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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, 2002
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 33-64325
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REUNION INDUSTRIES, INC.
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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, 2002, 15,590,619 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 30 pages.
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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act which are intended to be covered by the safe harbors created thereby. The
forward-looking statements contained in this report are enclosed in brackets
[] for ease of identification. All forward-looking statements involve risks
and uncertainties which could cause the future results and shareholder values
to differ materially from those expressed in the forward-looking statements.
Although the Company believes that the assumptions underlying the
forward-looking statements contained in this report are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurances
that the forward-looking statements included or incorporated by reference in
this report will prove to be accurate. Factors that could cause actual
results to differ materially from those described in the forward-looking
statements include, without limitation, the strengths/weaknesses of the
Company's primary markets, the Company's ability to complete the sale of
certain assets on acceptable terms, the Company's ability to realize the
benefits of its restructuring plan, the Company's ability to negotiate trade
terms with its vendors, the continued forbearance of the Company's creditors
with respect to indebtedness in default and the Company's ability to
restructure and renegotiate the terms of the Company's indebtedness. In light
of the significant uncertainties inherent in the forward-looking statements
included or incorporated by reference herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the Company's objectives and plans will be achieved. In
addition, the Company does not intend to, and is not obligated to, update
these forward-looking statements after filing and distribution of this report,
even if new information, future events or other circumstances have made them
incorrect or misleading as of any future date.
- 2 -
REUNION INDUSTRIES, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at
March 31, 2002 (unaudited) and December 31, 2001 4
Condensed Consolidated Statement of Income (Loss) and
Comprehensive Income (Loss) for the three months ended
March 31, 2002 and 2001 (unaudited) 5
Condensed Consolidated Statement of Cash Flows for
the three months ended March 31, 2002 and 2001 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 3. Defaults Upon Senior Securities 29
SIGNATURES 30
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AT MARCH 31, 2002 AND DECEMBER 31, 2001
(in thousands)
At March 31, At December 31,
2002 2001
----------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 712 $ 686
Receivables, net 9,819 12,347
Advances to employees 213 213
Inventories, net 10,708 10,814
Other current assets 1,121 1,219
Net assets of discontinued operations 4,259 5,162
-------- --------
Total current assets 26,832 30,441
Property, plant and equipment, net 18,595 19,134
Due from related parties 1,499 1,488
Goodwill, net 11,443 11,443
Net assets of discontinued operations 18,493 18,641
Other assets, net 3,196 3,269
-------- --------
Total assets $ 80,058 $ 84,416
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Debt in default $ 59,791 $ 64,389
Current maturities of debt 87 87
Trade payables 13,218 11,212
Due to related parties 1,565 1,107
Other current liabilities 15,777 13,825
-------- --------
Total current liabilities 90,438 90,620
Long-term debt 4,789 4,810
Long-term debt - related party 4,615 4,615
Other liabilities 1,745 1,616
-------- --------
Total liabilities 101,587 101,661
Commitments and contingent liabilities - -
Stockholders' deficit (21,529) (17,245)
-------- --------
Total liabilities and stockholders' deficit $ 80,058 $ 84,416
======== ========
See accompanying notes to condensed consolidated financial statements.
- 4 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(in thousands, except per share information)(unaudited)
Three Months Ended
March 31, March 31,
2002 2001
-------- --------
Operating revenue:
Sales $ 14,844 $ 32,472
Cost of Sales 14,142 25,072
-------- --------
Gross profit 702 7,400
Selling, general & administrative 3,669 4,427
Other expense (income), net (761) 469
-------- --------
Operating profit (loss) (2,206) 2,504
Interest expense, net 2,078 1,601
-------- --------
Income (loss) from continuing operations
before income taxes (4,284) 903
Provision for income taxes - 392
-------- --------
Income (loss) from continuing operations (4,284) 511
Income (loss) from discontinued operations,
net of tax of $-0- - 250
-------- --------
Net and comprehensive income (loss) $ (4,284) $ 761
======== ========
Income (loss) applicable to common stockholders $ (4,284) $ 761
======== ========
Earnings (loss) per common share - basic and diluted:
From continuing operations $ (0.27) $ 0.03
From discontinued operations - 0.02
-------- --------
Earnings (loss) per common share - basic and diluted $ (0.27) $ 0.05
======== ========
Weighted average shares outstanding - basic 15,591 15,236
======== ========
Weighted average shares outstanding - diluted 15,591 15,340
======== ========
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, 2002 AND 2001
(in thousands)
(unaudited)
Three Months Ended
March 31, March 31,
2002 2001
-------- --------
Cash provided by (used in) operating activities $ 4,107 $ (4,507)
-------- --------
Cash flow from investing activities:
Proceeds from sale of property 375 -
Capital expenditures (260) (799)
Acquisition of NPSAC common stock - (10)
-------- --------
Cash provided by (used in) investing activities 115 (809)
-------- --------
Cash flow from financing activities:
Net change in revolving credit facility (3,618) 5,396
Repayments of debt (1,003) (1,632)
-------- --------
Cash provided by (used in) financing activities (4,621) 3,764
-------- --------
Net decrease in cash and cash equivalents (399) (1,552)
Net change in cash of discontinued operations 425 612
Cash and cash equivalents, beginning of year 686 1,814
-------- --------
Cash and cash equivalents, end of period $ 712 $ 874
======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
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, 2002 are not necessarily indicative of the
results of operations for the full year. When reading the financial
information contained in this Quarterly Report, reference should be made to
the financial statements, schedule and notes contained in Reunion's Annual
Report on Form 10-K for the year ended December 31, 2001.
