Back to GetFilings.com
==============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 2000, Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
---------- ----------
Commission File Number 33-64325
--------
REUNION INDUSTRIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400, PITTSBURGH, PENNSYLVANIA 15236
-------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: COMMON STOCK, $.01 par value
Name of Each Exchange on Which Registered: AMERICAN STOCK EXCHANGE
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
----- -----
At March 27, 2001, 15,235,624 shares of common stock were issued and
outstanding. As of March 27, 2001, 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 American Stock Exchange) was
$4,550,823.
DOCUMENTS INCORPORATED BY REFERENCE: Part III, Items 10 through 13 are
incorporated from the Registrant's definitive proxy statements to be filed
within 120 days after the close of Reunion Industries's fiscal year.
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 the 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
Page No.
--------
PART I
Item 1. Business 4
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Consolidated Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosures 33
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial
Owners and Management 33
Item 13. Certain Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statements Schedules,
and Reports on Form 8-K 34
SIGNATURES 35
2
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act which are intended to be covered by the safe harbors created thereby. The
forward-looking statements contained in this report are enclosed in brackets
[] for ease of identification. Note that all forward-looking statements
involve risks and uncertainties, including, without limitation, factors which
could cause the future results and shareholder values to differ materially
from those expressed in the forward-looking statements. Although the Company
believes that the assumptions underlying the forward-looking statements
contained in this report are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurances that the forward-looking
statements included or incorporated by reference in this report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included or incorporated by reference herein, the
inclusion of such information should not be regarded as a representation by
the Company or any other person that the Company's objectives and plans will
be achieved. In addition, the Company does not intend to, and is not
obligated to, update these forward-looking statements after filing and
distribution of this report, even if new information, future events or other
circumstances have made them incorrect or misleading as of any future date.
3
PART I
ITEM 1. BUSINESS
GENERAL
Reunion Industries, Inc., a Delaware corporation ("Reunion Industries" or
"Reunion"), is the successor by merger, effective March 16, 2000, of Chatwins
Group, Inc. ("Chatwins Group") with and into Reunion Industries, Inc. As used
herein, the term "Company" refers, as the context requires, to Reunion, after
giving effect to the merger, and also to Chatwins Group prior to the merger,
as the acquirer for purposes of applying purchase accounting. Reunion
Industries' executive offices are located at 11 Stanwix Street, Suite 1400,
Pittsburgh, Pennsylvania 15222 and its telephone number is (412) 281-2111.
The Company owns and operates a diverse group of industrial manufacturing
operations that design and manufacture highly engineered, high-quality
products for specific customer requirements, such as large-diameter seamless
pressure vessels, hydraulic and pneumatic cylinders, precision plastic
components, heavy-duty cranes, bridge structures and materials handling
systems. The Company's customers include original equipment manufacturers and
end-users in a variety of industries, such as transportation, power
generation, chemicals, metals, home electronics, office equipment and consumer
goods. The Company's business units are organized into two major operating
groups:
The Metals Group, through its five manufacturing divisions (representing
the divisions of the former Chatwins Group plus Kingway Material Handling
Company acquired at the same time as the merger), designs, manufactures and
markets a broad range of fabricated and machined industrial metal parts and
products to original equipment manufacturers and end-users. The Metals Group
serves over 5,000 customers.
The Plastics Group (which is comprised of the pre-merger plastics
business units of Reunion) manufactures precision molded plastic parts and
provides engineered plastics services to more than 500 original equipment
manufacturers.
General information about each of Reunion Industries' principal
businesses is set forth below under the captions "Metals Group" and "Plastics
Group."
Reunion Industries' Certificate of Incorporation includes certain capital
stock transfer restrictions which are designed to prevent any person or group
of persons from becoming a 5% shareholder of Reunion Industries 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 Reunion Industries' 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 Reunion
Industries' Board of Directors if such approval is based on a determination
that the proposed transfer will not jeopardize the full utilization of Reunion
Industries' net operating loss carryforwards.
4
RECENT DEVELOPMENTS
The Merger
On March 16, 2000, Chatwins Group and Reunion merged, with Reunion as the
surviving entity. Prior to the merger, Chatwins Group owned approximately 37%
of Reunion's issued and outstanding common stock.
The merger was accounted for as a purchase under APB Opinion No. 16
"Business Combinations" with Chatwins Group as the acquirer for purposes of
applying purchase accounting. Accordingly, Chatwins Group's assets and
liabilities are accounted for at historical book values and the approximately
63% of assets and liabilities of Reunion not previously owned by Chatwins
Group have been revalued at their estimated fair value. Amounts assigned to
goodwill at the merger date have been allocated to deferred tax assets based
on the expected usage of net operating losses of pre-merger Reunion preserved
in the merger.
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The 1,450,000 shares of Reunion common
stock previously owned by Chatwins Group were retired in the merger, as were
the previously issued shares of Chatwins Group common stock. The merger
agreement also provided that up to an additional 500,000 shares of Reunion
common stock will be issued to former Chatwins Group common stockholders if
the former Chatwins Group businesses plus the acquired Kingway business on a
pro forma 2000 basis achieve specified performance levels in 2000. [Final
determination of the number of shares to be issued will be made by the board
of directors at its meeting scheduled for May 15, 2001.]
Holders of Chatwins Group Class D, Series A, B and C preferred stock
received 9,033 shares of Reunion Series A preferred stock in the merger. The
Reunion Series A preferred stock had an initial redemption price of
$9,033,000. See "Preferred Stock Exchange" below for a discussion of the
exchange of the Company's preferred stock for common stock.
The Refinancing
Simultaneously with the merger, Reunion entered into $72.5 million of
senior secured credit facilities with Bank of America ("Bank of America" or
"BOA"). These credit facilities consisted of a $39.0 million revolving credit
facility, a $25.8 million term loan A facility, a $5.0 million term loan B
facility and a $2.7 million capital expenditures facility.
Proceeds from initial borrowings under the Bank of America credit
facilities were used for various purposes, including repayment of Chatwins
Group's existing credit facilities with Bank of America, repayment of
Reunion's existing credit facilities with the CIT Group/Business Credit, Inc.
and retirement of $25.0 million of Chatwins Group's 13% senior notes plus
accrued and unpaid interest. Reunion assumed the obligations of Chatwins
Group under the indenture governing the remaining $24.975 million of 13%
senior notes.
Acquisition of Kingway
Simultaneously with the merger, Reunion acquired Stanwich Acquisition
Corp. (SAC), an affiliated company, doing business as Kingway Material
Handling (Kingway). Similar to Chatwins Group's material handling product
line, Kingway produces industrial and commercial storage racks and materials
handling systems. Subsequent to the merger and acquisition, Reunion
integrated Kingway into the existing material handling product line and
operates from a single location. The transaction was accounted for as a
purchase under APB 16. The purchase price in excess of net assets acquired
plus $0.3 million, the value assigned to SAC's net operating losses at the
time of the acquisition, of approximately $13.2 million was recorded as
goodwill and is being amortized over 15 years.
5
In the acquisition, the holder of SAC's preferred stock received in
exchange for its shares, 5,000 shares of Reunion Series B preferred stock.
The Reunion Series B preferred stock had a redemption price of $5,000,000 plus
cumulative dividends as of the date of the acquisition of $1,781,000. See
"Preferred Stock Exchange" below for a discussion of the exchange of the
Company's preferred stock for common stock.
Preferred Stock Exchange
On June 14, 2000, the Company's Board of Directors approved the exchange
of its Series A and Series B preferred stocks for 3,245,515 shares of the
Company's common stock at an exchange price of $5.00 per share. The Series A
and Series B preferred stock were issued in connection with the March 16, 2000
merger with Chatwins Group and acquisition of Kingway, and had an aggregate
liquidation value of $16.2 million. The closing market price of the common
stock was $1.00 on that date. Except for the par value of the issued common
stock and the expense connected with the exchange, the aggregate carrying
value of the Series A and B preferred stocks was recorded as additional paid-
in capital upon their exchange for common stock.
Dispositions and Discontinued Operations
On August 31, 2000, the Company sold its Irish plastics subsidiary, Data
Packaging, Ltd. The net proceeds of $10.0 million from the sale were used to
repay debt including a portion of the Company's senior secured and revolving
credit borrowings with Bank of America.
On October 27, 2000, the Company sold substantially all of its wine grape
agricultural operations and real estate holdings in Napa County, California.
The $16.5 million net proceeds from the sale after transaction-related costs
were used to reduce debt. During the third quarter of 2000, the Company
classified and began accounting for the agricultural operations as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" (APB 30), which requires
discontinued operations to be reported separately from continuing operations.
On December 28, 2000, the Company sold and leased-back the land and
building of its Chicago, IL hydraulic cylinder manufacturing location. The
net proceeds of $3.0 million from the sale were used to repay debt including a
portion of the Company's senior secured and revolving credit borrowings with
Bank of America.
Acquisition of NPS Acquisition Corp.
On January 17, 2001, the Company acquired NPS Acquisition Corp. (f/k/a
Naptech Pressure Systems) from Charles E. Bradley, Sr. (Mr. Bradley), the
Company's chairman of the board and chief executive officer. NPSAC is based
in Clearfield, Utah and manufactures seamless steel pressure vessels, an
existing Metals Group product line.
The purchase price was $10,000 plus the assumption of $10.3 million of
NPSAC's liabilities, including a $6.9 million note payable to Shaw Industries,
the former owner of Naptech Pressure Systems. Simultaneously with the
acquisition Reunion paid Shaw Industries $2.0 million of the note payable in
cash from funds available under its revolving credit facility with Bank of
America. The remainder of the note payable of $4.9 million was then
restructured to include quarterly principal payments of $0.6 million for eight
quarters which began on February 28, 2001. Reunion made the first payment.
The note is unsecured.
The transaction was accounted for as a purchase under APB 16. The
purchase price in excess of net assets acquired of $7.9 million was recorded
as goodwill and is being amortized over 15 years.
