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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
[X]Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998 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 1-7726
REUNION INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1439715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
62 Southfield Ave.
One Stamford Landing
Stamford, Connecticut 06902
(Address, including zip code, of principal executive offices)
(203) 324-8858
(Telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.01 par value Pacific Exchange, Inc.
NASDAQ Small-Cap. Market
Securities registered pursuant to Section 12(g) of the Act: (None)
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 [_]
As of March 19, 1999, the registrant had 3,900,065 shares of Common Stock
issued and outstanding. As of March 19, 1999, the aggregate market value of
the voting stock held by non-affiliates of the registrant (computed by
reference to the average of the high and low sales prices on the NASDAQ Small-
Cap. Market) was approximately $10,126,000.
Documents Incorporated by Reference
None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
REUNION INDUSTRIES, INC.
TABLE OF CONTENTS OF FORM 10-K
PART I
Item
No. Page
---- ----
1. BUSINESS........................................................ 1
General......................................................... 1
Plastic Products and Services................................... 2
Agricultural Operations......................................... 5
Environmental Regulation........................................ 6
Employees....................................................... 7
2. PROPERTIES...................................................... 7
3. LEGAL PROCEEDINGS............................................... 8
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 8
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................. 9
6. SELECTED FINANCIAL DATA......................................... 10
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 11
7.a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 17
8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 17
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................ 17
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 18
11. EXECUTIVE COMPENSATION.......................................... 20
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 23
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 24
PART IV
14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM
8-K............................................................ 26
SIGNATURES...................................................... 27
EXHIBIT INDEX................................................... 28
FORWARD LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements speak only as of the
date of this Form 10-K, and the Company expressly disclaims any obligation or
undertaking to publicly release any updates or revisions to any forward-
looking statements contained herein. Although the Company believes that its
expectations are based on reasonable assumptions, it cannot assure that the
expectations contained in such forward-looking statements will be achieved.
Such statements involve risks, uncertainties and assumptions which could cause
actual results to differ materially from those contained in such statements.
Such factors include, but are not limited to, domestic and international
economic conditions which affect the volume of sales of business and consumer
goods by the Company's customers and, therefore, the volume of sales of
component parts produced by the Company; the cost and availability of
materials, labor and other goods and services used in the Company's
operations; actions of the Company's competitors and industry trends, which
affect the pricing of the Company's products; and the cost of interest on the
Company's debt.
PART I
Item 1. Business
GENERAL
Reunion Industries, Inc., a Delaware corporation ("RII"), is the successor
by merger, effective April 19, 1996, of Reunion Resources Company ("RRC"). As
used herein, the term "Company" refers to RII, its predecessors and its
subsidiaries unless the context indicates otherwise. The Company's executive
offices are located at 62 Southfield Avenue, One Stamford Landing, Stamford,
Connecticut 06902 and its telephone number is (203) 324-8858.
The Company, through its wholly owned subsidiary, Oneida Rostone Corp.
("ORC"), manufactures high volume, precision plastic products and provides
engineered plastics services. ORC's Oneida division, acquired in September
1995, designs and produces injection molded parts and provides secondary
services such as hot stamping, welding, printing, painting and assembly of
such products. In addition, Oneida designs and builds custom molds at its tool
shops in order to produce component parts for specific customers. ORC's
Rostone division, acquired in February 1996, compounds and molds thermoset
polyester resins. The acquisitions in November 1996 of Data Packaging Limited
("DPL"), which operates in Ireland, and of the assets and business of Quality
Molded Products, Inc. ("QMP," now part of the Oneida division), have expanded
the Company's custom injection molding capacity. The Company is also engaged
in wine grape agricultural operations in Napa County, California.
On February 26, 1999, the Company announced that it had commenced
discussions with a third party to sell ORC and had reinstituted its merger
discussions with Chatwins Group, Inc. ("Chatwins"), which owns approximately
38% of Reunion's outstanding Common Stock. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Possible Merger with Chatwins" and Item 13 "Certain Relationships and Related
Transactions." The discussions with the third party to sell ORC have
subsequently been terminated. The Company has now decided to suspend its plans
for the sale of ORC in light of the ongoing discussions regarding the possible
merger with Chatwins and the related refinancings. The Company has also had
discussions regarding possible acquisitions of Stanwich Acquisition Corp.,
doing business as King-Way Material Handling Company ("King-Way") and of NPS
Acquisition Corp., doing business as NAPTech ("NAPTech"), at the same time as
the Chatwins merger. King-Way and NAPTech are affiliates of Chatwins and the
Company. See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Possible Merger with Chatwins and
acquisitions of King-Way and NAPTech" and Item 13 "Certain Relationships and
Related Transactions." Reunion has engaged legal and financial advisors in
connection with these transactions. In addition, financing discussions have
been held with prospective lenders. There can be no assurances that these
transactions will be agreed to, approved or consummated. The Company will
consider alternative strategies for ORC if the merger and refinancing are not
completed.
General information about each of the Company's principal businesses is set
forth below under the captions "Plastic Products and Services, "Agricultural
Operations" and "Discontinued Operations." Certain financial
1
information concerning the discontinued operations is set forth in Note 3 to
the Consolidated Financial Statements.
During the five year period ended December 31, 1998, the Company, through
its subsidiaries, was also engaged in exploring for, developing, producing and
selling crude oil and natural gas in the United States. In November 1995, the
Company's Board of Directors resolved to pursue the sale of the Company's oil
and gas assets and discontinue the Company's oil and gas operations. On May
24, 1996, the Company completed the sale of its wholly owned subsidiary,
Reunion Energy Company ("REC"), which included substantially all of the
Company's oil and gas assets.
The Company's original predecessor was organized in California in 1929. The
Company's predecessor, Buttes Gas and Oil Co. ("BGO"), and certain of its
subsidiaries emerged in December 1988 from a reorganization in bankruptcy (the
"Reorganization") under Chapter 11 of the United States Bankruptcy Code.
Effective June 29, 1993, the Articles of Incorporation of BGO were amended to
effect a plan of recapitalization (the "Recapitalization") pursuant to which,
among other things, (i) each then outstanding share of common stock, par value
$.01 per share, of BGO ("Old Buttes"), was converted automatically and without
further action by stockholders into 1/300th share of new common stock, par
value $.01 per share (the "Reverse Split"), of Old Buttes (as so
recapitalized, "New Buttes"); (ii) all fractional interests in shares of Old
Buttes resulting from the Recapitalization are to be settled in cash at the
last sale price of Old Buttes shares on the Pacific Exchange, Inc. (the
"Pacific Exchange") on the last trading day before the effective date of the
Recapitalization; (iii) following the effective date of the Recapitalization,
New Buttes distributed 14 additional shares of New Buttes for each one new
share issued (or issuable) in the Recapitalization, in payment of a stock
distribution payable to the holders of record of New Buttes shares on the day
after the effective date of the Recapitalization (thereby effecting a fifteen-
for-one stock split). BGO was then merged into RRC, a Delaware corporation.
RRC merged into RII effective April 19, 1996.
RII's Certificate of Incorporation includes certain capital stock transfer
restrictions (the "Transfer Restrictions") which are designed to prevent any
person or group of persons from becoming a 5% shareholder of RII and to
prevent an increase in the percentage stock ownership of any existing person
or group of persons that constitutes a 5% shareholder by prohibiting and
voiding any transfer or agreement to transfer stock to the extent that it
would cause the transferee to hold such a prohibited ownership percentage. The
Transfer Restrictions are intended to help assure that the Company's
substantial net operating loss carryforwards will continue to be available to
offset future taxable income by decreasing the likelihood of an "ownership
change" (measured over a three year testing period) for federal income tax
purposes. The Transfer Restrictions do not apply to transfers approved by the
Company's Board of Directors if such approval is based on a determination that
the proposed transfer will not jeopardize the full utilization of the
Company's net operating loss carryforwards.
PLASTIC PRODUCTS AND SERVICES
On September 14, 1995, the Company acquired (the "Oneida Acquisition")
Oneida Molded Plastics Corp. ("Oneida"). On February 2, 1996, Rostone
Corporation ("Rostone") merged with and into Oneida (the "Rostone
Acquisition") and the surviving corporation changed its name to ORC. Oneida
and Rostone operate as divisions of ORC. On November 18, 1996, ORC acquired
(the "QMP Acquisition") the assets and business of Quality Molded Products,
Inc. ("QMP") and completed the acquisition (the "DPL Acquisition") of 95.5% of
the outstanding shares of Data Packaging Limited ("DPL"). QMP became part of
the Oneida division of ORC. DPL is a subsidiary of ORC.
Oneida
Founded in 1964, ORC's Oneida division is a full service plastic injection
molder which manufactures high volume, precision plastic products and provides
engineered plastics services. Oneida designs and produces injection molded
parts and provides secondary services such as hot stamping, welding, printing,
painting and assembly of such products. Oneida's principal products consist of
specially designed and manufactured components for office equipment; business
machines; computers and peripherals; telecommunications, packaging and
industrial equipment; and recreational and consumer products.
2
Oneida designs and manufactures most of its products by injection molding to
a customer's specifications. In most cases, Oneida obtains a contract to
produce a specified number of custom designed products using custom built
molds owned by the customer. The customer either provides its own molds or has
Oneida design and build or obtain from a supplier the molds necessary to
produce the products. The custom molds produced by Oneida are manufactured at
one of its two tool shops, which are located in Phoenix, New York and Siler
City, North Carolina. Oneida has three injection molding facilities, which are
located in Oneida and Phoenix, New York and Siler City, North Carolina.
The markets in which Oneida competes have sales in excess of $6 billion per
year. These markets are highly competitive. Oneida's principal competitors are
international companies with multi-plant operations based in the United
States, Germany, France and Japan, as well as approximately 3,800 independent
companies located in the United States engaged in the custom molding business.
Most of these companies are privately owned and have sales volumes ranging
from $3 million to $7 million per year. In addition, approximately one-half of
the total injection molding market is supplied by in-house molding shops.
Oneida competes on the basis of price, customer service and product quality.
Oneida has a decentralized sales organization that keeps close contact with
customers. Sales of Oneida's products are made through an internal sales staff
and a network of independent manufacturer's representatives working from nine
separate regional offices throughout the eastern United States. Oneida
generally pays commissions of between 2% and 5% percent of sales, based upon
volume. During 1998, 1997 and 1996, one customer, Xerox Corporation, was
responsible for more than 20% of Oneida's net sales. Sales to Xerox were
approximately 22% of Oneida's sales during 1998 (11% of ORC consolidated
sales), and receivables from Xerox were approximately 18% of Oneida's accounts
receivable at December 31, 1998. The loss of this customer could have a
material adverse effect on the results of operations of Oneida. Sales to Xerox
have declined as a percentage of ORC sales in 1998 and 1997 as the Company
diversifies its customer base. In addition to Xerox Corporation, Oneida has
approximately 500 customers in the various industries described above. Oneida
continues to seek additional customers in the business machines, consumer
products and medical products industries. The Company believes that these new
customers provide future growth opportunities for Oneida.