Going Concern
These condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The negative
working capital position of $63.6 million at March 31, 2002, 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
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations." This statement
eliminates the pooling-of-interest method for business combinations and
changes the criteria for recognizing intangible assets apart from goodwill.
This statement is effective for purchases completed after June 30, 2001. The
Company has not engaged in any acquisitions since June 30, 2001. Acquisitions
prior to June 30, 2001 were recorded as purchases in accordance with
Accounting Principles Board Opinion No. 16.
The Financial Accounting Standards Board issued SFAS No. 142, "Goodwill
and Other Intangible Assets." This statement eliminates the amortization of
goodwill and indefinite lived intangible assets and requires such assets be
reviewed for impairment at least annually. This statement is effective for
goodwill and intangible assets acquired prior to July 1, 2001 upon adoption,
which is required for fiscal years beginning after December 15, 2001.
The Company has recorded goodwill totaling $11.4 million at both March
31, 2002 and December 31, 2001. Effective January 1, 2002, we ceased
amortizing goodwill and we will review goodwill for impairment prior to the
issuance of our second quarter 2002 interim financial statements. Had we
stopped amortizing goodwill at the beginning of 2001, the effect on net income
(loss) and diluted earnings (loss) per share for the three-month period ended
March 31, 2001 and the year ended December 31, 2001 are as follows (in
thousands, except per share information):
- 7 -
Three Months Ended Year Ended
March 31, 2001 December 31, 2001
--------------------- ---------------------
Net Income EPS Net Loss LPS
---------- --------- ---------- ---------
As reported $ 761 $ 0.05 $ (38,128) $ (2.45)
Add back goodwill amortization 468 0.03 1,903 0.13
---------- --------- ---------- ---------
Without goodwill amortization $ 1,229 $ 0.08 $ (36,225) $ (2.32)
========== ========= ========== =========
The Financial Accounting Standards Board issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" but retains many of its fundamental
provisions. SFAS 144 also supersedes certain provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" but retains its provision to separately report
discontinued operations and extends that reporting to a component of an
entity, as defined therein, that either has been disposed of or is classified
as held for sale, thus broadening the presentation of discontinued operations
to include more disposal transactions. Effective January 1, 2002, the Company
adopted this statement with no effect on financial position or results of
operations.
NOTE 2: RECENT DEVELOPMENTS
Restructuring and Other Actions
In the fourth quarter of 2001, we developed and adopted a plan to
restructure our continuing operations. During 2002, the Company has made
significant progress towards implementation of this plan.
On April 30, 2002, we entered into a non-binding letter of intent (LOI)
for the sale of substantially all of the assets and business of Kingway, our
discontinued materials handling systems operations, for a total of $34.0
million in cash ($29.0 million), subordinated notes ($3.0 million) and
subordinated contingent notes ($2.0 million). The due diligence process by
the buyer is in its early stages. The closing date set in the LOI is June 30,
2002.
On April 2, 2002, we entered into a non-binding letter of intent for the
sale of substantially all of the assets of Alliance, our discontinued bridges
and cranes operations, for $3.3 million in cash plus the assumption by the
buyer of certain liabilities. The due diligence process by the buyer is
proceeding and a definitive asset purchase agreement has been drafted. The
closing date set in the LOI and definitive asset purchase agreement is May 31,
2002.
The closings of each of these transactions are subject to certain
conditions, including the executions of definitive asset purchase agreements.
There are no assurances that both or either of these transactions will close
on the terms set forth in each LOI or definitive asset purchase agreement or
at all.
- 8 -
During the first quarter of 2002, NPSAC, the Company's former pressure
vessel operations in Clearfield, Utah, was relocated to and combined with the
pressure vessel operations in McKeesport, PA. The cylinder operations in
Milwaukee, WI have been relocated to our leased facility in Libertyville, IL.
The land and building in Milwaukee, WI is being prepared for sale. We are
preparing to move the cylinder operations in Chicago, IL to the Libertyville
facility during the third quarter of 2002. We closed the Plastics' corporate
headquarters in Charlotte, NC and all administrative and managerial positions
were eliminated. Plastics' corporate responsibilities have been returned to
our manufacturing and administrative operations in Oneida, NY.
We reevaluated the shut-down of our Plastics operation in Siler City, NC
and have determined to maintain our presence in the southern U.S. and service
the customers of the Siler City, NC location, [possibly by relocating the
operations to a smaller leased facility in the area]. This reevaluation does
not change our intent to dispose of the land, building and a large portion of
the existing machinery and equipment or the fourth quarter restructuring
charge related thereto.
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder is due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001
and May 1, 2002. We were also unable to make the $12.5 million sinking fund
payment due May 1, 2002. This inability to fund our obligations under the 13%
senior notes is due to a lack of liquidity and availability under our
revolving credit facility with BOA.
An event of default as defined in the indenture governing the senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. Although they have not moved to do so while we
execute our plan to restructure and generate liquidity through asset sales,
the senior notes holders have the right to accelerate all amounts outstanding,
including accrued and unpaid interest of $3.35 million, totaling $27.9 million
at March 31, 2002. Interest accrues at approximately $0.3 million per month,
including compounded interest at 13% per annum on the unpaid semi-annual
interest payments.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $34.9 million of senior secured revolving and term
loan credit facilities outstanding at March 31, 2002 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.
In November 2001, BOA informed us that a borrowing base deficiency
existed. Since that time, the Company and BOA have entered into six side
letter agreements wherein BOA and the other lenders that participated in the
BOA refinancing of the Company in March 2000 agreed to provide monthly
advances in excess of our calculated borrowing base for working capital needs
while we execute our plan to restructure and generate liquidity by selling
assets. The sixth side letter agreement, dated April 1, 2002, provides
overadvance approval on a day-to-day basis whereby the overadvance may not
- 9 -
exceed $3.5 million. As of May 15, 2002, we have not exceeded the $3.5
million overadvance availability. However, nothing in these six side letter
agreements waives or otherwise alters BOA's already existing remedies under
the BOA financing and security agreement including acceleration of all amounts
outstanding under the BOA financing and security agreement.