6
METALS GROUP
The Metals Group designs, manufactures and markets a broad range of
fabricated and machined industrial metal parts and products to original
equipment manufacturers and end-users through its five manufacturing
divisions. The Metals Group divisions include:
Alliance - Alliance, founded in 1901 and located in Alliance, Ohio,
designs, engineers and manufactures a variety of equipment including heavy-
duty cranes used in a wide range of steel and aluminum mill applications,
large special purpose cranes used in marine and aerospace applications and
heavy industrial plants and lighter duty cranes for various industrial
applications, coke oven machinery and other large steel-related fabrications.
Early in 2000, Alliance also entered the steel bridge fabrication market.
Alliance also offers maintenance and repair services for all of the equipment
it manufactures.
Kingway - Kingway, which represents Chatwins Group's former Auto-Lok
division founded in 1946 and combined with Kingway at the time of the
acquisition, is located in Acworth, Georgia. Kingway manufactures roll formed
and structural steel fabricated storage racks for industrial and commercial
materials handling systems and general storage applications. Kingway also
manufactures gravity flow racking and computer assisted picking systems for
the order selection segment of the materials handling systems industry. In
addition, Kingway participates on larger contracts in the sale of total
materials handling systems through purchasing and reselling related components
such as decking and carton flow devices, and subcontracting of rack erection.
CPI - CPI, founded in 1897 and located in McKeesport, Pennsylvania,
specializes in manufacturing large, seamless pressure vessels for the above
ground storage and transportation of highly pressurized gases such as natural
gas, hydrogen, nitrogen, oxygen and helium. These pressure vessels are
provided to customers such as industrial gas producers and suppliers, the
alternative fueled vehicle compressed natural gas fuel industry, chemical and
petrochemical processing facilities, shipbuilders, NASA, public utilities and
gas transportation companies.
Hanna - Hanna, founded in 1901 with locations in Chicago, Illinois and
Milwaukee, Wisconsin, designs and manufactures a broad line of hydraulic and
pneumatic cylinders, actuators, accumulators and manifolds. These products
are used in a wide variety of industrial and mobile machinery and equipment
requiring the application of force in a controlled and repetitive process.
Hanna's specialty is custom cylinders in both small quantities packaged by its
distributors with valves, pumps and controls as complete fluid power systems
and large quantities sold directly to equipment manufacturers.
Steelcraft - Steelcraft, founded in 1972 and located in Miami, Oklahoma,
manufactures and sells cold-rolled steel leaf springs. Its principal
customers are manufacturers of trailers for boats, small utility vehicles and
golf carts and makers of recreational vehicles and agricultural trailers.
Markets and Customers. The Metals Group operates in relatively mature
markets. Most of the Metals Group's products are sold in highly competitive
markets both in the U.S. and internationally and compete with a significant
number of companies of varying sizes, including divisions or subsidiaries of
larger companies, on the basis of price, service, quality and the ability to
supply customers in a timely manner. A number of our competitors have
financial and other resources that are substantially greater than those of the
Company. [Competitive pressures or other factors could cause us to lose
market share or erode prices which could negatively impact the Company's
results of operations.]
During 2000, no customer accounted for more than 10% of the net sales of
the Metals Group. Individual divisions of the Metals Group in the past have
7
had customers that have accounted for in excess of 10% of its net sales. This
occurs principally at CPI, Alliance and Kingway due to the large contract
nature of their businesses, and commonly occurs for different customers from
one year to the next.
Sales and Marketing. The Metals Group markets and distributes its
products in a variety of ways including in-house marketing and sales personnel
at all of its divisions, domestic independent and manufacturer
representatives, domestic and international agents and North American networks
of independent distributors that specialize in metal products and the specific
products of each division.
Raw Materials. The major raw materials used by the Metals Group include
steel hot- and cold-rolled bands, structural bars, stainless steel coils,
welded and seamless steel tubing and pipe, steel alloy bars, steel plates,
brass tubing and bars and aluminum extrusions, all of which are supplied by
various domestic sources. Prices for most of these raw materials used by the
Company remained relatively constant during 2000. [There can be no assurance
that prices for these and other raw materials used by the Company will not
increase in the future.]
Research and Development. The majority of the Metals group's research
and development work is related to improving the quality and performance of
its existing products, meeting design requirements and specifications of its
customers that require customized products and developing greater production
efficiencies. To meet these objectives, there are engineering departments at
all major metals manufacturing divisions. The Metals Group's business is not
materially dependent on any patents, licenses or trademarks.
PLASTICS GROUP
ORCplastics manufactures plastic products and provides engineered
plastics services through its two divisions: thermoplastics and Rostone.
Founded in 1964 as Oneida Molded Plastics, the thermoplastics division
designs and produces injection molded parts and provides secondary services
such as hot stamping, welding, printing, painting and assembly of such
products and designs and builds custom molds at its tool shop in order to
produce component parts for specific customers. The thermoplastics division'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.
Founded in 1927, the Rostone division compounds and molds thermoset
polyester resins. Rostone's principal products consist of specially designed
and manufactured components for original equipment manufacturers in the
electrical, transportation, appliance and office equipment industries.
Rostone is also a compounder of proprietary fiberglass reinforced materials
used in a number of customer applications.
Thermoplastics Division
Markets and Customers. The markets in which the thermoplastics division
competes have sales in excess of $25 billion per year. These markets are
highly competitive. The 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. The thermoplastics
division competes on the basis of customer service, product quality and price.
8
During 2000, sales to one customer, Remington Arms, were approximately
10% of the thermoplastics division's sales (6% of Plastics Group sales). [The
loss of this customer could have a material adverse effect on the results of
operations of the thermoplastics division], as did sales to Xerox, which have
declined as a percentage of the division's sales as the Company diversifies
its customer base. The division has approximately 500 customers in the
various industries described above. ORCplastics continues to seek additional
customers in the business machines, consumer products and medical products
industries. [We believe that these new customers provide future growth
opportunities for the division.]
Sales and Marketing. Sales of products are made through an internal
sales staff and a network of independent manufacturers' representatives
working from nine separate regional offices throughout the eastern United
States. The division generally pays commissions of between 2% and 5% percent
of sales based upon volume.
Raw Materials. The principal raw materials used by the thermoplastics
division 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 division's contracts with
its customers generally provide that such price increases can be passed
through to the customers.]
Research and Development. The majority of the thermoplastics division's
research and development 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, the
division has engineering personnel at each of its manufacturing locations.
The division's business is not materially dependent on any patents, licenses
or trademarks.
Rostone
Markets and Customers. Rostone competes in a market with a limited
number of privately owned competitors and in-house molders on the basis of
product specifications, customer service and price. During 2000, one
customer, Cutler Hammer, was responsible for more than 28% of Rostone's sales
(9% of Plastics Group sales). [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 previously and in other
industries.]
Sales and Marketing. Sales of Rostone's products are made through 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.
Raw Materials. 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. Research and development at Rostone is
focused on the development of proprietary thermoset materials under the trade
name Rosite. 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, Rostone's business is not materially dependent
on any patents, licenses or trademarks.
9
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 Reunion Industries' operations.
In addition, environmental laws and regulations typically impose "strict
liability" upon Reunion Industries for certain environmental damages.
[Accordingly, in some situations, Reunion Industries could be liable for clean
up costs even if the situation resulted from previous conduct of Reunion
Industries 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 Reunion Industries or events outside the control of Reunion
Industries. Such clean up or costs associated with changes in environmental
laws and regulations could be substantial and could have a materially adverse
effect on Reunion Industries' consolidated financial position, results of
operations or cash flows.]
Except as described in the following paragraphs, Reunion Industries
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, Reunion Industries has also employed outside consultants from time
to time to advise and assist Reunion Industries' environmental compliance
efforts. [Except as described in the following paragraphs, Reunion Industries
is not aware of any conditions or circumstances relating to environmental
matters that will require significant capital expenditures by Reunion
Industries 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. Rostone has initiated a remediation plan under
an agreement with the Indiana Department of Environmental Management and
expects to substantially complete the remediation during 2001. Rostone has
expended approximately $0.4 million of remediation costs. Remaining costs are
expected to be inconsequential.
In connection with the sale of its former oil and gas operations, Reunion
Industries retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. Reunion Industries is in the
process of environmental remediation under a plan approved by the Louisiana
Office of Conservation. Reunion Industries 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 Reunion Industries. During 1998 Reunion Industries increased this accrual
by a charge of $1,200,000, based on revised estimates of the remaining
remediation costs. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. [No decision has
been rendered to date, but Reunion Industries does not believe that the cost
of future remediation will exceed the amount accrued.] No remediation was
performed during 2000 pending the decision. However, Reunion paid
approximately $118,000 for its share of legal and consulting services in
connection with the hearings. At December 31, 2000, the balance accrued for
these remediation costs is approximately $1,190,000. Owners of a portion of
the property have objected to Reunion Industries' proposed cleanup methodology
and have filed suit to require additional procedures. Reunion Industries 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.
10
Employees
At December 31, 2000, Reunion Industries employed 1,300 full time
employees, of whom 807 were employed in the Metals Group and 473 were employed
in the Plastics Group. There were 20 corporate employees. The Company
believes its relations with its employees are good. The employees in Beijing,
China are Chinese nationals and relate to seamless pressure vessel sales
efforts in that region. These employees are not covered by a union nor are
they covered by any benefit or insurance plans sponsored by the Company.
A breakdown of the Company's workforce by location and function at
December 31, 2000 is as follows.