The principal raw materials used by Oneida are thermoplastic polymers. These
materials are available from a number of suppliers. Prices for these materials
are affected by changes in market demand, and there can be no assurances that
prices for these and other raw materials used by Oneida will not increase in
the future. Oneida's contracts with its customers generally provide that such
price increases can be passed through to the customers.
The majority of Oneida's engineering work is related to meeting design
requirements and specifications of its customers that require customized
products and developing greater production efficiencies. To meet these
objectives, Oneida has engineering personnel at each of its manufacturing
locations. Oneida's business is not materially dependent on any patents,
licenses or trademarks.
Rostone
Founded in 1927, ORC's Rostone division specializes in precision thermoset
plastic molded parts for original equipment manufacturers in the electrical,
transportation, appliance and office equipment industries. Rostone is also a
compounder of proprietary fiberglass reinforced polyester materials used in a
number of customer applications.
Rostone manufactures its thermoset products through the use of custom built
molds to produce parts to customer specifications. These customer owned molds
are either provided by the customer or designed by Rostone and built by one of
the Oneida tooling facilities or by another supplier. Rostone has two molding
facilities, which are located in Lafayette, Indiana and Clayton, North
Carolina.
Rostone competes in a market with a limited number of privately owned
competitors and in-house molders on the basis of price, product specifications
and customer service. Sales of Rostone's products are made through
3
an internal sales staff and a network of independent representatives working
from ten separate offices throughout the central United States. Rostone
generally pays commissions of between 3% and 5% of sales based on volume.
During 1998, 1997 and 1996, one customer, Cutler Hammer, was responsible for
more than 20% of Rostone's sales. Sales to Cutler Hammer were approximately
29% of Rostone's sales during 1998 (7% of ORC consolidated sales) and
receivables from Cutler Hammer were approximately 36% of Rostone's accounts
receivable at December 31, 1998. The loss of this customer could have a
material adverse effect on Rostone's results of operations. Rostone continues
to seek new customers in the industries described above and in other
industries.
The principal raw materials used by Rostone are styrene, polyester resins,
fiberglass and commercial phenolics. These materials are available from a
number of suppliers. Prices and availability of these materials are affected
by changes in market demand, and there can be no assurances that prices for
these and other raw materials used by Rostone will not increase in the future.
When possible if shortages occur, Rostone engineers new products to provide
its customers a cost effective alternative to the material in short supply.
Research and development at Rostone is focused on the development of
proprietary thermoset materials under the trade name Rosite(R). Rostone
compounds a wide range of Rosite materials to satisfy its customers' various
needs. Rostone also provides services in meeting customers' design
requirements and specifications of their customized products. Other than
Rosite(R), Rostone's business is not materially dependent on any patents,
licenses or trademarks.
Data Packaging Limited
Founded in 1981, DPL originally produced magnetic media cassettes, compact
disk and other proprietary products for the computer and data storage
industries. These businesses were discontinued by 1989. DPL presently is a
full service custom plastics injection molder which manufactures high volume,
precision plastic products and provides engineered plastics services. DPL's
principal products consist of specially designed and manufactured components
for office equipment; business machines; computer and peripherals; and
telecommunications equipment.
DPL designs and manufactures its products to a customer's specifications
using custom built molds owned by the customer. The customer either provides
its own molds or has DPL design and obtain from a supplier the molds necessary
to produce the products. All operations are conducted from one facility in
Mullingar, County Westmeath, Ireland.
DPL's markets are highly competitive. Principal competitors are
international companies with operations in Ireland and Western Europe, and
approximately five independent companies in Ireland. DPL competes on the basis
of price, customer service and product quality.
Sales of DPL's products are made by the company's in-house sales force,
which maintains close contact with its customers. During 1998 and 1997, one
customer was responsible for more than 20% of DPL's net sales. Dell Computer
represented approximately 42% of DPL's sales during 1998 (9% of ORC
consolidated sales) and receivables from Dell Computer were approximately 53%
of DPL's accounts receivables at December 31, 1998. The loss of this customer
could have a material adverse effect on DPL's results of operations. DPL
continues to seek new customers in the office equipment and telecommunications
industries in Europe.
The principal raw materials used by DPL are thermoplastic polymers. These
materials are available from a number of suppliers. Prices for these materials
are affected by changes in market demand, and there can be no assurances that
prices for these and other raw materials used by DPL will not increase in the
future. DPL's contracts with its customers generally provide that such price
increases can be passed through to the customers.
The majority of DPL's engineering work is related to meeting design
requirements and specifications of its customers that require customized
products and developing greater production efficiencies. DPL's business is not
materially dependent on any patents, licenses or trademarks.
4
During 1997, the legal ownership of DPL was reorganized to provide certain
members of DPL's management with conditional ownership of 15% of DPL.
Management's ownership will provisionally vest at the rate of up to 20% each
year based on the achievement of certain earnings targets, and will fully vest
when 100% provisionally vested or at the end of 2004, whichever is earlier.
Until fully vested, any manager's shares revert to the Company upon
termination of employment. When fully vested, management has the right to put,
and the Company has the right to call, such ownership for settlement in cash
for an amount determined by a formula based on a multiple of earnings. Because
of the put and call features, the Company accounts for this arrangement as a
deferred compensation plan and not as a minority interest. At December 31,
1998, management was provisionally vested in 40% of their 15% ownership and
deferred compensation of $0.4 million had been accrued.
Backlog
ORC's backlog of orders believed firm at December 31, 1998 and December 31,
1997 were approximately $16.7 million and $21.9 million, respectively,
substantially all of which are expected to ship within a year. Backlog is down
from 1997 as more major customers move to just-in-time ordering and shorter
delivery cycles and because of customer deferrals of new programs.
AGRICULTURAL OPERATIONS
The Company, through its subsidiary Juliana Vineyards ("Juliana"), is
engaged in wine grape vineyard development and the growing and harvesting of
wine grapes for the premium table wine market. The Company's wine grape
agricultural operations consist of approximately 3,800 acres, of which
approximately 1,200 acres are suitable for wine grape production and of which
approximately 325 acres are currently in production. This property is located
within the official boundaries of the Napa Valley American Viticultural Area,
the premier grape growing region of North America. The company does not hold a
significant position in the wine grape market. Prices received on the sale of
wine grapes may fluctuate widely, depending upon supply, demand and other
factors.
From October 1994 to September 1998, Juliana conducted its agricultural
operations through the Juliana Preserve (the "Preserve"), a joint venture
organized as a California general partnership. Juliana had a 71.7% interest in
the net income and net assets of the joint venture, but had a 50% voting
interest in matters concerning the operation, development and disposition of
the joint venture assets. In September 1998, Juliana purchased the interest of
its joint venture partner for approximately $5.9 million.
In August 1997, the Preserve sold approximately 500 acres, including
approximately 300 plantable acres, to a Napa Valley winery. In September 1998,
Juliana sold approximately 400 acres, including approximately 250 plantable
acres, to an Australian winery. Also during 1998, Juliana formed the Juliana
Mutual Water Company ("JMWC") to own and operate the water storage and
transmission system for the entire property originally owned by the Preserve.
Ownership of JMWC is generally in proportion to plantable acres as specified
in the JMWC bylaws.
Juliana has undertaken a limited wine grape development effort which
management believes will enhance the value of the property. Approximately 95
acres were planted in 1998. These new plantings should reach production in
four or five years. Additional plantings may be made in future years if
additional funds can be obtained through financing or from additional property
sales. One parcel including approximately 65 plantable acres has been leased
to a Napa Valley winery. Juliana also expects to provide vineyard development
and farm management services to certain of the third party owners and lessees
of parcels in the Preserve.
5
ENVIRONMENTAL REGULATION
Various 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 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.
The Company's plastic products and service business routinely uses chemicals
and solvents, some of which are classified as hazardous substances. The
Company's vineyard operations routinely use fungicides and insecticides, the
handling, storage and use of which is regulated under the Federal Insecticide,
Fungicide and Rodenticide Act, as well as California laws and regulations. The
Company's former oil and gas business and related activities routinely
involved the handling of significant amounts of waste materials some of which
are classified as hazardous substances.
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 is not aware of any conditions or
circumstances relating to environmental matters that will require significant
capital expenditures by the Company or that would result in material adverse
effects on its businesses.
In February 1996, Rostone was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. The Company has initiated a remediation plan
under an agreement with the Indiana Department of Environmental Management and
expects to substantially complete the remediation during 2000. The Company has
expended approximately $0.2 million and has accrued an additional $0.2 million
based on current estimates of remediation costs . Certain of these costs are
recoverable from CGI Investment Corp., the seller of Rostone. (See Item 13--
"Certain Relationships and Related Transactions".)
In connection with the sale of REC, the Company 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 Office of Conservation. 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 1998 the Company
increased this accrual by a charge of $1.2 million to discontinued operations,
based on revised estimates of the remaining remediation costs. At December 31,
1998, the balance accrued for these remediation costs was approximately $1.5
million. Owners of a portion of the property have objected to the Company's
proposed 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.
6
EMPLOYEES
At December 31, 1998, the Company employed 844 full time employees, of whom
834 were employed in the plastic products segment, six were employed in
agricultural operations and four were corporate personnel. The Company also
employs hourly employees in its agricultural operations, the number of whom
varies throughout the year.
In ORC's Rostone division, approximately 190 employees are represented by
the International Brotherhood of Electrical Workers, AFL-CIO, under a
collective bargaining agreement which expires in February 2000.
Substantially all of DPL's 117 hourly employees are represented by the
Services Industrial Profession and Technical Union. DPL participates in the
Irish Business and Employers Confederation, which negotiates binding national
agreements about employment policy, pay increases and taxation with the
government and trade unions. The latest three year agreement was signed in
December 1996.
Item 2. Properties
MANUFACTURING PROPERTIES
ORC's properties used in the plastic products and services segment are as
follows:
Lease
Square Land Expiration
Division Location Feet Acres Title Date Use
- -------- ------------------ ------- ----- ------ ---------- --------------------------------
Oneida Oneida, NY 84,000 3.5 Owned* -- Manufacturing and Administrative
Phoenix, NY 28,000 -- Leased 1/31/05 Manufacturing
Phoenix, NY 20,000 2.0 Owned* -- Manufacturing
Siler City, NC 130,000 8.3 Owned* -- Manufacturing and Administrative
Rostone Lafayette, IN 168,000 20.0 Owned* -- Manufacturing and Administrative
Clayton, NC 35,000 -- Leased 6/17/01 Manufacturing
DPL Mullingar, Ireland 72,000 5.9 Owned -- Manufacturing and Administrative
- --------
* Subject to mortgages in connection with ORC's credit facility with The CIT
Group/Business Credit, Inc. (see Note 8 of the Notes to the Consolidated
Financial Statements).
