. Therefore, basic and diluted LPS are
equal in both periods.
- 10 -
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
Legal Proceedings
The Company and its subsidiaries are defendants in a number of lawsuits
and administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. The Company believes that any
material liability which can result from any of such lawsuits or proceedings
has been properly reserved for in the Company's consolidated financial
statements or is covered by indemnification in favor of the Company or its
subsidiaries, and therefore the outcome of these lawsuits or proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended. There is no applicable insurance coverage.
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit remains in the initial stages of discovery. Reunion
intends to vigorously contest the suit.
The Company has been named as a defendant in fifteen consolidated
lawsuits filed in December 2000 or early 2001 in the Superior Court for Los
Angeles County, California, three of which are purported class actions
asserted on behalf of approximately 200 payees. The plaintiffs in these
suits, except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC are related parties.
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Charles E. Bradley, Sr., Chairman of the Board, Chief
Executive Officer and a director of the Company (Mr. Bradley), the sole
shareholder of SFSC's parent, several major financial institutions and certain
others. All of these suits arise out of the inability of SFSC to make
structured settlement payments when due. Pursuant to the court's order,
plaintiffs in the purported class actions and plaintiffs in the individual
cases actions filed a model complaint. Except for the class allegations, the
two model complaints are identical. The plaintiffs seek compensatory and
punitive damages, restoration of certain alleged trust assets, restitution and
attorneys' fees and costs.
The plaintiffs in one of the suits are former owners of a predecessor of
SFSC and current operators of a competing structured settlement business.
These plaintiffs claim that their business and reputations have been damaged
by SFSC's structured settlement defaults, seek damages for unfair competition
and purport to sue on behalf of the payees.
- 11 -
The plaintiffs allege that the Company borrowed funds from SFSC and has
not repaid these loans. The plaintiffs' theories of liability against the
Company are that it is the alter ego of SFSC and Mr. Bradley and that the
Company received fraudulent transfers of SFSC's assets. The plaintiffs also
assert direct claims against the Company for inducing breach of contract and
aiding and abetting an alleged breach of fiduciary duty by SFSC.
On May 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. As a result of this
restraining order of the bankruptcy court, the Company entered a standstill
agreement with the plaintiffs on August 22, 2001. Pursuant to the standstill
agreement, and the stipulation of the parties to the SFSC bankruptcy case, the
plaintiffs agreed to take no further action to prosecute any claim in the
litigation against the Company, Mr. Bradley and others to recover any
structured settlement trust assets or any derivative claims or claims based on
allegations of alter ego, fraudulent transfer or conversion. The plaintiffs
did not agree to waive or release their direct personal claims against the
Company for damages, but the plaintiffs agreed to cease and desist the
prosecution of those claims until no earlier than sixty days following service
of written notice to the Company stating that they have elected to
unilaterally terminate the standstill.
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. The court granted plaintiffs' motion for
class certification on February 13, 2002 and certified a class consisting of
unpaid structured settlement payees. Both model complaints allege causes of
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted cross-
complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
vigorously defend against these actions and cross-actions.
The Company has been named in approximately 500 separate asbestos suits
filed since January 1, 2001 by three plaintiffs' law firms in Wayne County,
Michigan. The claims allege that cranes from the Company's crane
manufacturing location in Alliance, OH were present in various parts of
McLouth and Great Lakes Steel Mills in Wayne County, Michigan and that those
cranes contained asbestos to which plaintiffs were exposed over a 40 year
span. Counsel for the Company has filed an answer to each complaint denying
liability by the Company and asserting all alternative defenses permitted
under the Court's Case Management Order. Counsel for the Company has
negotiated dismissal of 95 cases without any cost to the Company. The Company
denies that it manufactured any products containing asbestos or otherwise knew
or should have known that any component part manufacturers provided products
containing asbestos. The Company intends to vigorously defend against these
lawsuits.
- 12 -
Since July 10, 2001, various legal actions, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon, Washington,
New York and Mississippi, against a large number of defendants, including
Oneida Rostone Corporation (ORC), pre-merger Reunion's Plastics subsidiary and
the Company's Plastics segment. In October 2001, Allen-Bradley Company, a
former owner of the Rostone business of ORC, accepted Reunion Industries'
tender of its defense and indemnification in the first such lawsuit filed
pursuant to a contractual obligation to do so. Subsequent to the acceptance
of the tender of defense and indemnification in the first lawsuit, Allen-
Bradley Company has accepted the Company's tender of defense and
indemnification in a total of 96 separate actions, all of which are being
defended by Allen-Bradley Company.