General and
Group Location Manufacturing Administrative Total
- -------- -------- ----------------- ----------------- -----
Union Non-Union Union Non-Union
----- --------- ----- ---------
Metals Group:
Alliance, OH 121(1) 40 161
Acworth, GA 229 36 265
Beijing, China 7 7
Exeter, NH 23 23
McKeesport, PA 96(2) 5 8(3) 22 131
Chicago, IL 74 26 100
Milwaukee, WI 72 12 84
Miami, OK 30 6 36
Plastics Group:
Charlotte, NC 11 11
Oneida, NY 73 28 101
Phoenix, NY 53 11 64
Siler City, NC 102 19 121
LaFayette, IN 153(4) 23 176
Corporate:
Pittsburgh, PA 17 17
Stamford, CT 3 3
--- --- - --- -----
Totals 370 638 8 284 1,300
=== === = === =====
(1) United Steelworkers of America - Contract expires June 14, 2002.
(2) United Steelworkers of America - Contract expires May 31, 2001.
(3) United Steelworkers of America - Contract expires May 31, 2001.
(4) International Brotherhood of Electrical Workers - Contract expires
February 27, 2003.
11
ITEM 2. PROPERTIES
The Company has a total of 102.3 acres and 1,846,392 square feet being
used for ongoing operations. Except for CPI's sales office in Beijing, China,
the Plastics Group's administrative headquarters in Charlotte, NC and the
Company's corporate sites in Pittsburgh, PA and Stamford, CT, which are
administrative, all locations are both manufacturing and administrative
facilities:
Lease
Square Land Expiration
Group Location Feet Acres Title Date
- -------- -------- ------- ----- ----- ----------
Metals Group:
McKeesport, PA 602,772 37.0 Owned -
Beijing, China 808 - Leased 10/31/02
Alliance, OH 383,865 14.8 Owned -
Chicago, IL 85,283 - Leased 12/28/01
Milwaukee, WI 68,000 3.2 Owned -
Miami, OK 39,120 13.5 Owned -
Acworth, GA 222,900 - Leased 3/12/08
Exeter, NH 7,700 - Leased 3/31/02
Plastics Group:
Charlotte, NC 4,500 - Leased 6/30/02
Oneida, NY 84,000 3.5 Owned -
Phoenix, NY 28,000 - Leased 1/31/05
Phoenix, NY 20,000 2.0 Owned* -
Siler City, NC 130,000 8.3 Owned* -
LaFayette, IN 168,000 20.0 Owned* -
Headquarters:
Pittsburgh, PA 7,944 - Leased 4/30/05
Stamford, CT 1,500 - Leased monthly
In December 2000, the Company sold and leased-back the land and building
of its Chicago, IL location of the Metals Group. The Company intends to
relocate the operations of this location to Libertyville, IL in the next
twelve months to a facility the Company currently subleases to another
unaffiliated enterprise.
The Company also owns 92.7 acres of idle farm land adjacent to its former
Ipsen facility, in Boone County, IL, which were retained by the Company after
the Ipsen sale. The Company is currently pursuing the disposition of this
land.
In connection with the sale of its oil and gas business in Louisiana,
Reunion Industries retained certain oil and gas properties in Louisiana
because of litigation concerning environmental matters. Reunion Industries
intends to sell these properties when the litigation is resolved.
Reunion Industries 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 Reunion Industries is pursuing the sale or
farmout of these interests.
Reunion Industries subleases, from Stanwich Partners, Inc., a related
party approximately 1,500 square feet of office space in Stamford, Connecticut
for its corporate office there. Management believes the terms of this
sublease are comparable to those available from third parties.
12
The Company believes that all of its facilities have been in operation
for a sufficient period of time to demonstrate their suitability for their
individual purposes. [The production capacities of the Company's facilities
are believed by the Company to be sufficient for the Company's anticipated
future needs.]
ITEM 3. LEGAL PROCEEDINGS
Certain litigation in which Reunion Industries is involved is described
below.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. [The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended.] There is no applicable insurance coverage.
The owners of a portion of the Reunion Industries property in Louisiana
currently being remediated for environmental contamination have objected to
Reunion Industries' proposed cleanup methodology and have filed suit to
require additional procedures. Reunion Industries is contesting the
litigation, and believes its proposed methodology is well within accepted
industry practice for remediation efforts of a similar nature.
A suit was filed in December 1999 in the Court of Chancery of the State
of Delaware against Reunion Industries and its directors and Chatwins Group in
connection with the proposed merger. The lawsuit alleges breaches of
fiduciary duty by the defendants in setting the exchange ratio of the merger.
The defendants maintain that the exchange ratio fixed for the merger fairly
reflected the relative values of Reunion Industries and Chatwins Group when
the merger terms were agreed. The suit is in the initial stages of discovery.
[Reunion Industries intends to vigorously contest this lawsuit.]
The company has been named as a defendant in seven related lawsuits filed
in December 2000 or early 2001 in the Superior Court for Los Angeles County,
California. The plaintiffs in these suits except one are structured
settlement payees to whom Stanwich Financial Services Corp. (SFSC) is
indebted. The Company and SFSC are related parties (See item 13. Certain
relationships and Related Transactions).
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Bradley, several major financial institutions and certain
others. All of these suits arise out of the inability of SFSC to make
structured settlement payments when due. Although the claims made and the
relief sought vary somewhat from suit to suit, in general (1) the suits allege
breach of contract, breach of fiduciary duty, negligence, conversion,
fraudulent conveyance, fraud and violations of certain statutes and (2) the
relief sought includes compensatory and punitive damages, statutory penalties
and attorneys' fees and costs. The plaintiffs in one of the suits are former
owners of a predecessor of SFSC and current operators of a structured
settlement business. They also claim that their business and reputations have
been damaged by SFSC's structured settlement defaults, seek damages for unfair
competition and purport to sue on behalf of the payees. The plaintiffs in
three of the suits claim class action status.
The plaintiffs' theory of liability against the Company in these suits is
13
based on allegations that the Company is the alter ego of SFSC and Mr.
Bradley, sole shareholder and director of SFSC, and that the Company
participated in the actions and omissions alleged. [The Company denies these
allegations and intends to vigorously defend against these lawsuits.]
The Company has been named in approximately 195 separate asbestos suits
filed since January 1, 2001 by two plaintiffs' law firms in Wayne County,
Michigan. The claims allege that cranes from the Company's crane
manufacturing location in Alliance, OH were present in various parts of
McLouth Steel Mill in Wayne County, Michigan and that those cranes contained
asbestos to which plaintiffs were exposed over a 40 year span. As of the date
of this report, counsel for the Company has filed an answer to each complaint
denying liability by the Company and asserting all alternative defenses
permitted under the Court's Case Management Order. [The Company denies having
manufactured any products containing asbestos or otherwise knew or should have
known that any component part manufacturers provided products containing
asbestos. The Company intends to vigorously defend against these lawsuits.]
Reunion Industries and its subsidiaries are the defendants in other
lawsuits and administrative proceedings which have arisen in the ordinary
course of business. [Reunion Industries believes that any material liability
which can result from any of such lawsuits or proceedings has been properly
reserved for in Reunion Industries' financial statements or is covered by
indemnification in favor of Reunion Industries or its subsidiaries, and that,
therefore, the outcome of these lawsuits or proceedings will not have a
material adverse effect on Reunion Industries' financial position, results of
operations or cash flows.]
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in the fourth quarter of 2000.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Beginning March 23, 2000, Reunion Industries' common stock is traded on
the American Stock Exchange (RUN). Previously, Reunion Industries' common
stock was traded in the over-the-counter market and was listed on the NASDAQ
Small-Cap Market (RUNI). The stock was also listed on the Pacific Exchange
(RUN) until July 5, 2000.
As of March 15, 2001, there were 1,282 holders of record of Reunion
Industries' common stock with an aggregate of 15,235,624 shares outstanding.
The table below reflects the high and low sales prices on the NASDAQ
Small-Cap Market for the pre-merger quarterly period and on the American
Exchange for the post-merger quarterly periods in the two years ended December
31, 2000. 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
- ------------- ------ ------
2000
March 31.......................................$3.625 $1.875
June 30........................................$2.375 $0.938
September 30...................................$2.125 $1.625
December 31....................................$2.000 $0.875
1999
March 31.......................................$5.250 $2.625
June 30........................................$4.875 $3.188
September 30...................................$3.500 $2.375
December 31....................................$2.625 $1.688
No cash dividends have been declared or paid during the past three years
with respect to the common stock. The Board of Directors 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 contained in Reunion Industries' lending
agreements. [Therefore, Reunion Industries anticipates that it will not pay
any cash dividends on its common stock in the foreseeable future.]
15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of the Company. All data are reported in thousands, except for per-share
data. Historical data have been restated for the classifications of the
former Chatwins Group's Klemp division and oil and gas operations as
discontinued operations.