In consideration of providing its approval of overadvance availability,
we have been paying a weekly fee of $25,000 or $50,000, depending on the
amount of the overadvance. Since entering into the side letter agreements
beginning in November 2001, the Company has paid BOA a total of $800,000 in
such fees.
NOTE 3: DEBT IN DEFAULT AND LONG-TERM DEBT
Debt in default consists of the following (in thousands):
At March 31, At December 31,
2002 2001
----------- --------------
(unaudited)
13% senior notes (net of unamortized
discount of $0 and $2) $ 24,855 $ 24,853
BOA revolving credit facility 18,857 22,475
BOA term loan A due March 16, 2007 15,149 16,071
BOA capital expenditure facility 930 990
-------- --------
Total debt in default $ 59,791 $ 64,389
======== ========
Long-term debt consists of the following (in thousands):
At March 31, At December 31,
2002 2001
----------- --------------
(unaudited)
Note payable due February 28, 2003 $ 3,644 $ 3,644
Other 1,232 1,253
Other - related parties 4,615 4,615
-------- --------
Total long-term debt 9,491 9,512
Current maturities (87) (87)
-------- --------
Total long-term debt, less current maturities $ 9,404 $ 9,425
======== ========
NOTE 4: INVENTORIES
Inventories are comprised of the following (in thousands):
At March 31, At December 31,
2002 2001
----------- --------------
(unaudited)
Raw material $ 3,918 $ 5,012
Work-in-process 3,794 2,329
Finished goods 2,865 3,342
-------- --------
Gross inventories 10,577 10,683
Less: LIFO reserves 131 131
-------- --------
Inventories $ 10,708 $ 10,814
======== ========
- 10 -
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, 2002 (in thousands):
Accum-
Par Capital ulated
Value in Other
of Excess Accum- Compre-
Common of Par ulated hensive
Stock Value Deficit Loss Total
------ ------- -------- -------- --------
At January 1, 2002 $156 $25,064 $(41,329) $ (1,136) $(17,245)
Activity (unaudited):
Net loss - - (4,284) - (4,284)
---- ------- -------- -------- --------
At March 31, 2002 $156 $25,064 $(45,613) $ (1,136) $(21,529)
==== ======= ======== ======== ========
The computations of basic and diluted earnings (loss) per common share
[E(L)PS] for the three month periods ended March 31, 2002 and 2001 are as
follows (in thousands, except per share amounts)(unaudited):
Net
Income
(Loss) Shares E(L)PS
-------- -------- -------
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)
======== ======== =======
Three months ended March 31, 2001:
Income applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ 761 15,236 $ 0.05
=======
Dilutive effect of stock options 104
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted EPS $ 761 15,340 $ 0.05
======== ======== =======
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.
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
- 11 -
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.
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.
- 12 -
On June 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. As a result of this
restraining order of the bankruptcy court, the Company entered a standstill
agreement with the plaintiffs on August 22, 2001. Pursuant to the standstill
agreement, and the stipulation of the parties to the SFSC bankruptcy case, the
plaintiffs agreed to take no further action to prosecute any claim in the
litigation against the Company, Mr. Bradley and others to recover any
structured settlement trust assets or any derivative claims or claims based on
allegations of alter ego, fraudulent transfer or conversion. The plaintiffs
did not agree to waive or release their direct personal claims against the
Company for damages, but the plaintiffs agreed to cease and desist the
prosecution of those claims until no earlier than sixty days following service
of written notice to the Company stating that they have elected to
unilaterally terminate the standstill.
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. Both model complaints allege causes of
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted cross-
complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
vigorously defend against these actions and cross-actions.
The Company has been named in approximately 250 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.
Since July 10, 2001, various lawsuits, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon 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 43
separate actions, all of which are being defended by Allen-Bradley Company.
- 13 -
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 $376,000 of
remediation costs and accrued an additional $20,000.
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. The Company's
environmental consultant is in the process of updating the estimate of the
costs to comply with this order, but the Company does not believe that the
cost of future remediation will exceed the amount accrued. No remediation was
performed in 2000 or 2001 pending the decision. However, the Company has paid
$232,000 for its share of consulting services in connection with the hearings.
At March 31, 2002, the balance accrued for these remediation costs is
approximately $1,076,000. Owners of a portion of the property have objected
to the Company's cleanup methodology and have filed suit to require additional
procedures. The Company is contesting this litigation, and believes its
proposed methodology is well within accepted industry practice for
remediation efforts of a similar nature. No accrual has been made for costs
- 14 -
of any alternative cleanup methodology which might be imposed as a result of
the litigation.
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site in Marin County, California. The Company operated a
mercury mine on this site from 1965 to 1970. The Company has gathered and
forwarded to the USEPA the information it requested. At this time, the
Company has not been formally named as a potentially responsible party. As
such and because the USEPA's interest in the Gambonini Mine Site is not known,
the Company has not made any assessment of potential liability, if any.