The Company believes that these facilities are suitable and adequate for
ORC's use.
OTHER PROPERTIES
For information concerning the Company's agricultural properties see Item 1.
"Business--Agricultural Operations." The Company maintains an office facility
on its vineyard property.
In connection with the sale of REC, the Company retained certain oil and gas
properties in Louisiana because of litigation concerning environmental
matters. As described in Item 1 "Business--Environmental Regulation," the
Company is in the process of environmental remediation of these properties.
The Company intends to sell these properties when the litigation is resolved.
The Company holds title to or recordable interests in federal and state
leases totaling approximately 55,000 acres near Moab, Utah, known as Ten Mile
Potash. Sylvanite, a potash mineral, is the principal mineral of interest and
occurrence in the Ten Mile Potash property. To date, Ten Mile Potash has not
yielded any significant revenues from mining operations or any other
significant revenues, and the Company is pursuing the sale or farmout of these
interests.
The Company subleases, from Stanwich Partners, Inc. ("SPI"), a related party
(see Item 13--"Certain Relationships and Related Transactions"), approximately
1,500 square feet of office space in Stamford, Connecticut for its corporate
offices. Management believes the terms of this sublease are comparable to
those available from third parties.
7
Item 3. Legal Proceedings
Certain litigation in which the Company is involved is described below.
The Company filed suit in the 125th Judicial District Court of Harris
County, Texas against Bargo Energy Company ("Bargo") and its general partners,
Chisos Corporation, Austin Resources Corporation, Shearwave, Inc., Brazos Oil
& Gas Corporation, and Schroder Oil Financing & Investment Company, on January
16, 1996 for damages and relief arising out of Bargo's repudiation of its
agreement to purchase all outstanding shares of the capital stock of the
Company's subsidiary, REC. Bargo had agreed to pay the Company $15.1 million
for REC's capital stock, subject to certain potential adjustments in the
purchase price as set forth in the stock purchase agreement between the
Company and Bargo and had deposited $0.5 million with a contractual escrow
agent in accordance with the terms of the stock purchase agreement. The
Company alleged in its complaint that Bargo tortiously interfered with a
prospective stock purchase agreement with another purchaser of REC's stock,
and then wrongfully repudiated its agreement to purchase REC's stock. The
Company also asserted claims against Bargo for breach of contract and breach
of duty of good faith and fair dealing, and sought damages under these
theories of liability. Bargo also filed suit against the Company claiming that
the Company, its investment bankers, and certain individuals fraudulently
misrepresented information and fraudulently induced Bargo into signing the
Stock Purchase Agreement. Bargo also asserted claims for breach of contract
and warranty, return of its escrow, and for unspecified damages under these
theories of liability. The cases were consolidated in the 334th Judicial
District Court of Harris County, Texas, and the consolidated case was
realigned with the Company as plaintiff.
On April 24, 1998, after a three week trial, a jury returned jury verdict
findings that Bargo had a right to terminate the stock purchase agreement with
the Company and that the Company fraudulently induced Bargo into entering into
the agreement and recommended that an award of $5.0 million in punitive
damages be assessed against the Company. In July 1998, the court entered
judgment affirming the $5.0 million jury verdict and awarding approximately
$3.0 million in attorneys' fees and costs. The Company maintained at trial and
continues to maintain that all requirements to closing under the contract were
met, and that Bargo was required to close the transaction. The Company also
maintains that no evidence sufficient to support a jury finding of fraud or
the related punitive damages finding was presented at trial. The Company has
filed a bond which suspends execution on the judgement while the Company
appeals. A formal notice of appeal has been filed and the Company intends to
file its appeal in April 1999. Management believes, based on consultation with
counsel, that it is more likely than not that any judgment based on a finding
of fraud, the award of attorneys' fees based on a finding of fraud and
punitive damages would be overturned on appeal. If the judgment is not
overturned on appeal, and the proposed merger with Chatwins and related
refinancing do not occur, the Company would be obligated to seek alternative
funding sources, including a sale of assets.
As described in Item 1: "Business--Environmental Regulation," the owners of
a portion of the property currently being remediated for environmental
contamination have filed suit to require additional procedures. The Company is
contesting the litigation.
The Company and its subsidiaries are the defendants in other 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 financial statements or is
covered by indemnification in favor of the Company or its subsidiaries, and,
that, therefore, the outcome of these lawsuits or proceedings, or the matters
referred to above, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is traded in the over-the-counter market and is
listed on the NASDAQ Small-Cap Market (RUNI). The Common Stock is also listed
on the Pacific Exchange (RUN).
As of March 19, 1999, there were approximately 1,370 holders of record of
the Company's Common Stock with an aggregate of 3,900,065 shares outstanding.
The table below reflects the high and low sales prices on the NASDAQ Small-
Cap Market for the quarterly periods in the two years ended December 31, 1998.
The NASDAQ Small-Cap quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
Quarter Ended High Low
------------- ------ ------
1998
March 31.................................................. $5.500 $4.750
June 30................................................... $7.625 $5.000
September 30.............................................. $6.125 $2.875
December 31............................................... $3.250 $2.406
1997
March 31.................................................. $5.000 $3.875
June 30................................................... $4.125 $3.125
September 30.............................................. $4.380 $3.813
December 31............................................... $5.250 $4.188
No cash dividends have been declared or paid during the past three years
with respect to the Common Stock of the Company. The Board of Directors of the
Company currently follows a policy of retaining any earnings for operations
and for the expansion of the business of the Company. Cash dividends are also
limited by the availability of funds, including limitations on dividends and
other transfers to Reunion by ORC and Juliana contained in ORC's lending
agreements (See Note 8 of the Notes to Consolidated Financial Statements).
Therefore, the Company anticipates that it will not pay any cash dividends on
the Company's Common Stock in the foreseeable future.
9
Item 6. Selected Financial Data
Year Ended December 31,
---------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- -------- -------
(1) (2) (3) (4) (5)
(In Thousands, Except Per Share Data)
Operations Data
Continuing Operations:
Operating Revenue............. $ 97,318 $93,378 $60,305 $ 10,855 $ 1,619
======== ======= ======= ======== =======
Operating Income (Loss)....... 1,495 2,513 1,449 (3,016) (2,481)
Interest Expense.............. (3,221) (3,267) (2,402) (508) (269)
Provision for Bargo Judgment
and Related Costs............ (9,239) -- -- -- --
Equity in Writedown of Joint
Venture Development Costs.... -- (855) (1,290) -- --
Gain on Sale of Mineral
Properties................... -- -- -- -- 2,124
Other Income (Expense)........ (136) 714 425 (57) (34)
Income Tax Benefit (Expense).. 661 (86) (876) -- --
-------- ------- ------- -------- -------
Loss From Continuing
Operations..................... (10,440) (981) (2,694) (3,581) (660)
-------- ------- ------- -------- -------
Discontinued Operations:
Agriculture................... -- 710 (710) -- --
Oil and Gas................... (1,710) -- 1,122 (10,389) (3,495)
Drilling and Workover......... -- -- -- -- 65
-------- ------- ------- -------- -------
Income (Loss) From Discontinued
Operations..................... (1,710) 710 412 (10,389) 3,430
-------- ------- ------- -------- -------
Extraordinary Item.............. (233) -- -- -- --
-------- ------- ------- -------- -------
Net Loss........................ $(12,383) $ (271) $(2,282) $(13,970) $(4,090)
======== ======= ======= ======== =======
Income (Loss) Per Share-Basic:
Continuing Operations......... $ (2.69) $ (0.25) $ (.70) $ (.93) $ (.17)
Discontinued Operations....... (.44) 0.18 0.11 (2.72) (.91)
Extraordinary Item............ (0.06) -- -- -- --
-------- ------- ------- -------- -------
Net Loss...................... $ (3.19) $ (0.07) $ (0.59) $ (3.65) $ (1.08)
======== ======= ======= ======== =======
Loss Per Share-Diluted.......... $ (3.19) $ (0.07) $ (0.59) $ (3.65) $ (1.08)
======== ======= ======= ======== =======
Balance Sheet Data
Total Assets.................... $ 74,874 $72,059 $75,176 $ 51,935 $51,639
Long-term Obligations........... $ 17,237 $12,654 $15,575 $ 7,947 $ 2,693
Shareholders' Equity............ $ 16,239 $28,317 $28,944 $ 31,254 $44,624
Weighted Average Common Shares
Outstanding.................... 3,881 3,855 3,855 3,832 3,794
Cash Dividends per Common
Share.......................... $ -0- $ -0- $ -0- $ -0- $ -0-
- -------
(1) Includes Juliana as a consolidated subsidiary subsequent to the September
1998 purchase of joint venture partner's interest. See Item 1 "Business--
Agricultural Operations." Operating income includes a $9.2 million charge
to record entry of the judgment and related costs in the Company's
litigation with Bargo Energy Company. See Item 3 "Legal Proceedings." Net
income includes a $1.2 million charge for increase in a provision for
environmental remediation and a $0.5 million charge for a provision for
tax settlement, included in "Discontinued Operations." See Item 1
"Business--Environmental Regulation" and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--
Contingencies and Uncertainties."
(2) Operating income includes a $1.0 million charge for writedown of excess
equipment. Net income also includes a $0.9 million charge for equity in
the write-off of joint venture development costs and income of $0.7
million from reversal of the 1996 estimated loss on disposal of the
agricultural and real estate operations. See Item 1 "Business--
Agricultural Operations," Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Discontinued Operations"
and Notes 3 and 6 of the Notes to the Consolidated Financial Statements.
(3) Includes the results of operations of Rostone subsequent to the Rostone
Acquisition on February 2, 1996. Includes the results of QMP and DPL
subsequent to their acquisitions on November 18, 1996. See Note 2 of the
Notes to the Consolidated Financial Statements. Includes a $1.3 million
impairment charge, a $0.7 million charge for the estimated loss on
disposal of the agricultural and real estate operations and a $1.1 million
net gain from the disposal of the oil and gas operations. See Notes 3 and
6 of the Notes to the Consolidated Financial Statements.
(4) Includes the results of operations of Oneida subsequent to the Oneida
Acquisition on September 14, 1995. Includes a $7.0 million impairment
charge against the Company's oil and gas properties and a $3.8 million
charge for the expected loss on disposal of the oil and gas operations.
See Notes 2 and 3 of the Notes to the Consolidated Financial Statements.