Year Ended December 31, 2000 1999(1) 1998(1) 1997(1) 1996(1)
-------- -------- -------- -------- --------
EARNINGS DATA:
Net sales $180,417 $120,150 $135,164 $137,017 $104,554
Cost of sales 146,737 100,666 109,187 111,938 85,323
-------- -------- -------- -------- --------
Gross profit 33,680 19,484 25,977 25,079 19,231
Selling, general and
administrative expenses 23,802 12,742 13,740 13,380 12,613
Other expense, net (5,821) 495 579 595 251
-------- -------- -------- -------- --------
Operating profit 15,699 6,247 11,658 11,104 6,367
Interest expense, net(2) 10,374 7,989 7,453 7,374 7,284
Equity in loss from continuing
operations of affiliate 296 566 4,056 373 915
-------- -------- -------- -------- --------
Income (loss) before income
taxes from continuing
operations 5,029 (2,308) 149 3,357 (1,832)
Provision for (benefit from)
income taxes(3) (616) (1,628) 46 851 (659)
-------- -------- -------- -------- --------
Income (loss) from
continuing operations $ 5,645 $ (680) $ 103 $ 2,506 $ (1,173)
======== ======== ======== ======== ========
Income (loss) from continuing
operations applicable to
common stockholders(4) $ 5,550 $ (1,136) $ (353) $ 2,050 $ (1,629)
======== ======== ======== ======== ========
Weighted average common
shares outstanding(5) 13,236 9,500 9,500 9,500 9,500
======== ======== ======== ======== ========
Income (loss) from continuing
operations per common
share(5) $ 0.42 $ (0.12) $ (0.04) $ 0.22 $ (0.17)
======== ======== ======== ======== ========
OPERATING AND OTHER DATA:
Cash flow from (used in)
operating activities(6) $ 5,507 $ (4,168) $ (3,268) $ 2,312 $ 3,492
======== ======== ======== ======== ========
Cash flow from (used in)
investing activities(6) 27,997 34,494 (5,195) (5,044) (1,190)
======== ======== ======== ======== ========
Cash flow from (used in)
financing activities(6) (31,385) (30,249) 8,070 3,110 (2,303)
======== ======== ======== ======== ========
16
Depreciation and
amortization(7) 6,270 3,083 2,956 2,706 2,742
======== ======== ======== ======== ========
Capital expenditures(8) 3,743 1,795 2,349 2,694 2,951
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital(9) $ 17,844 $ 22,613 $ 25,156 $ 20,759 $ 18,198
======== ======== ======== ======== ========
Total assets 129,955 81,037 108,476 103,279 95,211
======== ======== ======== ======== ========
Revolving credit facility 19,367 5,834 34,005 26,061 23,629
======== ======== ======== ======== ========
Total long-term debt(10) 50,732 49,971 50,019 50,043 50,066
======== ======== ======== ======== ========
Redeemable preferred stock - 8,938 8,482 8,026 7,570
======== ======== ======== ======== ========
Stockholders' equity(11) 21,559 (7,870) (8,594) (6,863) (8,666)
======== ======== ======== ======== ========
EBITDA(12): $ 21,969 $ 9,330 $ 14,614 $ 13,810 $ 9,109
======== ======== ======== ======== ========
(1) Represents historical financial data of Chatwins Group as Chatwins Group
was considered the acquirer in the merger. The Company has revised its 1999
financial statements to defer revenue recognition at December 31, 1999 for
sales of seamless pressure vessel products that were manufactured in 1999 but
not received by the customer until 2000. See note 1, "Revised Financial
Statements."
(2) Includes amortization of debt issuance expenses of the following amounts
for the following years: 2000: $897; 1999: $1,308; 1998: $671; 1997: $550
and 1996: $632. The year 2000 also includes $700 of overadvance fees.
(3) See note 11 to the consolidated financial statements. Due primarily to
the use of net operating loss carryforwards, Chatwins Group's actual cash
payments, net of refunds, relating to state and federal income taxes for the
years ended December 31, 1995 through December 31, 1997 have been
approximately $20, $53 and $205, respectively. In 1998, Chatwins Group had a
net refund of $139. In 1999, Chatwins Group paid $279. In 2000, Reunion paid
$322.
(4) In determining income (loss) from continuing operations applicable to
common stock, income from continuing operations is reduced by accretions of
dividends on preferred stock of $95 in 2000 and $456 in each of the years 1999
through 1996.
17
(5) Weighted average shares outstanding for the year ended December 31, 1999
through 1996 have been restated to give retroactive effect to the
recapitalization of Chatwins Group in connection with the merger.
(6) Current accounting rules do not require restatement of the statement of
cash flows upon the classification of a segment as a discontinued operation.
(7) Excludes amortization of debt issuance expenses and depreciation and
amortization related to discontinued operations. See footnote (2) above.
(8) Excludes capital expenditures of discontinued operations.
(9) Represents current assets excluding net assets of discontinued
operations less current liabilities excluding borrowings under revolving
credit facilities, current maturities of senior notes prior to 2000 and net
liabilities of discontinued operations.
(10) Excludes borrowings under revolving credit facilities and includes
current maturities of 13% senior notes.
(11) Stockholders' equity has been reduced by accretions for redemption value
of and dividends on redeemable preferred stock of $15.0 million through
December 31, 2000.
(12) EBITDA is calculated as follows:
2000 1999(1) 1998(1) 1997(1) 1996(1)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before taxes $ 5,029 $ (2,308) $ 149 $ 3,357 $ (1,832)
Interest expense, net(2) 10,374 7,989 7,453 7,374 7,284
Depreciation and
amortization(7) 6,270 3,083 2,956 2,706 2,742
Equity loss from continuing
operations of affiliate 296 566 4,056 373 915
-------- -------- -------- -------- --------
EBITDA $ 21,969 $ 9,330 $ 14,614 $ 13,810 $ 9,109
======== ======== ======== ======== ========
EBITDA is included in the Selected Historical Financial Data due to the
close relationship it bears to Reunion's financial covenants in its borrowing
agreements.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company owns and operates a diverse group of industrial manufacturing
operations that design and manufacture highly engineered, high-quality
products for specific customer requirements, such as large-diameter seamless
pressure vessels, hydraulic and pneumatic cylinders, precision plastic
components, heavy-duty cranes, bridge structures and materials handling
systems. The Company's customers include original equipment manufacturers and
end-users in a variety of industries, such as transportation, power
generation, chemicals, metals, home electronics, office equipment and consumer
goods. The Company's business units are organized into two operating groups:
The Metals Group, through its five manufacturing divisions, designs,
manufactures and markets a broad range of fabricated and machined industrial
metal parts and products to original equipment manufacturers and end-users.
The Metals Group serves over 5,000 customers.
The Plastics Group manufactures precision molded plastic parts and
provides engineered plastics services to more than 500 original equipment
manufacturers.
RECENT DEVELOPMENTS
The Merger
On March 16, 2000, Chatwins Group and Reunion merged, with Reunion as the
surviving entity. Prior to the merger, Chatwins Group owned approximately 37%
of Reunion's issued and outstanding common stock.
The merger was accounted for as a purchase under APB Opinion No. 16
"Business Combinations" with Chatwins Group as the acquirer for purposes of
applying purchase accounting. Accordingly, Chatwins Group's assets and
liabilities are accounted for at historical book values and the unowned
portion of the assets and liabilities of Reunion have been revalued at their
estimated fair value. Amounts assigned to goodwill at the merger date have
been allocated to deferred tax assets based on expected usage of the net
operating losses of pre-merger Reunion preserved in the merger.
The purchase price in the merger was $8.1 million, consisting of
2,490,000 shares of Reunion common stock not owned by Chatwins Group at March
16, 2000 valued at $3.25 per share, based on the market price of Reunion
common stock between July 28 and August 2, 1999, immediately prior to the
announcement of the July 28, 1999 approval by Reunion's board of directors of
the amended and restated merger agreement. Assets acquired included
approximately $13.3 million of current assets and approximately $23.5 million
of fixed and other assets. Liabilities and minority interests assumed
included approximately $9.9 million of current liabilities, $21.6 million of
noncurrent liabilities and $2.1 million of minority interests.
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The 1,450,000 shares of Reunion common
stock previously owned by Chatwins Group were retired in the merger, as were
the previously issued shares of Chatwins Group common stock. The merger
agreement also provided that up to an additional 500,000 shares of Reunion
common stock will be issued to former Chatwins Group common stockholders if
the former Chatwins Group businesses plus the acquired Kingway business
achieve specified performance levels in 2000. [Final determination of the
number of shares to be issued will be made by the board of directors at its
meeting scheduled for May 15, 2001.]
Holders of Chatwins Group Class D, Series A, B and C preferred stock
19
received 9,033 shares of Reunion Series A preferred stock in the merger. The
Reunion Series A preferred stock had an initial redemption price of
$9,033,000. See "Preferred Stock Exchange" below for a discussion of the
exchange of the Company's preferred stock for common stock.
The Refinancing
Simultaneously with the merger, Reunion entered into $72.5 million of
senior secured credit facilities with Bank of America. These credit
facilities consisted of a $39.0 million revolving credit facility, a $25.8
million term loan A facility, a $5.0 million term loan B facility and a $2.7
million capital expenditures facility.
Proceeds from initial borrowings under the Bank of America credit
facilities were used for various purposes, including repayment of Chatwins
Group's existing credit facilities with Bank of America, repayment of
Reunion's existing credit facilities with the CIT Group/Business Credit, Inc.
and retirement of $25.0 million of Chatwins Group's 13% senior notes plus
accrued and unpaid interest. Reunion assumed the obligations of Chatwins
Group under the indenture governing the remaining $24.975 million 13% senior
notes.
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
As such, on June 1, 2000 Reunion made the required offer to purchase
$2,525,000 of senior notes, of which holders of only $120,000 of senior notes
tendered. However, the $25.0 million of 13% senior notes repaid from the
merger proceeds was and can be applied against Reunion's obligations for
sinking fund payments and the purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
Therefore, only $120,000 principal amount of 13% senior notes is
scheduled to be repaid in May 2001, $12.5 million is scheduled to be repaid in
May 2002 and the remaining balance is scheduled to be repaid in May 2003.
[Management believes there will be sufficient funds available under its
revolving credit facility to make the required sinking fund payment of
$120,000 on May 1, 2001.]
Acquisition of Kingway
Simultaneously with the merger, Reunion acquired Stanwich Acquisition
Corp. (SAC), an affiliated company, doing business as Kingway Material
Handling (Kingway). Similar to Chatwins Group's material handling product
line, Kingway produces industrial and commercial storage racks and materials
handling systems. Subsequent to the merger and acquisition, Reunion
integrated Kingway into the existing material handling product line and
operates from a single location. The transaction was accounted for as a
20
purchase under APB 16.
The purchase price included $100,000 in cash paid to the then existing
common stockholders of Kingway, the assumption of approximately $10.3 million
of Kingway's debt and the issuance of $6.8 million of preferred stock in
exchange for Kingway's existing preferred stock as described below. Assets
acquired included approximately $3.0 million of current assets and
approximately $2.1 million of fixed and other assets. Liabilities assumed,
including the assumed debt, included approximately $11.7 million of current
liabilities and $6.8 million of preferred stock. The purchase price in excess
of net assets acquired, less $0.3 million, the value assigned to SAC's net
operating losses at the time of the acquisition, amounting to approximately
$13.2 million, was recorded as goodwill and is being amortized over 15 years.