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, 2002:
----------------------
Metals:
Pressure vessels and springs $ 2,481 $ (871) $ 41 $ 14,362
Cylinders 4,441 (87) 25 10,222
-------- -------- -------- --------
Subtotal Metals 6,922 (958) 66 24,584
Plastics 7,922 172 113 18,367
Corporate and other - (710) - 14,355
Discontinued operations - - 81 22,752
-------- -------- -------- --------
Totals $ 14,844 (1,496) $ 260 $ 80,058
======== ======== ========
Depreciation and amortization(3) (710)
Interest expense (2,078)
--------
Loss from continuing operations
before income taxes $ (4,284)
========
Three months ended March 31, 2001
and at December 31, 2001:
---------------------------------
Metals:
Pressure vessels and springs $ 14,084 $ 3,599 $ 60 $ 17,936
Cylinders 6,153 502 20 9,662
-------- -------- -------- --------
Subtotal Metals 20,237 4,101 80 27,598
Plastics 12,235 753 137 18,443
Corporate and other - (966) 1 14,572
Discontinued operations - - 581 23,803
-------- -------- -------- --------
Totals $ 32,472 3,888 $ 799 $ 84,416
======== ======== ========
Depreciation and amortization(3) (1,384)
Interest expense (1,601)
--------
Income from continuing operations
before income taxes $ 903
========
- 15 -
(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, 2002 and December 31, 2001 is
primarily comprised of goodwill related to its pressure vessel and
springs segment ($9.9 million) and cylinder segment ($1.5 million).
Because of the historically positive operating results and cash generation
of the pressure vessel and springs segment, management does not consider
its related goodwill to be impaired. Also, management does not consider
the cylinders segment goodwill to be impaired as the Company believes
this segment is in a temporary cyclical downturn.
(3) Excludes amortization of debt issuance expenses and fees of $132,000
and $174,000 for the three month periods ended March 31, 2002 and 2001,
respectively, which is included in interest expense.
NOTE 8: DISCONTINUED OPERATIONS
At March 31, 2002 and December 31, 2001, the assets and liabilities of
discontinued operations are comprised of the assets and liabilities of the
discontinued bridges and cranes and material handling systems businesses and
the remaining reserve for expenses of the discontinued grating business. The
assets and liabilities of discontinued operations have been separately
classified on the balance sheet as follows (in thousands):
At March 31, At December 31,
2002 2001
----------- --------------
ASSETS: (unaudited)
Cash and cash equivalents $ 81 $ 506
Receivables, net 11,992 14,463
Inventories, net 2,717 2,093
Other current assets 379 249
-------- --------
Total current assets 15,169 17,311
-------- --------
LIABILITIES AND EQUITY:
Trade payables 7,339 7,182
Other current liabilities 1,520 2,014
Reserve for operating loss during phase-out 1,772 2,628
Reserve for estimated expenses 279 325
-------- --------
Total liabilities 10,910 12,149
-------- --------
Net assets of discontinued operations, current $ 4,259 $ 5,162
======== ========
NET ASSETS, NON-CURRENT:
Property, plant and equipment, net $ 6,749 $ 6,985
Goodwill, net 11,628 11,628
Other assets, net 116 28
-------- --------
Net assets of discontinued operations,
non-current $ 18,493 $ 18,641
======== ========
- 16 -
Summarized results of discontinued operations for the three month periods
ended March 31, 2002 and 2001 follow (in thousands):
2002 2001
-------- --------
Net sales $ 13,248 $ 17,151
Income before taxes - 250
The above results of discontinued operations include actual and allocated
interest expense for the three month periods ended March 31, 2002 and 2001
totaling $627,000 and $808,000, respectively.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis is provided to assist readers in
understanding financial performance during the periods presented and
significant trends which may impact future performance. It should be read in
conjunction with the consolidated financial statements and accompanying notes
included elsewhere in this Form 10-Q and in conjunction with our annual report
on Form 10-K for the year ended December 31, 2001.
We adopted a plan to restructure continuing operations and dispose of or
shut-down other businesses. Such businesses are being reported as
discontinued operations. Prior year information has been restated for
comparative purposes and the following discussion of results of operations is
separated into continuing and discontinued operations.
GENERAL
The Company owns and operates a diverse group of industrial manufacturing
operations that design and manufacture engineered, high-quality products for
specific customer requirements, such as large-diameter seamless pressure
vessels, hydraulic and pneumatic cylinders, leaf springs and precision plastic
components. Until December 2001, the Company's products also included heavy-
duty cranes, bridge structures and materials handling systems. The Company
classified its heavy-duty cranes, bridge structures and materials handling
systems businesses as discontinued operations.
RECENT DEVELOPMENTS
Restructuring and Other Actions
In the fourth quarter of 2001, we developed and adopted a plan to
restructure our continuing operations. During 2002, the Company has made
significant progress towards implementation of this plan.
On April 30, 2002, we entered into a non-binding letter of intent (LOI)
for the sale of substantially all of the assets and business of Kingway, our
discontinued materials handling systems operations, for a total of $34.0
million in cash ($29.0 million), subordinated notes ($3.0 million) and
subordinated contingent notes ($2.0 million). The due diligence process by
the buyer is in its early stages. The closing date set in the LOI is June 30,
2002.
- 17 -
On April 2, 2002, we entered into a non-binding letter of intent for the
sale of substantially all of the assets of Alliance, our discontinued bridges
and cranes operations, for $3.3 million in cash plus the assumption by the
buyer of certain liabilities. The due diligence process by the buyer is
proceeding and a definitive asset purchase agreement has been drafted. The
closing date set in the LOI and definitive asset purchase agreement is May 31,
2002.
The closings of each of these transactions are subject to certain
conditions, including the executions of definitive asset purchase agreements.
There are no assurances that both or either of these transactions will close
on the terms set forth in each LOI or definitive asset purchase agreement or
at all.
During the first quarter of 2002, NPSAC, the Company's former pressure
vessel operations in Clearfield, Utah, was relocated to and combined with the
pressure vessel operations in McKeesport, PA. The cylinder operations in
Milwaukee, WI have been relocated to our leased facility in Libertyville, IL.