(5) Includes a $3.2 million impairment charge against the Company's oil and
gas properties, a $2.1 million gain on the sale of mineral properties, the
results of operations of acquired producing gas properties after May 1,
1994 and a change in the Company's proportionate share of agricultural
revenues and expenses.
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The Company's principal operations are in the plastic products and services
industry through its wholly owned subsidiary ORC. The Company is also engaged
in wine grape agricultural operations in Napa County, California.
In November 1995, the Company's Board of Directors resolved to sell the
Company's oil and gas assets and discontinue the Company's oil and gas
operations. During 1996, the Company sold substantially all of its oil and gas
assets, for a total price of approximately $11.4 million.
The Company recognized a net loss of $12.4 million in 1998 compared to a net
loss of $0.3 million in 1997 and a net loss of $2.3 million in 1996. The
following discussion of Results of Continuing Operations describes the
Company's continuing operations in plastic products and services and wine
grape agriculture separately from discontinued operations.
RESULTS OF CONTINUING OPERATIONS--1998 COMPARED TO 1997
Plastic products and services: ORC revenues and operating income were $95.1
million and $5.0 million, respectively, for the year ended December 31, 1998.
This compares to 1997 revenues and operating income of $93.4 million and $4.3
million, respectively.
The increase in revenues is attributable to a 34% increase in DPL sales as a
result of new customer programs, offset by a 5% decrease in sales at U.S.
operations. Parts sales increased $0.7 million, or 0.6% to $89.0 million for
the year ended December 31, 1998 compared to $88.5 million for the prior year
period. Tooling sales increased $1.2 million, or 24.5% to $6.1 million for
1998 compared to $4.9 million for 1997. Tooling revenues associated with the
production of customer tools are deferred until the tools are completed and
delivered to the customers. As a result, tooling sales fluctuate depending on
when projects are completed. The 34% increase in DPL sales resulted from two
significant new projects, for which the Company added production capacity.
Although the Company continues to seek new customers and projects, management
does not expect that such sales growth will recur. ORC backlog totaled $16.7
million at December 31, 1998 compared to backlog of $21.9 million at December
31, 1997. Backlog is down from 1997 as more major customers move to just-in-
time ordering and shorter delivery cycles and because of customer deferrals of
new programs.
Cost of sales totaled $80.9 million, or 85.1% of net sales, for the year
ended December 31, 1998 compared to $78.9 million, or 84.5% of net sales, for
the year ended December 31, 1997. Gross margins were $14.2 million or 14.9% of
net sales, in 1998 compared to $14.5 million, or 15.5% of net sales in 1997.
During 1997, ORC recorded a $1.0 million writedown of surplus equipment to
net realizable value. This writedown was made in conjunction with the
relocation of thermoplastic molding production from the Clayton, N.C. facility
to the Siler City, N.C. facility.
Selling, general and administrative expenses were $9.2 million in 1998, and
$9.2 million in 1997. Operating income was $5.0 million, or 5.3% of net sales
in 1998 compared to $4.3 million, or 4.6% of net sales in 1997.
Agriculture: Juliana had an operating loss of $0.1 million on revenues of
$2.2 million in 1998. Revenues and direct expenses from the 1998 harvest were
recognized in the fourth quarter, and these fourth quarter amounts are not
representative of a full year. Prior to October 1998, the Company accounted
for its wine grape agriculture operations on the equity method.
Corporate General and Administrative Expense: Corporate general and
administrative expenses, consisting primarily of executive and administrative
salaries and benefits, professional fees and other public company costs,
totaled $2.1 million for the year ended December 31, 1998 compared to $1.8
million for the year ended December 31, 1997. The 1998 and 1997 amounts
included approximately $0.6 million and $0.4 million, respectively, in legal
costs for the Company's Bargo litigation.
11
As a result of termination of the 1998 Merger Agreement with Chatwins
because of the inability to raise sufficient financing under then current
market conditions, the Company recorded a charge of $1.4 million in 1998 to
write off accumulated legal, investment banking and other costs related to the
merger.
Other Income and Expense: Interest expense was $3.2 million in 1998 compared
to $3.3 million for the prior year. The Company also recorded a charge of $9.2
million during 1998 to record entry of the judgment in the Company's
litigation with Bargo, accrual of interest on the judgment and letter of
credit and guarantee fees related to obtaining a supersedeas bond to appeal
the judgment.
The Company participated in the wine grape agriculture industry through its
equity investment in the Juliana Preserve joint venture in 1997 and until
September 1998. The Company recognized a loss of $0.4 million in 1998 and
income of $0.3 million in 1997 from its equity interest in the Preserve's
results of operations. In addition, the Company recorded a charge of $0.9
million in 1997 for its equity in the write off of development costs by the
joint venture.
Income Tax Expense: In August 1998, the Company reached a settlement with
the IRS on its appeal of the denial of the Company's request for refund of
Alternative Minimum Tax paid in 1990 and 1991. As a result of the settlement,
the Company received refunds totaling $0.7 million including interest. Because
of the uncertainty over realization of the refund, the Company had recorded an
allowance of $0.8 million in 1996 for the possible denial of the refund claim
with a corresponding charge to income tax expense. As a result of the
settlement, the Company recorded an income tax benefit of $0.7 million in
1998.
RESULTS OF CONTINUING OPERATIONS--1997 COMPARED TO 1996
Plastic products and services: ORC revenues and operating income were $93.4
million and $4.3 million, respectively, for the year ended December 31, 1997.
This compares to 1996 revenues and operating profit of $60.3 million and $3.4
million respectively.
The increase in revenues is attributable primarily to a full year's results
of the acquired businesses offset somewhat by a strike at the Rostone
division. Parts sales increased $35.5 million, or 67.0% to $88.5 million for
the year ended December 31, 1997 compared to $53.0 million for the prior year
period. Tooling sales decreased $2.4 million, or 32.9% to $4.9 million for
1997 compared to $7.3 million for 1996. Tooling revenues associated with the
production of customer tools are deferred until the tools are completed and
delivered to the customers. As a result, tooling sales fluctuate dependent
upon when projects are completed. Additionally, in 1997, there was a higher
incidence of molding contracts where the tools were provided by the customer.
ORC backlog totaled $21.9 million at December 31, 1997 compared to backlog of
$25.1 million at December 31, 1996. Backlog is down from 1996 as more major
customers move to just-in-time ordering and shorter delivery cycles.
During the second calendar quarter of 1997, a strike of the Company's
unionized factory work force took place at ORC's Rostone division. The work
stoppage occurred on April 15, 1997 and continued until May 15, 1997. Rostone
used office personnel, temporary workers and new hires to minimize the impact
of the strike on product shipments and the loss of customer business. Rostone,
however, experienced excess scrap, labor inefficiencies and higher than normal
product returns during the strike period and incurred additional overtime
subsequent to the strike in restoring normal production. As a result of the
strike, sales and operating income were approximately $2.1 million and $1.0
million, respectively, less than expected for the second quarter.
Cost of sales totaled $78.9 million, or 84.5% of net sales, for the year
ended December 31, 1997 compared to $50.7 million, or 84.1% of net sales, for
the year ended December 31, 1996. As a result of the increase in sales, offset
by the effects of the strike, gross margins rose to $14.5 million or 15.5% of
net sales, in 1997 from $ 9.6 million, or 15.9% of net sales in 1996.
During 1997, ORC recorded a $1.0 million writedown of surplus equipment.
This writedown was made in conjunction with the relocation of thermoplastic
molding production from the Clayton, N.C. facility to the Siler City, N.C.
facility acquired by the Company in November 1996.
12
Selling, general and administrative expenses were $9.2 million in 1997, $2.9
million more than in 1996 reflecting the businesses acquired in 1996.
Operating income was $4.3 million, or 4.6% of net sales in 1997 compared to
$3.4 million, or 5.6% of net sales in 1996.
Corporate General and Administrative Expense: Corporate general and
administrative expenses, consisting primarily of executive and administrative
salaries and benefits, professional fees and other public company costs,
totaled $1.8 million for the year ended December 31, 1997 compared to $1.9
million for the year ended December 31, 1996. The 1997 amount included
approximately $0.4 million in legal costs for the Company's Bargo litigation.
The expenses for the year ended December 31, 1996 included occupancy and
office costs for both the Company's previous headquarters in Houston, Texas,
closed in May 1996, and its new headquarters in Stamford, Connecticut and are
net of $0.3 million in reversals of certain charges for office closing and
severance accrued in 1995.
Other Income and Expense: Interest expense was $3.3 million in 1997 compared
to $2.4 million in 1996 as a result of interest on ORC debt subsequent to the
Rostone, QMP and DPL Acquisitions. Other income in 1996 includes a $0.6
million insurance recovery on a business loss claim for a DPL customer
contract termination.
The Company participated in the wine grape agriculture industry in 1997 and
1996 through its equity investment in the Preserve. The Company recognized
income of $0.3 million in 1997 compared to a loss of $0.3 million in 1996 from
its equity interest in the Preserve's results of operations. In addition, the
Company recorded an impairment charge of $1.3 million in 1996 and a further
charge of $0.9 million in 1997 for its equity in the write off of
approximately $2.9 million of development costs by the joint venture.
Income Tax Expense: Because of the uncertainty over realization of a refund
claimed for Alternative Minimum Taxes paid in 1990 and 1991 , the Company
recorded an allowance of $0.8 million for the possible denial of the refund
claim with a corresponding charge to Income Tax Expense in 1996.
DISCONTINUED OPERATIONS
The Company discontinued its U. S. oil and gas operations in 1995 . The
Company recognized income from discontinued operations of $0.7 million in 1997
compared to income of $0.4 million in 1996. The Company recognized a net gain
of $1.1 million in 1996 from disposition of the oil and gas assets, consisting
of a $1.6 million insurance reimbursement offset by $0.4 million of
adjustments to the purchase price for certain assets not sold and $0.1 million
of provisions for environmental remediation of those assets. Results of
discontinued oil and gas operations during 1996, prior to the disposition on
May 24, 1996, were approximately break even on revenues of $2.1 million.
As described below under "Contingencies and Uncertainties," the Company has
recorded a provision of $0.5 million in connection with settlement discussions
for the California Franchise Tax Board audit of the company's Franchise tax
returns for 1991 through 1993.
LIQUIDITY AND CAPITAL RESOURCES
Summary of 1998 Activities
Cash and cash equivalents totaled $2.0 million at December 31, 1998. During
the year ended December 31, 1998, cash decreased $0.1 million, with $2.4
million provided by operations, $2.2 million used by investing activities and
$0.6 million provided by financing activities.
Investing Activities: Capital expenditures were $3.3 million. The Company
paid $2.2 million to acquire its joint venture partner's interest in the
Preserve, and received $2.6 million from the sale of a portion of the
Preserve.