In the acquisition, the holder of SAC's preferred stock received in
exchange for its shares, 5,000 shares of Reunion Series B preferred stock.
The Reunion Series B preferred stock has a redemption price of $5,000,000 plus
cumulative dividends as of the date of the acquisition of $1,781,000. See
"Preferred Stock Exchange" below for a discussion of the exchange of the
Company's preferred stock for common stock.
Preferred Stock Exchange
On June 14, 2000, the Company's Board of Directors approved the exchange
of its Series A and Series B preferred stocks for 3,245,515 shares of the
Company's common stock at an exchange price of $5.00 per share. The Series A
and Series B preferred stock were issued in connection with the March 16, 2000
merger with Chatwins Group and acquisition of Kingway, and had an aggregate
liquidation value of $16.2 million. The closing market price of the common
stock was $1.00 on that date. Except for the par value of the issued common
stock and the expense connected with the exchange, the aggregate carrying
value of the Series A and B preferred stocks was recorded as additional paid-
in capital upon their exchange for common stock.
Dispositions and Discontinued Operations
On August 31, 2000, the Company sold its Irish plastics subsidiary, Data
Packaging, Ltd. The net proceeds of $10.0 million from the sale were used to
repay debt including a portion of the Company's senior secured and revolving
credit borrowings with Bank of America.
On October 27, 2000, the Company sold substantially all of its wine grape
agricultural operations and real estate holdings in Napa County, California.
The $16.5 million net proceeds from the sale after transaction-related costs
were used to reduce debt. In the third quarter of 2000, the Company
classified and began accounting for the agricultural operations as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" (APB 30), which requires
discontinued operations to be reported separately from continuing operations.
On December 28, 2000, the Company sold and leased-back the land and
building of its Chicago, IL hydraulic cylinder manufacturing location. The
net proceeds of $3.0 million from the sale were used to repay debt including a
portion of the Company's senior secured and revolving credit borrowings with
Bank of America.
Acquisition of NPS Acquisition Corp.
On January 17, 2001, the Company acquired the common stock of NPS
Acquisition Corp. (f/k/a Naptech Pressure Systems) from Mr. Bradley. NPSAC is
based in Clearfield, Utah and manufactures seamless steel pressure vessels, an
existing Metals Group product line. The transaction was accounted for as a
purchase under APB 16.
21
The purchase price was $10,000 plus the assumption of $10.3 million
NPSAC's liabilities, including a $6.9 million note payable to Shaw Industries,
the former owner of Naptech Pressure Systems. Simultaneously with the
acquisition Reunion paid Shaw Industries $2.0 million of the note payable in
cash from funds available under its revolving credit facility with Bank of
America. The remainder of the note payable of $4.9 million was then
restructured to include quarterly principal payments of $0.6 million for eight
quarters which began on February 28, 2001. Reunion made the first payment on
February 28, 2001. The note is unsecured. The estimated fair value of assets
acquired included approximately $1.4 million of cash, receivables, inventories
and other current assets and approximately $1.0 million of fixed assets. The
purchase price in excess of net assets acquired of approximately $7.9 million
was recorded as goodwill and will be amortized over 15 years.
RESULTS OF OPERATIONS
Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999
Continuing Operations
Metals Group
Metals Group sales for 2000 totaled $138.4 million, compared to $120.2
million for 1999, an increase of $18.2 million, or 15%. Sales increases of
$18.4 million in the Metals Group's materials handling and computer-assisted
picking systems product line (including $16.3 million from Kingway since it
was acquired by the Company on March 16, 2000), $5.1 million in seamless
pressure vessels, $6.0 million in bridge fabrication sales and $0.3 million in
spring sales were partially offset by decreases of $9.2 million in heavy-duty
crane sales and $1.6 million in cylinder sales. The increase in material
handling sales reflects the acquisition of Kingway and increased demand and
large project bid wins. The increase in pressure vessel sales in 2000 was due
to strong first and second quarter 2000 order levels which began to ship in
the 2000 second half. Heavy-duty crane sales continue to be impacted by weak
order levels due to a downturn in large capital project spending in the steel
industry caused by strong foreign competition. During the first quarter of
2000, the Company moved to counter this trend by entering the steel bridge
fabrication market. [Management believes the Company's crane manufacturing
processes are ideally suited for complex bridge manufacturing and seeks to
position the Company to participate in what management anticipates will be a
significant increase in state and federal transportation spending on bridges
through the year 2004.] Sales of cylinders was down due to softness in the
hydraulic cylinder market. Sales of leaf springs were up slightly compared to
1999.
Metals Group gross profit for 2000 was $27.4 million, or 19.8% of sales,
compared to $19.5 million for 1999, or 16.3% of sales, an increase of $7.9
million. Gross profit in both dollars and as a percentage of sales increased
during 2000 compared to 1999 primarily due to the acquisition of Kingway which
has higher margin products than Chatwins Group's pre-merger material handling
products, the increase in volume and a change in product mix to the higher
margin seamless pressure vessels.
Plastics Group
Plastics Group sales for 2000 since the March 16, 2000 merger totaled
$42.0 million. Such sales resulted in a Plastics Group gross profit of $6.3
million, or 15.0% of sales.
On a pro forma basis as if the Plastics Group was acquired on January 1,
1999, Plastics Group sales in 2000 totaled $56.0 million, compared to $71.6
million for 1999. Excluding the Irish plastics business for reasons of
22
comparability, such sales would be $48.3 million for 2000 and $57.7 million
for 1999, a decrease of $9.4 million or 16%. The decrease in revenues is the
continuation of a trend which began in 1999 and resulted from several factors,
including certain customers relocating manufacturing operations to Mexico and
Asia, reduced customer orders for continuing programs, end of product cycles
and delays in new program starts, which affected all Plastics Group
facilities. [Management was investigating the feasibility of opening or
acquiring a molding facility in Mexico or establishing a joint venture in
Mexico with an existing plastics molding company in order to counter these
trends. However, management's view of current business conditions in Mexico
and the impact on the Company's liquidity caused by the need to fund increased
working capital demands in the Company's seamless pressure vessel product line
due to a substantial increase in order levels in the first quarter of 2001 has
cause management to put this plan on hold temporarily. Accordingly, the trend
in Plastics Group revenue could continue into 2001.]
Plastics Group gross profit for 2000 was $6.3 million, or 15.0% of sales.
On a pro forma basis, Plastics Group gross profit for 2000 was $8.2 million,
or 14.6% of sales, compared to $10.8 million, or 14.9% of sales, for 1999.
Excluding the Irish plastics business for reasons of comparability, gross
profit would be $7.1 million, or 14.7% of sales, for 2000 and $8.6 million, or
15.0% of sales, for 1999, a decrease of $1.5 million or 18%. The decline in
gross profit is directly related to the reduction in sales volume and
resulting cost absorption inefficiencies.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for 2000 were $23.8
million, compared to $12.7 million for 1999, an increase of $11.1 million.
SGA expenses in 2000 include approximately $8.7 million of SGA from the
Plastics Group, the acquired Kingway business and corporate administrative
expenses of pre-merger Reunion which were not present in 1999. The remaining
increase was due primarily to an increase in pre-merger related professional
fees at Chatwins Group and a non-recurring increase in healthcare costs in the
2000 fourth quarter. SGA expenses as a percentage of sales increased to 13.2%
for 2000 compared to 10.5% in 1999. SGA as a percentage of sales was higher
in 2000 compared to 1999 due to the additions of the Plastics Group and the
acquired Kingway business, whose combined SGA as a percentage of related sales
was 14.8%, and increases in pre-merger related professional fees at Chatwins
Group and fourth quarter healthcare costs.
Other (Income) Expense
Other income for 2000 was $5.8 million. Included in other income for
2000 were gains on the third quarter sale of the Company's Irish plastics
business of $4.9 million and the fourth quarter sale of the land and building
of the Company's Chicago, IL hydraulic cylinder location of $2.4 million.
Excluding these gains, other expense for 2000 was $1.6 million, compared to
$0.5 million in 1999, an increase of $1.1 million. The increase in other
expense for 2000 compared to 1999 is due to an increase in goodwill
amortization as a result of the higher level of goodwill of post-merger
Reunion compared to the level of goodwill of pre-merger Chatwins Group. Other
than the gains on sales discussed above and the increased level of goodwill
amortization, there were no individually significant or offsetting items in
either 2000 or 1999.
Interest Expense
Interest expense, net, for 2000 was $10.4 million plus $1.0 million
included in discontinued operations, compared to $8.0 million for 1999 plus
$1.9 million included in discontinued operations, indicating an increase of
$1.5 million. The overall increase in interest expense reflects the higher
level of debt of the post-merger company when compared to the 1999 debt levels
of pre-merger Chatwins Group and the payment of $0.7 million in overadvance
fees. See "Liquidity and Capital Resources - Recent Developments." [The
23
Company anticipates that interest expense for 2001 will decrease compared to
2000 due to the lower debt level as the result of the $29.5 million of cash
proceeds generated through asset sales during 2000.] See "Liquidity and
Capital Resources - Summary of 2000 Activities."
Equity Results
Equity in loss of continuing operations of affiliate in 2000 and 1999
represents Chatwins Group's pre-merger share of Reunion's loss from continuing
operations in each period.
Income Taxes
There was a non-cash tax benefit from continuing operations of $0.6
million for 2000 compared to a non-cash tax benefit of $1.5 million for 1999.
The tax benefit from continuing operations is the result of the fact that the
valuation allowance against the deferred tax assets related to the Company's
net operating loss carryforwards was reduced based on estimates of future
taxable income. The tax benefit for 1999 is primarily the result of the pre-
tax loss from continuing operations in 1999 and the reversal of the valuation
allowance of $640,000 for deferred tax assets.