The land and building in Milwaukee, WI is being prepared for sale. We are
preparing to move the cylinder operations in Chicago, IL to the Libertyville
facility during the third quarter of 2002. We closed the Plastics' corporate
headquarters in Charlotte, NC and all administrative and managerial positions
were eliminated. Plastics' corporate responsibilities have been returned to
our manufacturing and administrative operations in Oneida, NY.
We reevaluated the shut-down of our Plastics operation in Siler City, NC
and have determined to maintain our presence in the southern U.S. and service
the customers of the Siler City, NC location, [possibly by relocating the
operations to a smaller leased facility in the area]. This reevaluation does
not change our intent to dispose of the land, building and a large portion of
the existing machinery and equipment or the fourth quarter restructuring
charge related thereto.
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder is due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001
and May 1, 2002. We were also unable to make the $12.5 million sinking fund
payment due May 1, 2002. This inability to fund our obligations under the 13%
senior notes is due to a lack of liquidity and availability under our
revolving credit facility with Bank of America (BOA).
- 18 -
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to
Three Months Ended March 31, 2001
Continuing Operations
Sales, gross margins and EBITDA percentages for the three months ended
March 31, 2002 and 2001 are as follows:
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2002 2001 2002 2001 2002 2001
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 2,481 $ 14,084 (16.6%) 30.1% (35.1%) 25.6%
Cylinders 4,441 6,153 8.2% 18.9% (2.0%) 8.2%
Plastics 7,922 12,235 9.5% 16.4% 2.2% 6.2%
--------- --------- ------ ------ ------ ------
Totals $ 14,844 $ 32,472 4.7% 22.8% (5.3%) 15.0%
========= ========= ====== ====== ====== ======
Pressure vessels and springs sales are down significantly in the first
quarter of 2002 compared to the same period in 2001. This decrease is due
primarily to management's decision to shut-down our pressure vessels facility
for the first two months of 2002 with a limited production schedule
thereafter. We made this decision to reduce spending due to our liquidity
problems and to lessen the strain on this segment's raw material vendors. The
decrease was also caused by the fact that the first quarter of 2001 included
the recognition of $2.8 million of revenues on a large NASA contract
manufactured in 2000 but shipped in the first quarter of 2001. The backlog
for pressure vessels is up $3.3 million since the beginning of the year [and
we anticipate correcting vendor-related issues in the near-term with cash
proceeds from asset sales].
Sales of cylinders was affected by the temporary disruption caused by the
relocation of our Milwaukee, WI cylinder operations to Libertyville, IL and
continues to be affected by a softness in this market, [a trend which the
Company believes will bottom-out but possibly not reverse during 2002.]
The decrease in Plastics revenues is the continuation of a downward trend
which began in 1999 and resulted from several factors, including certain
customers relocating manufacturing operations to Mexico and Asia, reduced
customer orders for continuing programs, end of product cycles and delays in
new program starts, which affected all Plastics facilities. Plastics also
lost a top ten customer in the second half of 2001 to competitive bidding on
the internet. [Management is seeking to expand Plastics' product offerings in
the business machines, consumer products and medical products industries to
mitigate this trend. However, if not successful, this trend in Plastics
revenue could continue during the remainder of 2002.]
The decreases in gross margins across all segments is related to volume
declines resulting in a decrease in production activity and our ability to
absorb costs. We are responding to these conditions by making progress on our
plan to restructure, including combining certain operations and eliminating
various administrative and management positions. [However, the benefits of
these actions may not materialize immediately.]
- 19 -
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales
decreased significantly during the 2002 first quarter compared to the same
period in 2001 primarily due to the same factors affecting gross profit margin
discussed above. Total EBITDA as a percentage of sales in the first quarters
of 2002 and 2001 exclude corporate and other EBITDA in each period.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first quarter
of 2002 were $3.7 million, compared to $4.4 million for the first quarter of
2001. This decrease in SGA is directly related to the decreasing trend in
sales, resulting in lower commissions expense, cost cutting measures taken
during June 2001 and progress made on the restructuring, both of which
included personnel reductions in sales and administration. [Management
estimates the savings from these reductions to be approximately $1.8 million
annually.] However, the benefits of these cost cutting measures are being
offset by the continuation of the negative trend in sales and the resulting
effect on the Company's ability to absorb costs. SGA expenses as a percentage
of sales increased to 24.7% for the 2002 first quarter compared to 13.6% in
the 2001 first quarter. SGA as a percentage of sales was higher in 2002 first
quarter compared to the first quarter of 2001 due to the faster rate at which
volume has decreased compared to decreases in relatively fixed administrative
costs.
Other (Income) Expense
Other income for the first quarter of 2002 was $0.8 million, compared to
other expense of $0.5 million for the first quarter of 2001. The components
are as follows:
2002 2001 Change
-------- -------- --------
Goodwill and other intangibles amortization $ 3 $ 492 $ (489)
Gain on sale of equipment with zero book value (375) - (375)
Other (income) expense, net (389) (23) (366)
-------- -------- --------
Total other (income) expense, net $ (761) $ 469 $ (1,230)
======== ======== ========
We stopped amortizing goodwill effective January 1, 2002. In January
2002, we sold equipment that had no book value. The increase in the remaining
other income is primarily due to higher levels of sales of scrap and
miscellaneous parts due to cleaning out idled facilities.