Financing Activities: Principal payments reduced long-term obligations by
$10.2 million in the year ended December 31, 1998. Proceeds from new term loan
borrowings totaled $7.1 million and debt issuance costs of $1.9 million were
paid. Net short term borrowings totaled $3.4 million.
13
Factors Affecting Future Liquidity
Because of various restrictions included in the Company's loan arrangements,
management must separately consider liquidity and financing for corporate
requirements, ORC and Juliana.
Corporate: Corporate expenses, including salaries and benefits, professional
fees and other public company costs, are expected to approximate $1.5 million
annually. Legal costs to appeal the Bargo litigation and the cost of
collateralizing the Bargo appeal bond will add to corporate requirements. In
addition, a significant portion of the $1.5 million accrued for environmental
remediation of the Louisiana properties, described in Item 1 "Business--
Environmental Regulation," is expected to be expended during the next twelve
months and a settlement payment for the California tax audit, described below
under "Contingencies and Uncertainties," is expected to be made. The Company's
source of funds for these expenses, other than from additional borrowings, are
from cash balances and permitted payments by ORC. The Corporate cash balance
at December 31, 1998 was $0.01 million.
As described in Note 7 to the Consolidated Financial Statements, ORC closed
a new credit facility with The CIT Group/Business Credit, Inc. ("CITBC") in
October 1998. This new credit facility limits payments to Reunion by ORC. If
certain levels of availability (as defined in the loan agreements) are
maintained, ORC is permitted to pay Reunion monthly payments of interest, plus
up to $0.1 million for management fees and dividends on preferred stock, plus
tax sharing payments of up to 50% of the tax savings realized by ORC because
of Reunion's NOLs. There can be no assurances that ORC will be able to
maintain the required levels of availability and be permitted to make the
management fee and tax sharing fee payments to Reunion. In any event, the
maximum amount of such payments is not expected to be sufficient for Reunion's
corporate operating and debt service requirements.
The new credit facility also provides a letter of credit guarantee to
provide credit support for a supersedeas bond in the Bargo litigation (see
Item 3--"Legal Proceedings"). In addition to the ORC assets, the facility is
secured by a guarantee by Mr. Bradley, a pledge of assets by Stanwich
Financial Services Corp., ("SFSC"), a related party (see Item 13--"Certain
Relationships and Related Transactions") and a pledge of the stock of ORC and
Juliana. Since October 1998, substantially all the amounts otherwise permitted
to be paid by ORC have been used to fund letter of credit and guarantee fees
relating to the supersedeas bond.
Without additional financing, management believes that the Company will not
have sufficient resources to meet its corporate expenses and legal and
environmental costs as they become due over the next twelve months. During
1998, the Company borrowed a total of $1.0 million from SFSC. These borrowings
bear interest at 15%, and were due to mature September 30, 1998. SFSC has
agreed to extend the maturity date to December 31, 1999 while the Company
seeks additional financing. There can be no assurances that such financing
will be arranged, or that SFSC will extend the maturity indefinitely or lend
additional funds.
As described below in "Possible Merger with Chatwins and Acquisitions of
King-Way and NAPTech," the Company has announced that it has reinstituted
merger discussions with Chatwins and has held financing discussions with
prospective lenders in connection with the proposed merger. If such a merger
and refinancing is completed, management believes that there will be
sufficient resources for the Company's requirements and for reinvestment in a
new business or businesses. There can be no assurances that any of these
transactions will be consummated.
ORC: On October 19, 1998, ORC closed the new credit facility with CITBC.
This is a six-year senior secured credit facility including revolving credit
loans of up to $10.2 million and a term loan in the initial amount of $6.0
million for ORC. The proceeds were used to refinance ORC's debt with Congress
Financial Corporation and to provide working capital for ORC. Management
believes that ORC's cash flow from operations, together with this credit
facility and permitted levels of capital and operating leases, will be
sufficient for ORC's operating requirements, including capital expenditures
and debt service, over the next twelve months. At December 31, 1998 ORC had
$1.2 million in revolving credit availability.
14
Juliana: In September 1998, Juliana completed the purchase of its joint
venture partner's 28.3% interest in the Juliana Preserve joint venture for
approximately $5.9 million. The purchase was funded from the proceeds of the
sale of three parcels for $2.7 million, and by a $3.7 million 4-month note to
the joint venture partner.
In January 1999, Juliana closed a $7.5 million loan with Equitable Life
Assurance Society of the United States ("Equitable"). The proceeds were used
to refinance Juliana's existing $2.0 million loan with Equitable, to repay the
$3.7 million 4-month note to the joint venture partner and for working
capital.
Juliana plans to continue a limited wine grape development effort, which
management believes will enhance the value of the property. Management
believes the combination of farming revenues plus working capital provided by
borrowings will be sufficient to fund the agricultural operations over the
next twelve months.
YEAR 2000 COMPUTER COMPLIANCE
The Company, like most companies, utilizes electronic technology which
includes computer hardware and software systems that process information and
perform calculations that are date-and time-dependent. The Company is aware
that the coming of the Year 2000 ("Y2K") poses pervasive and complex problems
in that virtually every computer operation (including manufacturing equipment
and other non-information systems equipment), unless it is Y2K compliant, will
be affected in some way by the rollover of the two-digit year value from "99"
to "00" and the inadvertent recognition by electronic technology of "00" as
the year 1900 rather than Y2K. The Company is also aware that it may not only
be negatively affected by the failure of its own systems to be Y2K compliant,
but may also be negatively affected by the Y2K non-compliance of its vendors,
customers, lenders and any other party with which the Company transacts
business.
The Company has completed its initial assessment of all of the systems and
software in place at all locations and has identified hardware replacements
and software upgrades necessary to achieve Y2K compliance. Because the Company
uses integrated accounting and manufacturing software provided by third party
vendors, it has avoided internal programming costs associated with modifying
code and data to handle dates past the year 2000. The latest software releases
provided by the respective third party vendors have achieved Y2K certification
from independent testing organizations. The Company is in the process of
upgrading all of its software to Y2K compliant releases. Upgrading and testing
is substantially complete at six of the Company's seven manufacturing
locations and at the headquarters location. The Company expects to complete
the remaining upgrades by the second quarter of 1999. Significant customers
and outside vendors such as suppliers, banks and payroll services have been
contacted and have provided assurances that they either are or will be Y2K
compliant by June 1999. Testing of the Company's software and systems
(including manufacturing equipment and other non-information systems
equipment) is expected to be completed during the second quarter of 1999.
Because management expects to complete the upgrading of all of its software
early in 1999, the Company has not developed a Y2K contingency plan.
Management regularly monitors the status of the Y2K compliance process, and
will develop contingency plans if it appears that the Company will not achieve
full Y2K compliance.
The Company has incurred and expects to continue to incur internal staff and
other costs as a result of modifying existing systems to be Y2K compliant.
Such costs will continue to be expensed as incurred and funded through
internally generated cash while costs to acquire new equipment and software
will be capitalized and depreciated over their useful lives. The hardware
replacements and software upgrades were principally planned to improve
operating controls and implementation was not significantly accelerated.
Management does not expect the incremental cost to the Company of enterprise-
wide Y2K compliance to be material to its operations.
Management recognizes that the failure of the Company or any party with
which the Company conducts business to be Y2K compliant in a timely manner
could have a material adverse impact on the operations of the Company. If the
Company's systems were to fail because they were not Y2K compliant, the
Company would incur significant costs and inefficiencies. Manual systems for
manufacturing and financial control would have to be implemented and staffed.
Significant customers might decide to cease doing business with the Company.
Disruptions in electric power or in the delivery of materials could cause
significant business interruptions. Similarly, business interruptions at
significant customers could result in deferred or canceled orders.
15
The dates on which the Company believes Y2K compliance will be completed are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there
can be no guarantee that these estimates will be achieved, or that there will
not be a delay in, or increased costs associated with, the implementation of
Y2K compliance. Specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, timely responses to and
corrections by third-parties and suppliers, the ability to implement
interfaces between the new systems and the systems not being replaced, and
similar uncertainties. Due to the general uncertainty inherent in the Y2K
problem, resulting in part from the uncertainty of the Y2K readiness of third-
parties, the company cannot ensure its ability to resolve problems associated
with the Y2K issue that may affect its operations and business, or expose it
to third-party liability in a timely and cost-effective manner.
POSSIBLE MERGER WITH CHATWINS AND ACQUISITIONS OF KING-WAY AND NAPTECH
On February 26, 1996, the Company announced that it had reinstituted its
merger discussions with Chatwins, which owns approximately 38% of Reunion's
Common Stock. The Company has also had discussions regarding possible
acquisitions of King-Way and of NAPTech at the same time as the Chatwins
merger. King-Way and NAPTech are affiliates of Chatwins and the Company. See
Item 13 "Certain Relationships and Related Transactions." The Company has
engaged legal and financial advisors in connection with these transactions,
and has held financing discussions with prospective lenders. These
transactions are subject to approval by the Company's Board of Directors and a
merger with Chatwins is subject to approval by the Company's and Chatwins'
stockholders. If such transactions are agreed to, and requisite approvals are
obtained and other conditions are satisfied, the consummation of the
transactions could occur as early as the second quarter of this year. There
can be no assurances that these transactions will be agreed to, or
consummated.
CONTINGENCIES AND UNCERTAINTIES
On April 24, 1998, a jury in state district court in Harris County, Texas
returned jury verdict findings that Bargo had a right to terminate a November
1995 stock purchase agreement with the Company and that the Company
fraudulently induced Bargo into entering into the agreement. The November 1995
stock purchase agreement concerned the sale of the Company's subsidiary, REC,
which operated the Company's discontinued oil and gas business. The jury
recommended that an award of $5.0 million in punitive damages be assessed
against the Company. In July 1998, the court entered judgment affirming the
$5.0 million jury verdict and awarding approximately $3.0 million in
attorneys' fees and costs. The Company maintained at trial and continues to
maintain that all requirements to closing under the contract were met, and
that Bargo was required to close the transaction. The Company also maintains
that no evidence sufficient to support a jury finding of fraud or the related
punitive damages finding was presented at trial. The Company has filed a bond
which suspends execution on the judgement while the Company appeals. A formal
notice of appeal has been filed and the Company intends to file its appeal in
April 1999. Although management believes, based on consultation with counsel,
that it is more likely than not that the judgment will be overturned on
appeal, the Company has recorded an accrual for the amount of the judgment
with a charge to continuing operations in 1998. Interest on the judgment at
10% has been accrued and will continue to accrue until the litigation is
resolved.
In early 1996, the State of California Franchise Tax Board initiated an
audit of the Company's franchise tax returns for the years 1991, 1992 and
1993. In October 1996, the Company received a formal notice of assessment from
the taxing authority in the aggregate amount of $0.7 million plus interest. Of
this amount, $0.6 million results from the auditors conclusion that income
from gains on sales of certain Canadian oil and gas assets in 1991 should be
reclassified from nonbusiness to business income. The Company believes its
classification of such income was correct, and appealed the assessment of tax.