Discontinued Operations
There was income from discontinued operations during 2000 of $1.3
million. The income from discontinued operations was comprised of the loss
from the discontinued wine grape agricultural operations ($0.6 million), the
gain from the sale of such operations ($2.3 million with $-0- tax effect as
the valuation allowance against the deferred tax assets related to the
Company's net operating loss carryforwards was reduced for the tax effect of
such gain), a reduction in the gain on disposal of the discontinued grating
business of the former Chatwins Group ($0.8 million) and a reduction in the
provision for estimated expenses of the discontinued grating business ($0.5
million).
The reduction in the gain on disposal is the result of the final outcome
of the arbitration with Alabama Metal Industries Corporation (AMICO), the
purchaser of the Company's discontinued grating business, regarding the final
purchase price adjustment resulting from a disagreement between the Company
and AMICO in the preparation of the closing date balance sheet. In
calculating the gain on disposal in September 1999, the Company provided $0.5
million for future estimated purchase price adjustments. In November 2000,
the arbiter for the dispute returned a final purchase price adjustment,
including interest, of $1.3 million, a difference of $0.8 million. The
Company paid AMICO $1.3 million in November 2000 from proceeds available under
its revolving credit facility.
During the third quarter of 2000, the Company reevaluated its reserve for
estimated expenses of the discontinued grating business. Such reevaluation
resulted in a $0.8 million reduction in the reserve needed for estimated
future expenses.
There was income from discontinued operations during 1999 of $2.0
million, net of taxes of $0.9 million. Income from discontinued operations
was comprised of the gain on disposal of the discontinued grating business of
the former Chatwins Group ($8.4 million) and income from discontinued
operations of the grating business ($0.1 million, which included the $1.7
million pre-tax gain on sale of the Chicago property that comprised the
Chicago manufacturing operations of Chatwins Group's Klemp division),
partially offset by provisions for estimated expenses ($1.9 million) and
disposals of the international grating subsidiaries ($4.1 million) and the oil
and gas operations ($0.7 million). There was also equity in income from
discontinued operations of pre-merger Reunion (less than $0.1 million).
24
Extraordinary Items
The losses from extraordinary items in 2000 of $1.9 million represents
the pre-merger write-offs of deferred financing costs at both Chatwins Group
and pre-merger Reunion and the write-off of term loan B deferred financing
costs due to the early retirement of this debt.
On August 31, 2000, the Company sold its Irish plastics subsidiary for
net proceeds of $10.0 million. A portion of the proceeds was used to repay in
its entirety the term B loan. Related to the term B loan was $133,000 of
unamortized debt issuance fees which the Company has recorded as an
extraordinary item of $80,000.
Year Ended December 31, 1999 compared to
Year Ended December 31, 1998
The Company's consolidated financial statements at and for the year ended
December 31, 1999 have been revised to defer revenue recognition at December
31, 1999 for sales of seamless pressure vessel products that were manufactured
in 1999 but not received by the customer until 2000. The following discussion
has been changed to reflect this revision.
Continuing Operations
Net sales for 1999 totaled $120.2 million, compared to $135.2 million for
1998. Sales for 1999 decreased $15.0 million, or 11%, from 1998. Sales
decreased at all divisions except for Auto-Lok. Sales decreased $15.9 million
at Alliance due primarily to a decrease in order levels which have been
negatively impacted by a downturn in large capital projects in the steel
industry due to strong foreign competition. Sales decreased $4.8 million at
CPI due primarily to a decrease in order levels in the first third of 1999 and
a change in the mix of CPI's backlog to a higher percentage of items with
longer delivery schedules. Sales decreased $2.4 million at Hanna due
primarily to a softening in demand in its hydraulic product line.
Steelcraft's sales were down $0.6 million compared to 1998 due to weak demand
across all product lines but primarily in marine and recreational springs as
discretionary spending by consumers continued to shift towards technology-
based products. Auto-Lok's sales increase of $8.5 million was due to
increased product demand and an increase in large project shipments.
Gross profit for 1999 was $19.5 million, compared to $26.0 million of
gross profit for 1998, a decrease of $6.5 million. Gross profit margin in
1999 was 16.2%, compared to 19.2% in 1998. Gross profit during 1999 compared
to 1998 decreased $3.5 million at Alliance, $2.2 million at Hanna and $2.0
million at CPI and $0.3 million at Steelcraft, partially offset by a $1.5
million increase at Auto-Lok. Gross profit margin for 1999 compared to 1998
increased only at Auto-Lok and decreased at all other divisions. The increase
in gross profit and margin at Auto-Lok is due primarily to the division's
increased volume. The decreases in gross profits and margins at the remaining
divisions are due to decreases in volume noted above, price compression at
Alliance due to softness in the steel industry caused by foreign competition
and a change in product mix at Hanna to lower margin product lines.
Selling, General and Administrative
Selling, general and administrative expenses for 1999 were $12.7 million,
compared to $13.7 million for 1998, a decrease of $1.0 million. Selling,
general and administrative expenses as a percentage of sales increased
slightly to 10.5% in 1999 compared to 10.2% in 1998. The decrease in selling,
general and administrative expenses was due to an overall effort to contain
and reduce such costs and administrative personnel reductions primarily at
Alliance. The increase in selling, general and administrative expenses as a
percentage of sales was due to the 10% decrease in sales while selling,
general and administrative expenses decreased only 7%.
25
Other (Income) Expense
Other expense for 1999 was $0.5 million, compared to other expense of
$0.6 million for 1998, a net decrease of $0.1 million. There were no
individually significant or offsetting items in either 1999 or 1998.
Interest Expense
Interest expense, net, in 1999 was $8.0 million plus $1.9 million
included in discontinued operations compared to $7.5 million in 1998 plus $2.5
million included in discontinued operations, indicating a decrease of $0.2
million. The decrease in interest expense is due to a reduction in average
borrowing levels in the fourth quarter of 1999 due to the sale of Chatwins
Group's domestic grating business in September 1999 and the application of the
$32.1 million of cash proceeds to borrowings under the BOA Facility partially
offset by a $0.6 million increase in the level of amortization of deferred
financing costs.
Equity Results
Equity loss from continuing operations of affiliate in 1999 and 1998
represents Chatwins Group's share of Reunion's loss from continuing
operations. Reunion's 1998 results from continuing operations were negatively
impacted by a litigation provision it recorded in its 1998 second quarter.
Income Taxes
There was a tax benefit of $1.6 million for 1999 compared to a tax
provision of less than $0.1 million for 1998. The tax benefit for 1999 is
primarily the result of the pre-tax loss in 1999 and the reversal of the
valuation allowance of $640,000 for deferred tax assets. The 1998 tax
provision is related to the level of pre-tax earnings.
Discontinued Operations
There was income from discontinued operations during 1999 of $2.0
million, compared to a loss of $1.6 million in 1998. Income from discontinued
operations in 1999 is comprised of income from Discontinued Klemp of $0.1
million, a gain on sale of Discontinued Klemp (domestic) of $8.4 million, a
provision for estimated expenses of $1.9 million, an estimated provision for
loss on disposal of Discontinued Klemp (foreign) of $4.1 million and an
estimated provision for loss on disposal of the discontinued oil and gas
operations of $0.7 million. Income from Discontinued Klemp in 1999 includes a
$1.7 million pre-tax effect gain on sale of property. Income (loss) from
Discontinued Klemp includes allocated interest expense of $1.9 million in 1999
and $2.5 million in 1998.
Income (loss) from discontinued operations are net of taxes of $0.9
million in 1999 and tax benefits of $0.6 million in 1998.
Change in Accounting Principle
Effective January 1, 1999, Chatwins Group adopted the AICPA's Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities," which
requires that the costs of start-up activities be expensed as incurred. Such
adoption is reported as the cumulative effect of a change in accounting
principle and resulted in the write-off of $176,000 of start-up costs, net of
taxes of $91,000. These start-up costs primarily related to Chatwins Group's
international subsidiaries.
26
LIQUIDITY AND CAPITAL RESOURCES
General
The Company manages its liquidity as a consolidated enterprise. The
operating groups of the Company carry minimal cash balances. Cash generated
from group operating activities generally is used to repay borrowings under
revolving credit arrangements, as well as other uses (e.g. corporate
headquarters expenses, debt service, capital expenditures, etc.). Conversely,
cash required for group operating activities generally is provided from funds
available under the same revolving credit arrangements. Although the Company
operates in relatively mature markets, [it intends to continue to invest in
and grow its businesses through selected capital expenditures as cash
generation permits.]
Recent Developments
Simultaneously with the Chatwins Group merger, Reunion entered into
senior secured credit facilities with Bank of America and other lenders.
These credit facilities consisted of a $39.0 million revolving credit
facility, a $25.8 million term loan A facility amortizing in 84 monthly
principal payments, a $5.0 million term loan B facility amortizing in 36
monthly principal payments, and a $2.7 million capital expenditures facility
which amortizes in 60 monthly principal payments when borrowed. These
facilities have a three-year initial term and automatically renew for
additional one-year increments unless either party gives the other notice of
termination at least 60 days prior to the beginning of the next one-year term.
Subsequent to the merger, the Company borrowed $0.7 million under the capital
expenditures facility. All of the term loan B and portions of the term loan A
and revolving credit facility were repaid with the proceeds from the sale of
the Company's Irish plastics business. See "Summary of 2000 Activities -
Financing Activities" below.
Interest on loans outstanding under the Bank of America facilities, other
than term loan B, is payable monthly at variable rates tied to either Bank of
America's prime rate, as that term is defined in the financing agreements, or
LIBOR, at the option of Reunion. The interest rate tied to the prime rate is
initially the prime rate plus 0.50% for the revolving credit facility and the
prime rate plus 0.75% for the term loan and capital expenditures facilities.
The interest rate tied to LIBOR is initially LIBOR plus 2.75% for the
revolving credit facility and LIBOR plus 3.00% for the term loan and capital
expenditure facilities. These interest rates will be subject to quarterly
adjustment after the first year based on the ratio of Reunion's total funded
debt to earnings before interest, taxes, depreciation and amortization.