Interest Expense
Interest expense, net, for the first quarter of 2002 was $2.1 million
compared to $1.6 million for the first quarter of 2001. For the first
quarters of 2002 and 2001, a total of $0.6 million and $0.8 million,
respectively, of interest expense has been allocated to or actually incurred
in discontinued operations. On a combined basis interest expense was $2.7
million in the first quarter of 2002 compared to $2.4 million in the first
quarter of 2001. Although debt has decreased significantly from first quarter
- 20 -
2001 levels to first quarter 2002, the resulting decrease was more than offset
by the increased default rate being paid on the BOA revolving credit and term
loan facilities and $625,000 in overadvance fees paid in the first quarter of
2002. [Interest expense for 2002 may decrease compared to 2001 depending on
the amount of proceeds and timing of asset dispositions in 2002 as part of the
restructuring plan.]
Income Taxes
There was no tax provision from continuing operations in the first
quarter of 2002 compared to a provision of $0.4 million for the first quarter
of 2001. The Company has net operating loss carryforwards for Federal tax
return reporting purposes totaling $124.1 million at December 31, 2001, $79.2
million of which expire by 2004. [The Company may be able to utilize its loss
carryforwards against possible increased profitability as the result of the
Company's corporate-wide restructuring plan. However, until the amount of
proceeds from and timing of asset dispositions as part of such plan are
known], management has determined to fully reserve for the total amount of net
deferred tax assets as of December 31, 2001 [and to continue to do so during
2002 until assets are disposed]. The tax provision from continuing operations
in the first quarter of 2001 was based on income from continuing operations
before tax adjusted for permanent differences.
Discontinued Operations
There was no income or loss from discontinued operations for the first
quarter of 2002 compared to income from discontinued operations of $0.3
million in the first quarter of 2001. For the first quarters of 2002 and
2001, discontinued operations includes a total of $0.6 million and $0.8
million, respectively, of interest expense.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company manages its liquidity as a consolidated enterprise. The
operating groups of the Company carry minimal cash balances. Cash generated
from group operating activities generally is used to repay borrowings under
revolving credit arrangements, as well as other uses (e.g. corporate
headquarters expenses, debt service, capital expenditures, etc.). Conversely,
cash required for group operating activities generally is provided from funds
available under the same revolving credit arrangements.
Restructuring and Other Actions
In the fourth quarter of 2001, we developed and adopted a plan to
restructure our continuing operations. During 2002, the Company has made
significant progress towards implementation of this plan.
On April 30, 2002, we entered into a non-binding letter of intent (LOI)
for the sale of substantially all of the assets and business of Kingway, our
discontinued materials handling systems operations, for a total of $34.0
million in cash ($29.0 million), subordinated notes ($3.0 million) and
subordinated contingent notes ($2.0 million). The due diligence process by
the buyer is in its early stages. The closing date set in the LOI is June 30,
2002.
- 21 -
On April 2, 2002, we entered into a non-binding letter of intent for the
sale of substantially all of the assets of Alliance, our discontinued bridges
and cranes operations, for $3.3 million in cash plus the assumption by the
buyer of certain liabilities. The due diligence process by the buyer is
proceeding and a definitive asset purchase agreement has been drafted. The
closing date set in the LOI and definitive asset purchase agreement is May 31,
2002.
[We anticipate using the cash proceeds from these asset sales to pay
accrued interest on our senior notes, reduce debt, pay our overextended
vendors and for other corporate purposes. Debt reductions will include a
combination of BOA revolving credit and term loan facilities and 13% senior
notes. Cash proceeds to be applied to reducing debt is dependent on a number
of factors including, but not limited to, finalization of the net cash to be
received in each asset sale and limitations imposed by BOA, if any.]
The closings of each of these transactions are subject to certain
conditions, including the executions of definitive asset purchase agreements.
There are no assurances that both or either of these transactions will close
on the terms set forth in each LOI or definitive asset purchase agreement or
at all.
During the first quarter of 2002, NPSAC, the Company's former pressure
vessel operations in Clearfield, Utah, was relocated to and combined with the
pressure vessel operations in McKeesport, PA. The cylinder operations in
Milwaukee, WI have been relocated to our leased facility in Libertyville, IL.
The land and building in Milwaukee, WI is being prepared for sale. We are
preparing to move the cylinder operations in Chicago, IL to the Libertyville
facility during the third quarter of 2002. We closed the Plastics' corporate
headquarters in Charlotte, NC and all administrative and managerial positions
were eliminated. Plastics' corporate responsibilities have been returned to
our manufacturing and administrative operations in Oneida, NY.
- 22 -
The restructuring charge we recorded in the fourth quarter of 2001
included estimated cash and non-cash components. The cash components were
comprised of reserves for lease termination costs and employee separations.
We think the estimates made last year are still valid now. The following
represents a summary of first quarter 2002 cash activity for the estimated
cash components of our fourth quarter 2001 restructuring charge (in
thousands).
At 2002 At
Description 12/31/01 Activity 03/31/02
--------------------------------------------- -------- -------- --------
Lease termination costs $ 1,172 $ (102) $ 1,070
Employee separations 20 - 20
-------- -------- --------
Reserve for restructuring $ 1,192 $ (102) $ 1,090
======== ======== ========
We reevaluated the shut-down of our Plastics operation in Siler City, NC
and have determined to maintain our presence in the southern U.S. and service
the customers of the Siler City, NC location, [possibly by relocating the
operations to a smaller leased facility in the area]. This reevaluation does
not change our intent to dispose of the land, building and a large portion of
the existing machinery and equipment or the fourth quarter restructuring
charge related thereto.
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder is due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001
and May 1, 2002. We were also unable to make the $12.5 million sinking fund
payment due May 1, 2002. This inability to fund our obligations under the 13%
senior notes is due to a lack of liquidity and availability under our
revolving credit facility with BOA.