In the 2002 fourth quarter, in the Court of Common Pleas of Stark County,
Ohio, Putman Properties, Inc. filed a complaint against the Company asserting
breach of an exclusive listing contract in connection with the sale of certain
property ancillary to the divestiture of the Company's Alliance Machine
division in Alliance, Ohio. The plaintiff is a broker who claims entitlement
to a commission in the amount of $155,000. The Company has answered the
complaint, denies any liability and intends to vigorously defend against this
lawsuit. Discovery is ongoing and a mediation is schedule for May 28, 2003
with a trail date of September 22, 2003. No amount has been accrued for this
matter in the Company's financial statements.
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. Pleadings are not yet closed and discovery is just beginning.
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.
In the 2002 fourth quarter, Wheeling-Pittsburgh Steel Corporation
(debtor) filed suit against the Company in U.S. Bankruptcy Court for the
Northern District of Ohio, seeking to compel the return of certain
preferential transfers pursuant to 11 U.S.C 547. The debtor seeks a judgment
in the amount of $2,705,541. The Company filed an answer alleging that such
payments are not avoidable because (a) the transfers were made by the Debtor
in the ordinary course of business and (b) the Company extended new value to
the Debtor after the transfers were made in an amount exceeding the original
payments. A status conference was held before the court on April 21, 2003.
The parties agreed to a 30-day period to settle this suit out of court after
which discovery will continue. No trial dates have been established. The
Company intends to vigorously defend against this lawsuit. No amount has been
accrued for this matter in the Company's financial statements.
In connection with the Chapter 11 bankruptcies of LTV Steel Company, Inc.
(LTV), et al, pending in the United States Bankruptcy Court for the Northern
District of Ohio, Youngstown Division, LTV has filed a complaint for avoidance
and recovery of preferential transfers against Alliance Machine Division, a
former division of the Company. Pursuant to an adversary proceeding filed in
the LTV Case on December 17, 2002, LTV seeks recovery of $385,000 in alleged
preferential transfers, together with costs and attorney's fees. The Company
believes it has adequate defenses and intends to vigorously defend against
this complaint. No amount has been accrued for this matter in the Company's
financial statements.
- 13 -
In the 2002 fourth quarter, Dick Corporation (Dick) filed an action
against the Company in the Court of Common Pleas of Allegheny County, PA.
Dick alleges that the Company breached a contract to supply it with structural
steel for use in a construction project for the PA Department of
Transportation. Dick seeks damages of approximately $351,000, representing
the extra costs allegedly incurred by Dick for Dick to secure structural steel
from another vendor. The Company has filed an answer to Dick's complaint in
which it denies any liability. Pleading are closed and discovery has begun.
The Company believes it has meritorious defenses against Dick's suit and
intends to vigorously defend against it. No amount has been accrued for this
matter in the Company's financial statements.
Environmental Compliance
Various U.S. federal, state and local laws and regulations including,
without limitation, laws and regulations concerning the containment and
disposal of hazardous waste, oil field waste and other waste materials, the
use of storage tanks, the use of insecticides and fungicides and the use of
underground injection wells directly or indirectly affect the Company's
operations. In addition, environmental laws and regulations typically impose
"strict liability" upon the Company for certain environmental damages.
Accordingly, in some situations, the Company could be liable for clean up
costs even if the situation resulted from previous conduct of the Company that
was lawful at the time or from improper conduct of, or conditions caused by,
previous property owners, lessees or other persons not associated with the
Company or events outside the control of the Company. Such clean up costs or
costs associated with changes in environmental laws and regulations could be
substantial and could have a materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Except as described in the following paragraphs, the Company believes it
is currently in material compliance with existing environmental protection
laws and regulations and is not involved in any significant remediation
activities or administrative or judicial proceedings arising under federal,
state or local environmental protection laws and regulations. In addition to
management personnel who are responsible for monitoring environmental
compliance and arranging for remedial actions that may be required, the
Company has also employed outside consultants from time to time to advise and
assist the Company's environmental compliance efforts. Except as described in
the following paragraphs, the Company has not recorded any accruals for
environmental costs.