Interest on term loan B was payable monthly at a fixed rate of 15%.
Additional interest accrued on term loan B to yield a total return of 20%.
The additional interest was paid when term loan B was fully repaid.
The Bank of America credit facilities are collateralized by a first
priority lien on substantially all of the current and after-acquired assets of
Reunion including, without limitation, all accounts receivable, inventory,
property, plant and equipment, chattel paper, documents, instruments, deposit
accounts, contract rights and general intangibles.
The facilities require Reunion to comply with financial covenants and
other covenants, including fixed charge coverage and leverage tests. The
fixed charge coverage covenant requires the Company to maintain a minimum
fixed charge coverage ratio to be tested as of the last day of each fiscal
quarter beginning with the quarter ended June 30, 2000 for the year-to-date
period starting on April 1, 2000. For quarters ended March 31, 2001 and
thereafter, the components of the calculation are on a rolling twelve-month
basis. The ratio is defined as EBITDA (adjusted to exclude non-financed
capital expenditures and income taxes paid) divided by fixed charges (defined
as scheduled or required principal and interest payments on debt). For the
ratio calculation period (as defined) ended December 31, 2000 the required
27
minimum fixed charge coverage ratio is 1.25:1. The actual ratio of 1.59:1 was
in compliance with the required minimum. The first test for the financial
covenant related to leverage was December 31, 2000. The leverage test is
defined as the ratio of funded debt to EBITDA. Funded debt is defined as all
secured and unsecured long-term debt, including current maturities. For the
purposes of this ratio, EBITDA for the period ended December 31, 2000 is
annualized. For the annualized year ended December 31, 2000 the required
maximum funded debt to EBITDA ratio is 3.75:1. The actual ratio of 2.42:1 was
in compliance with the required maximum. See "2001 Covenant Compliance."
In addition, the facilities contain various affirmative and negative
covenants, including limitations on stockholder and related party
distributions. As of the date of this report, the Company was in compliance
with all other covenants. The facilities require Reunion to pay the
reasonable expenses incurred by the lenders in connection with the
facilities. Available borrowings under the Bank of America revolving credit
facility are based upon a percentage of eligible receivables and inventories.
Proceeds from initial borrowings under the Bank of America credit
facilities were used to repay ORC's credit facilities with CIT Group
Business/Credit, Inc. totaling $19.3 million, to repay Chatwins Group's credit
facilities with Bank of America totaling $5.2 million, to repay certain debt
and acquire stock in the Kingway acquisition totaling $7.4 million and to
retire $25.0 million of Chatwins Group's 13% senior notes including $1.2
million of related accrued interest. Proceeds of $1.4 million were used to
pay various merger related fees and expenses, including approximately $1.0
million to Bank of America. The Company had approximately $3.8 million of
borrowing availability after the initial borrowings. However, as discussed
below, in the period subsequent to the merger it was necessary for the Company
to obtain temporary overadvances from the Bank of America in order to pay its
May 1, 2000 semi-annual interest payment on its senior notes and to fund
changes in working capital. With the sales of its Irish plastics business and
the wine grape agricultural operations and the resulting reduction in
revolving credit debt, all overadvances have been repaid. Availability under
the Company's revolving credit facility totaled $8.5 million at December 31,
2000. [Management does not foresee any need for additional temporary
overadvances in the next twelve months.]
On May 1, 2000, Bank of America and Reunion Industries entered into a
letter agreement to provide Reunion with a temporary overadvance availability
under the Bank of America revolving credit facility of up to $1.5 million.
This letter agreement expired on May 31, 2000. Proceeds from this
overadvance, which was not fully drawn down, were used for the Company's May
1, 2000 $1.623 million semi-annual interest payment on its $24,975,000 of
outstanding 13% senior notes. Reunion paid Bank of America a $50,000
overadvance fee in connection with this letter agreement.
Upon the expiration of the May 1, 2000 letter agreement, Reunion and Bank
of America entered into a letter agreement dated June 1, 2000 to provide
Reunion with a temporary overadvance availability under the Bank of America
revolving credit facility of up to $2.0 million. This letter agreement
expired on June 16, 2000. Proceeds from this overadvance were used to fund
changes in working capital. Reunion paid Bank of America a $100,000
overadvance fee in connection with this letter agreement.
Upon the expiration of the June 1, 2000 letter agreement, Reunion and
Bank of America entered into a first amendment to the Bank of America
financing and security agreement dated June 26, 2000 to provide Reunion with a
special availability loan under the Bank of America revolving credit facility
of up to $5.0 million. The amount of the special availability loan was $5.0
million from June 17, 2000 through July 14, 2000; $4.5 million from July 15,
2000 through July 31, 2000 and was reduced to zero thereafter. Proceeds from
this special availability loan were used to fund changes in working capital.
The first amendment provided for weekly special availability fees to be paid
28
to Bank of America by Reunion in the amount of $75,000 per week if the amount
of the special availability loan was equal to or greater than $4.0 million;
$50,000 per week if the amount of the special availability loan was equal to
or greater than $2.0 million but less than $4.0 million and $25,000 per week
if the amount of the special availability loan was less than $2.0 million.
Reunion paid Bank of America fees totaling $425,000 over the term of this
special availability loan.
Upon the expiration of the June 26, 2000 first amendment to the Bank of
America financing and security agreement, Reunion and Bank of America entered
into a second amendment to the Bank of America financing and security
agreement dated July 31, 2000 to provide Reunion with a special availability
loan under the Bank of America revolving credit facility of up to $3.5
million. The amount of the special availability loan was $3.5 million from
August 1, 2000 through August 21, 2000; $3.0 million from August 22, 2000
through August 31, 2000 and was reduced to zero thereafter. Proceeds from
this special availability loan were being used to fund changes in working
capital. The second amendment provided for weekly special availability fees
to be paid to Bank of America by Reunion in the amount of $50,000 per week if
the amount of the special availability loan was greater than $3.0 million and
$25,000 per week if the amount of the special availability loan was equal to
or less than $3.0 million. Reunion paid Bank of America fees totaling
$125,000 under this special availability loan.
The Company and Bank of America recently entered into two additional
amendments to the financing and security agreement. On December 12, 2000, the
agreement was amended to include a requirement that the Company maintain a
minimum availability under the revolving credit facility of $1.5 million.
Through the date of this report the Company has complied with this
requirement. On January 19, 2001, the agreement was amended to allow for the
acquisition of NPSAC by the Company.
During the year, the Company spent $4.072 million on capital
expenditures. Of this amount, $373,000 in expenditures applied to and was
funded by its former Irish subsidiary that was sold in the third quarter of
the year and $329,000 in expenditures applied to and was funded by its former
agricultural operation that was sold in the fourth quarter of the year. The
Company's covenant limitation on capital expenditures is $3.5 million for the
year 2000. Although the Company believes that it complied with the covenant's
intent, it did receive a waiver from the bank of any default concerning its
capital expenditures for the year.
[Management believes that the Company's cash flow from operations,
together with these credit facilities, will be sufficient for the Company's
operating requirements, including capital expenditure and debt service, over
the next twelve months.]
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
Reunion assumed the obligations of Chatwins Group under the indenture
governing the 13% senior notes. As such, on June 1, 2000 Reunion made the
required offer to purchase $2,525,000 of senior notes, of which holders of
only $120,000 of senior notes tendered. However, the $25.0 million of 13%
senior notes repaid from the merger proceeds was and can be applied against
Reunion's obligations for sinking fund payments and the purchase offer as
follows (in thousands):
29
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
Therefore, only $120,000 principal amount of 13% senior notes is
scheduled to be repaid in May 2001, $12.5 million is scheduled to be repaid in
May 2002 and the remaining balance is scheduled to be repaid in May 2003.
[Management believes there will be sufficient funds available under its
revolving credit facility to make the required sinking fund payment of
$120,000 on May 1, 2001.]
The Indenture governing the 13% senior notes also includes covenants
which restrict or prohibit: incurrence of indebtedness outside its revolving
credit facility unless interest coverage tests are met; dividends, stock
repurchases, loans, investments and retirements of junior debt; liens and
encumbrances on assets; transactions with affiliates; sales of assets at less
than fair value and for less than 75% cash consideration; and mergers,
consolidations and the sale of substantially all assets.
The indenture also requires that the company maintain EBITDA (as defined
in the indenture) of at least $7.2 million on a last twelve months basis at
the end of each fiscal quarter and that the company offer to repurchase some
or all of the 13% senior notes upon a change of control or the sale of a
significant amount of assets where the proceeds are not reinvested in other
manufacturing assets within 180 days of the sale. In 2000, the Company
generated $22.0 million of EBITDA.
On August 31, 2000, the Company sold its Irish plastics subsidiary, Data
Packaging, Ltd. The net proceeds of $10.0 million from the sale were used to
repay $4.1 million of revolving credit facility borrowings, $1.6 million of
term loan A debt and $4.3 million of term loan B debt.
On October 27, 2000, the Company sold substantially all of its wine grape
agricultural operations and real estate holdings in Napa County, California.
The $16.5 million net proceeds from the sale after transaction-related costs
were used to reduce debt.
On December 28, 2000, the Company sold and leased-back the land and
building of its Chicago, IL hydraulic cylinder manufacturing location. The
net proceeds of $3.0 million from the sale were used to repay debt including a
portion of the Company's senior secured and revolving credit borrowings with
Bank of America.
Summary of 2000 Activities
Cash and cash equivalents totaled $2.5 million (including $0.7 million
classified within discontinued operations) at December 31, 2000, compared to
$0.4 million (including $0.1 million classified within discontinued
operations) at December 31, 1999, an increase of $2.1 million, with $5.5
million provided by operations, $28.0 million provided by investing activities
and $31.4 million used in financing activities.