In 1996, the Company recorded a provision for approximately $0.1 million for
certain other proposed adjustments. The appeal was denied, and the Company
requested that the case be considered for settlement. If the Company's
positions prevail on this issue,
16
management believes that the amounts due would not exceed amounts previously
paid or provided for. However, in connection with the settlement discussions,
the Company accrued an additional $0.5 million in 1998, with a corresponding
charge to Discontinued Operations. The total accrual of $0.6 million
represents management's estimate of the minimum of the range of possible
settlement outcomes.
In connection with the sale of REC, the Company 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 Office of Conservation. 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 1998 the Company
increased this accrual by a charge of $1.2 million to discontinued operations,
based on revised estimates of the remaining remediation costs. At December 31,
1998, the balance accrued for these remediation costs is approximately $1.5
million. Owners of a portion of the property have objected to the Company's
proposed 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 any costs of any
alternative cleanup methodology which might be imposed as a result of the
litigation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the operation of its business, the Company has market risk exposures to
foreign currency exchange rates, raw material prices and interest rates. Each
of these risks and the Company's strategies to manage the exposure is
discussed below.
The Company manufactures its products in the United States and Ireland and
sells products in those markets as well as in Europe. International sales were
28% of the Company's sales in 1998 and 18% in 1997. The Company's operating
results could be affected by changes in foreign currency exchange rates or
weak economic conditions in Europe. The Company does not actively hedge its
foreign currency risk because the international operations are self-financed
and the translation exposure is not considered material to the Company's
financial condition, liquidity or results of operations.
The principal raw materials used by the Company are thermoplastic polymers.
These materials are available from a number of suppliers. Prices for these
materials are affected by changes in market demand, and there can be no
assurances that prices for these and other raw materials will not increase in
the future. The Company's contracts with its customer generally provide that
such price increases can be passed through to the customers.
The Company's operating results are subject to risk from interest rate
fluctuations on debt which carries variable interest rates. The variable rate
debt was approximately $15 million at December 31, 1998, which is
representative of balances outstanding during the year. A 0.25% change in
interest rates would affect results of operations by approximately $0.04
million.
Item 8. Consolidated Financial Statements and Supplementary Data
The Company's consolidated financial statements are set forth beginning at
Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
17
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors. The following is a list of Directors of the Company:
Principal Position Director
Name with the Company Age Since
- ---- ------------------------- --- --------
Thomas N. Amonett(1)(2)................. Director 55 1992
Charles E. Bradley, Sr.................. Director, President & CEO 69 1995
Thomas L. Cassidy (1)................... Director 70 1995
W. R. Clerihue(1)(2).................... Director 75 1996
Franklin Myers(2)....................... Director 46 1995(3)
John G. Poole........................... Director 56 1996
- --------
(1) Member, Compensation Committee of the Board of Directors
(2) Member, Audit Committee of the Board of Directors
(3) Prior to his reappointment in October 1995, Mr. Myers was a director of
the Company from July 1992 to June 1995.
The following is a summary of the business experience of each director
during the past five years. If not otherwise indicated, each director has been
engaged in his current occupation for at least five years.
Thomas N. Amonett has served as a director of the Company since July 1, 1992
and served as the President and Chief Executive Officer of the Company from
July 1, 1992 until October 26, 1995. Mr. Amonett also served as the President
of Reunion Energy Company, then a wholly-owned subsidiary of the Company in
the oil and gas operating business, from July 1, 1992 until May 24, 1996. Mr.
Amonett is currently President, Chief Executive Officer and a director of
American Residential Services, Inc., a company providing equipment and
services relating to residential heating, ventilating, air conditioning,
plumbing, electrical and indoor air quality systems and appliances. From July,
1996 until June, 1997, Mr. Amonett was Interim President and Chief Executive
Officer of Weatherford Enterra, Inc., an energy services and manufacturing
company. Prior to his affiliation with the Company, he practiced law at
Fulbright & Jaworski in Houston, Texas, where he was of counsel for more than
five years. Mr. Amonett serves as a director of Petro Corp Incorporated, a
Houston-based oil and gas company and ITEQ, Inc. a provider of manufactured
equipment, engineered systems and services used in the processing, treatment,
storage and movement of gases and liquids.
Charles E. Bradley, Sr. became a director of the Company on June 20, 1995
and was appointed President and Chief Executive Officer of the Company on
October 26, 1995. Mr. Bradley was a co-founder of Stanwich Partners, Inc.
("SPI") in 1982 and has served as its President since that time. SPI is a
private investment company. Mr. Bradley has been a director of Chatwins Group,
Inc. ("Chatwins") since 1986 and Chairman of the Board of Chatwins since 1988.
Chatwins is an industrial products manufacturing company. Mr. Bradley is a
director of DeVlieg-Bullard, Inc. ("DBI"), a machine tool parts and services
company, General Housewares Corp., a manufacturer and distributor of
housewares, Consumer Portfolio Services, Inc. ("CPS"), engaged in the business
of purchasing, selling and servicing retail automobile installment sales
contracts, NAB Asset Corporation ("NAB"), engaged in mortgage and construction
lending, Audits and Surveys, Inc., an international marketing research firm,
and Zydeco Energy, Inc., an oil and gas reserve development company. Mr.
Bradley is currently the Chairman of the Board of DBI, Chairman and CEO of NAB
as well as President and acting Chief Financial Officer and a director of
Sanitas, an inactive company, and President, acting Chief Financial Officer
and a director of Texon Energy Corporation, an inactive company.
Thomas L. Cassidy became a director of the Company on June 20, 1995. Mr.
Cassidy has been a Managing Director of Trust Company of the West ("TCW"), an
investment management firm, since 1984. He is also a Senior Partner of TCW
Capital, an affiliate of TCW. He is a Director of DBI, Holnam Inc., a cement
manufacturing company, and Spartech Corporation, a plastics manufacturing
company.
18
W. R. Clerihue became a director of the Company in December 1996. Mr.
Clerihue has been Chairman of the Board of Directors of Spartech Corporation
since October 1991.
Franklin Myers served as a director of the Company from July 1, 1992 until
June 20, 1995, when he resigned contemporaneously with the sale of 1,450,000
shares of the Company's common stock by Parkdale Holdings Corporation N.V.
("Parkdale") to Chatwins. Mr. Myers was reappointed as a Director of the
Company on October 26, 1995. On April 1, 1995, Mr. Myers became Senior Vice
President, General Counsel and Secretary of Cooper Cameron Corporation, an oil
field manufacturing company. Prior thereto he was Senior Vice President and
General Counsel of Baker Hughes Incorporated, an international oil field
service and equipment company, for more than six years.
John G. Poole became a director of the Company on April 19, 1996. Mr. Poole
was a co-founder of SPI with Mr. Bradley in 1982 and has served as SPI's Vice
President since that time. Mr. Poole has been a director of Chatwins since
1988, and is also a director of DBI, CPS and Sanitas, Inc.
(b) Executive Officers. The following is a list of executive officers of the
Company and its principal subsidiary:
Name Position Age
- ---- -------- ---
Charles E. Bradley, Sr.... Director, President and Chief Executive Officer 69
of the Company
Richard L. Evans.......... Executive Vice President, Chief Financial 46
Officer and Secretary of the Company
David N. Harrington....... President and Chief Executive Officer, ORC 58
The business experience of Mr. Bradley is described above under "Directors."
Mr. Evans joined the Company as Executive Vice President and Chief Financial
Officer in October 1995. He was appointed Secretary of the Company in December
1995. From May 1993 to September 1995, he was Controller of Terex Corporation,
a capital goods manufacturer. From October 1989 to May 1993, Mr. Evans was
Controller of SPI.
Mr. Harrington has served as Chief Executive Officer of Oneida Molded
Plastics Corp. ("OMPC") (now a constituent of Oneida Rostone Corp., a wholly-
owned subsidiary of the Company), since December 1989 and as its President
since October 1990. From March 1986 through December 1989, Mr. Harrington
served as Vice President and General Manager of OMPC.
Compliance With Section 16(a) Of Securities Exchange Act Of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended requires
the Company's directors and officers and person who own beneficially more than
10% of the Common Stock of the Company to file with the Securities and
Exchange Commission and the National Association of Securities Dealers initial
reports of beneficial ownership and reports of changes in beneficial ownership
of the common stock of the Company. Directors, officers and person owning more
than 10% of the common stock of the Company are required to furnish the
Company with copies of all such reports. Mr. Evans failed to timely file Form
4 in March 1998 regarding the exercise of options and Form 5 for the fiscal
year ending December 31, 1998. Mr. Myers failed to timely file Form 4 in June
1998 regarding the exercise of warrants and Form 5 for the fiscal year ending
December 31, 1998. Messrs. Amonett, Bradley, Cassidy, Clerihue and Poole
failed to timely file Form 5 for the fiscal year ending December 31, 1998. All
individuals have subsequently filed the required forms.
19
Item 11. Executive Compensation
Compensation
The following table reflects all forms of compensation for services to the
Company for the years ended December 31, 1998, 1997 and 1996, of those
individuals who were at December 31, 1998 (i) the chief executive officer and
(ii) the two other most highly compensated executive officers (collectively
the "Named Executives"):
Long-Term
Annual Compensation Compensation
-------------------------------------- Stock
Name and Principal Other Annual Options All Other
Position Year Salary Bonus(1) Compensation(2) (Shares) Compensation(3)
------------------ ---- -------- -------- --------------- ------------ ---------------
Charles E. Bradley,
Sr..................... 1998 $150,000 $ 0 $ 0 75,000 $ 0
President and Chief 1997 100,000 0 0 0 300
Executive Officer 1996 100,000 0 0 0 312
Richard L. Evans........ 1998 $165,000 $15,000 $ 0 20,000 $7,411
Executive Vice
President, Chief 1997 150,000 75,000 $ 0 0 4,662
Financial Officer and
Secretary 1996 135,000 30,000 $ 0 50,000 4,352
David N. Harrington
President.............. 1998 $255,000 $ 0 $52,000 0 $3,064
President and Chief 1997 259,904 $51,000 $52,000 0 $2,614
Executive Officer, ORC 1996 240,000 48,000 $52,000 0 2,297
- --------
(1) Amounts shown for bonuses are amounts earned for the period shown,
although such bonuses are generally paid in the subsequent year.
(2) Includes automobile allowance, and certain deferred compensation.
(3) Contributions under nondiscriminatory defined contribution plan and
certain health insurance plans of the Company and/or its subsidiaries. The
Company maintains a voluntary employee retirement plan under which
employees of the Company and its subsidiaries may contribute up to 18% of
their pre-tax earnings, with the Company making matching contributions of
25% of each employee's contribution, not to exceed 4% of each
participant's pre-tax earnings.