In February 1996, Reunion was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. Since then, the Company has expended $419,275 of
remediation costs. The Company estimates completion of this remediation
effort to be $15,000.
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
- 14 -
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. No remediation was
performed in 2000, 2001 or 2002 pending the decision. However, the Company
has paid $304,000 for its share of consulting services in connection with the
hearings. Most recently, the Company's environmental consultants filed with
the LDNROC updated amendments to the prior approved plan for sampling and
remediation. If approved, the plan will be implemented. At March 31, 2003,
after accruing an additional $40,000 in December 2002, the balance accrued for
these remediation costs is approximately $1,042,000. The Company believes
that future remediation costs will not exceed the amount accrued.
Litigation on this matter had been stayed pending the determination by
the LDNROC as to the extent of remediation that would be required. Most
recently, such stay was lifted and the District Court has established a jury
trial for September 22, 2003 to determine the necessity for any further
remediation and the extent of damages, if any, suffered by the plaintiff
owners of the property. The Company is contesting this litigation and
believes its proposed methodology is well within accepted industry practice
for remediation efforts of a similar nature. No accrual has been made for
costs of any potential alternative clean-up methodology that might be imposed
as a result of the outcome of the litigation.
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site outside Petaluma, Marin County, California. The Company
gathered and forwarded to the USEPA the information it requested. On May 16,
2002, the Company, as the successor to Buttes Gas & Oil Company (BGO),
received from the USEPA a notice of potential liability and demand for payment
of $3,909,614.37 for reimbursement of costs related to its removal and
disposal efforts initiated in 1998 pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA).
BGO, predecessor by merger to the Company, leased the site for mining
purposes and operated a mercury mine on this site from 1965 to 1970. BGO's
mining operations were terminated in 1970. Subsequently, under the
supervision of the environmental and planning representatives of Marin County,
BGO completed closure and environmental restoration activities at the site,
including stabilization and re-vegetation of the site. BGO then quitclaimed
the mining lease back to the Gambonini's in 1973. Because of apparent
overgrazing at the site subsequent to BGO's restoration efforts, a storm in
1982 caused severe flooding resulting in the failure of the dam built to
retain mining materials. Runoff from the flood released mining materials into
the creek below and, ultimately, into the Tomales Bay, a local recreation and
fishing area.
In 1985, BGO, headquartered in Houston, Texas, filed Chapter 11
proceedings in bankruptcy court in the Southern District of Texas in Houston.
In December 1988, BGO confirmed its plan of reorganization which provided for,
among other things, a discharge of all claims that arose prior to the date of
confirmation of the plan. The reorganization plan became effective in
February 1989.
In response to the USEPA's demand, the Company filed an adversary
proceeding in bankruptcy court in the Southern District of Texas in Houston
seeking an order to enjoin the efforts of the USEPA to pursue collection of
any claims related to the site. The USEPA responded by filing a motion to
dismiss based on several jurisdictional and substantive grounds. A status
- 15 -
conference was held on August 27, 2002, at which time the judge for the
bankruptcy court in the Southern District of Texas in Houston ruled that the
court did not have jurisdiction and, at that time, the Company and the USEPA
entered into a standstill agreement through December 31, 2002 which has been
extended through May 31, 2003.
In March 2003, the Company and the USEPA reached an agreement in
principle to settle the USEPA's demand for payment for $100,000, payable in
three installments over a two-year period. This amount has been accrued as of
December 31, 2002. This settlement agreement will resolve the USEPA's claims
for reimbursement of environmental response costs, 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 natural resource
damage. The United States has given no indication as to whether or not it
will pursue such claims. However, the Company has agreed in principle to
extend the statute of limitations with respect to any such claims for a period
of five years from the date of the execution of the above discussed settlement
agreement.