An event of default as defined in the indenture governing the senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. Although they have not moved to do so while we
execute our plan to restructure and generate liquidity through asset sales,
the senior notes holders have the right to accelerate all amounts outstanding,
including accrued and unpaid interest of $3.35 million, totaling $27.9 million
at March 31, 2002. Interest accrues at approximately $0.3 million per month,
including compounded interest at 13% per annum on the unpaid semi-annual
interest payments.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $34.9 million of senior secured revolving and term
loan credit facilities outstanding at March 31, 2002 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.
- 23 -
In November 2001, BOA informed us that a borrowing base deficiency
existed. Since that time, the Company and BOA have entered into six side
letter agreements wherein BOA and the other lenders that participated in the
BOA refinancing of the Company in March 2000 agreed to provide monthly
advances in excess of our calculated borrowing base for working capital needs
while we execute our plan to restructure and generate liquidity by selling
assets. The sixth side letter agreement, dated April 1, 2002, provides
overadvance approval on a day-to-day basis whereby the overadvance may not
exceed $3.5 million. As of May 15, 2002, we have not exceeded the $3.5
million overadvance availability. However, nothing in these six side letter
agreements waives or otherwise alters BOA's already existing remedies under
the BOA financing and security agreement including acceleration of all amounts
outstanding under the BOA financing and security agreement.
In consideration of providing its approval of overadvance availability,
we have been paying a weekly fee of $25,000 or $50,000, depending on the
amount of the overadvance. Since entering into the side letter agreements
beginning in November 2001, the Company has paid BOA a total of $800,000 in
such fees.
[Since we could not repay our senior noteholders or bank lenders if
either or both of them exercised their existing rights to accelerate what we
owe them, they could pursue all remedies available to creditors in the normal
course of business, including filing of involuntary bankruptcy petitions.]
SUMMARY OF 2002 ACTIVITIES
Cash and cash equivalents totaled $0.8 million (including $0.1 million
classified within discontinued operations) at March 31, 2002, compared to $1.2
million (including $0.5 million classified within discontinued operations) at
December 31, 2001, a decrease of $0.4 million. This decrease resulted from
$4.1 million of cash provided by operations and $0.1 million of cash provided
by investing activities being more than offset by $4.6 million used in
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 provided by operating activities of $4.1 million in the first
quarter of 2002 was the result of a decrease in net working capital as lower
volume levels led to a reduction in receivables and as tighter liquidity
resulted in a slowdown in payments to vendors and an increase in trade
payables.
Investing Activities
The Company disposed of machinery and equipment with no book value during
the first quarter of 2002, generating $0.4 million in cash proceeds. Capital
expenditures were $0.3 million.
Financing Activities
The Company made scheduled repayments of debt totaling $1.0 million,
which included $0.9 million on its term loan A and $0.1 million on its capital
expenditures facility. Revolving credit facility borrowings decreased $3.6
million during the first quarter of 2002. These reductions were funded
primarily with working capital. Other debt repayments totaling $22,000
represent payments on capital lease obligations and other debt.
- 24 -
FACTORS AFFECTING CURRENT AND FUTURE LIQUIDITY
During the third and fourth quarters of 2001, downturns in several of the
markets we serve adversely affected our ability to absorb costs and we
experienced an increase in ineligible receivables and inventory. This
increase in ineligibles resulted in a decrease in borrowing availability under
the revolving credit facility. These events have and continue to adversely
affect our ability to meet obligations. We have extended our vendors and
failed to make the November 1, 2001 and May 1, 2002 $1.616 million semi-annual
interest payments and the May 1, 2002 $12.5 million sinking fund payment on
our 13% senior notes.
During 2002, we have made significant progress towards implementation of
our restructuring plan, including entering into LOIs for the sales of our
discontinued materials handling systems and bridges and cranes operations.
[We believe we will generate adequate proceeds from these asset sales to
alleviate the current and future strain on liquidity and meet past due,
immediate and near-term obligations. However, no assurances can be given that
such pursuits will be successful.]
If we are not able to complete the sales of assets on acceptable terms or
if other anticipated benefits of our plan to restructuring do not materialize,
[we may not be able to continue as a going concern].
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risk factors which
affect the Company since the end of the preceding fiscal year.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal Proceedings
The Company and its subsidiaries are defendants in a number of lawsuits
and administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. The Company believes that any
material liability which can result from any of such lawsuits or proceedings
has been properly reserved for in the Company's consolidated financial
statements or is covered by indemnification in favor of the Company or its
subsidiaries, and therefore the outcome of these lawsuits or proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended. There is no applicable insurance coverage.
- 25 -
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. Bradley, the sole shareholder of SFSC's parent, several
major financial institutions and certain others. All of these suits arise out
of the inability of SFSC to make structured settlement payments when due.
Pursuant to the court's order, plaintiffs in the purported class actions and
plaintiffs in the individual cases actions filed a model complaint. Except
for the class allegations, the two model complaints are identical. The
plaintiffs seek compensatory and punitive damages, restoration of certain
alleged trust assets, restitution and attorneys' fees and costs.
The plaintiffs in one of the suits are former owners of a predecessor of
SFSC and current operators of a competing structured settlement business.
These plaintiffs claim that their business and reputations have been damaged
by SFSC's structured settlement defaults, seek damages for unfair competition
and purport to sue on behalf of the payees.
The plaintiffs allege that the Company borrowed funds from SFSC and has
not repaid these loans. The plaintiffs' theories of liability against the
Company are that it is the alter ego of SFSC and Mr. Bradley and that the
Company received fraudulent transfers of SFSC's assets. The plaintiffs also
assert direct claims against the Company for inducing breach of contract and
aiding and abetting an alleged breach of fiduciary duty by SFSC.