Option Grants
The following table sets forth information with respect to the options to
purchase shares of common stock granted under all stock option plans to the
Named Executives in the fiscal year ended December 31, 1998.
Option/SAR Grants in Last Fiscal Year
Potential
Realizable Value
At Assumed
Percent of Annual Rates of
Number of Total Stock Price
Securities Options/SARs Exercise Appreciation for
Underlying Granted to or Base Option Term
Options/SARs Employees in Price Expiration ----------------
Name Granted Fiscal Year ($/Share) Date 5% ($) 20% ($)
---- ------------ ------------ --------- ---------- ------ --------
Charles E. Bradley...... 75,000 44% $7.21875 05/19/2003 $86,768 $252,273
Richard L. Evans........ 20,000 12% $ 5.0625 02/13/2003 $27,975 $ 61,814
20
Option Exercises and Year-End Values
The following table sets forth information with respect to the exercise of
options during the year ended December 31, 1998 and the unexercised options to
purchase shares of common stock granted under all stock option plans to the
Named Executives and held by them at December 31, 1998:
Aggregate Option Exercises in Last Fiscal Year and Option Value at December
31, 1998
Number of Securities
Underlying Unexercised Value of Unexercised
Number of Options at In-the-Money Options at
Shares December 31, 1998 December 31, 1998(1)
Acquired Value ------------------------- -------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Charles E. Bradley...... -0- -0- 13,800 61,200(2) -0- -0-
Richard L. Evans........ 7,465 $4,199 46,535 16,000(3) -0- -0-
- --------
(1) None of the outstanding options were in-the-money at December 31, 1998. In
addition to the options granted in 1998 to Mr. Bradley and Mr. Evans, Mr.
Evans has exercisable options for 42,535 shares at $4.4375 per share. The
closing sales price of the common stock on NASDAQ Small-Cap. Market on
December 31, 1998 was $2.75.
(2) These options become exercisable in annual 13,800 share increments on May
19,1999 through May 19, 2002 and 6,000 shares on January 2, 2003.
(3) These options become exercisable in 8,000 share increments on February 13,
1999 and February 13, 2000.
Oneida Pension Plan
The Oneida Molded Plastics Corp. Employee Retirement Plan #3 (the "Oneida
Pension Plan") covers substantially all of the employees of the former Oneida
Molded Plastics Corp. (a constituent of ORC). The monthly amount payable at
age 65 is 1% of a participant's average monthly compensation for the five
highest consecutive years of compensation times years of participation to a
maximum of 30 years. Effective January 1, 1997, benefits for salaried
employees except certain executives were frozen under the Oneida Pension Plan
and no additional benefits will be earned for future service. In conjunction
with the freeze, these employees are eligible to participate in the Company's
401(k) Plan. Oneida hourly employees will continue to participate in the
Oneida pension plan.
The following table shows estimated annual gross benefits payable from the
Oneida Pension Plan as a single life annuity upon retirement at age 65 for
employees in the salary classifications and within the five years of
participation specified. Various optional forms of benefits are payable in
lieu of a single life annuity. The maximum annual benefit payable under the
Oneida Pension Plan is that permitted by applicable law or regulations.
Years of Participation
----------------------------------------------------------
Remuneration 15 20 25 30 35
------------ ---------- ----------- ----------- ----------- -----------
125,000....... $18,750.00 $ 25,000.00 $ 31,250.00 $ 37,500.00 $ 37,500.00
150,000....... $22,500.00 $ 30,000.00 $ 37,500.00 $ 45,000.00 $ 45,000.00
175,000....... $26,250.00 $ 35,000.00 $ 43,750.00 $ 52,500.00 $ 52,500.00
200,000....... $30,000.00 $ 40,000.00 $ 50,000.00 $ 60,000.00 $ 60,000.00
225,000....... $33,570.00 $ 45,000.00 $ 56,250.00 $ 67,500.00 $ 67,500.00
250,000....... $37,500.00 $ 50,000.00 $ 62,500.00 $ 75,000.00 $ 75,000.00
300,000....... $45,000.00 $ 60,000.00 $ 75,000.00 $ 90,000.00 $ 90,000.00
400,000....... $60,000.00 $ 80,000.00 $100,000.00 $120,000.00 $120,000.00
450,000....... $67,500.00 $ 90,000.00 $112,500.00 $135,000.00 $135,000.00
500,000....... $75,000.00 $100,000.00 $125,000.00 $150,000.00 $150,000.00
Mr. Harrington is eligible to participate in this Plan. Mr. Harrington's
compensation for 1998 (included in the executive compensation table) covered
by the Oneida Pension Plan is $160,000 and he currently has twelve years of
service.
21
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
ORC (then Oneida Molded Plastics Corp.) entered into an Employment Agreement
(the "Harrington Employment Agreement"), effective as of January 1, 1995, with
David N. Harrington, its President. Pursuant to the Harrington Employment
Agreement, Mr. Harrington received (i) an annual base salary of $225,000 in
1995, increased to $240,000 in 1996 and $255,000 in 1997, (ii) an annual cash
bonus of up to 50% of his annual base salary based upon ORC's actual
performance for the year as compared to ORC's budgeted performance for the
year, (iii) a monthly car allowance of $1,000 and (iv) coverage under ORC's
fringe benefit plans for executives. In certain circumstances, Mr. Harrington
is entitled to receive up to 24 months of his base salary upon termination of
his employment. During the term of the Harrington Employment Agreement, Mr.
Harrington is required to maintain a reverse split-dollar universal life
insurance policy on his life in the amount of $2 million payable to ORC. ORC
is required to reimburse Mr. Harrington for up to $26,244 of the annual
premiums paid for such policy. If Mr. Harrington's employment is terminated
for any reason other than death, he may request that ORC assign its right to
receive the proceeds of such life insurance policy to Mr. Harrington.
Effective January 1, 1995, Mr. Harrington is eligible to earn deferred
compensation at the rate of $3,333.33 per month. The Harrington Employment
Agreement expired by its terms on December 31, 1997, but has been extended by
oral agreement through March 31, 1999 at the same salary as in 1997.
Director Compensation
Directors not otherwise compensated by the Company receive annual retainers
of $18,000 for service on the Board and $500 for each Board or committee
meeting attended. Compensation paid to non-employee directors during 1998 for
service in all Board capacities aggregated $111,000. Directors are reimbursed
for the actual cost of any travel expenses incurred.
22
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 19, 1999, the Company had outstanding 3,900,065 shares of common
stock. The following table sets forth information regarding the beneficial
ownership of the Company's common stock at March 19, 1999, by (i) each
stockholder known to the Company to own 5% or more of the Company's common
stock, (ii) each director of the Company, (iii) the Named Executives and (iv)
all current directors and executive officers as a group. Except as set forth
in the footnotes to the following table, each stockholder has sole dispositive
and voting power with respect to the shares of the Company's common stock
shown as owned by him.
Amount and
Nature Percent
Name and Address of 5% of Beneficial Owners of Ownership of Class
------------------------------------------- ------------ --------
Chatwins Group, Inc................................ 1,525,000(1) 38.4%
300 Weyman Plaza, Suite 340
Pittsburg, PA 15236
Bradley Family Limited Partnership................. 1,525,000(2) 38.4%
c/o Stanwich Partners, Inc.
62 Southfield Avenue
One Stamford Landing
Stamford, CT 06902
Stanwich Partners, Inc............................. 1,525,000(2) 38.4%
62 Southfield Avenue
One Stamford Landing
Stamford, CT 06902
Stanwich Financial Services Corp................... 271,280(3) 7.0%
c/o Stanwich Partners, Inc.
62 Southfield Avenue
One Stamford Landing
Stamford, CT 06902
Thomas N. Amonett.................................. 49,000(4) 1.3%
Charles E. Bradley, Sr............................. 1,538,800(5) 38.6%
Thomas L. Cassidy.................................. 30,000(4) 0.8%
W. R. Clerihue..................................... 20,000(4) 0.5%
Franklin Myers..................................... 118,710(4) 3.0%
John G. Poole...................................... 1,540,000(2)(4) 38.6%
Richard L. Evans................................... 63,000(6) 1.6%
David N. Harrington................................ 0 0.0%
All Current Directors and Executive Officers as a
group (8 individuals)............................. 1,834,510(7) 44.5%
- --------
(1) Includes 75,000 shares that may be purchased pursuant to currently
exercisable warrants, with respect to which Chatwins has dispositive power
only.
(2) Includes all shares of common stock shown as beneficially owned by
Chatwins. The Bradley Family Limited Partnership (the "Bradley FLP"),
established by Mr. Bradley in May 1998 for estate planning purposes and of
which Mr. Bradley owns 1% as general partner and 55% as a limited partner.
The Bradley FLP is owner of record of more than 50% of the issued and
outstanding shares of Chatwins. The Bradley FLP has designated Stanwich
Partners, Inc. ("SPI") to vote these shares and SPI in turn has designated
Mr. Poole, who is one of its officers, as the person to vote these shares
on its behalf. Pursuant to Rule 13d-3 the Bradley FLP may be deemed to be
the beneficial owner of these shares with shared dispositive power with
respect thereto, and SPI and Mr. Poole may be deemed to be the beneficial
owner of these shares with voting power with respect thereto.
(3) Acquired by Stanwich Financial Services Corp. ("SFSC") from Parkdale
Holdings Corporation N.V. pursuant to a settlement agreement with respect
to loans secured by these shares. On January 28, 1999, the Company's Board
of Directors resolved to permit this transaction notwithstanding the
Transfer Restrictions
23
in Reunion's Articles of Incorporation after determining that, based on the
facts presently in existence, the transaction will not jeopardize the
Company's full utilization of the Company's tax benefits.
(4) Includes options to purchase 15,000 shares of common stock.
(5) Includes all shares of common stock shown as beneficially owned by
Chatwins. Mr. Bradley is Chairman of the Board of Chatwins as well as the
beneficial owner of more than 50% of the issued and outstanding shares of
Chatwins and may, under Rule 13d-3, be deemed beneficial owner of all
shares of the Company's common stock beneficially owned by Chatwins. Mr.
Bradley disclaims such beneficial ownership. Includes currently exercisable
options to purchase 13,800 shares of common stock.
(6) Includes currently exercisable options to purchase 54,535 shares of common
stock.
(7) Includes currently exercisable warrants and options to purchase an
aggregate of 218,335 shares of common stock.