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 follows (in 000's):
General
Product Specific
Description Reserve Accrual Total
- --------------------------------------------- -------- -------- --------
Balance at December 31, 2002 $ 175 $ 204 $ 379
Add: Provision for estimated future claims 45 - 45
Deduct: Changes related to rework or
replacement of cylinders (40) (45) (85)
-------- -------- --------
Balance at March 31, 2003 $ 180 $ 159 $ 339
======== ======== ========
- 16 -
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 March 31, 2003:
- ----------------------
Metals:
Pressure vessels and springs $ 7,530 $ 1,763 $ - $ 15,517
Cylinders 5,590 529 57 10,315
-------- -------- -------- --------
Subtotal Metals 13,120 2,292 57 25,832
Plastics 8,143 651 75 16,174
Corporate and other - (840) - 14,772
-------- -------- -------- --------
Totals $ 21,263 2,103 $ 133 $ 56,778
======== ======== ========
Depreciation and amortization(3) (685)
Interest expense (1,509)
--------
Loss from continuing operations
before income taxes $ (91)
========
Three months ended March 31, 2002
and at December 31, 2002:
- ---------------------------------
Metals:
Pressure vessels and springs $ 2,481 $ (871) $ 41 $ 13,725
Cylinders 4,441 (87) 25 9,700
-------- -------- -------- --------
Subtotal Metals 6,922 (958) 66 23,425
Plastics 7,922 172 113 16,536
Corporate and other(4) - (710) - 15,357
Discontinued operations - - 81 -
-------- -------- -------- --------
Totals $ 14,844 (1,492) $ 260 $ 55,318
======== ======== ========
Depreciation and amortization(3) (710)
Interest expense (2,078)
--------
Loss from continuing operations
before income taxes $ (4,284)
========
(1) EBITDA is presented as it is the primary measurement used by management
in assessing segment performance and not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a
widely accepted financial indicator of a company's ability to incur and
service debt.
(2) Headquarters total assets at March 31, 2003 and December 31, 2002 includes
$8.0 million of goodwill. This goodwill 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.
- 17 -
(3) Excludes amortization of debt issuance expenses and fees of $60,000
and $132,000 for the three month periods ended March 31, 2003 and 2002,
respectively, which is included in interest expense.
(4) Includes a $375,000 gain on sale of property in January 2002.
NOTE 8: DISCONTINUED OPERATIONS
Discontinued operations includes the discontinued bridges and cranes and
material handling systems businesses. Summarized results of discontinued
operations for the three month period ended March 31, 2002 follows (in
thousands):
2002
--------
Net sales $ 13,248
Income before taxes -
The above results of discontinued operations includes actual and
allocated interest expense for the three month period ended March 31, 2002
totaling $627,000.
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, 2002, as amended by Form 10-K/A
as filed on April 30, 2003.
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, leaf springs and precision plastic components.
- 18 -
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 Compared to
Three Months Ended March 31, 2002
Continuing Operations
Sales, gross margins and EBITDA percentages for the three months ended
March 31, 2003 and 2002 are as follows:
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2003 2002 2003 2002 2003 2002
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 7,530 $ 2,481 28.3% (16.6%) 23.4% (35.1%)
Cylinders 5,590 4,441 18.7% 8.2% 9.5% (2.0%)
Plastics 8,143 7,972 12.4% 9.5% 8.0% 2.2%
--------- --------- ------ ------ ------ ------
Totals $ 21,263 $ 14,844 19.7% 4.7% 13.8% (5.3%)
========= ========= ====== ====== ====== ======
Pressure vessels and springs sales were up significantly in the first
quarter of 2003 compared to the same period in 2002. This increase is due to
this segment's return to normal production and shipment levels compared to
management's decision to shut-down our pressure vessels facility for the first
two months of 2002 with a limited production schedule. We made this decision
in 2002 to reduce spending due to our liquidity problems and to lessen the
strain on this segment's raw material vendors. Those vendor-related issues
having been corrected, [this segment can more readily obtain raw materials for
production].
Sales of cylinders was up for the first quarter of 2003 compared to 2002
due to an improvement in order levels during the 2003 first quarter. However,
this segment continues to be affected by a softness in its markets, [a trend
which the Company believes will lessen during 2003.]
The increase in Plastics revenues is the result of higher orders levels
and the start of new customer programs. [Management continues to seek to
expand Plastics' product offerings in the business machines, consumer products
and medical products industries.]
The increases in gross margins across all segments is related to volume
improvements resulting in an increase in production activity and our ability
to absorb costs.