Operating Activities
Cash provided by operating activities of $5.5 million in 2000 was the
result of increased profitability and a reduction in net working capital.
Investing Activities
The Company disposed of non-core businesses and assets during 2000,
30
generating $29.5 million in net cash proceeds. Capital expenditures were $4.1
million and $0.1 million was used to acquire the common stock of Kingway.
Investing activities also provided $2.7 million of cash acquired in the
merger.
Financing Activities
Proceeds from new term loan borrowings totaled $31.5 million, consisting
of $25.8 million of the term loan A facility, $5.0 million of the term loan B
facility and, subsequent to the merger, $0.7 million of borrowings under the
capital expenditures facility. Repayments of Chatwins Group's and Reunion's
former revolving credit facilities with the proceeds from the new revolving
credit facility and revolving credit facility borrowings repaid using proceeds
from asset sales during 2000 are reflected in the $13.5 million net change in
revolving credit facilities. The Company made other repayments of debt with
the refinancing proceeds totaling $51.7 million and paid $1.4 million in
financing fees and closing costs. During the period since the merger, the
Company made scheduled payments totaling $3.5 million on its term loan A, B
and capital expenditures facilities and an additional $3.3 million of term
loan A debt and $4.3 million of term loan B debt were repaid using a portion
of the proceeds from asset sales during 2000. The term loan B is fully
repaid. Other debt repayments totaling $10.6 million were made, including the
debt of the Irish plastics business, the discontinued agricultural operations
and capital lease obligations.
[2001 Covenant Compliance
For quarters ended March 31, 2001 and for each fiscal quarter thereafter
in 2001, the Company is required to maintain a minimum fixed charge coverage
ratio of 1.25:1 and maximum funded debt to EBITDA ratios of 3.75:1, 3.50:1,
3.25:1 and 3.00:1 (both as previously defined in "Recent Developments").
The Company's 2001 business plan includes assumptions regarding results
of operations and economic conditions, achievement of which is necessary for
compliance with its financial covenants in 2001, particularly the third and
fourth quarters. If one or more of these assumptions do not occur or if
economic conditions in the markets served by the Company worsen, the Company
could fall out of compliance with one or both of its financial covenants
during 2001. Therefore, in April 2001, the Company entered into a letter
agreement with Bank of America whereby, as long as the Company maintains both
a fixed charge coverage ratio of at least 1.00:1 and has a funded debt to
EBITDA ratio of no more than 4.50:1 as of the September 30, 2001 and December
31, 2001 calculation dates, and as long as the Company is in compliance on all
other covenants, the Bank of America will not accelerate any of its loans.]
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the operation of its business, Reunion Industries has market risk
exposure to foreign currency exchange rates, raw material prices and interest
rates. Each of these risks and Reunion Industries' strategies to manage the
exposure is discussed below.
Reunion Industries manufactures its products in the United States and
sells its products in the United States and in other foreign countries. These
countries to which the Company exports its products vary from year to year.
International sales in 2000 were in four major areas of the globe: the Far
East, Australia, and Asia; Canada; Western Europe; and Central and South
Americas. The majority of international sales in 2000 relate to pressure
vessel sales to customers in Taiwan and the People's Republic of China.
31
Export sales to foreign countries from are denominated in U.S. dollars, the
Company's reporting currency. Accordingly, transaction loss exposures due to
fluctuations in the functional currencies of the countries to which the
Company's domestic locations export are minimal.
The major raw material used by the Metals Group include steel hot- and
cold-rolled bands, structural bars, stainless steel coils, welded and seamless
steel tubing and pipe, steel alloy bars, steel plates, brass tubing and bars
and aluminum extrusions. The major raw material used by the Plastics Group is
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.] [Reunion Industries' contracts
with its customers generally provide that such price increases can be passed
through to its customers.]
Reunion Industries' operating results are subject to risk from interest
rate fluctuations on debt that carries variable interest rates. The variable
rate debt was approximately $39.8 million at December 31, 2000, which is
representative of balances outstanding during the year. A 1.00% change in
interest rates would affect results of operations by approximately $400,000.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reunion Industries' consolidated financial statements are set forth
beginning at Page F-1.
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*
ITEM 11. EXECUTIVE COMPENSATION*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*
*Items 10, 11, 12 and 13 are incorporated by reference to the Registrant's
Definitive Proxy Statement to be filed with the commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934 within 120 days after
the close of the Registrant's fiscal year.
33
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-XX)
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Operations - Years Ended December 31, 2000,
1999 and 1998
Consolidated Statements of Cash Flows - Years Ended December 31, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules (Page S-1)
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
Reunion Industries' financial statements and related notes.
3. Exhibits
See pages E-1A to E-1D for a listing of exhibits filed with this report
or incorporated by reference herein.
(b) Current Reports on Form 8-K
On February 7, 2001, the Company filed a Current Report on Form 8-K dated
October 27, 2000 to report under Items 2 and 7 that the Company had completed
the sale of its discontinued wine grape agricultural business and to file the
required pro forma financial information and exhibits.
On February 23, 2001, the Company filed a Current Report on Form 8-K
dated February 23, 2001 to announce under Item 5 the date, time and place of
the annual meeting of shareholders of the Company.
34
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.
Date: April 18, 2001 REUNION INDUSTRIES, INC.
--------------
By: /s/ Kimball J. Bradley
---------------------------
Kimball J. Bradley
President, Chief Operating
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on this 18th day of April, 2001.
Signature Title
- --------- -----
/s/ Charles E. Bradley, Sr. Chairman of the Board, Chief Executive
- --------------------------- Office and Director
Charles E. Bradley, Sr.
/s/ Joseph C. Lawyer Vice Chairman and Director
- ---------------------------
Joseph C. Lawyer
/s/ John M. Froehlich Executive Vice President, Chief
- --------------------------- Financial Officer, Treasurer and
John M. Froehlich Assistant Secretary (chief financial
and accounting officer)
/s/ John G. Poole Director
- ---------------------------
John G. Poole
/s/ Thomas N. Amonett Director
- ---------------------------
Thomas N. Amonett
/s/ Thomas L. Cassidy Director
- ---------------------------
Thomas L. Cassidy
/s/ W. R. Clerihue Director
- ---------------------------
W. R. Clerihue
/s/ Franklin Myers Director
- ---------------------------
Franklin Myers
35
REUNION INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
- ------------------------------------------ ----
Report of Independent Accountants.......................................F-2
Consolidated Balance Sheet..............................................F-3
Consolidated Statement of Income and Comprehensive Income...............F-4
Consolidated Statement of Cash Flows....................................F-6
Notes to Consolidated Financial Statements..............................F-8
F-1
Report of Independent Accountants
To the Board of Directors
and Stockholders of
Reunion Industries
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and comprehensive income and of cash
flows, after the restatement described in Note 1, present fairly, in all
material respects, the financial position of Reunion Industries, Inc. and its
subsidiaries (Reunion) at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of Reunion's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our
opinion.
As discussed in Note 2 to the accompanying consolidated financial
statements, Reunion merged with Chatwins Group, Inc. (Chatwins), an affiliated
company, on March 16, 2000. Chatwins was considered the acquiring company for
financial reporting purposes. Effective with the merger, the combined company
retained the name Reunion Industries, Inc.
As discussed in Note 1 to the accompanying consolidated financial
statements, Reunion changed its method of accounting for start-up costs as of
January 1, 1999.
PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
April 18, 2001
F-2
REUNION INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
At December 31, At December 31,
2000 1999
-------------- --------------
ASSETS:
Cash and cash equivalents $ 1,826 $ 252
Receivables, net (note 1) 31,777 24,470
Advances to employees (note 12) 233 -
Inventories, net (note 3) 21,781 13,817
Other current assets 3,307 3,344
Net assets of discontinued operations (note 15) 9 -
-------- --------
Total current assets 58,933 41,883
Property, plant and equipment, net (note 4) 31,166 16,675
Investments, net - 6,270
Due from related parties (note 12) 3,950 4,734
Goodwill, net (note 2) 18,837 3,371
Other assets, net (note 5) 17,069 8,104
-------- --------
Total assets $129,955 $ 81,037
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Revolving credit facilities (note 6) $ 19,367 $ 5,834
Current maturities of debt (note 6) 4,061 25,022
Trade payables 21,662 12,543
Accrued salaries and benefits 4,554 2,478
Accrued interest 1,075 1,140
Accrued environmental reserves 1,287 -
Due to related party (note 12) 224 -
Other current liabilities 8,217 3,061
Net liabilities of discontinued
operations (note 15) - 3,011
-------- --------
Total current liabilities 60,447 53,089
Long-term debt (note 6) 42,656 24,997
Long-term debt - related party (notes 6 and 12) 4,015 -
Other liabilities 1,278 1,883
-------- --------
Total liabilities 108,396 79,969
-------- --------
Commitments and contingent liabilities (note 13) - -
Redeemable preferred stock - 8,938
Stockholders' equity (note 7):
Common stock (2000: $.01 par value, 20,000,000
shares authorized, 15,235,624 shares
outstanding; 1999: $0.1 par value, 400,000
shares authorized, 292,862 shares outstanding) 152 3
Capital in excess of par value 24,608 873
Treasury stock - (500)
Accumulated deficit (note 1) (3,201) (8,246)
-------- --------
Stockholders' equity 21,559 (7,870)
-------- --------
Total liabilities and stockholders' equity $129,955 $ 81,037
======== ========
See accompanying notes to consolidated financial statements.
F-3
REUNION INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share information)
Year Ended December 31,
2000 1999 1998
-------- -------- --------
Sales:
Metals Group $138,409 $120,150 $135,164
Plastics Group 42,008 - -
-------- -------- --------
Total sales 180,417 120,150 135,164
-------- -------- --------
Cost of sales:
Metals Group 111,024 100,666 109,187
Plastics Group 35,713 - -
-------- -------- --------
Total cost of sales 146,737 100,666 109,187
-------- -------- --------
Gross profit 33,680 19,484