Item 13. Certain Relationships and Related Transactions
Chatwins owns 1,450,000 shares, or approximately 38%, of the Company's common
stock, and a warrant to purchase 75,000 shares of the Company's common stock
(the "Chatwins Warrant"). Charles E. Bradley, Sr., President , Chief Executive
Officer and a Director of the Company, is the Chairman and a Director of
Chatwins and the beneficial owner of approximately 57% of the outstanding
common stock of Chatwins. John G. Poole, a Director of the Company, is a
Director of Chatwins and Thomas L. Cassidy, a Director of the Company, was a
director of Chatwins until June 1997.
SFSC owns 271,280 shares, or approximately 7% of the Company's common stock.
Mr. Bradley is President and the indirect owner of 42.5% of SFSC's common
stock. Mr. Poole is the indirect owner of 7.5% of SFSC common stock. Richard L.
Evans, Executive Vice President, Chief Financial Officer and Secretary of the
Company, is Vice President of SFSC.
ORC's loan facility with CITBC (the "CITBC Credit Facility") provides for a
guarantee of a letter of credit supporting a supersedeas bond filed in
connection with the Company's litigation with Bargo. As additional collateral
for the letter of credit guarantee, the Company pledged the stock of its
subsidiaries ORC and Juliana, SFSC pledged certain collateral, and Mr. Bradley
guaranteed the obligations of ORC and Reunion under the CITBC Credit Facility.
Mr. Bradley receives a credit support fee from the Company in an aggregate
amount equal to 3% per annum of the amount guaranteed, payable monthly. Mr.
Bradley's rights to payment of the monthly installments of the credit support
fee are subordinated to the prior payment of indebtedness owing by ORC to
CITBC, except that if certain conditions are met, the monthly installments may
be paid when due. The SFSC pledge and Mr. Bradley's guarantee will terminate
upon the termination of the CITBC guarantee of the letter of credit supporting
the supersedeas bond.
Under ORC's previous loan facility with Congress Financial Corporation
("Congress"), Mr. Bradley received a credit support fee from ORC in an
aggregate amount equal to 1% per annum of the amount guaranteed, payable
monthly. The amount guaranteed was subject to a cap of $4 million, which
declined over time. Mr. Bradley also indemnified Congress against potential
liabilities arising from certain environmental exposures. Mr. Bradley's
obligations to Congress and the company's payment of guarantee fees were
released upon termination of the Congress loan facility in October 1998.
ORC is indebted to Mr. Bradley pursuant to a note in the approximate amount
of $1,017,000 bearing interest at 10% per annum which is subordinated to the
prior payment of indebtedness owed by ORC to CITBC , except that if certain
conditions are met, regularly scheduled payments of interest may be paid when
due.
ORC is indebted to CGII pursuant to a $250,000 promissory note dated May 21,
1993. The note had an outstanding balance of $477,270 (principal and accrued
interest) on December 31, 1998, and is subordinated to the prior payment of
indebtedness owing by ORC to CITBC under the CITBC Credit Facility, except that
if certain conditions are met, regularly scheduled monthly interest payments
may be paid when due. ORC is also permitted to recover certain environmental
remediation costs relating to soil and ground water contamination at
24
Rostone's Lafayette, Indiana site by offset against this note. CGII is owned
51% by SPI and 49% by Chatwins. Mr. Bradley, Mr. Poole and Mr. Evans are
officers, directors and/or shareholders of SPI. Prior to the Rostone
Acquisition certain officers of Oneida were also serving as officers of
Rostone and CGII.
Beginning in 1997, ORC has entered into leases for machinery and equipment
with CPS Leasing, Inc. ("CPS Leasing"), a subsidiary of Consumer Portfolio
Services, Inc. ("CPS"). Mr. Bradley and Mr. Poole are directors and
shareholders of CPS. The leases are for terms of five to seven years. The
Company believes that the terms of these leases are comparable to those
available from third parties.
The Company subleases from SPI approximately 1,500 square feet of office
space in Stamford, Connecticut for its corporate offices. The Company believes
that the terms of this sublease are comparable to those available from third
parties.
Beginning in January 1998, the Company entered into an arrangement for
flying services with Butler Air, Inc. ("Butler"). Mr. Bradley is a director of
Butler and the owner of 65% of Stanwich Aviation Company, Inc., of which
Butler is a wholly-owned subsidiary. Butler provides charter flight services
for certain business travel by Company officers and employees at rates which
the Company believes are comparable to those available from third parties. The
Company pays a monthly minimum of $5,000, which is credited against services
as used.
Beginning in August 1998, the Company has borrowed funds for corporate
working capital from SFSC. The debt bears interest at 15% and was originally
scheduled to mature September 30, 1998. SFSC has agreed to extend the maturity
to December 31, 1999 while the Company seeks an alternative source of funds.
Under the arrangements described above, the Company's consolidated statement
of operations for the year ended December 31, 1998 includes interest expense
of $112,000 to Mr. Bradley, $38,000 to CGII and $23,000 to SFSC; guarantee
fees of $190,000 to Mr. Bradley; rent expense of $167,000 to CPS Leasing and
$32,000 to SPI; and travel expense of $75,000 to Butler. At December 31, 1998,
the Company's consolidated balance sheet includes interest payable to CGII of
$109,000; short term debt payable to SFSC of $1,015,000 and accrued travel of
$20,000 payable to Butler classified as Current Liabilities; principal payable
to Mr. Bradley of $1,017,000 and payable to CGII of $368,000 classified as
Long Term Debt-Related Parties; and interest and fees payable to Mr. Bradley
under prior arrangements of $123,000 classified as Other Liabilities. At
December 31, 1998, future minimum rental commitments to CPS Leasing under
operating leases totaled $937,000.
ORC manufactures component parts for King-Way. Mr. Bradley and Mr. Evans are
officers and directors of King-Way and own 42.5% and 15%, respectively, of
King-Way's common stock. Sales to King-Way in 1998 were $299,000 and were at
margins equivalent to those earned on sales to third party customers at
comparable volumes.
The Company obtains its property, casualty and product and general liability
insurance coverage through a joint arrangement with Chatwins. The Company and
Chatwins share the costs in proportion to the coverages.
The Company and Chatwins are considering the possible merger of Chatwins
with and into the Company in a tax-free exchange of stock. Such a merger will
be subject to, among other conditions, approvals by the Boards of Directors
and the Stockholders of the Company and Chatwins and compliance by Chatwins
with the covenants in its financing agreements. The Company has also had
discussions regarding possible acquisitions of King-Way and of NAPTech at the
same time as the Chatwins merger. NAPTech is owned by Mr. Bradley. If King-Way
and NAPTech were acquired, they would be combined with divisions of Chatwins
operating in similar businesses. The Company has engaged legal and financial
advisors in connection with these transactions and has held financing
discussions with prospective lenders. If such transactions are agreed to, and
requisite approvals are obtained and other conditions are satisfied, the
consummation of the transactions could occur as early as the second quarter of
this year. There can be no assurances that these transactions will be agreed
to, approved or consummated.
25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on From 8-K
(a) Documents included in this report:
The following consolidated financial statements and financial statement
schedules of Reunion Industries, Inc. and its subsidiaries are included in
Part II, Item 8:
1. Financial Statements (Pages F-1 through F-34)
Report of Independent Public Accountants
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Operations--Years Ended December 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows--Years Ended December 31, 1998, 1997
and 1996
Consolidated Statements of Shareholders' Equity--Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules (Pages S-1 through S-5)
Schedule I --Condensed Financial Information of Registrant
Schedule II--Valuation and Qualifying Accounts and Reserves
Other schedules have been omitted because they are either not required, not
applicable, or the information required to be presented is included in the
Company's financial statements and related notes.
3. Exhibits
See pages 28 and 29 for a listing of exhibits filed with this report or
incorporated by reference herein.
(b) Current Reports on Form 8-K
During the last quarter of the year ended December 31, 1998, the Company
filed the following Current Reports on Form 8-K:
Report Date Item Reported
----------- -------------
October 19, 1998 Refinancing of Secured Debt by Oneida Rostone
Corp. with The CIT Group/Business Credit, Inc.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 1999
REUNION INDUSTRIES, INC.
By: /s/ Charles E. Bradley
----------------------------------
Charles E. Bradley
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
Dated: March 29, 1999
By: /s/ Charles E. Bradley
----------------------------------
Charles E. Bradley
Director, President and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ Richard L. Evans
----------------------------------
Richard L. Evans
Executive Vice President and Chief
Financial Officer (Principal
Accounting and Financial Officer)
By: /s/ Thomas N. Amonett
----------------------------------
Thomas N. Amonett
Director
By: /s/ Thomas L. Cassidy
----------------------------------
Thomas L. Cassidy
Director
By: /s/ W. R. Clerihue
----------------------------------
W. R. Clerihue
Director
By: /s/ Franklin Myers
----------------------------------
Franklin Myers
Director
By: /s/ John G. Poole
----------------------------------
John G. Poole
Director
27
EXHIBIT INDEX
2.1 -- Merger Agreement by and between Reunion Resources Company and
Reunion Industries, Inc. Incorporated by reference to Exhibit 2.1 to
Registration Statement on Form S-4 (No. 33-64325).
3.1 -- Certificate of Incorporation of Reunion Industries, Inc.
Incorporated by reference to Exhibit 3.1 to Registration Statement
on Form S-4 (No. 33-64325).
3.2 -- Bylaws of Reunion Industries, Inc. Incorporated by reference to
Exhibit 3.2 to Registration Statement on Form S-4 (No. 33-64325).
4.1 -- Specimen Stock Certificate evidencing the Common Stock, par value
$.01 per share, of Reunion Industries, Inc. Incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-4
(Registration No. 33-64325).
10.1 -- Buttes Gas & Oil Co. 1992 Nonqualified Stock Option Plan.
Incorporated by reference to Exhibit 10.35 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992.
10.2 -- Form of Stock Option Agreement for options issued pursuant to the
1992 Nonqualified Stock Option Plan. Incorporated by reference to
Exhibit 10.36 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.
10.3 -- Form of Warrants expiring June 30, 1999 to purchase an aggregate of
150,000 shares of Common Stock of Reunion Industries, Inc.
Incorporated by reference to Exhibit 10.37 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992.
10.4 -- Reunion Resources Company 1993 Incentive Stock Plan. Incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on Form
10-K for the year ended December 31, 1993.
10.5 -- Form of Stock Option Agreement for options issued pursuant to the
1993 Incentive Stock Plan. Incorporated by reference to Exhibit
10.35 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
10.6 -- The 1998 Stock Option Plan of Reunion Industries, Inc. Incorporated
by reference to Exhibit 2.2 to Registration Statement on Form S-4
(No. 333-56153).
10.7 -- Form of Stock Option Agreement for options issued pursuant to the
1998 Stock Option Plan of Reunion Industries, Inc.*
10.8 -- Loan and Security Agreement dated as of October 16, 1998 among
Oneida Rostone Corp., Reunion Industries, Inc. and DPL Acquisition
Corp.