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
increased significantly during the first quarter of 2003 compared to the 2002
first quarter primarily due to the same factors affecting gross profit margin
discussed above. A reconciliation of EBITDA to operating income (loss) in the
first quarters of 2003 and 2002 by segment and corporate and other is as
follows (000's):
- 19 -
Operating
Income Deprec- Amortiz-
(Loss) iation ation EBITDA
--------- --------- --------- ---------
2003:
- -----
Pressure vessels and springs $ 1,584 $ 179 $ - $ 1,763
Cylinders 458 71 - 529
Plastics 234 417 - 651
Corporate and other (858) 18 - (840)
-------- -------- -------- --------
Totals $ 1,418 $ 685 $ - $ 2,103
======== ======== ======== ========
2002:
- -----
Pressure vessels and springs $ (1,063) $ 189 $ 3 $ (871)
Cylinders (190) 103 - (87)
Plastics (225) 397 - 172
Corporate and other(1) (728) 18 - (710)
-------- -------- -------- --------
Totals $ (2,206) $ 707 $ 3 $ (1,496)
======== ======== ======== ========
(1) - Operating results for corporate and other for the quarter ended March
31, 2002 includes a $375,000 gain on sale of property.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first quarter
of 2003 were $2.8 million, compared to $3.7 million for the first quarter of
2002. This decrease in SGA is due to the 2002 first quarter including
approximately $400,000 of incremental legal, audit and consultant costs our
current bank lender caused us to incur related to our bank financing that did
not recur in the first quarter of 2003. The remaining decrease is related to
cost cutting measures taken during 2002, including trimming the executive
payroll and reductions in administrative positions, the benefits of which are
beginning to materialize. SGA as a percentage of sales decreased to 13.2% for
the 2003 first quarter compared to 24.7% in the 2002 first quarter. SGA as a
percentage of sales was much lower in 2003 first quarter compared to the first
quarter of 2002 due to increased sales volumes, lower incremental bank-induced
costs and previously described cost-cutting measures.
Other (Income) Expense
Other income for the first quarter of 2003 was $28,000, compared to other
income of $0.8 million for the first quarter of 2002. The components are as
follows:
2003 2002 Change
-------- -------- --------
Gain on sale of equipment with zero book value $ - $ (375) $ 375
Other (income) expense, net (28) (386) 358
-------- -------- --------
Total other (income) expense, net $ (28) $ (761) $ 733
======== ======== ========
In January 2002, we sold equipment that had no book value. The decrease
in the remaining other income is primarily due to higher levels of sales of
scrap and miscellaneous parts in 2002 due to cleaning out idled facilities.
- 20 -
Interest Expense
Interest expense, net, for the first quarter of 2003 was $1.5 million
compared to $2.1 million for the first quarter of 2002. For the first quarter
of 2002, a total of $0.6 million of interest expense has been allocated to or
actually incurred in discontinued operations. On a combined basis interest
expense was $2.7 million in the first quarter of 2002. Debt has decreased
significantly from first quarter 2002 levels due to pay-downs with proceeds
from asset sales in June 2002 and September 2002. Also, in the first quarter
of 2002, the Company was paying an increased default rate on the BOA revolving
credit and term loan facilities and we paid $625,000 in amendment and
overadvance fees to BOA in the first quarter of 2002 compared to no such fees
in the first quarter of 2003.
Income Taxes
There was no tax provision from continuing operations in the first
quarters of 2003 or 2002. The Company has net operating loss carryforwards
for Federal tax return reporting purposes totaling $119.9 million at December
31, 2002, $57.2 million of which expire by the end of 2004. [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, 2002 [and to
continue to do so during 2003 until management can conclude that it is more
likely than not that some or all of our loss carryforwards can be utilized.]
Discontinued Operations
There was no income or loss from discontinued operations for the first
quarter of 2002. For the first quarter of 2002, discontinued operations
includes a total of $0.6 million of interest expense.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company manages its liquidity as a consolidated enterprise. The
operating groups of the Company carry minimal cash balances. Cash generated
from group operating activities generally is used to repay borrowings under
revolving credit arrangements, as well as other uses (e.g. corporate
headquarters expenses, debt service, capital expenditures, etc.). Conversely,
cash required for group operating activities generally is provided from funds
available under the same revolving credit arrangements.
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder was due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001
and 2002 and May 1, 2002 and 2003. We were also unable to make the sinking
fund payments due May 1, 2002 and 2003. This inability to fund our
obligations under the 13% senior notes is due to a lack of liquidity and
availability under our revolving credit facility with BOA.