On June 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. As a result of this
restraining order of the bankruptcy court, the Company entered a standstill
agreement with the plaintiffs on August 22, 2001. Pursuant to the standstill
agreement, and the stipulation of the parties to the SFSC bankruptcy case, the
plaintiffs agreed to take no further action to prosecute any claim in the
litigation against the Company, Mr. Bradley and others to recover any
structured settlement trust assets or any derivative claims or claims based on
allegations of alter ego, fraudulent transfer or conversion. The plaintiffs
did not agree to waive or release their direct personal claims against the
Company for damages, but the plaintiffs agreed to cease and desist the
prosecution of those claims until no earlier than sixty days following service
of written notice to the Company stating that they have elected to
unilaterally terminate the standstill.
- 26 -
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. Both model complaints allege causes of
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted cross-
complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
vigorously defend against these actions and cross-actions.
The Company has been named in approximately 250 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.
Since July 10, 2001, various lawsuits, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon 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 43
separate actions, all of which are being defended by Allen-Bradley Company.
Environmental Compliance
Various U.S. federal, state and local laws and regulations including,
without limitation, laws and regulations concerning the containment and
disposal of hazardous waste, oil field waste and other waste materials, the
use of storage tanks, the use of insecticides and fungicides and the use of
underground injection wells directly or indirectly affect the Company's
operations. In addition, environmental laws and regulations typically impose
"strict liability" upon the Company for certain environmental damages.
Accordingly, in some situations, the Company could be liable for clean up
costs even if the situation resulted from previous conduct of the Company that
was lawful at the time or from improper conduct of, or conditions caused by,
previous property owners, lessees or other persons not associated with the
Company or events outside the control of the Company. Such clean up costs or
costs associated with changes in environmental laws and regulations could be
substantial and could have a materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
- 27 -
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 $376,000 of
remediation costs and accrued an additional $20,000.
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. The Company's
environmental consultant is in the process of updating the estimate of the
costs to comply with this order, but the Company does not believe that the
cost of future remediation will exceed the amount accrued. No remediation was
performed in 2000 or 2001 pending the decision. However, the Company has paid
$232,000 for its share of consulting services in connection with the hearings.
At March 31, 2002, the balance accrued for these remediation costs is
approximately $1,076,000. Owners of a portion of the property have objected
to the Company's cleanup methodology and have filed suit to require additional
procedures. The Company is contesting this litigation, and believes its
proposed methodology is well within accepted industry practice for
remediation efforts of a similar nature. No accrual has been made for costs
of any alternative cleanup methodology which might be imposed as a result of
the litigation.
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site in Marin County, California. The Company operated a
mercury mine on this site from 1965 to 1970. The Company has gathered and
forwarded to the USEPA the information it requested. At this time, the
Company has not been formally named as a potentially responsible party. As
such and because the USEPA's interest in the Gambonini Mine Site is not known,
the Company has not made any assessment of potential liability, if any.
- 28 -
Item 3. Defaults Upon Senior Securities
Debt in default consists of the following (in thousands):
At March 31, At December 31,
2002 2001
----------- --------------
(unaudited)
13% senior notes (net of unamortized
discount of $-0- and $2) $ 24,855 $ 24,853
BOA revolving credit facility 18,857 22,475
BOA term loan A due March 16, 2007 15,149 16,071
BOA capital expenditure facility 930 990
-------- --------
Total debt in default $ 59,791 $ 64,389
======== ========
13% Senior Notes and Semi-Annual Interest Payments
We have a total of $24.855 million of 13% senior notes outstanding, of
which a sinking fund payment of $12.5 million was due on May 1, 2002 and the
remainder is due on May 1, 2003. The senior notes require semi-annual
interest payments every November 1st and May 1st. We were unable to make the
semi-annual interest payments of $1.616 million on each of November 1, 2001
and May 1, 2002. We were also unable to make the $12.5 million sinking fund
payment due May 1, 2002.
An event of default as defined in the indenture governing the senior
notes has existed since December 1, 2001 as we were not able to make the
November 1, 2001 semi-annual interest payment within the 30-day cure period
provided for in the indenture. As such, the senior notes holders have the
right to accelerate all amounts outstanding, including accrued and unpaid
interest of $3.35 million, totaling $27.9 million at March 31, 2002. Interest
accrues at approximately $0.3 million per month, including compounded interest
at 13% per annum on the unpaid semi-annual interest payments.
Bank of America Revolving and Term Loan Credit Facilities
We have a total of $34.9 million of senior secured revolving and term
loan credit facilities outstanding at March 31, 2002 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.
In November 2001, BOA informed us that a borrowing base deficiency
existed. Since that time, the Company and BOA have entered into six side
letter agreements wherein BOA and the other lenders that participated in the
BOA refinancing of the Company in March 2000 agreed to provide monthly
advances in excess of our calculated borrowing base for working capital needs
while we execute our plan to restructure and generate liquidity by selling
assets. The sixth side letter agreement, dated April 1, 2002, provides
overadvance approval on a day-to-day basis whereby the overadvance may not
exceed $3.5 million. As of May 15, 2002, we have not exceeded the $3.5
million overadvance availability. However, nothing in these six side letter
agreements waives or otherwise alters BOA's already existing remedies under
the BOA financing and security agreement including acceleration of all amounts
outstanding under the BOA financing and security agreement.
- 29 -
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, 2002 REUNION INDUSTRIES, INC.
------------ (Registrant)
By: /s/ Kimball J. Bradley
-------------------------------
Kimball J. Bradley
President and Chief
Operating Officer
By: /s/ John M. Froehlich
-------------------------------
John M. Froehlich
Executive Vice President, Finance
and Chief Financial Officer
(chief financial and accounting officer)
- 30 -