An event of default as defined in the indenture governing the 13% senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
- 21 -
provided for in the indenture. Although they have not moved to do so, the
senior notes holders have the right to accelerate all amounts outstanding,
including accrued and unpaid interest of $6.6 million, totaling $31.5 million
at March 31, 2003. We are currently discussing with holders of a majority of
principal amount of senior notes scenarios that would involve suspending their
currently existing right to accelerate for some period of time. [Although
possible, no assurances exist that we will be successful in this pursuit.]
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $15.7 million of senior secured revolving and term
loan credit facilities outstanding at March 31, 2003 with BOA. We have been
in default under these facilities since September 30, 2001 due to our
inability to achieve our financial ratio covenants contained in the financing
and security agreement with BOA. During the third quarter of 2001 we were
also unable to maintain the $1.5 million minimum availability under the
revolving credit facility as required by a December 2000 amendment.
Although Reunion and BOA have executed a forbearance agreement wherein
BOA has agreed to standstill through May 31, 2003 while we attempt to
refinance our BOA facilities with another lender, nothing in the forbearance
agreement waives or otherwise alters BOA's already existing remedies under the
BOA financing and security agreement including acceleration of all amounts
outstanding under the BOA financing and security agreement. We are currently
negotiating with a nationally recognized lender the refinancing of our BOA
revolving and term loan facilities. [Although possible, no assurances exist
that we will be successful in this pursuit.]
[Since we could not repay our senior noteholders or bank lenders if
either or both of them exercised their existing rights to accelerate what we
owe them, they could pursue all remedies available to creditors in the normal
course of business, including filing of involuntary bankruptcy petitions.]
SUMMARY OF 2003 ACTIVITIES
Cash and cash equivalents totaled $0.8 million at both March 31, 2003 and
December 31, 2002. This resulted from $0.4 million of cash used in operations
and $0.1 million of cash used in investing activities being offset by $0.5
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 BOA revolving credit facility the following business day.
Operating Activities
Cash used in operating activities of $0.4 million in the first quarter of
2003 was the result of an increase in net working capital as higher volume
levels led to an increase in receivables and inventories, partially funded by
increased trade payables and revolver borrowings.
Investing Activities
Capital expenditures were $0.1 million.
Financing Activities
The Company made scheduled repayments of term loan A totaling $0.9
million and paid an additional $200,000 on term loan A in connection with a
forbearance agreement from BOA for the month of February 2003. Revolving
credit facility borrowings increased $1.6 million during the first quarter of
2003. Other debt repayments totaling $25,000 represent payments on capital
lease obligations and other debt.
- 22 -
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 2003 cash activity of the remaining lease termination
reserves (in thousands):
At 2003 At
Description 12/31/02 Activity 03/31/03
- --------------------------------------------- -------- -------- --------
Lease termination costs $ 861 $ (73) $ 788
======== ======== ========
Of the remaining lease termination costs, $719 relates to idle
manufacturing facilities in Milwaukee, Wisconsin and Clearfield, Utah. The
remainder relates to lease commitments under idle machinery in the Plastics
Group.
FACTORS THAT COULD AFFECT FUTURE RESULTS
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. The negative working capital
position of $57,423,000, the defaults of the BOA Financing and Security
Agreement and the 13% senior notes, and the lack of borrowing capacity under
its revolving credit facility indicate that [the Company may not be able to
continue as a going concern for a reasonable period of time.] The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
Reunion's vendors may restrict credit terms
We have corrected many vendor-related problems with liquidity generated
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 may not be able to consummate a planned refinancing
We have made significant progress recently on a planned refinancing of
our BOA term and revolving credit obligations. However, it is not a certainty
that this planned refinancing will happen. If we are unable to refinance our
BOA credit facilities, they may move to take advantage of all remedies
available to them including, but not limited to, acceleration of all amounts
currently due and a liquidation of their collateral.
- 23 -
Reunion's senior noteholders may accelerate
Although our senior note obligations are in default, the senior
noteholders have stood still as we continue to work through the refinancing of
our BOA credit facilities. However, it is not a certainty that they will
continue to stand still and they may move to take advantage of all remedies
available to them including, but not limited to, acceleration of all amount
currently due.
Reunion's current bank lender may require us to pay exorbitant fees and cause
us to incur significant incremental costs again
Since entering into the BOA facilities, we have incurred significant
incremental costs related to our bank financing. These costs total $4.3
million, including $2.6 million paid to BOA relating to amendment and
overadvance fees and approximately $0.6 million in default interest. The
additional incremental costs included legal fees, audit and consultant fees
and reappraisal costs. These costs have negatively affected our liquidity.
If we do not refinance our BOA credit facilities, they could continue to
strain our liquidity with incremental fees and costs.
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 of March 31, 2003, an evaluation was performed under the supervision
of and with the participation of the Company's management, including the
Company's principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the Company's principal executive officer and principal financial officer,
concluded that Reunion's disclosure controls and procedures were effective as
of March 31, 2003. There were no significant changes in Reunion's internal
controls or in other factors that could significantly affect these controls
subsequent to March 31, 2003.
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."
Item 3. Defaults Upon Senior Securities
Debt in default consists of the following (in thousands):
At March 31, At December 31,
2003 2002
----------- --------------
(unaudited)
13% senior notes $ 24,855 $ 24,855
BOA revolving credit facility 13,433 11,787
BOA term loan A due March 16, 2007 2,286 3,407
-------- --------
Total debt in default $ 40,574 $ 40,049
======== ========
- 24 -
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder was due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001
and 2002 and May 1, 2002 and 2003. We were also unable to make the sinking
fund payments due May 1, 2002 and 2003. This inability to fund our
obligations under the 13% senior notes is due to a lack of liquidity and
availability under our revolving credit facility with BOA.
An event of default as defined in the indenture governing the senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. Although they have not moved to do so, the
senior notes holders have the right to accelerate all amounts outstanding,
including accrued and unpaid interest of $6.6 million, totaling $31.5 million
at March 31, 2003. Interest accrues at approximately $0.3 million per month,
including compounded interest at 13% per annum on the unpaid semi-annual
interest payments.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $15.7 million of senior secured revolving and term
loan credit facilities outstanding at March 31, 2003 with BOA. We have been
in default under these facilities since September 30, 2001 due to our
inability to achieve our financial ratio covenants contained in the financing
and security agreement with BOA. During the third quarter of 2001 we were
also unable to maintain the $1.5 million minimum availability under the
revolving credit facility as required by a December 2000 amendment.
Although Reunion and BOA have executed a forbearance agreement wherein
BOA has agreed to standstill through May 31, 2003 while we attempt to
refinance our BOA facilities with another lender, nothing in the forbearance
agreement waives or otherwise alters BOA's already existing remedies under the
BOA financing and security agreement including acceleration of all amounts
outstanding under the BOA financing and security agreement.
13% Senior Notes and Semi-Annual Interest Payments
- 25 -
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
March 31, 2003 on April 2, 2003 to set the record date of
those shareholders entitled to vote at and to announce the
time and place of the Company's 2003 annual meeting of the
Company's stockholders.
The Company filed a Current Report on Form 8-K/A dated
March 31, 2003 on May 5, 2003 to change the record date of
those shareholders entitled to vote at the Company's 2003
annual meeting of the Company's stockholders.
(c) Exhibits
--------
Exhibit No. Exhibit Description
----------- -------------------
99.1 Certification of Chief Executive Officer
and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- 26 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Date: May 15, 2003 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)
- 27 -
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 quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 By /s/ Charles E. Bradley, Sr.
------------ ------------------------------
Charles E. Bradley, Sr.
Chief Executive Officer
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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 quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 By /s/ John M. Freohlich
------------ ------------------------------
John M. Froehlich
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
----------- ------------------- --------
99.1 Certifications of Chief Executive 31
Officer and Chief Financial
Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
- 30 -
EXHIBIT 99.1
CERTIFICATION
In connection with the Quarterly Report of Reunion Industries, Inc. on Form
10-Q for the period ending March 31, 2003 (the Report), as filed with the
Securities and Exchange Commission on the date hereof, the undersigned certify
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report 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 the Report fairly presents, in all
material respects, the financial condition and results of operations
of Reunion Industries, Inc.
Date: May 15, 2003 By /s/ Charles E. Bradley, Sr.
------------ ------------------------------
Charles E. Bradley, Sr.
Chairman and Chief Executive
Officer (principal executive officer)
Date: May 15, 2003 By /s/ John M. Froehlich
------------ ------------------------------
John M. Froehlich
Chief Financial Officer
(principal financial officer)
- 31 -